Fitch Ratings has affirmed
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
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
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
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
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
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
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
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
Key Assumptions
Floating interest rates based on three-month SOFR curve;
West Texas Intermediate oil prices of
Flat to single digit production growth;
Capex of
No incremental acquisitions, divestitures or equity issuance. Dividend is reinstated in 2026.
Recovery Analysis
The recovery analysis assumes that
Comstock's GC EBITDA assumptions reflects Fitch's projections under a stressed case price deck, which assumes
The GC EBITDA assumption is
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
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
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
Issuer Profile
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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