Comstock Resources, Inc. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; filed May 7, 2020. Comstock is an oil and natural gas producer, with operations concentrated in the Haynesville/Bossier shale. Q1 2020 includes Covey Park, acquired in July 2019, so comparisons with reported Q1 2019 are not on a like-for-like basis.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Oil and gas sales | $225.9 million | $126.9 million |
| Operating income | $44.0 million | $53.2 million |
| Net income | $42.0 million | $13.6 million |
| Net income available to common stockholders | $30.0 million | $13.6 million |
| Diluted EPS | $0.15 | $0.13 |
| Cash from operations | $150.1 million | $74.7 million |
| Cash capital expenditures | $143.5 million | $94.9 million |
Revenue increased 78%, principally reflecting the acquired production base and higher natural gas volumes. Natural gas production rose to 122.8 Bcf from 33.1 Bcf; oil production declined to 454,000 barrels from 810,000. Average realized prices fell to $1.69/Mcf for gas from $2.72 and $41.01/barrel for oil from $45.34. Including cash derivative settlements, realized prices were $2.04/Mcf and $46.31/barrel, respectively.
Operating margin was approximately 19.5% of sales, down from approximately 41.9%. Higher gathering and transportation, lease operating, and depreciation, depletion and amortization costs contributed; reported DD&A increased to $110.4 million from $37.6 million. Net income included a $61.9 million derivative gain, including fair-value changes, while interest expense rose to $52.8 million from $27.9 million. Preferred dividends and accretion totaled $12.1 million.
Operating cash flow less cash capital expenditures was approximately $6.6 million. Cash declined to $15.5 million from $18.5 million at year-end. Current assets of $267.8 million were below current liabilities of $327.6 million, a working-capital deficit of about $59.8 million. Total debt carrying value was $2.507 billion; principal outstanding was $2.725 billion, comprising $1.25 billion under the bank facility and $1.475 billion of senior notes. The company reported compliance with its credit covenants at quarter-end. The borrowing base was reduced from $1.5 billion to $1.4 billion in May 2020.
Material changes and context
- Reported sales and production reflect Covey Park, acquired in July 2019; Q1 2019 was a pre-acquisition quarter. The filing’s pro forma Q1 2019 revenue was $315.3 million and net income was $62.1 million, but these unaudited figures include specified pro forma adjustments and exclude acquisition costs.
- Derivative settlements generated $45.4 million of realized gains, versus $5.4 million in Q1 2019. The $61.9 million reported derivative gain also includes fair-value changes and should not be treated as equivalent to recurring operating earnings.
- The company paid $9.6 million of preferred dividends in the quarter. Its 10% Series A and Series B preferred shares become convertible after July 16, 2020 into a total of 96.25 million common shares at $4.00 per share, subject to adjustment.
- Cash-flow statements report $143.5 million of capital expenditures, while MD&A reports $130.5 million of capital expenditure activity; the filing attributes cash-flow timing differences partly to accrued capital expenditures.
Outlook, risks and contingencies
- Management said COVID-19, reduced energy demand, market disruption and the sharp oil-price decline created substantial uncertainty. Haynesville natural gas operations were not adversely affected in Q1, but non-operated oil activity could be affected by low prices and limited storage. The scale and duration of future impacts could not be estimated.
- Management expected to spend another $281.5 million during the remaining nine months of 2020 for drilling, completions and development, with plans for 53 additional wells drilled and 62 completed. Spending was described as discretionary and adjustable; the filing says future development is expected to be funded by operating cash flow.
- At March 31, the company reported natural gas swaps covering about 141.1 Bcf for 2020–2021 at an average $2.66/MMBtu, plus collars and oil collars. It disclosed that a 10% gas-price change would change swap fair value by about $38.2 million. After quarter-end, it added gas swaps and collars and fixed LIBOR at 0.33% on $500 million of bank borrowings through April 2023.
- The revolving facility matures July 2024, is secured by substantially all company assets and includes leverage and current-ratio covenants. Long-term natural gas transportation commitments total $10.9 million for the remainder of 2020, with substantial additional commitments extending through 2031. Management reported no material litigation accruals.
- Property values, reserves and future impairment risk depend on commodity-price, cost and production assumptions. No impairment of proved oil and gas properties was recorded in the periods presented; management noted future impairment is possible. The company also has $335.9 million of goodwill.
Important facts for investors to verify
- Whether post-quarter commodity prices, production conditions and COVID-related disruptions changed expected cash generation or the planned 2020 capital program.
- Available borrowing capacity and covenant headroom after the May 2020 borrowing-base reduction, including the impact of the $1.25 billion drawn balance.
- How much reported earnings depends on derivative fair-value movements and cash settlements, and how hedge positions and counterparties evolve.
- The potential effects of preferred-stock conversion, including dilution of up to 96.25 million shares, and the continuing 10% dividend obligation if shares remain outstanding.
- The difference between cash capital expenditures and MD&A capital activity, and the timing of accrued spending and operating cash flows.