Comstock Resources, Inc. — Q3 2015 Form 10-Q
Business context and period. Comstock is an oil and natural gas producer. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Unless noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $61.4 | $145.0 | $205.2 | $442.6 |
| Operating income (loss) | $(596.0) | $0.3 | $(875.1) | $48.2 |
| Net income (loss) | $(545.0) | $(1.9) | $(758.6) | $1.2 |
| Diluted EPS | $(11.81) | $(0.04) | $(16.45) | $0.02 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $23.5 | $329.0 |
- Revenue and production: Q3 oil and gas sales fell 58%, driven by lower commodity prices. Realized oil price declined to $43.63/bbl from $95.92; natural gas price fell to $2.50/Mcf from $3.85. Q3 oil production declined 44%, while gas production increased 40%. Nine-month oil and gas sales fell 54%; oil production was down 18% and gas production up 7%.
- Margins and costs: Equivalent realized price fell to $3.55/Mcfe in Q3 from $8.85. Q3 lease operating expense was $0.96/Mcfe versus $0.97; DD&A was $4.58/Mcfe versus $6.08. The filing does not present a comparable adjusted or normalized operating margin; reported operating results include substantial impairment charges.
- Cash flow and spending: Nine-month operating cash flow was $23.5, down from $329.0; cash flow excluding working-capital changes was $39.5 versus $305.8. Cash capital expenditures were $232.9; investing cash outflow was $130.2, including $102.7 of asset-sale proceeds. Cash rose to $163.8 from $2.1 at year-end 2014.
- Balance sheet and debt: Current assets were $191.9 and current liabilities $91.0, or approximately $100.9 of working capital. Long-term debt was $1,297.3; total liabilities were $1,414.4 and stockholders’ equity $115.3. The company had no borrowings on its $50 revolving credit facility and reported compliance with its covenants. Fixed-rate notes carry coupons of 7.75%, 9.5% and 10%. The filing reports fixed-rate debt fair value of $645.6 versus carrying value of approximately $1.3 billion.
Material changes and unusual items
- Comstock recorded oil and gas property impairments of $544.7 in Q3 and $547.1 for the first nine months, following lower management price expectations. It also recorded $68.6 of unevaluated-lease impairments within exploration expense for the nine-month period.
- The company sold properties in and near Burleson County, Texas, for net proceeds of $102.7 and recognized a $111.8 loss. It also reported a $55.6 nine-month net gain on extinguishment of debt, including a $59.3 gain from repurchasing notes below face value, partly offset by a debt-cost write-off.
- In March, Comstock issued $700.0 of 10% secured notes; proceeds were used to retire the prior bank credit facility and for general corporate purposes. Nine-month interest expense rose to $86.7 from $43.4. No dividends were paid in the first nine months of 2015, versus $17.9 paid in 2014.
- The company recorded a nine-month income tax benefit of $144.9 and established valuation allowances against deferred tax assets. The filing cites $178.6 million for federal and $71.6 million for state deferred tax assets at September 30.
Outlook, risks and contingencies
- Management expects oil production to decline until drilling resumes; it expects natural gas production to increase through its 2015 Haynesville Shale drilling program. Planned fourth-quarter 2015 development and exploration drilling and lease spending was approximately $28 million, expected to be funded by operating cash flow and cash on hand.
- Management said cash flow from operations, asset-sale proceeds, cash on hand and available revolver capacity should fund the current business plan, but additional capital could be required if assumptions or plans change; access and terms are not assured.
- Persistently low oil and gas prices could reduce revenue, cash flow and economically recoverable reserves, and cause further property impairments. Management also cautioned that limited capital to develop reserves or decisions not to develop unevaluated properties could lead to additional impairments.
- At September 30, the company had gas swaps covering 2,700 MMcf for October 2015–June 2016 at a weighted-average $3.20/Mcf; derivative fair value was a $1.3 asset. Management estimated that a $0.10/Mcf gas-price change would change nine-month cash flow by about $3.1 and a $1/bbl oil-price change by about $2.5.
- Commitments included $1.3 for contracted drilling services through November 2015 and maximum natural-gas transportation and treating commitments of $7.1 through July 2019. The company reported that ordinary-course litigation was not expected to materially affect its financial position or results.
- After quarter-end, on October 1, Comstock adopted a rights plan intended to protect tax net operating loss carryforwards from potential ownership-change limitations. It generally penalizes acquisitions of 4.9% or more without board approval.
Important facts for investors to verify
- Whether commodity prices and production trends support management’s outlook and whether further impairments are likely.
- Liquidity and refinancing capacity relative to substantial debt, high coupon costs, the small revolver, and covenant requirements.
- The assumptions behind the $544.7 property impairment, including price forecasts, reserves, costs and discount rates.
- Expected realization of deferred tax assets and the potential effect of ownership changes on net operating loss carryforwards.
- Whether fourth-quarter spending and cash generation remain consistent with management’s funding expectations.