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We are maintaining our long-term Neutral recommendation on Comstock Resources Inc. (CRK - Analyst Report), supported by a Zacks #3 Rank (short-term Hold rating).

Frisco, Texas-based Comstock is an independent oil and gas exploration and production company engaged in the acquisition, exploration and development of oil and gas properties. The company’s operations are concentrated primarily in two regions in the U.S. namely East Texas/North Louisiana and South Texas.

We appreciate the company’s strategy of growing its reserve base through balanced acquisitions, as well as through development and exploration programs. This has been supplemented by successful drilling activities, which expanded the company’s proved reserve base by 25% as Comstock added 228 Bcfe of proved reserves in 2011.

The company’s strong acreage position in the prolific Haynesville/ Bossier Shale play (82,000 net acres with a resource potential of 7.3 trillion cubic feet equivalent) in the East Texas and North Louisiana region provides attractive reserve-add and production growth prospects.

We also believe that the recent 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 drive its overall volumes.

However, our optimism about Comstock is somewhat dampened by the disappointing first quarter 2012 performance. The company reported adjusted loss per share of 30 cents in the quarter, wider than the Zacks Consensus Estimate of a loss of 17 cents. Comstock’s performance also deteriorated considerably from the year-ago adjusted loss of 10 cents per share.

Moreover, 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, which derives more than 85% of its reserves/production from natural gas, has seen its sales and income drop drastically in recent quarters on the heels of a sharp drop in gas prices.

Being a relatively small player, Comstock lacks the financial resources of larger industry giants such as Encana Corp. (ECA - Analyst Report) and Chesapeake Energy Corporation (CHK - Analyst Report). As such, during periods of prolonged credit crunch, the company is forced to spend within its internal cash generation. This may prove detrimental to its growth plans.

Hence, we see limited upside potential for Comstock from current levels and advise investors to hold on the stock.

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