Q3 2026 Comstock Resources, Inc. Earnings Conference Call - COMSTOCK RESOURCES INC

Financial Performance:

• Q3 2026 production averaged 1.3 BCFE/d, up 9% YoY and 8% QoQ.
• Oil and gas sales (hedged) were $359 million; EBITDAX was $266 million.
• Cash flow from operations was $208 million ($0.71 per share) before working capital changes.
• Reported net income of $22 million ($0.08/share), including a $35 million unrealized hedge gain; adjusted net income was $6 million ($0.02/share).
• Year-to-date (9 months) production averaged 1.2 BCFE/d; EBITDAX was $763 million; cash flow was $588 million ($2.02/share).
• Reported net income for YTD was $138 million; adjusted net income was $54 million ($0.18/share).
• Operating costs averaged $0.80/MCFE; EBITDAX margin was 73%.
• Natural gas realization averaged $2.61/MCFE; 59% of gas was hedged for the quarter.
• Capital expenditures YTD were $1.1 billion; 55 wells (38.7 net) were drilled, and 52 wells (44.7 net) were turned to sales.
• Leverage ratio was 3.2x at quarter-end; projected to drop to ~2.0x after the SOCAR transaction.

Guidance and Future Outlook:

• 2026 Outlook: Expect to drill 19 wells and turn 20 to sales in the Western Haynesville; drill 52 wells and turn 45 to sales in Legacy Haynesville in 2027.
• Free Cash Flow: Anticipated generation in Q4 2026 driven by the Jerry Jones drilling venture.
• Long-Term Goal: Target leverage below 1.5x; dividend resumption dependent on achieving target leverage, strong gas prices, and hedging coverage.
• Production Growth: Plans to extend lateral lengths to 10,000–15,000 feet and leverage larger frack designs (5,000–6,000 lbs/ft) to increase EURs.
• 2031 Vision: Aiming to provide 1 BCF/d of supply to the Anderson County Power Hub and support LNG export markets.

Business Segments and Product Lines:

• Upstream: 1,084,812 gross acres (809,883 net) across Legacy and Western Haynesville and Bossier formations; 47 producing wells in Western Haynesville; 8 wells added to sales in Q3.
• Drilling Programs: 9 rigs running (5 in Western Haynesville); introducing "big hole" laterals and 10,000 PSI rigs to improve ROP and steering.
• Midstream: Pinnacle Gas Service (PGS) ownership includes SOCAR (15%) and Sixth Street (27%); Comstock retains operational control with increased future interest potential.
• Strategic Partnerships:
  • Jerry Jones (Arcoma III): Funding 85% of Western Haynesville and 80% of Legacy Haynesville wells (27 total); $300M CapEx in 2026, $150M in 2027. Comstock recovers pre-venture costs before profit split.
  • SOCAR: $1.65 billion transaction for 20% Legacy, 15% Western, and 15% PGS interest; proceeds used to repay half of outstanding debt. SOCAR offers LNG marketing opportunities.

Market and Competitive Landscape:

• Demand Drivers: Anticipated natural gas undersupply by 2029; LNG demand projected to rise from 20 BCF/d to 35 BCF/d by 2032, plus 12 BCF/d for power generation.
• Strategic Location: Gulf Coast position offers proximity to LNG export infrastructure and the Anderson County Power Hub.
• Competitive Advantage: Unique ability to drill 10,000+ foot laterals in a massive inventory (2,500+ net locations in Western Haynesville); partners include NextEra, Sixth Street, Jones Family, and SOCAR.
• Pricing: Potential for higher netbacks via international LNG markets and direct power generation contracts compared to domestic spot prices.

Risks and Challenges:

• Capital Intensity: High cost per foot in Western Haynesville compared to Legacy ($1,934/ft vs. $634/ft in Q3) due to shorter laterals and early-stage development.
• Service Cost Inflation: Elevated service costs and inflationary pressures on diesel and completions impacted Q3 margins; inflation expected to persist but potentially flatten in 2027.
• Drilling Execution: Transition to "big hole" and 10,000 PSI rigs requires successful replication of performance across different formations (Hainesville vs. Bossier).
• Regulatory/Political: Uncertainty regarding future tax or regulatory environments affecting break-even pricing.

Management Commentary and Tone:

• Tone: Highly confident and optimistic, emphasizing the "sweet spot" for gas demand and the strength of the balance sheet post-transaction.
• Strategy: Focus on de-risking the Western Haynesville through long-term capital partners (Jones, SOCAR) rather than reckless expansion.
• Partnership Value: Highlighted the "winning team" dynamic with SOCAR, Sixth Street, and NextEra; management emphasized the alignment of long-term interests with partners.
• Commitment: CEO reiterated commitment to prudent capital allocation and balancing sheet health before considering dividend restoration.

Analyst Questions and Answers:

• Big Hole Design: Confirmed as the future standard for the majority of wells; crossover point estimated at 10,000–11,000 ft laterals; improved steering and ROP observed.
• Completion Design: Larger frack loads (5,000–6,000 lbs/ft) expected to increase EURs by >10%; conservative drawdown strategy supports long-term production stability.
• Drilling Inventory: Western Haynesville inventory is 2,507 net locations; 40% of locations have laterals >10,000 ft.
• Dividend Policy: No immediate plans; target leverage <1.5x is prerequisite.
• Marketing: SOCAR partnership opens pathways to international LNG; immediate focus on long-term power generation contracts for premium pricing.
• Cost Trends: Long-term cost reduction expected via infill drilling, longer laterals, and rig upgrades (10k/20k PSI); currently higher due to short laterals and single-well pads in early development phase.

Other Key Points:

• Balance Sheet Strengthening: The SOCAR deal will reduce net debt from $3.4 billion to ~$1.7 billion; credit facility maturity extended to 2031 upon closing.
• Horseshoe Wells: 17 wells turned to sales with average IP of 29 MMcfd; 108 remaining locations identified.
• Anderson County Power Hub: First 1 GW phase coming online early 2028; long-term capacity up to 5.2–5.3 GW.
• Well Performance: 2026 vintage wells show improved initial production rates (IP) with Kretschmar well posting high IP; 33 MMcfd average IP for recent Western Haynesville wells.
• Transitions: Shifting from HBP (holdback) acreage to value-driven development as the 90-mile inventory is held and infill opportunities mature.