Comstock Resources, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The financial statements are unaudited. Comstock is an oil and natural gas producer, with gas-services activities; production is predominantly natural gas.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $288.2 million | $946.3 million | $777.8 million | $1,515.7 million |
| Operating income (loss) | $(17.1) million | $649.1 million | $128.6 million | $989.8 million |
| Net income (loss) available to common shareholders | $(45.7) million | $372.5 million | $88.8 million | $256.8 million |
| Basic / diluted EPS | $(0.17) / $(0.17) | $1.60 / $1.36 | $0.32 / $0.32 | $1.10 / $0.96 |
| Operating cash flow | Not separately presented | Not separately presented | $717.9 million | $696.5 million |
Q2 natural gas and oil sales were $229.8 million, down 73% year over year; gas-services revenue was $58.5 million. Q2 natural gas production rose 2% to 126.3 Bcf, while the average realized gas price fell to $1.81/Mcf from $6.93/Mcf. Including derivative cash settlements, the realized gas price was $2.25/Mcf versus $4.85/Mcf.
For the first half, natural gas production increased 6% to 253.4 Bcf, but the average realized gas price fell to $2.40/Mcf from $5.79/Mcf. Natural gas and oil sales declined 56%. Gas-services revenue increased 30% to $168.1 million for the first half, though it declined 31% in Q2.
Q2 operating expenses were $305.3 million, including DD&A of $140.2 million. The filing reports no operating margin percentage. First-half cash capital expenditures were $752.5 million; operating cash flow less cash capital expenditures was approximately negative $34.6 million, before financing and other investing cash flows.
Balance sheet, debt and liquidity
- At June 30, 2023, cash was $9.9 million, down from $54.7 million at year-end 2022. Current assets were $282.2 million and current liabilities were $762.1 million.
- Long-term debt carrying value was $2.176 billion. Debt included $1.224 billion principal of 6.75% senior notes due 2029, $965 million of 5.875% notes due 2030, and $20 million drawn on the bank facility.
- The bank facility has $1.5 billion of aggregate commitments and a $2.0 billion borrowing base; $1.48 billion of capacity remained unused. Reported total liquidity, including cash, was $1.5 billion. The facility matures November 15, 2027 and is secured by substantially all company and subsidiary assets.
- The company was compliant with its financial covenants at quarter-end: leverage ratio below 3.5-to-1 and adjusted current ratio of at least 1.0-to-1.
Material changes and management commentary
- The sharp revenue and earnings decline primarily reflected lower natural gas prices, partly offset by higher production. Q2 shifted from substantial prior-year operating income and net income to an operating loss and net loss.
- Derivative results improved versus the prior year: first-half earnings included a $61.9 million derivative gain, compared with a $510.3 million loss in 2022. Cash settlements were a $65.9 million gain in the first half of 2023 versus a $374.5 million loss in 2022. These results are volatile and include both settlements and fair-value changes.
- First-half DD&A increased to $274.2 million from $225.9 million. Management attributed the higher rate to increased drilling and completion costs and lower reserves in estimates reflecting lower gas prices. Gathering and transportation and lease operating costs also increased, including due to production growth in higher-cost areas and higher water-disposal and other production costs.
- First-half capital expenditures rose to $752.5 million from $526.1 million, reflecting increased drilling and completion activity and $56.6 million of unproved-property acquisitions. Comstock drilled 39 gross (30.9 net) wells and completed 36 gross (24.9 net) operated Haynesville and Bossier wells.
Outlook, risks and contingencies
- Management expects to spend an additional $400 million to $600 million during the second half of 2023 on drilling, completion, infrastructure and other activity. It expects to fund development and exploration primarily with operating cash flow and bank-facility borrowings; most future capital spending is described as discretionary.
- At June 30, hedges covered approximately 46.0 Bcf of 2023 gas production through collars with a $3.00/MMBtu average floor and $10.28/MMBtu average ceiling, and 47.6 Bcf of 2024 production through swaps at $3.50/MMBtu. The filing says contracts have no margin requirements or collateral provisions requiring funding before scheduled settlement.
- Commodity-price weakness could adversely affect cash flow, economic reserves and access to capital. The filing also identifies interest-rate exposure on the $20 million variable-rate facility balance, although most debt is fixed-rate.
- Comstock reported $767.5 million of federal and $1.5 billion of certain state NOL carryforwards, but Section 382 limitations and expiration could restrict utilization; management estimates substantial federal and state NOL amounts will expire unused. Deferred tax assets are subject to valuation allowances.
- Management said ordinary-course litigation is not expected to have a material effect and no material litigation amounts were accrued. No impairments of proved properties were recorded in the periods presented. The company also disclosed $117.8 million of expected future contracted drilling-service payments and three rig commitments with minimum annual commitments of $12.2 million per rig.
- The board authorized a $0.125-per-share dividend on July 31, payable September 15, 2023 to shareholders of record September 1. The company paid $0.25 per share in dividends in the first half.
Important facts for investors to verify
- Whether gas prices, production volumes and realized prices—including hedge settlements—support the planned second-half spending level.
- Capital-spending pace, cash generation, and the effect of drilling, completion and infrastructure costs on liquidity and debt.
- Hedge positions, settlement timing, and the distinction between cash settlements and non-cash fair-value gains or losses.
- Borrowing-base redeterminations, facility availability, covenant headroom and any changes in debt or interest expense.
- Reserve estimates, DD&A assumptions, potential property impairments, and the recoverability and expiration of tax NOLs.