Comstock Resources, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. The unaudited filing covers Comstock and its subsidiaries, an oil and natural gas producer.
Financial performance and position
Unless otherwise indicated, amounts are in millions of dollars.
| Metric | Q1 2015 / March 31, 2015 | Q1 2014 / December 31, 2014 |
|---|---|---|
| Oil and gas revenue | $66.5 | $141.9 |
| Operating income (loss) | $(96.9) | $20.2 |
| Net income (loss) | $(78.5); $(1.71) per share | $1.2; $0.02 per diluted share |
| Operating cash flow | $60.9 | $95.7 |
| Capital expenditures, cash basis | $141.0 | $237.5 |
| Cash and cash equivalents | $228.9 | $2.1 |
| Long-term debt | $1,393.7 | $1,070.4 |
| Current assets / current liabilities | $265.3 / $165.2 | $61.2 / $162.2 |
Interest expense was $20.8 million, versus $13.7 million a year earlier. The income-tax benefit was $41.6 million. The filing does not provide a clear consolidated profit-margin measure; operating results included significant exploration charges. Fixed-rate debt had a reported fair value of $963.4 million at quarter-end. No borrowings were outstanding under the $50 million revolving facility, and the company reported compliance with its financial covenants.
Material changes versus Q1 2014
- Revenue fell 53%, primarily reflecting lower realized commodity prices. Average realized oil price declined 53% to $44.34 per barrel; natural gas price declined 47% to $2.51 per Mcf. Oil production rose 11%, while natural gas production fell 25%; total equivalent production declined 13%.
- Comstock moved from $1.2 million net income to a $78.5 million net loss. In addition to lower prices, results included $42.2 million of exploration expense, higher DD&A and increased interest expense.
- Operating cash flow decreased 36% to $60.9 million. Cash increased substantially following the March secured-notes offering and related refinancing.
- No dividend was paid in Q1 2015; $6.0 million was paid in Q1 2014.
Financing, outlook, and risks
- In March, Comstock issued $700 million of 10% senior secured notes due 2020, receiving $684 million net proceeds. It used $415 million to retire its prior bank credit facility and entered a new $50 million revolving facility maturing in 2019. The notes are secured and guaranteed by subsidiaries. The company also had $400 million of 7.75% notes due 2019 and approximately $298 million of 9.5% notes due 2020.
- Management expected to spend approximately $122 million on development and exploratory drilling and lease acquisitions during the remaining nine months of 2015, funded from operating cash flow and cash on hand. Management said available cash, operating cash flow, asset-sale proceeds and revolver capacity were expected to support its current plan, while noting additional capital might be needed if plans or assumptions changed.
- Management said natural gas drilling was restarting in 2015. Capital spending is largely discretionary, but the company had $6.3 million of contracted drilling commitments through November 2015 and up to $9.7 million of natural-gas transportation and treating commitments through July 2019.
- Commodity-price weakness is a key risk and may also reduce economically recoverable reserves and access to capital. Based on Q1 production, a $0.10/Mcf gas-price change would change quarterly operating cash flow by about $0.8 million; a $1/barrel oil-price change by about $1.0 million. No commodity derivatives were outstanding at March 31, 2015.
- Unusual items included $40.4 million of impairment on undeveloped acreage the company did not plan to develop, $1.8 million of rig termination fees, and a $2.7 million net debt-extinguishment loss, which included a gain on repurchasing notes and a write-off of prior loan costs. The company also purchased a 20% interest in an airplane from two executive officers for $1.7 million, based on a third-party fair-market valuation and approved by the audit committee and board.
- Management stated that ordinary-course litigation was not expected to materially affect the company. One state tax return was under review; management did not expect a material financial-statement effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commodity prices and production trends support revenue and operating cash flow recovery, particularly given the decline in natural gas production.
- Liquidity and refinancing capacity, including the cash balance, availability and covenants of the revolver, and the burden of high-coupon debt and interest payments.
- Whether planned 2015 capital spending and the restart of gas drilling can be funded within management’s stated assumptions.
- Further acreage impairments, reserve valuation changes, and any effect of lower prices on borrowing capacity or economically recoverable reserves.
- The outcome of the state tax review, outstanding commitments, and any developments in litigation or other contingencies.