Rising Renewables Will Undermine Haynesville Drilling Viability

Key Takeaways

• Long-term demand, revenues, and asset values are threatened by global energy transition, increasing regulations, and the company's reliance on natural gas from a single region.
  
• Rising costs, capital constraints, and ESG pressures squeeze margins, limit financing options, and could require asset sales or cutbacks in drilling.
  
• Strong operational efficiency, strategic infrastructure investments, and disciplined financial management position the company to benefit from growing Gulf Coast LNG export and regional power demand.

Catalysts

An independent energy company, engages in the acquisition, exploration, development, and production of natural gas and oil properties in the United States.

• Rapid acceleration of global renewable energy adoption and electrification is poised to erode long-term natural gas demand, which will place sustained downward pressure on Comstock's core revenues and diminish the value of their large drilling inventory in the Haynesville Shale over time.
  
• Implementation of intensified climate policies and potential carbon pricing mechanisms globally will directly increase future regulatory compliance costs, severely impacting net margins and putting persistent structural pressure on Comstock's earnings profile.
  
• Comstock's high geographic and commodity concentration in the Haynesville and in natural gas exposes the company to significant revenue volatility and amplifies the risk of severe cash flow disruptions in the event of regional market or infrastructure setbacks, especially as diversified energy sources displace gas in the power sector.
  
• Continued capital intensity required to sustain production growth in deeper, higher-pressure Western Haynesville wells, combined with rising industry costs and the need for specialized completion techniques, will likely drive up per-unit costs, compress margins, and reduce overall profitability as technological gains hit diminishing returns.
  
• Mounting ESG-driven capital constraints and institutional divestment are set to restrict Comstock's access to financing, raise interest expense, and may ultimately force reductions in drilling activity or asset sales at unattractive valuations, further impairing both revenue growth and net income over the long term.

Comstock Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Comstock Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Comstock Resources's revenue will grow by 7.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.4% today to 20.8% in 3 years time.
• The bearish analysts expect earnings to reach $431.5 million (and earnings per share of $1.46) by about September 2028, up from $-72.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, up from -64.6x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Comstock Resources Future Earnings Per Share Growth

Risks

• The company's large, low-cost acreage position in the Haynesville and Bossier shales-particularly the rapidly expanding, high-productivity Western Haynesville asset-positions it to be a key supplier for Gulf Coast LNG export growth, which could support long-term demand, realized pricing, and top-line revenues.
  
• Rapid improvements in well design, drilling efficiency, and completion techniques, such as the horseshoe lateral program and tighter stage spacing, are lowering per-unit drilling and completion costs, potentially increasing margins and improving overall profitability.
  
• Strategic investment in company-owned midstream infrastructure, including a new gas treating plant that more than doubled treating capacity, ensures reliable market access and reduces basis differentials, supporting more stable revenue streams and higher net margins.
  
• Disciplined capital allocation and planned deleveraging through the sale of noncore assets, alongside strengthening cash flow and reduced leverage, improve the company's financial flexibility and reduce interest expense, supporting future earnings growth.
  
• Partnerships and proximity to major energy infrastructure and the Dallas Metroplex, such as its agreement with NextEra Energy for potential gas-fired power generation targeting data centers, position the company to benefit from long-term secular growth in North American electricity and data demand, which in turn could boost revenues and cash flow.

Valuation

• The assumed bearish price target for Comstock Resources is $10.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Comstock Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $431.5 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $15.99, the bearish analyst price target of $10.0 is 59.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.