On Jun 25, 2013, we retained our Neutral recommendation on
domestic energy explorer
Comstock Resources Inc.
). Our investment thesis is supported by a Zacks Rank #3 (Hold).
COMSTOCK RESOUR (CRK): Free Stock Analysis
OASIS PETROLEUM (OAS): Free Stock Analysis
PETROQUEST ENGY (PQ): Free Stock Analysis
SANCHEZ ENERGY (SN): Free Stock Analysis
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Why the Reiteration?
Comstock Resources' large acreage position in the prolific
Haynesville/Bossier Shale play provides a multi-year inventory of
low-risk development drilling opportunities. Supplemented with a
low cost structure, Comstock remains well positioned to maintain
a strong growth trajectory in the near- to medium-term. The
initiation of a quarterly cash dividend will create further value
However, the company's highly gas-weighted reserves/production
profile, along with its geographically concentrated asset base,
offset these strengths and is the key area of concern, in our
view. The rise in net debt/reduction of liquidity associated with
the Delaware Basin acquisition is also concerning.
The Frisco, TX-based company's strong acreage position in the
prolific Haynesville/Bossier Shale play (80,000 net acres with a
resource potential of 6 trillion cubic feet equivalent) in the
East Texas and North Louisiana region provides attractive
reserve-add and production growth prospects.
We believe that the recent acquisition of sizeable acreage in the
Delaware Basin in West Texas from Eagle Oil & Gas Co. will
offer Comstock another low risk oil-focused production growth
opportunity and further drive its overall volumes.
Finally, we welcome Comstock's last month's announcement to start
paying out shareholder dividends. We believe that the dividend
start-up not only highlights Comstock's commitment to create
value for shareholders but also underlines the oil and gas
finder's confidence in its business going forward.
However, we think these factors are adequately reflected in the
present valuation, leaving little room for meaningful upside from
current levels. In particular, following Comstock's debt-financed
acquisition of producing properties and acreage in the Delaware
Basin, we remain worried about the company's incremental leverage
and reduction of liquidity.
Additionally, continued volatility in natural gas prices have
created a difficult operating environment for Comstock, which
derives bulk of its reserves/production from the commodity.
Stocks That Warrant a Look
While we expect Comstock to perform in line with its peers and
industry levels in the coming months and advice investors to wait
for a better entry point before accumulating shares, one can look
Oasis Petroleum Inc.
Sanchez Energy Corp.
PetroQuest Energy Inc.
) as good buying opportunities. These domestic upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have solid
secular growth stories with potential to rise significantly from