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Why Comstock Resources Plummeted 36% at the Open on Thursday

By Reuben Gregg Brewer – May 14, 2020 at 9:39AM

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The exploration and production company did what it had to do, but investors weren't at all pleased.

What happened

Shares of exploration and production company Comstock Resources (CRK) lost more than a third of their value in the first half hour of trading on May 14. Although it bounced back a little bit from the worst of the decline by 10 a.m. EDT, the stock was still down by just about 30%.

So what

The big news here was the sale of 40 million shares of Comstock Resources stock at $5 a piece. The underwriters have the option of buying an additional 6 million shares. The proceeds from the sale, projected to be around $190 million (not including the underwriters' option), are expected to be used to redeem the company's Series A convertible preferred stock.

A man looking at a chart line crashing through the floor beneath him.

Image source: Getty Images.

Although redeeming the preferred shares removes an overhang, the company's outstanding share count was roughly 190 million at the end of the first quarter. So a material amount of shareholder dilution will come from this equity raise, as it increases the share count by a bit more than 20%. Adding to the pain, the $5 price was well below the roughly $6.50 the stock fetched before the announcement. In other words, to get this deal done, the company had to offer buyers a discount of more than 20%. That's not a great piece of news for shareholders to digest.

Now what

Based on this equity raise, it looks like Comstock Resources is desperate for cash. That's not surprising given the state of the energy sector today. However, investors are clearly not pleased with the efforts it is making during these hard times. At such times, companies have to do what's necessary, not what shareholders want. That said, with so many other options in the energy patch, this stock is probably best avoided by most investors at the moment.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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