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Comstock Resources: Walking Tall Onshore

Posted: Mar 20, 2009 13:00 PM by Eric Fox

Tickers in this Article: PXD, PQ, BDE, SGY, CRK

Comstock Resources Inc. (NYSE:CRK) sold its offshore assets and other non-core properties at the peak of the market, an action that could be described as either lucky or brilliant. The company is now solely focused on some promising onshore properties, and is in fine shape financially to meet the challenging commodity price environment that the industry finds itself in.

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Comstock Resources is an oil and gas exploration and production company with onshore operations primarily in Texas and Louisiana. The company divested its offshore assets in August 2008 when it sold its 49%-owned subsidiary Bois D'Arc Energy (NYSE:BDE) to Stone Energy (NYSE:SGY) for $440 million and 5,317,069 shares of Stone Energy. Stone Energy bought these assets near the peak in commodity prices and has since seen its stock fall by 96%. Comstock ended 2008 with 582 Bcfe of reserves, 90% of which are natural gas.

Reserve Decline
Reserves for the company fell from 651 Bcfe at the end of 2007 to 582 Bcfe at year-end 2008. There are two mitigating factors that make this decline less severe than it appears. During 2008, the company divested 59 Bcf of properties and Comstock had to remove 52 Bcf of reserves from the proven category, due to the fall in natural gas prices.

Fifty percent of the company's reserves are in the East Texas and North Louisiana areas. Although the company's acreage includes 70,000 acres in the Haynesville Shale, it is behind other operators that are developing this field and has only two producing wells, with three more nearing completion. The importance of this area can be seen in Comstock's drilling program for 2009, where 87% of its capital expenditures will be spent. The company plans 30 horizontal wells in 2009.

The Haynesville Shale is considered one of the most promising areas in North America, and it has been attracting many companies looking to build acreages. Petrohawk (NYSE:HK) has thousands of acres under lease and just started drilling a well in Shreveport, LA, which is one of the first urban sites in the area.

Financials
Comstock had a relatively low debt to total capitalization ratio of 17% at the end of 2008. Its total debt is $210 million, with $35 million drawn on its credit facility and a single debt issue for $175 million. The note matures in 2012.

Leverage is an important consideration for investors, due to the credit crisis and fall in oil and gas prices. One company that has a higher leverage ratio is Pioneer Natural Resources (NYSE:PXD) which had a net debt to total capitalization of 45% at the end of 2008. PetroQuest (NYSE:PQ) sold off sharply in early March 2009, after concerns arose that its lenders would restrict borrowing under its lending facility. The value of its reserves are down due to the drop in commodity prices.

The Bottom Line
Comstock's prescient move to sell properties at the peak of commodity prices over the summer of 2008 has put the company in decent financial shape to weather the energy bear market. The company can now work on developing its promising properties in the Haynesville Shale in order to build value in that area.

Check out our Oil And Gas Industry Primer to learn more about investing in stocks in this sector.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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