Fitch Ratings has affirmed
The Rating Outlook is Stable.
Comstock's rating reflects the company's position as one of the largest producers of natural gas in the
The conversion of the preferred stock to common further improves leverage but increases an already consolidated ownership structure. This is offset by the company's modestly higher leverage and less robust hedging program relative to its peers. The Stable Outlook reflects Fitch's expectation of positive FCF over the forecast horizon.
Key Rating Drivers
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. Comstock's total cash costs per unit of production are just above
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 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
Consistent FCF generation: In Fitch Base and Strip cases, a reversion to slightly lower capex in years beyond 2023 allows for consistent positive FCF generation throughout the remainder of the forecast period. Comstock has been FCF positive since 2020. Using the middle of Comstock's 4% to 13% production growth guidance for 2023 and the full
Diminished Hedging Program: Fitch view Comstock's decreased hedging level as a modest credit negative. Comstock has typically hedged approximately 50%-60% of its forward 12-month gas production; however only 35% of expected 2023 production is hedged at an average price of
Favorable Debt Paydown: Fitch views the paydown of
Derivation Summary
Fitch estimates Comstock's EBITDA leverage at 1.1x as
Comstock's 2022 production of 1,373 mmcfe/d is higher than other single B peers other than
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case:
West Texas Intermediate oil prices of
Production growth of 8% in 2023 and mid-single digit growth throughout the forecast period;
Capex of
No incremental acquisitions, divestitures or equity issuance.
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 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.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Solid Liquidity: Comstock had
Issuer Profile
While public, 66% 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 66% of the outstanding shares owned by one shareholder. This shareholder does not sit on the Board but can exert a level of strategic control. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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