Summary
- Comstock's recent purchase of the Covey Park assets in the Haynesville basin makes it the largest shale player there with core assets operating at good margins.
- Despite the bullish news, chronically low natural gas prices threaten the opportunity to see strong growth acceleration according to EIA projections.
- Because of the likelihood of lower realization prices, Comstock's management is likely to play defensively to maintain a $100 million cash flow target for 2020.
The month of September was fantastic for the oil and gas E&P firm Comstock Resources (NYSE:CRK), as good news on an acquisition of new leases sent the stock soaring to new highs. Before the spike, the price of CRK held a resistance level around $7.50 that was met in early March, prompting a return to its 52-week low near $4.17. However, a series of strong trading days on the good news sent CRK past its resistance to its 52-week high of $10.70. The spike has cooled a bit and is approaching the $7.50 price level again with most expecting it to hold there. It seems likely that a range will develop in the $7-8 with the bullish fundamental news subdued by low energy prices.
From Finviz
The market moving news for CRK were comments by Dallas Cowboys owner Jerry Jones, a 75 percent owner of the company, praising CRK's newest Covey Park acquisition as "one of the best positions of leases" in the natural gas drilling industry. His optimistic presence suggested to a Seaport Global analyst that the shale company would have unique access to his funding and prompted him to reiterate a Buy rating with a higher price target of $11, up from $8.
The completion of the Covey Park acquisition was highlighted in CRK's 2019 Q2 report and will start to affect the operations in the third quarter by July 16th. The acquisition includes over 1.1 Bcfe/d of production on about 374,000 acres. Those acres include about 2,000 net drilling locations making CRK the leading driller in the Haynesville Basin. In 2019 Q2, Covey Park reported 694 million cf/d of production which will more than double the 416 million cf/d the company did in the same quarter.
The newly acquired operations are not just raw acreage, but actually an already efficiently producing entity with operating cost per unit that mirrors CRK's own assets. At its peak, CRK's operating cost per million cubic feet equivalent was $0.84 and has dropped 22.7 percent to $0.65 in the latest earnings report for 2019 Q2. Covey Park's current reported cost per unit is about $0.72, but this includes G&A costs while the $0.65 doesn't. Investors should expect the newly combined entity to see slightly higher costs as acquisitions can cause a bump in costs, but in the long run, the expectation should be those synergies will be realized as CRK has a good track record.
