Falling Gas Price Dents Comstock 3Q

Domestic energy explorer Comstock Resources Inc. ( CRK - Analyst Report ) reported weak third quarter 2012 results, hamstrung by depressed natural gas prices.

The predominantly natural gas-focused exploration and production firm reported adjusted loss per share of 50 cents in the quarter, almost double the Zacks Consensus Estimate of a loss of 26 cents. Comstock’s performance also deteriorated considerably from the year-ago adjusted loss of 1 cent per share.

Total revenues were down 1.9% year over year to $117.1 million, missing the Zacks Consensus Estimate of $123.0 million.

Volume Analysis

Comstock recorded quarterly volume decline of 7.7% year over year to 24.2 billion cubic feet equivalent (Bcfe), of which 84% was natural gas. The downtrend reflects output shrinkage from its East Texas/North Louisiana operations that made up three-fourths of the total volume.

Production in the East Texas/North Louisiana operating region decreased 18.7% to 17.8 Bcfe (99% gas). Elsewhere, output from the South Texas, West Texas and Other properties came in at 4.7 Bcfe (41% gas, up 26.7% year over year), 1.2 Bcfe (16% gas, up 84.1% year over year) and 0.5 Bcfe (91% gas, down 21.6% year over year), respectively.

Price Realizations

Average price realization per thousand cubic feet equivalent (Mcfe), before hedging, was $4.70 in the quarter, up 3.3% year over year. Average oil price realization (before hedging) was $97.09 per barrel (versus $87.55 per barrel in third quarter 2011) and average natural gas realization was $2.46 per Mcf (compared with $4.09 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 in the wake of a sharp drop in gas prices.

Costs & Expenses

Gathering and transportation costs and lease operating costs came in at $6.4 million (down 21.2% year over year) and $15.5 million (up 23.8%) respectively, while total operating expenses increased 27.9% over the third quarter of 2011 to $137.3 million.

Cash Flow & EBITDAX

Comstock generated operating cash flow from continuing operations of $83.8 million, reflecting a decrease of 15.9% from the year-earlier quarter. Quarterly EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other non-cash expenses) was down 7.9% year over year to $86.7 million.

Capital Expenditure & Balance Sheet

During the third quarter of 2012, Comstock spent $90.4 million on exploration/development drilling activities. As of September 30, 2012, Comstock had approximately $2.6 million in cash and cash equivalents and $1,238.8 million in long-term debt. Debt-to-capitalization at the end of the quarter was 55.1%.

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 - Analyst Report ) , Encana Corp. ( ECA - Analyst Report ) and Royal Dutch Shell plc ( RDS.A - Analyst Report ) are also leaseholders – provides a multi-year inventory of low-risk development drilling opportunities. As a result, Comstock remains well positioned to maintain a strong growth trajectory in the near to medium term.

However, the company’s highly gas-weighted reserves/production profile, along with exposure to the inherently cyclical and volatile exploration and production sector, offset these strengths and remains the key areas of concern, in our view. We believe that Comstock’s current valuation adequately reflects its fairly balanced risk/reward profile.

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).