Comstock Resources, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Comstock is an oil and natural gas exploration and production company. Financial amounts below are in millions of dollars unless noted.
Financial results and position
- Revenue: Q3 oil and gas sales were $117.1 million, down 2% from $119.4 million a year earlier. Nine-month sales were $332.2 million, up 4% from $319.9 million.
- Earnings: Q3 operating loss was $20.2 million and net loss was $26.0 million ($0.56 per share), compared with operating income of $12.1 million and net income of $1.3 million ($0.03 per share) in Q3 2011. Nine-month operating loss was $22.8 million and net loss was $29.4 million ($0.63 per share), versus operating income of $12.2 million and net income of $7.7 million ($0.16 per share) in 2011.
- Costs and operating performance: Q3 DD&A rose 28% to $99.2 million; DD&A per Mcfe increased to $4.09 from $2.95. Nine-month DD&A rose 26% to $268.4 million. Nine-month production was 75.1 Bcfe, up 7%; oil production increased substantially while natural gas production declined.
- Cash flow and investment: Nine-month operating cash flow was $225.7 million, versus $217.5 million in 2011. Cash used in investing was $264.1 million, including $468.5 million of cash capital expenditures and $204.4 million of asset-sale proceeds. Accrual-basis capital expenditures were $454.5 million before $23.8 million of initial KKR joint-venture funding.
- Liquidity and debt: September 30 cash was $2.6 million; marketable securities were $15.1 million. Long-term debt was $1.239 billion, up from $1.197 billion at year-end 2011. On October 29, the $850 million revolving credit facility had a $570 million borrowing base and $215 million available. The company reported compliance with financial covenants at September 30.
- Other balance-sheet items: Total assets were $2.658 billion and stockholders’ equity was $1.011 billion at September 30. The company reported a $13.7 million fair-value asset for commodity derivatives.
Changes versus the prior comparable period
- Natural gas prices weakened sharply: the average realized gas price fell 40% in Q3 and 42% for the first nine months year over year. Oil prices and production increased; oil rose to 16% of Q3 equivalent production from 4% a year earlier.
- Higher oil production helped support revenue, but lower gas prices, lower Q3 gas production, increased operating costs, higher DD&A, and greater interest expense contributed to the shift to losses.
- Management attributed the higher DD&A rate partly to lower estimated proved undeveloped gas reserves after the gas-price decline. The interim estimated gas reserve price fell from $4.18/Mcf at year-end 2011 to $3.01/Mcf at September 30, 2012; estimated proved undeveloped gas reserves declined by approximately 434 Bcf, or 61%.
- Comstock issued $300 million of 9.5% senior notes due 2020 in June 2012, using proceeds to reduce credit-facility borrowings. Interest expense increased to $17.5 million for Q3 and $45.3 million for the first nine months.
- Nine-month results included a $26.6 million pretax gain from Stone Energy share sales and a $24.3 million gain on oil and gas property sales. Q3 included a $2.8 million loss on property sales, including $1.7 million of Eagle Ford joint-venture formation costs.
Outlook, risks and contingencies
- Management expected 2012 spending of approximately $475 million for development and exploratory drilling and $30 million for leasehold costs, funded by operating cash flow and asset-sale proceeds. It said spending could be adjusted as circumstances warranted and believed cash flow, asset-sale proceeds, cash on hand and available credit would fund its current plan; additional capital might be needed if plans or assumptions changed.
- In July, Comstock entered an Eagle Ford participation agreement with KKR covering its 28,160 net acres. KKR may earn approximately one-third working interests in participating wells by paying acreage costs and one-third of well costs; subject to conditions, it is obligated to acquire acreage for the first 100 wells drilled after July 30. Of $34.0 million received for future costs, $24.2 million remained unspent at September 30 and was included in accrued expenses.
- Commodity prices are a significant risk. Management estimated that, based on nine-month production, a $1/Mcf change in gas price would change cash flow by approximately $62.5 million, and a $1/barrel oil-price change by approximately $0.5 million. Oil swaps covered 450,000 barrels for October–December 2012 at a weighted-average $99.53/barrel and 2.16 million barrels for 2013 at $98.67/barrel.
- Variable-rate credit-facility debt was $355 million; management estimated a 100-basis-point rate change would affect annual interest expense by approximately $2.7 million. The credit facility is secured and subject to semiannual borrowing-base redeterminations that may be affected by commodity prices and property performance.
- Commitments included $68.7 million for contracted drilling services, $1.5 million for well completion services, and maximum natural-gas transportation commitments of $28.4 million. Management said ordinary-course litigation was not expected to have a material effect; two state tax returns were under review, with no material impact expected.
- Management stated that disclosure controls were effective as of September 30, 2012 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether production, realized commodity prices and hedge settlements develop as expected, particularly given the company’s gas-price exposure.
- The reserve and DD&A effects of lower gas prices, and subsequent updates to reserve estimates.
- Cash generation, capital spending, asset-sale proceeds and the extent to which the planned program depends on additional borrowing or divestitures.
- Debt costs, borrowing-base availability, covenant compliance and refinancing needs; note the 9.5% coupon on the 2020 notes.
- KKR participation obligations, future funding and acreage/well economics, as well as the company’s drilling, completion and transportation commitments.