2023-03-30 12:47:20 ET
Summary
- Insiders have been accumulating shares of Comstock Resources, Inc. aggressively over the past year.
- Comstock Resources shares are down more than 20% year-to-date on natural gas weakness.
- Should you follow insiders into Comstock?
Insiders Are Buying This Natural Gas Producer: Should You?
As a natural gas producer, Comstock Resources, Inc. ( CRK ) offers significant potential for returns on investment due to its exposure to natural gas prices, all while maintaining relatively low risk.
That's because Comstock operates efficiently, with lower production costs than most competitors. For example, its production cost per Mcfe in the fourth quarter was a mere $0.76 per Mcfe, placing it among the industry's lowest and well below the current spot natural gas prices (over $2).
Thanks to its low production costs, Comstock is well-equipped to navigate the existing market challenges in the natural gas sector. Furthermore, the company benefits from prime access to export facilities in the Gulf, a crucial factor in satisfying the increasing demand from global markets. And, insiders have been buying the stock aggressively, which is a very good sign.
Comstock’s Low Valuation: An Update
Comstock's appeal extends beyond its low production costs, as its current valuation is also quite enticing. The company's shares are trading at a P/E ratio of 2.60 and a forward P/E of 5.14 , while its EV/EBITDA ratio is a mere 1.86!
Despite the market's lack of optimism surrounding natural gas prices, which has adversely affected Comstock's share price, it seems that this risk has already been factored into the stock's valuation. I think this makes the current share price even more attractive for potential investors.
Even if natural gas prices stay low for a prolonged period, Comstock's robust balance sheet and low costs make it an attractive, lower-risk stock to hold. For example, the company managed to repay over $500 million in debt last year, reducing its leverage ratio to 0.94 (a ratio below 1 is considered favorable within the industry).
Although short-term natural gas price fluctuations may affect Comstock, the company shows promising long-term cash flow potential. Its current market cap of $2.96 billion appears significantly undervalued when compared to the more than $1 billion in operating cash flow generated during the first nine months of 2022, and I anticipate at least $1 billion in cash flow for 2023.
Another positive factor is the recent reinstatement of Comstock's quarterly dividend. Boasting a ~ 4.7% yield and a healthy balance sheet, the company is well-positioned to increase dividend pay-outs, further reduce debt, and potentially buy back shares.
Over the coming years and as natural gas prices rebound, I think Comstock's stock has the potential to easily exceed its 2022 stock price highs.
Comstock Resources: Insider Buying Alert
Insiders seem to agree with this bullish sentiment. Check out the recent insider buying activity.
Several insiders are buying shares of Comstock on the open market, using the recent stock price dip as an opportunity to add to their positions.
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On March 23, Roland Burns, Comstock's President, purchased 20,000 shares at prices ranging from $9.90 to $10.00. This boosted his holdings to slightly over 960,000 shares, with the new acquisitions carrying a market value of $199,000.
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On March 15, Patrick McGough, an Officer at Comstock, bought 20,000 shares at $10.05, bringing his total position to 126,337 shares.
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Additionally, Brian Claunch, another Officer, acquired 5,000 shares at $10.08.
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E*Trade reports that over the past four years, insiders have, on average, purchased 12,585,956 shares each year.
The recent insider purchases likely suggest a positive outlook for Comstock’s stock price. Insider buying typically implies that insiders hold a firm conviction in the company's future success, and buying more shares means that these insiders have faith in the company’s potential for growth, view the stock as undervalued, and are willing to risk their own money to boost their ownership stakes.
Natural gas prices: A word of caution
The short-term picture for natural gas is very uncertain and most likely bearish. Prices may continue falling due to an oversupply, and the risk of a recession, which would further dampen demand.
Natural gas stockpiles continue to remain relatively high. When natural gas stockpiles increase, it usually causes natural gas prices to decline. This indicates that there is more supply than demand for natural gas. As of Friday, March 17, 2023, working gas in storage stood at 1,900 billion cubic feet (Bcf), based on estimates from the Energy Information Administration ((EIA)). This figure reflects a net decrease of 72 Bcf compared to the previous week, but current stocks are 504 Bcf higher than the same period last year and 351 Bcf above the five-year average of 1,549 Bcf.
The natural gas market has also been impacted by warmer weather. This situation is bearish for natural gas, as the mild winter weather reduced demand, with supply continuing to increase.
Nonetheless, with prices approaching 10-year lows, I think it could be an opportune time for bargain hunting , as long as you keep a long-term focus in mind (6+ months). Keep in mind that prices might continue to decline before hitting rock bottom (which is impossible to predict accurately). We could see prices reach pandemic-low levels (~$1.50), for example.
Therefore, I believe the most effective strategy for long-term investors is to utilize dollar-cost averaging for natural gas prices. This simply means purchasing shares on a set schedule, like monthly or quarterly. And it's probably also a good idea to buy shares on the dips when the stock hits oversold levels (on the relative strength index).
Comstock Resources: The Final Word
Comstock Resources, Inc. presents a compelling investment opportunity here due to its low valuation, strong earnings and cash flow, sustainable dividend, and leverage to the natural gas market. I believe recent insider buying serves as a testament to the confidence company insiders have in the stock, further validating its potential as a solid investment.
As Comstock Resources, Inc. navigates through the recent market challenges and capitalizes on its strategic advantages, I believe it is well-positioned for long-term growth and to deliver value to its shareholders. Therefore, I’ve made Comstock Resources, Inc. a top pick for investors seeking exposure to the oil & gas sector.
For further details see:
Comstock Resources: Insiders Buying This Natural Gas Producer Hand Over Fist