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Rating Action:

Moody's rates Comstock's new notes B2

28 Feb 2011

$722 million of rated debt affected

New York, February 28, 2011 -- Moody's Investors Service assigned a B2 rating to Comstock Resources, Inc.'s (Comstock) proposed $250 million senior unsecured notes due 2017. Proceeds from the notes will be used to fund a tender offer for the company's existing senior unsecured notes due 2012 and to repay all outstanding revolving credit facility borrowings. The LGD point estimate on Comstock's existing senior unsecured notes was changed to LGD5-73% from LGD5-75%. The outlook is stable.

RATINGS RATIONALE

The proposed notes issuance and tender offer would increase total debt by $33 million, $6 million of which would be applied toward estimated fees and expenses with the remaining $27 million going toward funding 2011 capital spending. "The transaction enhances Comstock's liquidity with increased revolver availability, a larger cash balance, and no debt maturities until 2015," commented Jonathan Kalmanoff, Moody's Analyst. "Leverage on production and reserves would increase only slightly (pro-forma December 31, 2010), and this increase has the potential be moderated by increased production and reserves once the $27 million of net proceeds is applied toward the company's 2011 drilling program."

Comstock's B1 CFR reflects the company's small scale in terms of proven developed reserves, its geological concentration, production which consists of 94% un-hedged natural gas in a low gas price environment, and leverage which is low compared to similarly rated peers. The rating also considers the risks inherent in Comstock's very early stage operations in the Eagle Ford, which account for one third of planned 2011 capital spending, as well as the potential for improvement in both profitability and diversification if the company is able to economically develop its liquids focused Eagle Ford acreage.

Comstock has good liquidity. Following this note offering, the company will have an undrawn senior secured credit facility with a $481 million borrowing base and $29 million of cash. The facility does not mature until 2015, and the company's existing $300 million 8.375% notes don't mature until 2017. Financial covenants consist of a Minimum Tangible Net Worth of $625,000 and a Current Ratio of at least 1.0x. We believe that Comstock will remain well within these limits through 2011, and that the revolver will provide ample liquidity as the company outspends cash flow. Substantially all of Comstock's oil and gas reserves are pledged as security under the credit facility which limits the extent to which asset sales could provide a source of additional liquidity.

The B2 senior unsecured note rating reflects both the overall probability of default of Comstock, to which Moody's assigns a PDR of B1, and a loss given default of LGD5-73%. The size of the senior secured revolver's potential priority claim relative to the senior unsecured notes results in the notes being rated one notch beneath the B1 CFR under Moody's Loss Given Default Methodology.

The relatively small size of Comstock's proven developed reserve base combined with its high percentage of natural gas production makes positive ratings action unlikely in the near future. Over the longer term, positive ratings action could occur if liquids production were to increase to 50% or proven developed reserves were to increase to 200,000 mboe while maintaining leverage on production and reserves at current levels. Alternately, positive ratings action could be driven by a reduction in leverage on production and reserves with Debt / Average Daily Production sustained below $10,000/boe. A deterioration in F&D costs leading to an increase in leverage on production and reserves with Debt / Average Daily Production sustained above $20,000/boe, a deterioration in liquidity, or a leveraged full cycle ratio (LFCR) sustained significantly below 1.0x could lead to native ratings action.

The principal methodologies used in rating Comstock were the Global Exploration and Production (E&P) rating methodology published in December 2008, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Moody's last rating action for Comstock was on October 6, 2009 when Moody's assigned a B2 rating to the company's proposed offering of $200 million senior unsecured notes due 2017, affirmed the B1 Corporate Family Rating (CFR), B1 Probability of Default (PDR) Rating, and the B2 rating on the $175 million senior unsecured notes due 2012.

Comstock Resources, Inc. is an independent exploration and production company headquartered in Frisco, Texas.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Jonathan Kalmanoff
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates Comstock's new notes B2
No Related Data.
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