Fitch Ratings has affirmed Comstock Resources, Inc.'s (Comstock) Long-Term Issuer Default Rating (IDR) at 'B+', affirmed the secured revolver at 'BB+'/'RR1', and has downgraded the unsecured rating to 'B+'/'RR4' from 'BB-'/'RR3' following the proposed note issuance.

The new notes which are rated 'B+'/'RR4' will be used to repay the outstanding balance under the revolver and for general corporate purposes. The Rating Outlook is revised to Negative from Stable.

Comstock's rating reflects the company's position as one of the largest producers of natural gas in the Haynesville shale basin, its industry-leading operating and drilling cost structure, the company's ability to generate positive FCF under base- and strip-pricing assumptions, and relatively low differentials due to its proximity to the Henry Hub and its deep drilling inventory.

The Negative Outlook reflects concerns around potential liquidity deterioration and Comstock's ability to decrease leverage in the current low gas price environment. The company was less hedged than peers in 2023 and funded elevated capex with revolver borrowings. With better hedging in 2024, the suspension of the dividend, lowered capital spending, and an equity infusion the company should be able to repay debt modestly over the year but remains exposed to low natural gas prices.

Key Rating Drivers

Increased Structural Debt: Comstock's addition of more permanent debt to the capital structure drives the recovery rating on the unsecured notes lower. While the transaction to issue bonds to repay revolver borrowings is leverage neutral and improves liquidity, the expected recovery for unsecured bonds declines in Fitch's bespoke recovery analysis.

Low-Cost Operator: Comstock's cost structure supports the credit rating. The company has one of the lowest operating cost structures among its natural gas peers due to its low lease operating costs and gathering and transportation costs. Fitch estimates Comstock's total cash costs per unit of production, including interest, at $1.15/thousand cubic feet of natural gas equivalent (mcfe) which is lower than other Haynesville peers.

The Haynesville shale basin is a relatively expensive basin in which to operate as wells tend to be deeper, higher pressure, and hotter than wells in other plays which adds complexity and cost to the drilling process. The proximity of Comstock's acreage to Henry Hub allows the company to achieve minimal differentials for its natural gas.

Haynesville Scale: Comstock is one of the largest producers in the Haynesville shale basin with strong positions in both eastern and western parts of the play. The eastern provides strong current production and the western provides access to a more prospective part of the play that has shown strong initial results and may provide substantial production growth in the future.

Comstock's scale provides for significantly lower operating, gathering and transportation, and drilling costs. Haynesville producers have been putting down rigs in the current low-price environment, but the basin is expected to be a primary beneficiary of expected increases in Gulf Coast natural gas liquefaction capacity, which will provide greater access to more attractive export markets.

Generally Consistent FCF Generation: In Fitch base and strip cases, lower capex in 2024 and beyond enables Comstock to consistently generate positive FCF, adjusted for the midstream buildout funding received from its joint venture (JV) partner, throughout the remainder of the forecast period. Comstock had been FCF positive since 2020 before producing meaningful negative FCF in 2023 due to high capital spending and the dividend. Fitch believes that, in low-price scenarios, Comstock could cut capex back to levels more in line with historical capex of $500 million-$600 million with modest declines in production.

Lower Hedging Volumes: Comstock's limited hedging in 2023 had a detrimental effect on FCF. Prior to 2023, Comstock had typically hedged approximately 50%-60% of its forward 12-month gas production. Comstock has 28% of expected 2024 production hedged at improved pricing of $3.55 from $2.99 in 2023. Comstock has begun entering into longer dated hedges with approximately 20% of production in 2025 and 2026 hedged around $3.50.

Adequate Liquidity: Comstock's liquidity is adequate but subject to potential deterioration from borrowing base redetermination or covenant breaches. Fitch views the suspension of the dividend, decreased capital spending plan, equity infusion, and terming out of revolver borrowings as favorable for the company's liquidity.

In addition, Comstock entered into a JV with Quantum Capital Solutions under which Quantum agreed to fund up to $300 million to build out the western Haynesville gathering and gas treating system. The reduction in capital spending achieved by this arrangement along with upstream capital spending cuts, dividend suspension, and equity infusion enables Comstock to return to positive FCF generation in 2024 and beyond in Fitch's base case.

Liquidity could be impaired by an unfavorable borrowing base redetermination or non-compliance with a credit agreement leverage covenant in the current low gas-price environment. The company's credit agreement includes a 3.5x leverage covenant. Fitch's forecast shows Comstock maintaining compliance with this covenant, but persistent low gas prices could pressure the company's ability to do so.

Derivation Summary

Fitch estimates Comstock's EBITDA leverage at 2.9x as of Dec. 31, 2023 and remaining at around that level through 2024 before declining in 2025. While this leverage is higher than 'B'-rated peers and above our negative leverage sensitivity we expect leverage to return within sensitivities in 2025. The company has solid liquidity, lack of near-term maturities and low-cost structure relative to its peers as evidenced by its high EBITDA margins.

