Comstock Resources Inc: A Hidden Play on LNG Exports

The recent data points from the CEO of Cheniere Energy (NYSEMKT: LNG  ) should catch the attention of all investors interested in the natural gas revolution ongoing in the U.S. For those not familiar with Cheniere Energy, the company is working toward exporting liquefied natural gas, or LNG, at the Sabine Pass Terminal in La. and the Corpus Christi Terminal in Tx.

With Cheniere nearly doubling over the past year, one of the best ways to play the export boom are natural gas producers in the Haynesville shale in La. One such producer is Comstock Resources (NYSE: CRK  ) , and naturally the largest landholder in that area is Chesapeake Energy (NYSE: CHK  ) .

Export plans
In an interview with the Financial Times, Cheniere Energy CEO Charif Souki suggested that the U.S. couldn't solve European dependence on Russian natural gas by exports alone. Or at least it couldn't be resolved by the current limited approvals and credible plans in the planning stages.

For its part, Cheniere Energy has the only project approved by U.S. regulators. The LNG export facility at Sabine Pass in La. will start exports in 2015 and reach full capacity in 2018. At that time, it will export 2.2 Bcf/d of natural gas compared to daily consumption in Europe that will reach up to 50 Bcf/d. Unfortunately for Europe, large portions of the exports are already contracted to companies in South Korea and India.

To put the export totals into perspective, Cheniere would export 800 Bcf per year if it ran operations without interruptions 365 days a year. The current natural gas in storage in the U.S. after a brutally cold winter was only 826 Bcf. That level of usage will require further ramps in natural gas production. Don't forget that several other applications are currently in the process for export terminals that could materially increase demand for natural gas down the road.

Comstock Resources position
The Haynesville shale in northern La. provides an opportune point to quickly ship natural gas to the coast. Current infrastructure bottlenecks in the prolific Marcellus shale make it impractical that the region can supply the substantial needs coming from the coast.

Comstock Resources provides a hidden play on LNG exports considering it forecast natural gas production to decline during 2014 to 40 to 44 Bcf from the 55.7 Bcf produced in 2013. The company has natural gas reserves of 452.7 Bcf, mostly in the Haynesville shale area, but the low prices have the company shifting toward oil production, specifically in the Eagle Ford Shale. In fact, it only drilled two wells in the area during 2013 and expects limited focus this year despite the increase in natural gas prices.

The lack of capital spent on natural gas by Comstock Resources is interesting considering Chesapeake Energy has specifically discussed shifting a few resources toward that area in anticipation of surging Gulf Coast demand. The company plans to increase the rigs in the Haynesville shale to 7-9 rigs during 2014 after only having four rigs working in the fourth quarter. Chesapeake saw production decline by 51% year over year, so it might take substantial increases in drilling to reverse the downtrend.

Bottom line
While Comstock Resources isn't shifting its focus toward drilling in the Haynesville area due to demand expectations, the company has the assets -- with a resource potential of 6 Tcf -- to meet future demand. Even though Chesapeake Energy has slightly increased production resources in the area, the general consensus among natural gas producers doesn't match the production requirements of Cheniere Energy. The disconnect is perplexing and one that investors will want to watch down the road, but ultimately the company with the reserves will benefit the most.

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