Shares of U.S. oil and natural gas driller Comstock Resources (NYSE:CRK) fell sharply out of the gate on Nov. 5, dropping just shy of 13% in the first few minutes of trading. Although they quickly gained back some of that ground, the shares remained lower by around 7% at 10 a.m. EST. The company's after-market earnings release on Nov. 4 was the main driver here.
The energy sector, particularly in the United States, is deeply out of favor today. The severe drop in demand that resulted from the economic shutdowns used to slow the spread of COVID-19 have caused a massive supply-demand imbalance. Oil and gas prices have been weak for months. And that is showing up in the earnings of companies like Comstock. In the third quarter, it lost $0.57 per share, versus a loss of just a penny a share in the same period of 2019. Adjusted net income came in at a loss of $0.06 per share compared with a profit of $0.17 in the same stanza of 2019. Production was actually higher year over year in the quarter, so the weak performance was largely driven by a 14% drop in the company's realized selling price for natural gas and a nasty 35% decline on the oil side. No wonder investors were downbeat.
But operating performance is not the whole issue here. Part of the problem is that Comstock is a relatively small exploration and production company carrying a notable amount of leverage. Long-term debt makes up around two-thirds of the company's capital structure. Worse, interest expense in the quarter was over five times larger than the company's operating income (operating income was, as one would normally hope, higher than interest expense in the third quarter of 2019). Simply put, Comstock, like so many of its peers, needs energy prices to rise from their currently depressed levels if it has any hope of turning its business around.
At this point there's not much good news in the oil patch and little if any indication that there will be good news anytime soon. About the only thing that investors can expect is continued volatility. Shares of Comstock, for better or worse, will likely keep riding the emotional wave on Wall Street until there's a sustained rebound in energy prices.