Comstock: Increasing Liquidity Through Notes And Equity Investments (NYSE:CRK)

Comstock Resources (NYSE:CRK) received an equity investment of just over $100 million from Jerry Jones and also issued $400 million in 6.75% unsecured notes due 2029 at 93% of par. These moves help maintain Comstock’s liquidity (clearing out the majority of its credit facility borrowings) at a time when low natural gas prices are leading to near-term cash burn.

Fitch recently downgraded Comstock’s unsecured rating and gave it a negative outlook due to the low natural gas pricing environment and its increased amount of unsecured debt.

I believe the involvement of the Jones family makes Comstock’s debt less risky (as they can bail out Comstock as needed), but that comes at the price of potential dilution at relatively low prices. Comstock’s share price has gone up 30% since I last looked at it, while the equity investment (at a bit over $8) and issuance of debt at less than par lowers Comstock’s estimated value slightly. I now estimate Comstock’s value at $10.25 per share, which results in a downgrade to hold, since this is fairly close to its current share price.

Equity Investment

Comstock announced a $100.45 million equity investment by Jerry Jones, in which he acquired 12.5 million shares of Comstock’s common stock at an average price of $8.036 per share. That price reflected the average closing price during the five trading days ending on March 20 (the announcement date). This investment is boosting Jerry Jones’s ownership in Comstock from 65% to 67%, while the proceeds are helping to pay down part of Comstock’s credit facility debt. Comstock spent nearly $59 million on Western Haynesville acquisitions recently, which added to its credit facility debt.

Comstock had 278.4 million outstanding shares in mid-February 2024, so this equity investment will result in it having approximately 291 million outstanding shares.

Additional Unsecured Notes

Comstock also issued an additional $400 million in 6.75% unsecured notes due 2029. These additional notes have a different CUSIP than the original 2029 notes and have been issued under a separate indenture, but are otherwise similar to the original notes. Comstock now has $1.6239 billion in outstanding 6.75% unsecured notes due 2029.

These notes were issued at 93% of par, so the effective yield to maturity is closer to 8.5%.

Comstock is receiving net proceeds of approximately $365 million after expenses and the discount to par, and is planning on using those proceeds to pay down part of Comstock’s credit facility.

2024 Outlook

The current strip for natural gas is around $2.35 for 2024 now. At that commodity price, Comstock may be able to generate $1.349 billion in revenues after hedges.

Comstock added some Q4 2024 hedges, so it now has around 32% of its 2024 natural gas production hedged at an average swap price of $3.55. Comstock may have around 27% of its natural gas production hedged for the first three quarters, but has around 45% to 50% hedged in Q4 2024.

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Comstock is now projected to have $131 million in 2024 cash burn. Comstock’s cash burn is reduced a bit by lower near-term cash interest costs due to its equity investment helping pay down some of its credit facility borrowings.

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Projected Debt

Comstock started 2024 with $2.189 billion in outstanding notes, $480 million in credit facility debt and $17 million in cash.

Comstock is projected to end 2024 with $188 million in credit facility debt (if it carries a zero cash balance) and $2.589 billion in outstanding notes.

This assumes that Comstock spends $45 million on leasing transactions outside of the $58.7 million in Western Haynesville deals that it has already announced for 2024.

Comstock’s leverage is quite high, although most of its debt doesn’t mature until 2029 and 2030.

Estimated Valuation

I am trimming Comstock’s estimated value to $10.25 per share at long-term (after 2024) $3.75 NYMEX gas. This is a $0.25 per share reduction from before and reflects the impact of Comstock issuing new equity at a bit over $8 per share as well as issuing new notes at 93% of par.

Comstock has a very large number of notes (nearly $2.6 billion) maturing in 2029 and 2030. Despite this, I don’t really see Comstock’s debt as being a major direct risk due to the involvement of the Jones family, who can inject more equity into Comstock if needed.

However, the risk is that the equity injections often happen at relatively low prices. In addition to the recent investment at a bit over $8 per share, the Jones family previously acquired 93.75 million shares (including the conversion of preferred shares) for $475 million, a price of just over $5 per share.

There is also a chance that the Jones family makes a bid to take Comstock private at some point in the future, given their 67% ownership stake.

Comstock’s unsecured notes (yielding over 8% to maturity) appear to be a reasonably good value in my opinion, helped by the Jones family wanting to protect its equity stake.

Conclusion

Comstock has made a couple of moves to keep its credit facility mostly unutilized as it builds its Western Haynesville position and also deals with cash burn due to low 2024 natural gas prices. The Jones family invested just over $100 million in exchange for 12.5 million shares, while Comstock issued $400 million in additional 6.75% unsecured notes due 2029 at 93% of par.

These moves give Comstock some additional liquidity, but slightly reduce Comstock’s estimated value to $10.25 per share at long-term $3.75 NYMEX gas. With Comstock’s share price increasing by 30% since I last looked at it, I now have a hold rating on the company.