Comstock Resources (CRK)

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Avinash Gandhi

Comstock Resources is an independent oil and gas company that operates primarily in the Southern United States and offshore Gulf of Mexico; it has a proved reserve split of 77% natural gas and 23% oil, with 60% of its hydrocarbons coming from onshore reserves in the Southern United States, and the rest coming from the Gulf of Mexico^[1]. Comstock operates in the Gulf through the separately traded company, Bois D'Arc Energy (BDE), in which it holds a controlling stake. Recently, rising oil and gas prices have been highly beneficial to the company; in a commodity-like market, higher product prices push up profits. On the flip side, higher prices will lead to increased production, eventually causing prices to fall. Comstock's bet on deepwater oil exploration, realized through Bois D'Arc, depends on a continued state of high oil prices, as deepwater technology is very risky and very expensive. With prices currently high and shallow-water production declining, the company will benefit from successful deepwater attempts, but a fall in the price level could make Bois D'Arc's business much less profitable. Comstock's competitors include Anadarko Petroleum, EnCana, Apache, and Cabot Oil & Gas.

Business Financials

Though Comstock's growth rate has been erratic in recent years, the company has continued to grow. It should be noted that the large increase in revenue from 2005 to 2006 can probably be attributed to the inclusion of Bois D'Arc Energy's financial data by Comstock's accountants in 2006.

Comstock does most of its production in Texas and Louisiana, though its arm in the Gulf, Bois D'Arc Energy, has the highest regional production and the largest quantity of proven reserves of any segment of the company. It should be noted, however, that Gulf shelf production is easier than onshore production, causing offshore reserves to drain more quickly and making acquisition of new reserves constantly necessary. Comstock plans on remedying this problem through deepwater oil exploration.

Source: 2006 Annual Report^[2]

• Mmcf: Million cubic feet
• Mbbl: Thousand barrels
• MMbbls: Million barrels
• Mmcfe: Million cubic feet equivalent
• Bcf: Billion cubic feet
• Bcfe: Billion cubic feet equivalent

Trends and Forces

Oil and Gas Prices Are Key to Comstock's Operations

Oil and gas prices have fluctuated heavily over the past few years, though the most recent trend is a rise in prices, with a barrel of oil trading in international market a day after the new year at just over $100. Because both are nonrenewable forms of energy (they will eventually run out), slowing discoveries of new sources combined with increasing pricing has led to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's gas can only be differentiated from another company's gas based on price. While Comstock currently benefits from high prices, the profitability of the current market will drive increased exploration and production, which could eventually cause prices to fall and margins to drop.

Comstock Would Benefit from a Natural Gas Future

Natural gas is being touted by a number of sources as "the" alternative to oil and coal; ss a source of heating energy, it is cheaper^[3] and, in recent years, seemingly more abundant. Natural gas can be seen as environmental also: in terms of "dirty" emissions like sulfur and nitrogen oxides, natural gas is far cleaner than oil (though less so in terms of greenhouse gases. With 657 billion cubic feet of natural gas in its reserved, versus 194.4 billion cubic feet equivalent of oil (32.4 million barrels^[4]), Comstock would feel the sting of a transition away from oil and to natural gas much less than many more heavily oil-invested competitors.

Comstock's Heart Is in the Gulf

Hurricanes in the Gulf of Mexico pose a threat to third quarter profitability for Comstock, as they can damage equipment, hurt employees, and make transportation of products very difficult for Bois D'Arc Energy. Furthermore, Comstock plans on doing deepwater exploration and extraction, processes which are more expensive than operations on the shelf of the Gulf. It's possible that these operations could drive costs up, especially because of the increased demand for deepwater drilling driving up the cost of equipment rental. Furthermore, these operations are riskier than shelf operations - Comstock has a 73% overall success rate in exploration, and a 54% success rate in deepwater oil exploration^[5], meaning there is a relatively high probability that the company could spend millions drilling without striking hydrocarbons. Given that shelf explorations have been yielding less and less in recent years, however, the company could have no choice but to take the risk.

Environmental Concerns Could Create Long-Term Problems

Fossil fuels, though highly cost-efficient forms of energy, are heavy polluters when burned. Increasing environmental concern over environmental degradation and global climate change is fueling a consumer-driven push away from dirty forms of energy toward cleaner forms like wind, solar, biofuels, and/or nuclear. The current international focus on slowing carbon emissions is very likely to slow the market for both oil and natural gas, especially in developed, politically-progressive regions like Europe, where renewables are becoming more popular. In emerging markets like China and India, however, the drive for economic growth supersedes environmental concerns, and oil and gas are still cheaper than solar. Since emerging markets are where most of the future opportunities in the global economy lay, Comstock and other oil and gas companies could continue to grow even with strong growth in the renewables sector.

Competition

Comstock's main competitors lie in the independent oil and gas sector, since the major oil companies like Exxon Mobil and BP are too large and diverse to fairly be called "competition". Among Comstock's independent competitors are Anadarko Petroleum, Cabot Oil & Gas, Comstock Resources, and Apache. Anadarko Petroleum is by far the largest of these; it produces over thirty-two times the oil and ten times the gas that Comstock does. Apache's strategy is a unique one; the company buys up "mature" properties from oil majors and then extracts more from them, taking advantage of the high price level to keep margins up despite the use of expensive technology. 97% of Cabot Oil & Gas's reserves contain natural gas^[6], but the company has divested from its offshore holdings to focus exclusively on onshore North America, making it less of a threat to Comstock and its deepwater business. EnCana is a Canadian company that produces about twice the gas of even Anadarko, giving it a production advantage over Comstock, but EnCana also has Canadian regulatory restrictions and issues with exchange rates that Comstock does not have to deal with.

Notes

1. ↑ CRK 2006 10-K, Item 1, Page 7, http://sec.gov/Archives/edgar/data/23194/000095013407004595/d43050e10vk.htm#104
2. ↑ http://sec.gov/Archives/edgar/data/23194/000095013407004595/d43050e10vk.htm
3. ↑ http://en.wikipedia.org/wiki/Natural_gas#Cost_comparison_with_heating_oil_in_the_USA
4. ↑ http://sec.gov/Archives/edgar/data/23194/000095013407004595/d43050e10vk.htm
5. ↑ http://sec.gov/Archives/edgar/data/23194/000095013407004595/d43050e10vk.htm#105
6. ↑ Reuters, Cabot Oil & Gas Corp, http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=COG