Business context and reporting period
Comstock Resources, Inc. is an oil and natural gas producer. This summary covers its unaudited consolidated results for the three months ended March 31, 2018, compared with the first quarter of 2017. Amounts are in millions of dollars unless otherwise noted.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Oil and gas sales | $72.6 | $53.8 |
| Operating income (loss) | $(5.1) | $2.4 |
| Net loss | $(41.9) | $(22.9) |
| Net loss per share | $(2.78) | $(1.61) |
| Cash provided by operating activities | $21.6 | $3.2 |
| Capital expenditures | $46.5 | $38.4 cash-flow basis |
| Cash and cash equivalents, period-end | $51.0 | $30.4 |
Natural gas sales were $59.5 million and oil sales were $13.1 million. Natural gas production rose 55% to 21.646 Bcf; oil production fell 28% to 190,000 barrels. Average realized prices were $2.75/Mcf for gas and $68.71/barrel for oil. Including derivative cash settlements, the realized gas price was $2.82/Mcf.
Operating cash flow less capital expenditures was approximately negative $24.9 million. Total liabilities were $1.32 billion and stockholders’ deficit was $409.9 million at March 31. Cash was $51.0 million; current assets were $208.7 million, including $115.3 million of assets held for sale, versus current liabilities of $167.7 million.
Debt included $697.2 million of 10% senior secured toggle notes, $284.4 million of 7.75% convertible second-lien PIK notes, $187.1 million of 9.5% convertible second-lien PIK notes, $25.6 million of other senior notes, and $15.0 million drawn on a $50 million revolving facility. The filing reports long-term debt carrying value of $1.131 billion, excluding the current revolver borrowing. Interest expense was $38.9 million; $9.8 million was paid in kind. The company said it complied with its credit-facility covenants at quarter-end.
Material changes versus the prior comparable period
- Sales increased 35%, principally from Haynesville-driven gas production growth. Higher gas volumes were partly offset by a 6% lower realized gas price.
- Oil sales increased 1%: higher oil prices were largely offset by lower Eagle Ford production amid limited drilling there.
- Lease operating expense fell to $0.43/Mcfe from $0.64/Mcfe, and oil-and-gas DD&A fell to $1.18/Mcfe from $1.90/Mcfe, reflecting the greater contribution from lower-cost Haynesville properties.
- The company recorded a $28.6 million loss on properties held for sale and retained acreage. Interest expense rose $6.0 million, mainly due to amortization of debt discounts and exchange costs. These items contributed to the larger net loss.
- Operating cash flow increased, mainly on higher sales; capital expenditures also increased. Cash declined $10.3 million during the quarter.
Outlook, risks and unusual items
- No formal earnings or production guidance is provided. Management expected to fund future development with operating cash flow and cash on hand and described capital-spending timing as discretionary.
- On April 27, 2018, after quarter-end, Comstock completed the sale of producing Eagle Ford properties for $125 million. Approximately $16 million of estimated net cash flow from November 2017 through closing was paid to the buyer. Comstock retained about 8,700 undeveloped Eagle Ford acres.
- On April 25, Comstock entered a two-year drilling venture with Arkoma. Comstock receives a 20% carried interest in participating projects; it planned to offer at least $75 million of opportunities in year one and $100 million in year two. The first six projects represented a $34 million Arkoma investment.
- On May 9, Arkoma and Williston agreed to contribute North Dakota properties, estimated at $620 million, for approximately 88.6 million new Comstock shares. The proposed transaction was subject to closing conditions, including shareholder approval; the contributors would own about 84% of pro forma shares. Comstock expected to refinance all existing debt upon completion and said it would seek other refinancing alternatives if the transaction did not close.
- Debt maturities include $284.4 million of convertible notes due April 2019 and other notes due in 2019 and 2020; the revolving facility matures March 2019. The high debt burden, refinancing requirements, and secured claims are material risks.
- Commodity prices are volatile and materially affect results, cash flow, reserves, and access to capital. Gas swaps covered approximately 20.4 Bcf at an average $3.00/Mcf for April 2018–March 2019. A 10% commodity-price change would change swap fair value by about $4.2 million, and a $0.10/Mcf gas-price change was estimated to affect cash flow by about $1.9 million for the quarter’s production and hedges.
- Potential ownership changes from the proposed transaction or convertible-note conversions could limit use of tax-loss carryforwards. Management had not completed its accounting analysis of the Tax Cuts and Jobs Act; deferred tax assets remained subject to valuation allowances.
- The filing notes a $2.9 million reduction to Q1 2017 interest expense correcting an effective-interest calculation error relating to September–December 2016. It was accounted for as a correction of an accounting error.
- Management concluded disclosure controls were effective as of March 31, 2018 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the North Dakota property contribution closes, the final share issuance and ownership dilution, and the terms and completion of the planned debt refinancing.
- Use and net proceeds of the Eagle Ford sale, including the cash-flow adjustment paid to the buyer.
- Debt repayment capacity and refinancing alternatives, especially for 2019 maturities, and continued compliance with credit covenants.
- Haynesville production growth, realized commodity prices, hedge settlements, and the economics of planned drilling and the Arkoma venture.
- Reserve and valuation assumptions for retained and contributed properties, and the potential effect of ownership changes on tax-loss carryforwards.