Comstock Resources, Inc. — Q1 2022 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2022, compared with Q1 2021. Comstock is an oil and natural gas producer focused on its Haynesville and Bossier shale operations. Total production was essentially flat at 115.0 Bcfe; natural gas production rose 1% to 114.9 Bcf, while oil production fell following the October 2021 sale of the Bakken properties.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Oil and gas sales | $524.8 million | $340.5 million |
| Operating income | $336.8 million | $159.7 million |
| Operating margin | 64.2% | 46.9% |
| Net loss | $111.4 million | $134.1 million |
| Net loss attributable to common stockholders | $115.7 million; $0.50 per share | $138.4 million; $0.60 per share |
| Cash from operating activities | $284.0 million | $193.3 million |
| Cash capital expenditures | $213.3 million | $165.8 million |
Natural gas sales increased to $523.0 million from $324.0 million, primarily reflecting a higher average realized gas price ($4.55/Mcf versus $2.86/Mcf) and slightly higher production. Total sales rose 54%. Operating income improved, but a $437.5 million derivative loss drove the quarterly net loss; cash settlements of derivatives were a $117.2 million outflow. Interest expense declined 27% to $46.5 million, mainly following the 2021 debt refinancing. The income tax benefit was $31.6 million.
Liquidity, debt, and balance sheet
- Cash was $12.1 million at March 31, down from $30.7 million at year-end. Operating cash flow less cash capital expenditures was approximately $70.8 million.
- Reported long-term debt was $2.534 billion, versus $2.615 billion at December 31, 2021. This included $150 million outstanding on the bank facility, with a $1.4 billion borrowing base and maturity in July 2024.
- Management reported $1.26 billion of liquidity, comprising $1.25 billion of unused facility capacity and cash. The company was in compliance with its credit-facility covenants at quarter-end.
- Current derivative liabilities were $513.6 million, compared with $181.9 million at year-end. Stockholders’ equity was $898.5 million, down from $1.013 billion; the company also had $175 million of Series B convertible preferred stock classified as mezzanine equity.
Changes, outlook, and risks
- Operating cash flow rose 47% year over year, mainly due to higher gas prices. Cash capital expenditures increased as drilling and completion activity advanced.
- In Q1, Comstock drilled 29 gross (13.7 net) wells and completed 33 gross (15.2 net) Haynesville and Bossier wells. It expected to spend a further $650–$700 million in the remaining nine months of 2022 on drilling, completions, and other development, and could spend an additional $100 million on bolt-on acquisitions and leasing. These are spending plans, not earnings guidance.
- After quarter-end, Comstock announced redemption on May 15, 2022 of the remaining $244.4 million principal amount of 7.50% notes due 2025, at 101.875% of principal plus accrued interest. It expected to use cash and bank-facility borrowings and projected a $47–$49 million pretax early-retirement loss.
- At quarter-end, gas hedges included swaps covering 88.0 Bcf of 2022 production at $2.68/MMBtu and collars covering 233.9 Bcf of 2022–2023 production, with an average $2.82 floor and $7.17 ceiling. Derivatives can materially affect reported earnings and cash settlements; management disclosed no margin or collateral funding requirements.
- Commodity-price volatility, potential changes in economically recoverable reserves, and access to financing are key risks. The company reported $897.4 million of federal and $1.5 billion of state NOL carryforwards, but Section 382 limits use of certain NOLs; management estimated substantial amounts may expire unused. Routine litigation was not expected to have a material effect, and no material litigation accrual was recorded.
- Management said disclosure controls were effective as of March 31, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the large derivative liability and hedge settlements compare with expected future production, realized prices, and cash flow.
- Whether the planned 2022 development spending and well activity are delivered within budget and funded from operations or additional borrowing.
- The completed redemption terms and actual financing and loss associated with the 2025 notes redemption.
- The April 15, 2022 borrowing-base redetermination outcome, subsequent liquidity, and continued covenant compliance.
- The extent to which NOL limitations and potential expirations affect future cash taxes.