I don’t wish to brag (who am I kidding, of course I do!), but three weeks ago, in these very pages, I wrote a positive piece on Goodrich Petroleum (GDP). At the close of that day, the stock stood at $17.11. As I write, it is trading at over $26. Obviously, 50% in three weeks is a fairly good result, but if you missed that one, don’t despair. There is another way to play the same field, and I literally mean field.
The reason for my positive view of GDP was their heavy involvement in the Tuscaloosa Marine Shale oilfield, or TMS. Predictably enough, I guess, the success there that Goodrich announced which resulted in their stock surging also lifted other firms involved in the exploration of the play. One of them is Comstock Resources (CRK). In November of last year they announced the acquisition of 55,000 acres close to already successful wells in the TMS.
Before we go any further, the above, a 1 month chart for CRK doesn’t represent my usual idea of value. The stock is up over 30% in the last month and I am not usually a big momentum guy. My time in the interbank forex market left me with a natural aversion to jumping in when a move had already taken place. I hate the idea of providing the liquidity for early adopters to take a profit. In this case, though, the good news that will really push the stock could still be yet to come.
First, though, let’s look at the risks. Comstock has a large exposure (around 68%) to natural gas…
I don’t wish to brag (who am I kidding, of course I do!), but three weeks ago, in these very pages, I wrote a positive piece on Goodrich Petroleum (GDP). At the close of that day, the stock stood at $17.11. As I write, it is trading at over $26. Obviously, 50% in three weeks is a fairly good result, but if you missed that one, don’t despair. There is another way to play the same field, and I literally mean field.
The reason for my positive view of GDP was their heavy involvement in the Tuscaloosa Marine Shale oilfield, or TMS. Predictably enough, I guess, the success there that Goodrich announced which resulted in their stock surging also lifted other firms involved in the exploration of the play. One of them is Comstock Resources (CRK). In November of last year they announced the acquisition of 55,000 acres close to already successful wells in the TMS.
Before we go any further, the above, a 1 month chart for CRK doesn’t represent my usual idea of value. The stock is up over 30% in the last month and I am not usually a big momentum guy. My time in the interbank forex market left me with a natural aversion to jumping in when a move had already taken place. I hate the idea of providing the liquidity for early adopters to take a profit. In this case, though, the good news that will really push the stock could still be yet to come.
First, though, let’s look at the risks. Comstock has a large exposure (around 68%) to natural gas and gas futures, often a volatile market, are currently re-testing their 52 week highs.
Obviously this presents some degree of risk. If natural gas prices top out again at these levels, then CRK will drop with them. The total effect, however, may not be as bad as you think. CRK, according to a recent Stifel report, has only around $0.13 per share sensitivity to each $0.20 move in natural gas prices.
Secondly, the company is still testing both their TMS wells and others in the East Texas Eagle Ford field. Buying CRK is a bet that results from both areas will be positive and if not, then you will get hit. For this reason, prudent stop losses, say around the pre-jump $22-24 level would be a good idea.
Despite the desirability of stop-loss protection, though, this is not necessarily a short-term trade. Results from Eagle Ford are not expected until a few months from now, with the Q2 earnings results due in August a likely time to announce flow rate. In addition, CRK is taking a conservative approach to TMS, delaying drilling operations there until others confirm a low risk scenario.
Q1 results will be announced on April 6th and the consensus view of analysts is that this will herald a move to profitability for Comstock, with Earnings per Share (EPS) of $0.07. That could provide a boost if those numbers are met or exceeded, but the real play is on later announcements regarding Eagle Ford and the TMS wells.
Given the success of Goodrich and others in both areas, though, it doesn’t seem unreasonable to expect good news from Comstock in the near future. If that comes, the upside potential of CRK is still significant, despite the recent price rise. I don’t expect another 50% profit in three weeks, but as a longer term investment, CRK looks to have a good chance of success with a decent risk reward ratio.
