Fitch Ratings has affirmed Comstock Resources Inc.'s (Comstock) Long-Term Issuer Default Rating at 'B+'.

The Rating Outlook is Stable.

Comstock's rating reflects the company's position as one of the largest producers of natural gas in the Haynesville Shale Basin, its industry leading operating and drilling cost structure, the company's ability to generate positive FCF under base and strip pricing assumptions, and relatively low differentials due to its proximity to the Henry Hub and its deep drilling inventory.

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 $1/mcfe which is lower than other Haynesville peers. The Haynesville shale basin is a relatively expensive basin in which to operate as wells tend to be deeper, higher pressure, and hotter than wells in other plays which adds complexity and cost to the drilling process. The proximity of Comstock's acreage to Henry Hub allows the company to achieve minimal differentials for its natural gas.

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 Gulf Coast natural gas liquefaction capacity which will provide greater access to more attractive export markets.

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 $1.2 billion 2023 capital program results in negative FCF. Fitch believes that in low-price scenarios Comstock could cut capital spending back to levels more in line with historical spending ($500 million to $600 million) with modest declines in production.

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 $2.99/mcf. At present, the company has none of its production hedged beyond 2023. The lower level of hedging leaves Comstock more exposed to low price environments. Fitch expects Comstock to extend hedging into 2024 in line with its historical policy in the coming months.

Favorable Debt Paydown: Fitch views the paydown of $506 million in debt during 2022 favorably. Comstock retired the remaining $244 million of 2025 unsecured notes and paid down the $235 million that was outstanding on the revolver. In addition, the conversion of the $175 million of preferred equity into common shares counts as further debt reduction as this preferred stock was not given any equity credit by Fitch. Post the debt paydown and preferred conversion Comstock's Fitch calculated EBITDA leverage is 1.1x but is forecast to increase to 1.8x in 2023.

Derivation Summary

Fitch estimates Comstock's EBITDA leverage at 1.1x as Dec. 31, 2022 and remaining at or under 2.0x levered throughout the forecast period. With leverage in the mid to high 1x level it is on the higher end relative to single B gas-focused peers. This is offset by solid liquidity, lack of near-term maturities and low-cost structure relative to its peers as evidenced by its high EBITDA margins.

Comstock's 2022 production of 1,373 mmcfe/d is higher than other single B peers other than Ascent Resources Utica Holdings (B/Positive; 2,115 mmcfe/d). With reserves totalling 6.7 Tcfe, again Comstock is larger than all the single B gas-focused peers except Asent (8.9 Tcfe). Comstock's 2022 Fitch calculated netback of $5.15/mcfe was the highest among its peers, including Ascent ($4.93/mcfe), Aethon United BR LP (B/Stable; $4.33/mcfe), Gulfport Resources (B+/Stable; $4.83/mcfe), and Encino Acquisition Corporation (B/Stable; $5.10/mcfe).

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case:

West Texas Intermediate oil prices of $80/bbl in 2023, $70/bbl in 2024, $60/bbl in 2025 and $50/bbl in 2026;

Henry Hub natural gas price of $3.50/mcf in 2023 and 2024, $3/mcf in 2025 and $2.75/mcf in 2026;

Production growth of 8% in 2023 and mid-single digit growth throughout the forecast period;

Capex of $1.2 billion in 2023 and decreasing to $1billion in 2024, $800 million in 2025 and $700 million in 2026;

No incremental acquisitions, divestitures or equity issuance. $139 million annual dividend and any FCF is assumed to be used to reduce debt.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Solid Liquidity: Comstock had $55 million of cash on hand and full availability under its $1.5 billion revolver ($2 billion borrowing base and $1.5 billion commitment) as of Dec. 31, 2022. The company addressed its 2025 and 2026 maturities and extended its revolver out to November 2027. In addition, Fitch anticipates modest positive FCF throughout the forecast period. Comstock's next maturity is the revolver in 2027 followed by the $1.2 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 3.5:1.0 and a current ratio of at least 1.0:1.0. The company complied with both as of Dec. 31, 2022.

Issuer Profile

Comstock Resources, Inc. (CRK) is an independent E&P company that operates in the Haynesville Basin. The company has proved reserves of 6.7 Tcfe and a PV-10 value of $12.6 billion as of Dec. 31, 2022. Production for 2022 was 1,373 mmcfe/d, of which 99.9% was gas and .1% was oil.

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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