Fitch Downgrades Comstock Resources' IDR to 'B' and Unsecured Rating to 'B'/'RR4'; Outlook Stable

Published: 2025-04-01 06:11:14 ET CRK

Fitch Ratings has downgraded Comstock Resources Inc.'s Long-Term Issuer Default Rating (IDR) to 'B' from 'B+', secured revolver to 'BB' with a Recovery Rating of 'RR1' from 'BB+'/'RR1', and unsecured ratings to 'B'/'RR4' from 'B+'/'RR4'.

The rating on the secured revolver has been subsequently withdrawn for commercial reasons. The Rating Outlook for the IDR is Stable.

Comstock's ratings reflect its position as one of the largest producers of natural gas in the Haynesville shale basin, solid operating cost structure, and relatively low differentials due to its proximity to the Henry Hub. These factors are offset by Comstock's difficulty generating consistent positive FCF using Fitch's base case price deck and elevated leverage.

The rating downgrades reflect the uncertainty regarding Comstock's ability to return within leverage sensitivities and difficulty generating positive FCF using Fitch's base case price deck.

The rating on the secured revolver is being withdrawn due to commercial reasons.

Key Rating Drivers

Challenged FCF Generation: Comstock consistently generates negative FCF using Fitch's base case pricing. Comstock generated negative FCF in both 2023 and 2024. In Fitch's base case, FCF remains negative until 2028. Production increased by nearly 5% in 2023 due to elevated capital spending, while it remained flat in 2024 following a 31% reduction in capital spending. Comstock has guided towards 22% higher capital spending in 2025, with an expected 8% reduction in production. It is not unusual for shale production to experience a 9-12-month lag in returning to production growth after significant capex cuts. Production is expected to return to growth in 2026.

At strip pricing, the company returns to positive FCF in 2025 and should be able to repay revolver borrowings by the end of 2026. Fitch-rated peers in the 'B+' category are able to generate more consistent positive FCF at base case pricing.

Elevated Leverage: Comstock's leverage has been above Fitch's negative leverage sensitivity since 2023 and is expected to remain above it throughout the forecast. The company improved liquidity with the $400 million add-on to the senior notes in 2024. However, the expected negative FCF limits Comstock's ability to repay revolver borrowings and improve leverage metrics. Using strip pricing allows leverage to return within the leverage sensitivities throughout the forecast but leaves the company exposed to large maturities in 2029 and 2030.

Low-Cost Operator: Comstock's operating 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 2024 total cash costs per unit of production, including interest, at $1.17/thousand cubic feet of natural gas equivalent (mcfe), which is lower than other Haynesville peers.

Haynesville Drilling Costs: High drilling costs in the Haynesville weigh on Comstock's ratings. The reserves in the Haynesville shale basin are hotter, deeper, and higher pressure than other competing natural gas basins. This increases the cost of drilling wells in the basin and makes it more expensive to maintain production. The high cost of drilling and the focus on developing its Western Haynesville acreage has contributed to Comstock's negative FCF. The Western Haynesville acreage has the potential to be a large contributor to reserves, production and cash flow, but requires significant spending over the next few years to delineate and develop the play.

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. The basin's proximity to Gulf Coast natural gas liquefaction and export terminals is beneficial.

Improved Hedging Volumes: Comstock's return to hedging approximately 50%-60% of its forward 12-month gas production is a credit positive. Relatively low hedging in 2023 had a negative impact on performance. The company currently has around 50% of 2025 expected production hedged at $3.48/mcf and around 60% of Fitch forecasted 2026 production hedged at $3.50/mcf.

Peer Analysis

Fitch estimates Comstock's EBITDA leverage at 3.6x as of Dec. 31, 2024 and is forecast to remain above 2.5x. This leverage is higher than that of peers rated 'B' and above our negative leverage sensitivity.

Comstock is larger than other 'B' rated peers with 2024 production of 1,442 million cubic feet of natural gas equivalent per day (mmcfe/d) and reserves totaling 3.7 trillion cubic feet of natural gas equivalent. Comstock's 2024 Fitch-calculated unhedged levered netback of $0.81/mcfe was lower than its peers. Comstock has exhibited the lowest FCF margins amongst its peers over the past several years.

Key Assumptions

Floating interest rates based on three-month SOFR curve;

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

Henry Hub natural gas price of $3.25/mcf in 2025, $3/mcf in 2026 and $2.75/mcf thereafter;

High single-digit production decline in 2025, followed by mid-teens production growth in 2026, then modest single digit growth;

Capex of between $750 million and $1,200 throughout forecast;

Midstream capex funding from JV partner of $140 million in 2025 and $110 million in 2026;

No incremental acquisitions, divestitures or equity issuance.

Recovery Analysis

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

Comstock's going-concern (GC) EBITDA assumptions reflect 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 $675 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. The $675 million represents a 4% decrease from the previous GC EBITDA due to changes in our stress case model.

An EV multiple of 4.0x EBITDA is applied to the GC EBITDA to calculate a post-reorganization EV. 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' for the secured revolver and 'RR4' for the senior unsecured notes.

RATING SENSITIVITIES

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

Midcycle EBITDA leverage sustained above 3.5x;

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.

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

Consistent positive FCF generation at mid-cycle pricing leading to gross debt reduction;

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

Midcycle EBITDA leverage sustained below 2.5x.

Liquidity and Debt Structure

Comstock had $7 million of cash on hand and $1.09 billion of availability under its $1.5 billion revolver with a $2 billion borrowing base and $1.5 billion commitment, as of Dec. 31, 2024. Under Fitch's base case, FCF generation is mostly negative. Utilizing strip pricing, there is more consistent positive FCF generation and Fitch forecasts repayment of revolver borrowings by 2026.

Comstock's next maturity is the revolver in 2027 followed by the $1.62 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 4.0x, which falls to 3.75x on June 30, 2025 and 3.5x on September 30, 2025 and a current ratio of at least 1.0. The leverage covenant was amended in 2024 to avoid a covenant breach. The company complied with both as of Dec. 31, 2024.

Issuer Profile

Comstock Resources, Inc. is an independent E&P company operating in the Haynesville Basin. The company has proved reserves of 3.8 Tcfe and a PV-10 value of $1.6 billion as of Dec. 31, 2024. Production for 2023 was 1,442 mmcfe/d, of which 99.9% was gas and .1% was oil.

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.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

Comstock has an ESG Relevance Score of '4' for Governance Structure due to the consolidated ownership of 71% of the outstanding shares by one shareholder. This shareholder does not sit on the board but can exert a level of strategic control. This has a negative impact on the company's credit profile and is relevant to the rating in conjunction with other factors.

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.