Fitch downgrades Comstock Resources’ long-term issuer default rating

Investing.com -- Fitch Ratings has downgraded Comstock Resources Inc (NYSE:CRK).’s Long-Term Issuer Default Rating (IDR) to ’B’ from ’B+’, along with the secured revolver to ’BB’ and unsecured ratings to ’B’/’RR4’ on March 31, 2025. The rating on the secured revolver has been withdrawn due to commercial reasons. Despite the downgrade, the Rating Outlook for the IDR remains stable.

Comstock Resources, a significant natural gas producer in the Haynesville shale basin, has been grappling with challenges related to generating consistent positive free cash flow (FCF) and managing elevated leverage. These issues have led to the downgrade of its ratings.

The company’s ratings reflect its status as a major producer in the Haynesville shale basin, its solid operating cost structure, and relatively low differentials due to its proximity to the Henry Hub. However, these factors are offset by the company’s struggle to generate consistent positive FCF and its high leverage.

Comstock’s FCF generation has been consistently negative, as per Fitch’s base case pricing. The company generated negative FCF in both 2023 and 2024, and Fitch predicts this trend to continue until 2028. Despite a 31% reduction in capital spending in 2024, production remained flat, following a nearly 5% increase in 2023 due to elevated capital spending. Comstock is guiding towards 22% higher capital spending in 2025, with an expected 8% reduction in production. Production is expected to return to growth in 2026.

Comstock’s leverage has been above Fitch’s negative leverage sensitivity since 2023 and is expected to continue this trend. The company did improve 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.

Despite these challenges, 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.

However, 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.

Comstock’s return to hedging approximately 50%-60% of its forward 12-month gas production is a credit positive. 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.

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 Fitch’s negative leverage sensitivity.

In the case of a bankruptcy, Fitch assumes that Comstock would be reorganized as a going-concern rather than liquidated. The recovery analysis assumes a 10% administrative claim. 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.

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