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On Thursday, Comstock Resources (NYSE:CRK) stock received a lowered rating from Piper Sandler, moving from Neutral to Underweight. The firm also reduced the stock's price target to $5.00, down from the previous $8.00. The downgrade was primarily attributed to a decrease in the long-term natural gas price assumption, now set at $3.25, down from $4.00.
The revision follows Comstock's second-quarter performance, which missed expectations due to lower-than-anticipated gas volumes. Despite the shortfall, the company has provided third-quarter 2024 production guidance with a midpoint of 1.45 billion cubic feet equivalent per day (bcfe/d) and has kept its full-year 2024 guidance steady, ranging from 1.425 to 1.525 bcfe/d.
Comstock's financial leverage remains a concern, with trailing twelve-month net debt to EBITDA ratio standing at 3.4 times. The company's debt metrics are under pressure, particularly with a weak front end of the curve.
Although Comstock has expressed intentions to ramp up operations in the Western Haynesville, where it has secured a 450,000-acre position, the firm anticipates a necessary reduction in activity due to the projected $3 gas environment for the fiscal year 2025.
The company is expected to see some benefits from new wells turned in line (TILs) in the Western Haynesville during the fourth quarter of 2024. However, Piper Sandler has decreased its capital expenditure estimate for the fiscal year 2025 to approximately $700 million, a significant reduction from the prior forecast of $1.06 billion.
This cut in spending is projected to lead to a 9% drop in production forecasts for 2025 to 1.32 bcfe/d, down from the previous expectation of 1.43 bcfe/d.
The production forecast for the fiscal year 2024 has also been adjusted downward to 1.44 bcfe/d from 1.47 bcfe/d. Looking ahead, the firm projects a slight improvement in leverage to 2.7 times by the end of 2025, compared to an anticipated 3.0 times at the end of 2024.
InvestingPro Insights
Following the rating downgrade and price target reduction by Piper Sandler, Comstock Resources (NYSE:CRK) presents a complex financial picture. InvestingPro data indicates a market capitalization of $3.07 billion, with a negative P/E ratio of -150.07, reflecting the challenges in profitability that the company faces. The revenue has seen a significant decline over the last twelve months as of Q2 2024, with a drop of 52.6%, and the gross profit margin stands at 54.63%, suggesting some operational efficiency despite the revenue fall.
InvestingPro Tips highlight several critical issues for investors to consider. Comstock Resources operates with a significant debt burden and is quickly burning through cash, which aligns with the concerns raised about financial leverage in the article. Additionally, the company's short-term obligations exceed its liquid assets, indicating potential liquidity challenges. These factors, combined with the expectations that net income is expected to drop this year and analysts' anticipation that the company will not be profitable this year, paint a cautious picture for potential investors.
For readers interested in a deeper analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/CRK, which provide further insights into Comstock Resources' financial health and future prospects.
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