Comstock Resources, Inc. — Q1 2012 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are with December 31, 2011. Comstock is an oil and natural gas producer.
Financial and operating highlights
| Metric | Q1 2012 | Q1 2011 / prior balance date |
|---|---|---|
| Oil and gas sales | $110.3 million | $88.0 million |
| Total revenue, including property-sale gain | $117.1 million | $88.0 million |
| Operating income (loss) | $1.5 million | ($8.3 million) |
| Net income | $6.9 million; $0.14 per diluted share | $2.4 million; $0.05 per diluted share |
| Operating cash flow | $133.2 million | $50.9 million |
| Capital expenditures, cash-flow statement | $184.1 million | $158.1 million |
| Cash and cash equivalents | $3.8 million | $8.5 million at Dec. 31, 2011 |
| Long-term debt | $1,207.0 million | $1,196.9 million at Dec. 31, 2011 |
| Total current assets / current liabilities | $176.8 million / $250.1 million | $113.1 million / $187.2 million at Dec. 31, 2011 |
Production rose 28% to 25.5 Bcfe (280 MMcfe per day). Oil production increased to 506,000 barrels from 138,000; natural gas production was 22.4 Bcf versus 19.1 Bcf. Average realized oil price increased 13% to $104.02 per barrel, while natural gas price declined 34% to $2.63 per Mcf. Average realized equivalent price, including hedging, was $4.33 per Mcfe versus $4.42.
Operating expenses totaled $115.6 million versus $96.3 million. DD&A increased 31% to $79.1 million, and DD&A per Mcfe rose to $3.23 from $3.01. Interest expense increased to $13.2 million from $10.3 million. The effective tax rate was 53.8%, compared with 20.2%.
Changes, cash flows, and liquidity
- Oil and gas sales increased $22.3 million, reflecting higher production and oil prices, partly offset by lower gas prices. Oil sales increased substantially; natural gas sales declined to $59.0 million from $75.6 million.
- Net income included a $26.6 million gain from sales of Stone Energy shares and a $6.7 million gain on oil and gas property sales. Those gains materially affected reported earnings; operating income was $1.5 million.
- Operating cash flow rose $82.3 million. The filing attributes cash sources to operations, $37.7 million of asset-sale proceeds, and $10.0 million of credit-facility borrowings. The increase in accounts payable and accrued expenses contributed $63.4 million to operating cash flow.
- Cash capital expenditures were $184.1 million, exceeding operating cash flow; net cash used in investing activities was $146.4 million. Cash declined by $4.7 million during the quarter. Restricted cash of $9.5 million was associated with the reverse like-kind exchange and is not presented as unrestricted cash.
- At quarter-end, the $850 million revolving facility had $610 million outstanding and $90 million available within a $700 million borrowing base. Following the May 1 property sale, the borrowing base and total availability were reduced to $570 million and $655.5 million, respectively. The company reported covenant compliance at March 31.
- Comprehensive loss was $12.4 million despite net income, primarily reflecting other comprehensive losses on securities and oil-price hedges.
Outlook, risks, and unusual items
- Management expected approximately $458 million of developmental and exploratory drilling spending in 2012, funded by operating cash flow and asset-sale proceeds. It stated that cash flow, asset-sale proceeds, cash on hand, and available credit were expected to fund the business plan, while noting that changed or inaccurate assumptions could require additional capital.
- A sale of South Texas and North Louisiana properties for $118.5 million, subject to customary adjustments and conditions, closed May 1, 2012, with an effective date of January 1, 2012. The properties had a March 31 carrying value of $91.5 million. The sale also reduced the credit-facility borrowing base.
- Outstanding oil swaps covered 1.35 million barrels for April–December 2012 at a weighted-average $99.53 per barrel and 1.08 million barrels for 2013 at $100.33. The filing reported a $10.0 million derivative liability; some contracts were partially ineffective, and Q1 realized swap losses were $1.3 million.
- Management identifies commodity prices as a key risk: sustained weakness could harm cash flow, results, reserves, and access to capital. It reported that a $1 per Mcf gas-price change would affect period cash flow by approximately $21.7 million and a $1 per barrel oil-price change by approximately $0.1 million; investors should verify the stated sensitivity and its assumptions.
- Variable-rate credit-facility borrowings were $610 million; management estimated that a 100-basis-point rate change would alter annual interest expense by approximately $1.5 million. The company also had $81.3 million of contracted drilling commitments, $4.5 million of minimum well-completion commitments, and up to $31.1 million of natural-gas transportation commitments.
- State income tax returns in two jurisdictions were under review; the company did not expect a material effect. Management also said ordinary-course litigation was not expected to materially affect financial position or results. Disclosure controls were assessed as effective, with no material quarterly change in internal controls reported.
Important facts for investors to verify
- How much of earnings and operating cash flow is repeatable after excluding securities and property-sale gains and considering the working-capital contribution.
- Post-sale borrowing-base availability, credit-facility covenant headroom, and funding needs against the 2012 drilling budget.
- Production and realized-price trends, especially gas-price exposure, and the assumptions behind the filing’s commodity sensitivity estimates.
- Cash proceeds and final adjustments from the May 1 property sale, and the effect of the sale on production, reserves, and borrowing capacity.
- Hedge settlements, fair-value changes, and any further hedge ineffectiveness; also the liquidity available apart from restricted cash and marketable securities.