SWN - Comstock Resources: Reduced Liquidity Risks But Serious Cash Flow Headwinds Remain

2024-04-30 12:00:48 ET

Summary

• Comstock Resources has taken steps to reduce cash burn and improve liquidity, but still faces profitability and cash flow challenges.
• CRK's cost structure is higher than its peers in the Haynesville shale once you factor in CAPEX needed to maintain production.
• The trajectory of CRK's production is concerning, as it is expected to fall as gas prices recover, limiting its ability to generate free cash flow.

Over the past year, I've written two articles regarding natural gas exploration and production (E&P) company Comstock Resources, Inc. ( CRK ).

In the first, published in late April last year " Comstock Resources: 2023 Will Be Messy," I rated the stock a sell and that call proved correct with the stock falling as much as 30% to its lows in February 2024.

Further, since publication, CRK has dramatically underperformed the widely followed SPDR S&P Oil & Gas Exploration & Production ETF ( XOP ) by a more than 30 percentage point margin. According to Bloomberg , XOP is up 31.8% since the close on April 26, 2023, while CRK is up just 1.1%, both on a dividends-reinvested basis.

In my second piece on CRK in late January of this year, " Comstock Resources: Serious Cash Flow, Debt and Dividend Headwinds Loom ," I reiterated my sell call on the stock and indicated the company would need to eliminate its dividend and dramatically cut capital spending ((CAPEX)) to reduce cash burn.

I was correct about the dividend and CAPEX, but wrong about the stock, at least in the short run. CRK has rallied in absolute terms and outperformed XOP to the tune of about 6.4% per Bloomberg.

As I'll explain in this article, CRK has taken some encouraging steps to reduce cash burn this year. Even more important, CRK has improved its liquidity by selling 12.5 million shares to majority shareholder Jerry Jones and issuing $400 million worth of bonds to pay down its credit line.

However, while CRK's liquidity position has improved, the company still faces a profitability and cash flow squeeze due to its elevated cost structure, light commodity hedge coverage, and the production impact of its decision to dramatically reduce capital spending....

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