CRK

Comstock Resources, Inc. - 10-Q Summary (Quarter Ended June 30, 2002)

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2002, for Comstock Resources, Inc., an oil and gas exploration and production company. The financial statements are unaudited. The company operates primarily in Texas and utilizes hedging instruments to manage commodity price risk. Significant operational context includes the integration of the DevX Energy, Inc. acquisition completed in December 2001 and the sale of certain marginal properties classified as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Oil and gas sales decreased 17% in Q2 2002 and 43% in the first six months of 2002 compared to 2001. This was driven by a 31% drop in average natural gas prices and a 17% drop in crude oil prices, despite an 8% increase in production volume.
• Profitability Shift: The company reported a net loss of $2.6 million for the six months ended June 30, 2002, a sharp reversal from the $36.0 million net income in the same period in 2001. This includes a $1.1 million loss from discontinued operations.
• Expense Increases: Interest expense rose 39% year-over-year for the six-month period to $14.5 million due to higher debt levels financing the DevX acquisition. Depreciation, depletion, and amortization (DD&A) increased 15% to $27.5 million due to higher production volumes.
• Derivative Losses: The company recorded a $2.2 million loss on derivatives for the six months ended June 30, 2002, primarily due to unrealized losses on contracts not designated as hedges.

Guidance, Outlook, and Risks

• Capital Budget: Management has budgeted approximately $75.0 million for development and exploration projects in 2002, intending to fund these through internally generated cash flow. No specific acquisition budget is set.
• Liquidity: The company maintains a $350.0 million revolving credit facility with a borrowing base of $250.0 million. As of June 30, 2002, $164.0 million was outstanding under this facility. Management believes current cash flows and borrowing capacity are sufficient for operations.
• Market Risks: Results are highly sensitive to oil and natural gas prices. A $1.00 change in oil price impacts cash flow by approximately $16.1 million, and a $1.00 change in gas price impacts cash flow by $0.7 million (based on H1 2002 production).
• Contingencies: The company settled derivative positions with Enron Corporation in July 2002, agreeing to pay $3.0 million to cancel specific swap and floor agreements. Additionally, the filing notes risks associated with post-September 11, 2001, market instability and potential armed hostilities affecting energy prices.

Investor Verification Checklist

• Commodity Price Exposure: Verify the extent of hedging coverage for the remainder of 2002 and 2003, noting that approximately 45-50% of expected 2002 natural gas production was hedged through October 2002.
• Debt Covenants: Confirm continued compliance with financial covenants (current ratio, tangible net worth, interest coverage) given the high debt load ($384.7 million) and reduced cash flows.
• Discontinued Operations: Review the impact of the $1.8 million loss on the disposal of properties in April and July 2002, which are excluded from continuing operations.
• Derivative Valuation: Assess the fair value of outstanding derivative instruments, which stood as a net liability of $1.6 million (excluding Enron settlements) as of June 30, 2002.
• Enron Settlement: Monitor the execution and financial impact of the $3.0 million settlement with Enron Corporation regarding derivative cancellations.