Executive Summary / Key Takeaways

• Comstock Resources is strategically positioned as a pure-play natural gas producer in the prolific Haynesville basin, leveraging its established Legacy assets and aggressively developing the high-potential, technically challenging Western Haynesville play.
• The company has invested over $1 billion to build a 520,000 net acre footprint in the Western Haynesville, which is expected to yield significantly more resource potential per section than the Legacy area and offers thousands of future drilling locations.
• Operational execution and technological advancements, including significant reductions in drilling times and D&C costs in the deep, high-pressure Western Haynesville and the successful application of the horseshoe lateral concept in the Legacy area, are key drivers of inventory value and competitive positioning.
• Despite navigating a period of historically low natural gas prices in 2024, CRK has maintained strong liquidity, shored up its balance sheet through strategic financing, increased hedging, and is focused on funding its 2025 program from operating cash flow while targeting significant leverage reduction.
• Near-term financial performance is influenced by gas price volatility and derivative valuations, but the long-term outlook is underpinned by anticipated demand growth from LNG exports, AI-driven power generation, and industrial users, for which CRK's Gulf Coast proximity and developing low-carbon initiatives (like the BKV Corporation (BKV) CCUS partnership) provide a competitive advantage.

The Pursuit of the Holy Grail: Positioning for the Golden Age of Natural Gas

Comstock Resources, Inc. (CRK) operates as a focused exploration and production company, primarily targeting the vast natural gas reserves within the Haynesville and Bossier shales across East Texas and North Louisiana. In an industry increasingly driven by the burgeoning demand for natural gas – fueled by expanding LNG export capacity, the power needs of AI and data centers, and growing industrial consumption along the Gulf Coast – CRK has strategically positioned itself to be a key supplier. This positioning is not accidental; it is the culmination of a deliberate, multi-year strategy initiated around late 2017/early 2018 with significant backing from its majority shareholder, Jerry Jones and his family. The core objective: to build substantial drilling inventory, ensure production can be brought to market efficiently, and align the company with the long-term structural growth in natural gas demand.

While the company maintains a valuable position in the established Legacy Haynesville area, its strategic narrative has increasingly centered on the ambitious pursuit of a new frontier: the Western Haynesville play in Texas. Management has explicitly referred to drilling inventory as the "holy grail," and for the past five years, CRK has pursued exploration in the Western Haynesville to find it. This effort began with a grassroots leasing program in 2020 and has since grown into a massive 520,000 net acre footprint, built through a combination of leasing and strategic acquisitions, representing an investment exceeding $1 billion. This acreage is considered virtually undeveloped compared to the Legacy area, holding the potential for thousands of future drilling locations across multiple prospective benches.

The strategic importance of the Western Haynesville is amplified by its proximity to the Gulf Coast, home to over $100 billion in LNG facilities and a hub for growing industrial and power generation demand. Located approximately 100 miles from both Dallas and Houston, CRK's position is seen as ideal for serving these markets. This geographic advantage is a key competitive differentiator, potentially leading to better gas price realizations compared to producers located further inland.

Complementing its acreage position, CRK has also invested in capturing more of the value chain by developing its own midstream assets in the Western Haynesville through a joint venture, Pinnacle Gas Services, with Quantum Capital Solutions. This partnership, initiated in late 2023 with Quantum committing up to $300 million for build-out, ensures controlled gathering and treating capacity essential for bringing Western Haynesville production to market efficiently. The existing Pinnacle pipeline system, including 246 miles of high-pressure pipeline and treating plants, is considered the backbone of this new footprint and a valuable asset that would be costly to replicate.

Technological Edge and Operational Mastery

Unlocking the value of the Western Haynesville is not merely about acreage and infrastructure; it requires overcoming significant technical challenges. The play involves drilling deep, high-pressure horizontal wells at vertical depths reaching 19,000 feet where temperatures can exceed 400 degrees Fahrenheit. CRK's operations team has focused intensely on mastering these conditions, achieving substantial improvements in drilling efficiencies and cost reduction.

