On Dec 4, 2014, we issued an updated research report on Comstock Resources Inc. (CRK). The energy explorer finds maintaining profitability a challenge amid declining production levels and weak commodity pricing. Operational issues also add to the problems.
These are reflected in Comstock Resources’ current Zacks Rank #5 (Strong Sell), implying that the stock is expected to significantly underperform the broader U.S. equity market in the next one to three months.
Production growth, which depends on continued drilling and development of acreage, has become difficult for the company as evident from the declining volume trend. In the third quarter, total production volumes fell 5.8% year over year to 16.4 billion cubic feet equivalent. Production in the East Texas/North Louisiana operating region decreased 36% year over year. Also, continued weakness in commodity prices could significantly affect the company’s revenues, earnings and cash flows.
Comstock’s high natural gas exposure compared to its more-diversified independent peers with a balanced oil/gas production profile is also a concern in this depressed pricing market. The company has seen its sales and income drop drastically in recent quarters following a sharp drop in gas prices.
Moreover, Frisco, TX-based Comstock Resources faces several operational and execution issues, especially in East Texas. This has resulted in further concerns pertaining to the company’s exposure to the geologically complex Tuscaloosa Marine Shale.
Key Picks in the Energy Sector
Despite the weak energy sector outlook, some companies with better Zacks Rank are likely to outperform the broader U.S. market in the next one to three months. These include the Zacks Ranked #1 (Strong Buy) stocks of Seadrill Partners LLC (SDLP), Alon USA Partners, LP (ALDW) and Murphy USA Inc. (MUSA).
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