2023-03-07 11:17:42 ET
Summary
- The preferred stock has been converted.
- About $500 million of debt has been paid.
- Production is slowly growing.
- Jerry Jones controls about two-thirds of the shares outstanding.
- Leverage ratios are acceptable. Management is working to get the leverage acceptable at lower prices. A dividend has been initiated again.
(Note: This was in the newsletter on February 15, 2023)
Comstock Resources ( CRK ) simplified its capital structure without a whole lot of attention. Back in November, the preferred stock was converted to roughly 44 million shares of common stock. For common shareholders, that eliminated a superior claim to company assets. It, therefore, counts as part of the deleveraging that gets so much attention when debt is paid off.
Major shareholder Jerry Jones now owns 66% of the common stock of the company. The progress with the preferred shares can be added to the more public progress of lower debt. The common shareholders, therefore, saw a reduction of roughly $700 million in superior claims for fiscal year 2022. Of that amount, roughly $500 million was debt retirement in the fiscal year.
Comstock Resources Financial Structure (Comstock Resources Fourth Quarter 2022, Earnings Conference Call Slides)
The finances are now far better than when Jerry Jones first got involved with the company. As shown above, the debt due schedule is now extremely favorable. Once the company has some more results, management can very likely lower the interest on the remaining debt when the next favorable refinancing environment arrives.
In the meantime, the company is far financially stronger than it was before Jerry Jones entered the picture. Instead of a company that appeared headed towards the hereafter, there is now a very strong company moving forward to face the future with some of the industry's lowest costs.
Management also reinstated a quarterly dividend of $.125 per share on a quarterly basis. That works out to a $.50 annual dividend. It does appear that repayment of more debt combined with returning some money to shareholders will be the priority for the foreseeable future. Even with these priorities, management appears to have guided some production growth as well.
These steps taken in the latest fiscal year largely mark the end of reorganizing the company. Frankly, common shareholders were very lucky to maintain any interest in the company. A lot of companies in the shape this one was in usually wipe out the common shareholders. In this case, not only do shareholders maintain a stake in the (effectively) reorganized company, but that stake is in a low-cost competitor with sky-high margins.
Growth Ahead
Management does mention taking into account the current pricing environment in releasing some drilling rigs. However, the fourth quarter report also notes reserve growth and guidance appears to show some production growth planned as well.
This company is located close to a lot of building export capacity. Therefore, management is in a prime position to get stronger world pricing than a lot of competitors that are located further away. The probable lower transportation costs could lead to a permanent future competitive moat even if that "lower" is only a penny or so per MCF.
Profit margins are often a smaller part of sales revenue. So, small savings often have a disproportionate effect on profitability. This is especially true in a commodity business where a lot of companies are marketing the same product. Therefore, selling prices are fairly uniform.
Cost Advantage
This management has long had some of the lowest costs of all the dry gas producers that I follow.
Comstock Resources History Of Cost and Margin Advantage (Comstock Resources Fourth Quarter 2022, Earnings Conference Call Slides)
Management has long had one of the best EBITDAX margins of any industry. The margin shown above leaves plenty of room to service debt and recover depreciation costs. Current commodity prices appear to allow for a fast enough payback to assure a reasonable return on well investment. Management can then allow production to receive market prices for the rest of the well life.
Some of the costs shown above do increase with the increase in selling prices. However, the vast majority of costs are well controlled for a dry gas producer. I very seldom see overall costs this low.
Some of the cost advantages are due to the large initial production of these wells. That large initial production means that less wells have to be drilled to increase or maintain production (even if each of those wells is more expensive than elsewhere).
Reserve Report
One of the things about the Haynesville area is that the area has been producing for a very long time. For a while, it was seen as a high-cost area until technological advances revolutionized the play and brought about a production rebound.
The reserve report only notes the reserves that are currently commercially available for production given the technology at the time of the beginning of production. As technology continues to advance, more of the natural gas in the ground will become available to produce. Only if technology were to stop advancing would the reserve report represent the amount of natural gas available to the company to produce.
The other thing to consider is a lot of these basins have intervals or structures that are not commercially viable currently but are likely to become commercially viable in the future. I still remember when people thought the idea of drilling 10,000 feet was absurd because it would never be cost justified. Now we are so far past that and it is more than cost justified.
The bottom line is that there will likely be far more natural gas produced from this area than the reserve report shows. The area will also likely be producing natural gas long after you and I are gone.
The Future
The company is now past its financial troubles. The balance sheet structure is far more simplified. The debt due is much more favorable than before. Leverage ratios are currently in good shape. The next step is to make sure those leverage ratios remain acceptable in a cyclical downturn.
Therefore, debt repayment will remain a priority. That means that the dividend is likely to remain conservative until debt levels are at satisfactory levels when projecting far lower than current natural gas prices. But things have progressed enough to begin paying a dividend.
For those not retired, that dividend may grow rapidly as this low-cost producer continues to make progress in reducing the debt and growing the business. Going forward, shareholder dilution is no longer a consideration. Now management can concentrate on the business.
Management has been acquiring small acreage positions at a discounted price. This strategy will likely add value over time as those small acreage positions are combined into larger more marketable positions that will allow for profit maximization.
The combined growth rate is likely to average in the teens going forward. For shareholders, this is a cyclical company. So, the stock will be volatile going forward. Still, it looks like Jerry Jones has built an impressive company going forward. I am looking to hold the stock as long as he does or until the growth story changes. The only thing that would cause a change in the strategy is if the stock became ridiculously overpriced.
The current warm winter with its low prices (for the time being) may be a good time to consider this well-run company. Management did talk about releasing a rig or rigs until prices improve. As North America continues to expand the exporting capability, the United States is likely to join the far stronger natural gas prices of the world market. That would be a huge plus for this company.
For further details see:
Comstock Resources: Capital Progress