Key technological and operational advancements include:

• Deep, High-Pressure Drilling & Completion: Through continuous refinement, average drilling times to total depth in the Western Haynesville have been dramatically reduced from approximately 85 days initially to 55 days in Q1 2025. The fastest well to date was drilled in just 37 days with a 12,045-foot lateral. This efficiency gain is driven by improved casing designs, utilization of insulated drill pipe (which helps tools perform better in high temperatures), better downhole motor performance, and the strategic shift to two-well pads, which offer a 5-7% cost reduction compared to single wells. These operational improvements have translated into a 34% reduction in drilling cost per lateral foot since 2022, reaching $1,374/ft in Q1 2025, and a 28% reduction in completion cost per lateral foot from Q4 2022 levels to $1,315/ft in Q4 2024.
• Horseshoe Lateral Technology: In the Legacy Haynesville, CRK is implementing innovative techniques like the horseshoe lateral concept. This involves drilling a 180-degree turn to connect two adjacent short lateral locations into a single long lateral well. The first test well, Sebastian 11 #5, achieved an IP rate of 31 MMcf/d from a 9,382-foot lateral and cost approximately $1,700/ft, slightly below projections. This technology is transformative for inventory economics, converting previously less attractive short lateral locations into highly economic long laterals. It delivers significant cost savings (e.g., 23% or $8 million per section compared to drilling multiple short laterals) and substantially improves economic metrics, tripling the return rate and less than halving payouts for these specific locations. CRK is actively converting short Haynesville locations (57% identified so far, totaling 64 locations) and evaluating Bossier locations for this application.
• Carbon Capture & Emissions Reduction: Looking ahead, CRK is exploring initiatives to lower its carbon footprint, enhancing the marketability of its gas in a world increasingly focused on environmental considerations. A recent collaboration agreement with BKV Corporation aims to study and potentially deploy carbon capture projects at two Western Haynesville gas processing facilities. This partnership is structured such that BKV would fund the capital outlays and receive tax credits, while Comstock would sell the captured CO2 and see a net reduction in operating costs, without requiring significant capital investment from CRK. The company also utilizes dual-fuel frac fleets and drilling rigs, and has deployed advanced emissions monitoring technology across its sites, enabling certification of its gas as responsibly sourced. These efforts contribute to a lower greenhouse gas intensity (2.5 kg CO2e/BOE in 2024, down 28% from 2023) and methane emission intensity (0.039% in 2024, down 2.5% from 2023).

These technological and operational strengths form a critical part of CRK's competitive moat. While larger competitors like EQT Corporation (EQT) and Chesapeake Energy (CHK) benefit from scale and broader portfolios, CRK's focused expertise in the Haynesville, its integrated midstream assets, and its demonstrated ability to drive down costs in challenging environments provide a distinct advantage, particularly in its core operating areas. This allows CRK to maintain a competitive cost structure, which management believes is among the lowest in the industry.

Financial Performance and Outlook

CRK's financial performance over the past year has been significantly impacted by the volatile and often historically low natural gas price environment. In Q1 2025, however, the picture improved markedly compared to Q1 2024, driven by higher realized gas prices. Natural gas and oil sales increased by 43% to $413.0 million in Q1 2025, despite an 18% decrease in production volume, as the average realized gas price jumped 74% to $3.58 per Mcf. Including hedging, the realized price was $3.52 per Mcf. Gas service revenues also saw a substantial 109% increase, largely due to higher prices on purchased gas for resale.

Despite the revenue improvement, the quarter saw a net loss of $115.4 million, primarily driven by significant net losses from derivative financial instruments ($330.3 million) reflecting the increase in future NYMEX prices. Operating income, excluding these non-cash derivative impacts, was $126.2 million in Q1 2025, a significant improvement from an operating loss in Q1 2024.

Operating expenses saw mixed trends. Production and ad valorem taxes decreased due to lower production and a lower Louisiana tax rate. Gathering and transportation costs also decreased with lower production. Lease operating expenses remained relatively flat in absolute terms but increased on a per-unit basis due to lower volumes. DDA decreased with lower production but the rate per Mcfe increased due to higher finding and development costs.

For the full year 2024, the impact of low prices was more pronounced, with revenue declining 7% despite comparable production volumes to 2023. This necessitated strategic adjustments, including capital expenditure reductions (down 34-41% from 2023 levels), achieved by dropping two rigs and one frac spread in Q1 2024, and the suspension of the quarterly dividend to conserve cash.

