Comstock Resources Navigates Hedging Headwinds to Exceed Q1 Earnings Estimates

Comstock Resources (NYSE: CRK) reported first-quarter 2025 results that underscore its resilience in a volatile natural gas market. Despite a reported net loss of $0.40 per share driven by non-cash hedging losses, the company’s adjusted earnings of $0.18 per share beat analysts’ expectations of $0.16. This performance reflects strategic focus on high-margin Haynesville shale production, cost discipline, and a strengthened balance sheet. Below is an analysis of the key drivers and risks for investors.

Financial Highlights: Hedging Pressures vs. Operational Strength

The quarter’s headline net loss of $115.4 million stemmed from a $322.4 million unrealized loss on hedging contracts, a non-cash charge tied to rising future gas prices. This contrasts sharply with the company’s adjusted net income of $53.8 million, which excludes hedging impacts. Meanwhile, operating cash flow (excluding working capital changes) surged to $239 million, or $0.81 per share, fueled by natural gas sales of $405 million—up 41% year-over-year.

Operational Performance: Prioritizing Quality Over Volume

Total production fell to 115.1 MMcfe/d from 139.5 MMcfe/d in Q1 2024, as the company strategically reduced drilling activity to focus on high-return wells. This shift paid off: newly completed wells, including the Olajuwon Pickens #1 in the Western Haynesville, delivered initial production rates of 41 MMcf/d, outperforming the 25 MMcf/d average for other completions. With 14 operated wells turned to sales since late 2024, Comstock demonstrated its ability to extract value from its 1,900+ drilling locations.

Cost metrics remained tight: total production costs per Mcfe held steady at $0.83, with unhedged operating margins hitting 77%—a 14-percentage-point improvement from 2024. This efficiency, combined with $3.52/Mcf hedged gas prices, underscores the company’s cost management prowess in a high-price environment.

Strategic Momentum: Western Haynesville Expansion and Balance Sheet Strength

The Olajuwon Pickens #1 well marked a critical milestone, extending Comstock’s footprint 24.4 miles from existing Western Haynesville production. This success supports the company’s 19 Tcfe reserve potential across its Haynesville acreage, positioning it to capitalize on long-term demand for natural gas.

Liquidity remains robust: Comstock’s borrowing base was reaffirmed at $2.0 billion in April 2025, reflecting lender confidence. With $32.9 million in cash and no near-term debt maturities, the company has flexibility to fund its $249.8 million in Q1 capital spending, including midstream investments.

Risks and Challenges

• Hedging Volatility: While hedging protects cash flow, mark-to-market losses could continue to pressure reported earnings.
• Production Declines: Year-over-year output fell 17%, raising questions about future reserve replacement.
• Institutional Sentiment: Mixed institutional activity—UBS increased holdings by 686%, while Encompass Capital reduced its stake by 61.8%—suggests divided views on the company’s hedging strategy.

Conclusion: A Play on Natural Gas with Hedging Nuance

Comstock’s Q1 results highlight a deliberate trade-off: accepting short-term earnings volatility to lock in long-term cash flow via hedging, while focusing on high-margin Haynesville wells. With adjusted EBITDAX up 28% year-over-year to $293 million, and a 77% unhedged margin, the company is well-positioned to weather gas price swings.

Investors should weigh the $2.0 billion borrowing base and $239 million operating cash flow against the risks of hedging losses and production declines. The Olajuwon Pickens #1 success and 19 Tcfe reserve potential signal long-term upside, particularly if natural gas prices remain elevated.

For now, Comstock’s execution in its core Haynesville acreage—combined with disciplined capital allocation—suggests it remains a compelling play on U.S. natural gas, provided investors can tolerate the hedging-related earnings noise.

Data as of Q1 2025. Analysis based on SEC filings and management disclosures.