Comstock Resources, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; amounts below are in U.S. dollars. The company is an oil and natural gas producer. Per-share figures reflect the July 2016 one-for-five reverse stock split.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Oil and gas sales | $50.3 million | $61.4 million | $127.2 million | $205.2 million |
| Operating loss | $98.8 million | $596.0 million | $178.0 million | $875.1 million |
| Net loss | $28.5 million | $545.0 million | $80.2 million | $758.6 million |
| Loss per share | $2.32 | $59.05 | $7.13 | $82.27 |
| Operating cash flow | Not separately presented for the quarter | $(54.7) million | $23.5 million |
- Q3 oil and gas sales fell 18% year over year; nine-month sales fell 38%. Q3 natural gas sales rose 10%, but oil sales declined 51%. For the nine months, natural gas sales rose 9% while oil sales fell 68%.
- Production for Q3 was 16.0 Bcfe, versus 17.3 Bcfe a year earlier. Nine-month production was 48.0 Bcfe, approximately flat year over year. Nine-month average realized prices were $2.12/Mcf for gas and $36.15/barrel for oil.
- Q3 and nine-month results included exploration expense of $76.4 million and $84.1 million, respectively, largely reflecting impairment of unevaluated Tuscaloosa Marine shale leases. Nine-month proved-property impairment was $24.6 million, compared with $547.1 million in 2015. The substantial prior-year impairments contributed to the smaller reported losses in 2016.
- Cash and equivalents were $26.6 million at September 30, down from $134.0 million at year-end 2015. Nine-month investing cash use was $39.1 million, including $41.1 million of cash capital expenditures; financing cash use was $13.6 million.
- Balance-sheet long-term debt was $1.026 billion, versus $1.249 billion at December 31, 2015; total liabilities were $1.106 billion. The notes’ aggregate stated principal was approximately $1.163 billion, before discounts and accrued PIK interest. Stockholders’ deficit was $220.0 million.
- The company had no borrowings under its $50 million revolving facility. It reported compliance with the facility’s financial covenants. Current assets were $76.7 million and current liabilities $58.2 million.
Material changes, outlook and risks
- Debt restructuring: On September 6, 2016, Comstock exchanged notes held by approximately 98% of senior-note holders for $697.2 million of 10% secured toggle notes due 2020 and $440.3 million of convertible second-lien PIK notes due 2019 and 2020. The exchange and earlier note retirements contributed to a reported nine-month net gain on debt extinguishment of $190.1 million. The convertible notes may dilute shareholders; holders may convert, and mandatory conversion is triggered at a specified stock-price threshold. The company reported approximately $258.5 million of taxable cancellation-of-debt income, expected to be offset by net operating loss carryforwards, whose future use may be restricted by an ownership change.
- Capital program: Management planned five net 3.7 Haynesville wells in Q4 2016 and 22 net 17.1 wells in 2017, with estimated related capital expenditures of $20.9 million and $142.9 million, respectively. Funding was expected from operating cash flow, asset-sale proceeds and cash on hand; spending is described as discretionary.
- Management outlook: Management expected oil production to continue declining until drilling resumes, while Haynesville-focused drilling was expected to increase natural gas production through 2016 and 2017. Management cautioned that continued low commodity prices could reduce cash flow and lead to further property impairments or limit reserve development.
- Asset sale: After quarter-end, the company agreed to sell South Texas gas properties for $28.0 million, effective August 1, 2016, with closing expected in December subject to customary conditions. The assets were carried at $29.4 million at quarter-end; the company recorded a $13.2 million loss on the pending sale and a separate $20.8 million impairment during the nine-month period.
- Hedging: No derivatives were outstanding at September 30. After quarter-end, Comstock entered gas swaps covering approximately 12.6 Bcf of 2017 production at an average $3.27/Mcf.
- Other risks: Commodity-price volatility, restricted future use of tax-loss carryforwards, and potential further impairments are significant risks. Comstock had regained NYSE compliance with the minimum share-price standard but still faced review of the minimum market-capitalization standard. The filing states that a delisting could impair share liquidity and access to equity financing.
- Contingencies and controls: Management did not expect ordinary-course litigation to materially affect the company. Contracted gas transportation and treating commitments were up to $4.8 million through July 2019; contracted drilling commitments were $0.4 million through October 2016. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the planned South Texas asset sale closed, at what net proceeds, and how the final amount compared with the recorded carrying value.
- Whether the 2016–2017 Haynesville drilling and capital-spending plans were funded and delivered the expected production growth.
- Current liquidity, revolver availability, covenant headroom and cash needs, given negative nine-month operating cash flow and low cash balances.
- The terms, payment burden, conversion or dilution effects, and remaining principal of the restructured debt; distinguish stated principal from balance-sheet carrying value.
- Whether commodity prices or reserve revisions caused additional impairments, and whether the new gas hedges materially affected realized prices and cash flow.
- NYSE market-capitalization compliance and any change in the availability or value of tax-loss carryforwards following potential ownership changes.