As of March 31, 2025, CRK maintained strong liquidity totaling $1.0 billion, comprising $990.0 million of unused capacity under its $1.5 billion bank credit facility (with a $2.0 billion borrowing base reaffirmed in April 2025) and $32.9 million in cash.

The company successfully managed its debt covenants, securing an amendment to loosen the leverage ratio requirement during the low-price period, although the covenant tightens again in Q2 and Q3 2025. Recent financing activities, including a $100.5 million equity placement with the majority shareholder and a $400 million senior notes offering in early 2024, bolstered the balance sheet.

The outlook for 2025 reflects a strategic focus on the Western Haynesville and balance sheet improvement. The company expects to spend an additional $780 million to $880 million in the remaining nine months of 2025 on drilling, completion, and infrastructure. Midstream expenditures of $130 million to $150 million in 2025 are expected to be fully funded by the noncontrolling interest partner, allowing CRK's operating cash flow to be directed towards funding its drilling program and reducing debt.

Management anticipates funding the 2025 drilling program primarily from operating cash flow, depending on gas prices, and using any excess cash flow to pay down debt. A key assumption supporting this is a strong hedge position, targeting 50% of expected production for 2025 and 2026 at prices around $3.50 per Mcf or better, which is intended to safeguard the program from price volatility. With improved natural gas prices and this hedge position, the company expects its leverage ratio to improve significantly throughout 2025, with a goal of returning to lower leverage levels seen in prior years.

Risks and Competitive Dynamics

While the outlook is promising, significant risks remain. The most prominent is the inherent volatility of natural gas and oil prices, which directly impacts revenue, profitability, cash flow, and the economic viability of reserves. Sustained low prices could hinder the ability to fund capital expenditures and achieve deleveraging goals. The company's variable rate debt also exposes it to interest rate risk.

Operationally, successfully executing the drilling program in the technically challenging Western Haynesville remains critical. While significant progress has been made in reducing costs and improving efficiency, unforeseen geological issues or operational setbacks could impact results. The reliance on third-party midstream for some capacity and the build-out schedule of the joint venture's infrastructure are also factors to monitor, although controlling their own midstream mitigates some of this risk.

The competitive landscape in the Haynesville is dynamic. While CRK benefits from its focused expertise, integrated midstream, and technological advancements like the horseshoe lateral and Western Haynesville drilling techniques, it competes with larger, often more diversified players like Chesapeake Energy, EQT Corporation, Antero Resources (AR), and Devon Energy (DVN). These competitors may have greater scale, broader access to capital, or more diversified portfolios (like DVN's oil assets) that provide resilience during gas-specific downturns. However, management notes a general discipline among Haynesville producers, with a low level of activity relative to potential demand, suggesting a collective effort to avoid oversupplying the market. CRK's strategic focus on proving up its vast Western Haynesville inventory positions it favorably against basins potentially facing inventory exhaustion, offering a long-term growth runway. The BKV CCUS partnership could also provide a competitive edge by offering lower carbon intensity gas to environmentally conscious buyers like data centers and LNG exporters.

Conclusion

Comstock Resources is navigating a pivotal period, transitioning from a challenging low-price environment in 2024 to a strategic build-out phase in 2025 focused on its high-potential Western Haynesville play. The company's investment thesis is fundamentally tied to its ability to technically and economically unlock the vast resource potential of this new area, leveraging operational efficiencies and technological innovations like advanced drilling techniques and the horseshoe lateral concept.

While near-term financial results remain sensitive to natural gas price fluctuations and derivative impacts, the company's strong liquidity, strategic hedging, and commitment to funding its program from operating cash flow position it to manage volatility and pursue deleveraging. The long-term outlook is compelling, underpinned by anticipated structural growth in natural gas demand from LNG, AI, and industrial sectors, for which CRK's strategic location and developing low-carbon initiatives provide a competitive advantage. Investors should monitor the progress of the Western Haynesville development, the company's success in achieving cost reduction targets, and the trajectory of natural gas prices as key indicators of CRK's ability to capitalize on the opportunities ahead and deliver long-term shareholder value.