Oil and natural gas firm Comstock Resources Inc. (CRK) posted weak second quarter results due to lower natural gas prices.
The predominantly natural gas-focused exploration and production company reported adjusted loss per share of 43 cents in the quarter, wider than the Zacks Consensus Estimate of a loss of 34 cents. Comstock’s performance also deteriorated considerably from the year-ago adjusted loss of 4 cents per share.
Total revenues – aided by strong production – were up 11.2% year over year to $125.0 million, in the process outperforming the Zacks Consensus Estimate of $107.0 million.
Production
Comstock’s quarterly oil and gas production was up 6.0 % year over year to 25.4 billion cubic feet equivalent (Bcfe), of which 86.0 % was natural gas. The improvement was driven by a whopping 266.7% jump in oil volumes. On the other hand, Natural gas production decreased 4.8 % to 21.9 billion cubic feet (Bcf).
Price Realizations
Average price realization per thousand cubic feet equivalent (Mcfe), before hedging, was $4.02 in the quarter, down 14.3% year over year. Average oil price realization before hedging was $98.70 per barrel (versus $101.02 per barrel in second quarter of 2011) and average natural gas realization was $2.03 per Mcf (compared with $4.19 per Mcf in the year-earlier quarter).
Comstock’s high natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more-diversified independent peers with a balanced oil/gas production profile. The company saw its results suffer on the heels of a sharp drop in gas prices.
Costs & Expenses
Gathering and transportation cost averaged 29 cents per Mcfe in the quarter, up 3.6% from the prior-year quarter, while production tax averaged 13 cents per Mcfe, up 116.7% year over year. Total operating expenses increased 24.1 % year over year to $129.1 million.
Cash Flow & EBITDAX
Comstock generated operating cash flow from continuing operations of $8.7 million, reflecting a decrease of 87.0% from the year-earlier quarter. On the other hand, quarterly EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other non-cash expenses) was down 14.3% year over year to $74.6 million.
Capital Expenditure & Balance Sheet
As of June 30, 2012, Comstock had approximately $3.5 million in cash and cash equivalents and $1,223.2 million in long-term debt. Debt-to-capitalization was 54.0%.
In second quarter of 2012, Comstock incurred $141.1 million on exploration and development drilling, while $7.9 million was spent on acquiring exploration fields.
Recommendation & Rating
Comstock’s large acreage position in the prolific Haynesville Shale play (in East Texas and North Louisiana) – where industry heavyweights like Chesapeake Energy Corp. (CHK), Encana Corp (ECA) and Royal Dutch Shell plc (RDS.A) are also leaseholders – provides a multi-year inventory of low-risk development drilling opportunities. Supplemented with a robust balance sheet, Comstock remains well positioned to maintain a strong growth trajectory in the near- to medium-term.
Management’s guidance of a 5% production growth rate for 2012 is on the conservative side, in our view. We believe that the December 2011 acquisition of a sizeable acreage in the Delaware Basin in West Texas from Eagle Oil & Gas Co. will offer Comstock a low risk oil-focused production growth opportunity and expand its overall volumes.
Despite being hampered by low natural gas prices, Comstock’s strong drilling results and the divestiture of non-strategic assets are expected to improve the company’s already high cost structure.
As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).
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