COMSTOCK RESOURCES INC annual report, FY2015

Business context and reporting period

Comstock Resources, Inc. is an independent oil and natural gas exploration and production company operating primarily in Texas and Louisiana. This Form 10-K covers the fiscal year ended December 31, 2015; quarterly figures below identify the fourth quarter where provided.

At year-end, proved reserves were 625.0 Bcfe, 91% natural gas, with 59% developed. Operations were increasingly focused on Haynesville/Bossier natural gas development as weak oil prices curtailed oil drilling.

Financial and operating performance

Production was 66.2 Bcfe, up 1% from 2014: natural gas volumes rose 20% to 47.6 Bcf, while oil volumes fell 28% to 3.1 million barrels. Average realized prices declined to $2.30/Mcf for gas from $4.16 and $46.19/barrel for oil from $90.37. Average equivalent realized price fell to $3.81/Mcfe from $8.46. Lease operating expense increased to $0.97/Mcfe from $0.92; DD&A decreased to $4.84/Mcfe from $5.74.

Fourth-quarter 2015 oil and gas sales were $47.2 million and net loss was $288.5 million. For full-year 2015, the company reported an operating loss of $1,165.7 million and interest expense of $118.6 million. It recorded an income tax benefit of $154.4 million, partly offset by a substantial valuation allowance on deferred tax assets.

Material changes versus the prior comparable period

• Sales fell 55%, reflecting lower realized prices and lower oil production; natural gas production growth only partly offset these effects.
• Operating cash flow fell by $370.9 million to $30.1 million, while capital spending was reduced by $345.4 million.
• Property impairment charges rose to $801.3 million from $60.3 million. The company also recorded a $112.1 million loss on oil and gas property sales, principally relating to its Burleson County properties.
• Interest expense more than doubled, primarily following the March 2015 refinancing with 10% secured notes and lower capitalized interest.
• Proved reserves increased to 625.0 Bcfe from 578.4 Bcfe, led by 168.5 Bcf of natural gas extensions and discoveries, but price-related revisions reduced reserves by 77.7 Bcf of gas and 5.0 million barrels of oil. The standardized measure of discounted future net cash flows fell to $372.1 million from $1,090.7 million.

Liquidity, debt, outlook and risks

In March 2015, Comstock issued $700 million of 10% senior secured notes, using net proceeds of $683.8 million to repay its bank facility and for general corporate purposes. At December 31, total debt principal was approximately $1.270 billion, consisting of $700 million of 10% secured notes due 2020, $376.1 million of 7.75% notes due 2019 and $194.4 million of 9.5% notes due 2020. The company repurchased $129.5 million principal amount of senior notes for $42.7 million, recognizing an $82.4 million gain on extinguishment of debt. Its $50 million revolving facility was undrawn at year-end; the company reported compliance with its financial covenants.

Management expected 2016 exploration and development spending of approximately $98 million, including up to nine horizontal Haynesville/Bossier gas wells, subject to commodity prices. It stated that cash on hand, operating cash flow and available revolver capacity were expected to fund planned 2016 operations, while warning that sustained low prices could require further spending cuts or additional financing. In February 2016, the company issued approximately 4.6 million shares for $40 million principal amount of 2019 notes. The common dividend was suspended in February 2015.

Key risks include continued low or volatile oil and gas prices, high debt service and refinancing needs, limited liquidity and access to capital, reserve-estimate uncertainty, additional impairment charges, lease expirations, and environmental, regulatory, operational and transportation risks. Management noted that a decline exceeding 30% in future cash flow estimates for the Eagleville field could result in an additional impairment of at least $130 million. The filing reports no legal proceedings management believed would materially harm the company.

Most important facts for investors to verify

• Reconcile reported debt principal, carrying value, maturities, secured collateral and covenant headroom; assess the effect of the February 2016 share-for-debt exchange.
• Test the assumptions behind the $801.3 million impairment, the $372.1 million standardized reserve measure and the potential Eagleville impairment.
• Evaluate whether the $98 million 2016 budget and projected well program can be funded by cash generation and the undrawn revolver under current commodity prices.
• Confirm reserve development timing and capital requirements, particularly for the 258.5 Bcf of proved undeveloped gas reserves.
• Assess exposure to customer concentration, firm transportation commitments, derivative counterparties and further commodity-price declines.