Comstock Resources, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. Comstock is an oil and natural gas exploration and production company focused primarily in Texas and Louisiana. West Texas operations were sold in May 2013 and are reported as discontinued operations; operating comparisons below generally cover continuing operations unless noted.
Financial and operating performance
| Metric | 2013 | Prior comparable period |
|---|---|---|
| Oil and gas sales | $420.3 million | $384.8 million in 2012 |
| Operating loss | $72.3 million | $144.6 million loss in 2012 |
| Loss from continuing operations | $106.7 million; $2.22 per share | $103.1 million loss; $2.22 per share |
| Net income (loss), including discontinued operations | $41.0 million; $0.85 per share | $100.1 million loss in 2012 |
| Cash from continuing operating activities | $269.0 million | $219.7 million in 2012 |
| Continuing-operations capital expenditures | $480.9 million | $348.2 million in 2012 |
| Cash and cash equivalents at year-end | $3.0 million | $4.5 million at year-end 2012 |
| Total debt at year-end | $798.7 million | $1.324 billion at year-end 2012 |
- Oil and gas sales rose 9%, as oil sales increased 28% to $231.8 million while natural gas sales fell 8% to $188.5 million. Oil production increased 29%; natural gas production declined 32%. Total equivalent production decreased from 92.5 Bcfe to 69.6 Bcfe.
- Average realized oil and gas prices were $100.20 per barrel and $3.38 per Mcf, respectively, compared with $101.09 and $2.49 in 2012. Equivalent realized price increased from $4.16 to $6.04 per Mcfe.
- Continuing-operations operating margin, calculated as operating income (loss) divided by sales, was approximately negative 17% in 2013 versus negative 38% in 2012. DD&A was $337.1 million; DD&A per Mcfe increased to $4.83 from $3.76. Lease operating expense was $52.8 million, or $0.76 per Mcfe, versus $51.2 million, or $0.55 per Mcfe.
- Net income included $147.8 million of income from discontinued operations, principally the $230.0 million pretax gain on the West Texas sale ($148.6 million after tax). Continuing operations remained loss-making.
- Continuing operating cash flow less continuing capital expenditures was approximately negative $211.9 million. The West Texas divestiture generated $823.1 million in proceeds and was a major source of funding and debt reduction. Year-end current assets were $57.1 million and current liabilities were $195.0 million; the filing reports $415.0 million available under the borrowing base.
- Debt-to-total-capitalization was approximately 46%. The company repaid $530 million of debt during 2013, including redemption of its 8⅜% notes. Remaining principal included $300 million of 7¾% notes due 2019, $300 million of 9½% notes due 2020, and $210 million drawn under the revolving credit facility.
- Year-end proved reserves were 584.5 Bcfe, 77% natural gas and 23% oil, with 73% developed. The filing reports a $1.054 billion pre-tax PV-10 value and an $807.2 million after-tax standardized measure; these are reserve valuation measures, not estimates of market capitalization.
Material changes and unusual items
- The West Texas property sale materially reshaped the company: proceeds were used primarily to repay debt and support accelerated development of South Texas oil assets.
- 2013 exploration expense was $33.4 million, mainly impairment of unevaluated leasehold costs, versus $61.4 million in 2012. Impairments of proved and unproved properties totaled $33.6 million in 2013, compared with $86.7 million in 2012.
- Other significant continuing-operations items included an $17.9 million loss on early debt extinguishment and an $8.4 million derivative loss, partly offset by $7.9 million of gains on sales of marketable securities. The 2013 derivative cash settlements were positive $2.3 million.
- The company acquired approximately 21,000 net acres prospective for Eagle Ford oil in Texas for $67.4 million and approximately 51,000 net acres prospective for Tuscaloosa Marine shale oil in Louisiana and Mississippi for $53.3 million.
- Fourth-quarter 2013 oil and gas sales were $105.9 million, operating loss was $24.4 million, loss from continuing operations was $36.6 million, and net loss was $37.5 million. Fourth-quarter sales were below the third quarter’s $111.6 million.
Outlook, risks and contingencies
- Management expected approximately $478 million of 2014 spending for development, exploration and lease acquisitions, funded primarily by operating cash flow and credit-facility borrowings. Its plans called for 71 horizontal wells (47.6 net), primarily in South Texas; drilling activity could change with commodity prices. The filing also describes approximately $450 million for development and exploration plus $28 million for lease acquisitions.
- Management planned to defer most Haynesville/Bossier gas drilling until natural gas prices improve. It highlighted low natural gas prices, oil and gas price volatility, reserve-estimation uncertainty, drilling and execution risks, and the need to replace produced reserves.
- Liquidity and funding risks include low cash on hand, substantial capital needs, borrowing-base redeterminations tied to reserve values and prices, and debt covenants. The company reported compliance with its financial covenants at year-end. A 100-basis-point rise in variable rates would increase annual interest expense by approximately $2.1 million at year-end borrowings.
- Oil price swaps covered approximately 1.985 million barrels of expected 2014 production at a $96.31 per-barrel WTI price. Derivatives were not designated as cash-flow hedges; the company disclosed a prior-year material weakness in derivative accounting controls, said it had implemented a control framework, and reported effective controls at year-end.
- Other material risks include environmental and hydraulic-fracturing regulation, South Texas water availability, pipeline and transportation access, and customer concentration: two purchasers accounted for 51% and 36% of 2013 sales. Management stated alternative purchasers were available. No material adverse legal proceedings were reported; ordinary-course matters were not expected to materially affect results.
Important facts for investors to verify
- Reconcile the 2014 capital-spending descriptions and well-level budgets, and assess whether planned drilling can be funded by operating cash flow and available borrowing capacity.
- Review the West Texas sale accounting and cash proceeds, including the distinction between continuing and discontinued operations and the resulting debt reduction.
- Assess the sustainability and economics of oil-led production growth against declining natural gas production, higher unit operating costs and reserve replacement needs.
- Check borrowing-base availability, debt maturities, covenant headroom, interest costs and sensitivity to commodity-price and reserve-value changes.
- Evaluate reserve estimates and development assumptions, including 27% proved undeveloped reserves and the estimated $543.2 million of future development costs associated with those reserves.
- Review derivative exposure, the remediation of the prior accounting-control weakness, environmental and water risks, and dependence on two principal purchasers.