Comstock Resources Stock: Investing In The Western Haynesville (NYSE:CRK)

Comstock Resources (NYSE:CRK) has been putting a significant amount of investment into the Western Haynesville. It allocated close to half of its Q1 2024 capex towards the Western Haynesville for a combination of exploratory drilling and the acquisition of additional acreage.

The Western Haynesville has generated strong production results so far, but the currently high D&C costs result in reduced capital efficiency. At current D&C costs and well results, the Western Haynesville wells may need $4.50 to $5.00 Henry Hub natural gas to generate good returns.

I am keeping Comstock’s estimated value at $10.25 per share for now. If it is successful in reducing Western Haynesville costs, that should give it a high amount of additional potential inventory. Too much near-term investment in the Western Haynesville (over assets that are currently more capital efficient) may strain Comstock’s balance sheet though.

Western Haynesville Development

Comstock has been adding significantly to its Western Haynesville position, and now has over 450,000 net acres there. It added 189,000 net acres in Q1 2024 for $50 million and also noted that its most recent four Western Haynesville wells had initial production that ranged between 35 to 38 MMcf per day.

This compares favorably to the roughly 20 MMcf per day in initial production from its recent (non-Western) Haynesville wells, although those wells had a bit shorter average lateral length.

The Western Haynesville wells appear to be quite productive, but there are very high costs due to the extreme drilling depths. Bottom hole temperatures are already high in the Haynesville Shale and can reach around 350 degrees Fahrenheit. In the Western Haynesville, temperatures can reach around 425 degrees Fahrenheit.

Aethon Energy and Comstock Resources have been drilling wells in Western Haynesville, but neither company has disclosed exact costs yet. Aethon did mention that its costs tended to be lower than the rumored $30 million to $40 million per well, but an average in the high-$20s million range would still be a lot given Aethon’s recent wells had an average lateral length of a bit over 7,000′.

Comstock’s average Western Hayneville lateral length has been closer to 9,000′, pointing to a likely average cost in that $30 million to $40 million per well range.

So the challenge is that Western Haynesville wells currently appear to cost roughly double a regular Haynesville well of the same length, while the well productivity may only be around 50% to 75% higher.

Thus Comstock’s Western Haynesville wells probably need a 25% D&C cost reduction to be fully competitive with its current regular Haynesville wells.

Q1 2024 Results

Comstock’s Q1 2024 results were in-line with expectations, although it reported negative $143 million in free cash flow during the quarter. This was due to low natural gas prices, its spending on acquiring additional Western Haynesville acreage, along with a heavier development schedule in this part of the year.

Comstock reported $331 million in Q1 2024 capex. Of this, $106 million in D&C costs and $50 million in acquisitions were related to its Western Haynesville assets. This is around 38% of its full-year capex budget.

With lower quarterly capex and somewhat higher natural gas prices, I’d expect Comstock’s free cash flow to be only slightly negative during the rest of the year.

Updated 2024 Outlook

Comstock’s 2024 production outlook remains unchanged and at current strip of approximately $2.30 NYMEX gas, I estimate that it can generate $1.335 billion in revenues after hedges.

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With the increased leasehold acquisition budget for 2024, Comstock is now expected to have around $182 million in cash burn during the year at current strip prices.

If Comstock focused on drilling its existing Haynesville assets instead of exploring the Western Haynesville, it could probably achieve the same overall 2024 production results with around $725 million to $750 million in capex and leasing costs. This assumes that it also didn’t spend the $50 million in Q1 2024 on acquiring Western Haynesville acreage.

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Notes On Valuation

I am maintaining Comstock’s estimated value at $10.25 per share at long-term (after 2024) $3.75 Henry Hub gas. Comstock’s investments in the Western Haynesville may pay off in the long run, but I believe that D&C costs there will need to be reduced by at least 25% to make the returns truly competitive with regular Haynesville wells.

Comstock is expected to have a manageable amount of cash burn in 2024, but it will need to take care in allocating its capex. Too much focus on the Western Haynesville could cause a deterioration in its financial state, due to the combination of low natural gas prices and the weaker capital efficiency of Western Haynesville wells with current D&C costs.

Conclusion

Comstock is now expected to have around $182 million in 2024 cash burn as it has increased its leasehold acquisition budget. Comstock spent $50 million in Q1 2024 to add 189,000 net acres in the Western Haynesville, bringing its position there to over 450,000 net acres.

While the production results have been strong from Comstock’s Western Haynesville wells, D&C costs there appear to be quite high due to the deep drilling required there. I believe that Western Haynesville D&C costs need to be reduced by at least 25% to be fully competitive with Comstock’s main Haynesville assets.

Being able to reduce Western Haynesville costs and prove out its acquired acreage would give Comstock a very large amount of additional inventory. However, Comstock will need to be careful in balancing out exploration with the development of its more proven and capital efficient acreage.