Comstock's 2023 production of 1,438 million cubic feet of natural gas equivalent per day (mmcfe/d) is higher than other 'B' rated peers other than Ascent Resources Utica Holdings (B/Positive) at 2,135 mmcfe/d. With reserves totaling 4.9 trillion cubic feet of natural gas equivalent (Tcfe), again Comstock is larger than all 'B' rated gas-focused peers except Ascent (8.9 Tcfe). Comstock's 2023 Fitch calculated unhedged levered netback of $1.25/mcfe was higher than its peers with the exception of Gulfport (B+/Stable) at $1.34/mcfe.

Key Assumptions

Floating interest rates based on three-month SOFR curve;

West Texas Intermediate oil prices of $75/bbl in 2024, $65/bbl in 2025, $60/bbl in 2026 and $60/bbl in 2027 and $57/bbl in 2028;

Henry Hub natural gas price of $2.50/mcf in 2024, $3/mcf in 2025 and 2026 and $2.75/mcf thereafter;

Flat to single digit production growth;

Capex of $915 million in 2024 and 2025, offset by $125 million of funding from its JV partner in each of those years before decreasing to $800 million;

No incremental acquisitions, divestitures or equity issuance. Dividend is reinstated in 2026.

Recovery Analysis

The recovery analysis assumes that Comstock Resources would be reorganized as a going-concern in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim.

Comstock's GC EBITDA assumptions reflects Fitch's projections under a stressed case price deck, which assumes Henry Hub natural gas prices of $2.00 in 2024, and $2.25 thereafter. The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which Fitch bases the enterprise valuation (EV).

The GC EBITDA assumption is $700 million, which reflects the decline from current pricing levels to stressed levels and then a partial recovery coming out of a troughed pricing environment. The model was adjusted for reduced production and varying differentials given the material decline in the prices from the previous price deck.

An EV multiple of 4.0x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of the multiple considered the following factors:

The historical case study exit multiples for peer companies ranged from 2.8x-7.0x, with an average of 5.2x and median of 5.4x;

Comstock's $2.2 billion acquisition of Covey Energy Partners, LP in 2019 had an approximate EBITDA multiple of 4.0x. Southwestern acquired Indigo Energy Partners, LLC, a Haynesville operator at an approximate multiple of 3.8x. Indigo is smaller than Comstock in terms of reserves and production.

The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realized in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors. Fitch considers valuations such as SEC PV-10 and M&A transactions for each basin including multiples for production per flowing barrel, proved reserves valuation, value per acre and value per drilling location.

The senior secured revolver is expected to be 90% drawn from the $1.5 billion commitment. This reflects the expectation that in a stressed pricing environment, the borrowing base will be reduced. The allocation of value in the liability waterfall results in recovery corresponding to 'RR1' recovery for the $1.5 billion senior secured revolver and a recovery corresponding to 'RR4' for the senior unsecured notes.

RATING SENSITIVITIES

Factors that Could Individually or Collectively, Lead to Positive Rating Action/Upgrade

Material increase in production and reserves;

Demonstrated commitment to stated conservative financial policy, including hedging program;

Midcycle EBITDA leverage sustained below 2.0x.

Factors that Could Individually or Collectively, Lead to Negative Rating Action/Downgrade

Midcycle EBITDA leverage sustained above 2.5x;

A material reduction in liquidity through excessive borrowings or a reduction in the borrowing base;

A change in terms of financial policy that is debtholder unfriendly.

Liquidity and Debt Structure

Solid Liquidity: Comstock had $17 million of cash on hand and $1.02 billion of availability under its $1.5 billion revolver with a $2 billion borrowing base and $1.5 billion commitment, as of Dec. 31, 2023. In addition, Fitch anticipates modest positive FCF throughout the forecast period. Comstock's next maturity is the revolver in 2027 followed by the $1.2 billion unsecured notes due in 2029 and the $965 million unsecured notes due in 2030. The revolver has two financial covenants: a leverage ratio of less than 3.5 to 1.0 and a current ratio of at least 1.0 to 1.0. The company complied with both as of Dec. 31, 2023.

Issuer Profile

Comstock Resources, Inc. (CRK) is an independent E&P company that operates in the Haynesville Basin. The company has proved reserves of 4.9 Tcfe and a PV-10 value of $2.4 billion as of Dec. 31, 2023. Production for 2023 was 1,438 mmcfe/d, of which 99.9% was gas and .1% was oil.

While public, 67% of the shares of the company are held by one shareholder. This shareholder is not on the Board but does exert a level of strategic control of the company.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The ESG credit relevance score for Governance Structure is a '4' due to the consolidated ownership of the common shares with 67% of the outstanding shares owned by one shareholder. This shareholder does not sit on the board but can exert a level of strategic control.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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