Comstock Resources, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Comstock is an oil and natural gas producer. Results are reported as “Successor” after the August 2018 Jones Contribution and pushdown accounting; the company cautions that Q1 2019 and Q1 2018 “Predecessor” results are not comparable.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Oil and gas sales | $126.9 million | $72.6 million |
| Operating income (loss) | $53.2 million | $(5.1) million |
| Net income (loss) | $13.6 million | $(41.9) million |
| Diluted earnings (loss) per share | $0.13 | $(2.78) |
| Cash from operating activities | $74.7 million | $21.6 million |
| Capital expenditures | $92.5 million | $46.5 million |
- Production was 33.1 Bcf of natural gas and 810,470 barrels of oil, or 38.0 Bcfe total. Average sales prices were $2.72/Mcf for gas and $45.34/barrel for oil. Including derivative cash settlements, realized prices were $2.87/Mcf and $45.78/barrel, respectively.
- Operating income represented approximately 42% of oil and gas sales; net income approximately 11%. These ratios are calculated from reported figures and are not presented by the company as margin measures.
- Cash and cash equivalents were $29.3 million at March 31, 2019. Current assets were $134.1 million and current liabilities $198.1 million.
- Long-term debt carrying value was $1.266 billion: $850 million of 9.75% senior notes due 2026 and $470 million drawn on a $700 million bank facility due 2023. The facility had $230 million of nominal borrowing-base capacity remaining, subject to its terms and redetermination. Comstock reported compliance with its covenants at quarter-end.
- Net cash used in investing was $88.5 million; financing provided $19.9 million, including $45 million of borrowings and $25 million of repayments. Cash increased $6.1 million during the quarter.
Material changes and drivers
- Reported sales rose by $54.3 million year over year, but the comparison is distorted by the Jones Contribution and changed asset mix. Q1 2019 included Bakken oil production; Q1 2018 included Eagle Ford production, whose properties were sold in April 2018.
- Production volumes increased, while oil’s average sales price fell from $68.71 to $45.34 per barrel; gas prices were broadly similar. The filing attributes increased production in part to the combined asset base, but does not provide a directly comparable same-asset growth measure.
- Q1 2018 operating results included a $28.6 million loss on sale of oil and gas properties. Q1 2019 instead recorded a $7.7 million derivative loss, compared with a $2.6 million derivative gain in Q1 2018. Q1 2019 realized derivative settlements were a $5.4 million gain.
- Interest expense declined to $27.9 million from $38.9 million, reflecting the post-refinancing debt structure and lower debt discount amortization. Cash interest paid in Q1 2019 was $50.3 million, above reported interest expense.
- Capital spending roughly doubled year over year, primarily reflecting increased development drilling. DD&A rose to $37.6 million from $27.2 million, while the reported DD&A rate fell to $0.99/Mcfe from $1.18/Mcfe, partly reflecting the new fair-value basis.
Outlook, risks and notable items
- Management expected to spend a further $252.5 million in the remaining nine months of 2019, including drilling 48 gross (28.5 net) wells and completing 38 gross (22.5 net) wells, and expected to fund future development and exploration with operating cash flow. Capital spending is largely discretionary; no full-year production or earnings guidance is provided in the supplied filing text.
- Commodity prices are a significant risk. At March 31, Comstock had gas swaps covering 21.6 Bcf at an average $3.00/Mcf, gas collars covering 44.6 Bcf with an average $2.46 floor and $3.52 ceiling, and oil collars covering 1.93 million barrels with an average $49.66 floor and $69.07 ceiling. Hedges can limit upside as well as downside.
- Variable-rate facility borrowings expose results and cash flow to rate increases; management estimated that a 100-basis-point change would affect interest expense by about $1.2 million based on quarter-end borrowings. The company also identified commodity-price volatility as a risk to cash flow, reserves, and access to capital.
- The Jones Contribution gave the Jones Group control and triggered an IRC Section 382 limitation; the company estimated pre-change NOL use at $3.3 million annually, subject to potential built-in-gain adjustments. Deferred-tax valuation allowances were recorded. Unused AMT credit carryforwards were $20.4 million.
- Goodwill of $350.2 million arose from the Jones Contribution. The purchase-price allocation was preliminary and could be revised; management said it expected to complete the allocation within the one-year measurement period. Oil and gas property valuations and future impairment assessments depend on estimates including prices, reserves, costs, and production.
- In February 2019, Comstock sold 1,464 undeveloped net acres to an affiliate of its majority stockholder for $5.9 million and used the proceeds to buy a like number of net acres from a third party for the same amount. Comstock retained working interests in planned wells and will operate them. The related-party transaction and acreage pricing merit review.
- Operating lease liabilities were $4.8 million following adoption of ASC 842; the company also disclosed $17.0 million of contracted drilling services through October 2019. It reported no litigation expected to have a material effect and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the year-over-year revenue and operating improvement reflects the Jones Contribution, asset mix, production growth, or commodity prices, given the explicit noncomparability of the reporting periods.
- Whether operating cash flow can support the planned remaining-2019 capital program while meeting debt service and facility requirements, and how much borrowing capacity is available after borrowing-base terms and redeterminations.
- The effect of commodity prices and hedge settlements on realized revenue and cash flow, including hedge volumes, floors, ceilings, and maturities.
- Final purchase-price allocation and goodwill valuation, including any subsequent adjustments or impairment indicators.
- The related-party acreage transaction terms, Section 382 NOL limitations and valuation allowances, and ongoing compliance with debt covenants.