Comstock Resources, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter filing. Fourth-quarter figures are shown separately below. Comstock’s 2018 reporting spans a change from predecessor to successor accounting; the filing’s full-year 2018 comparison is a non-GAAP combination of those periods and is not fully comparable.
Business context and reporting period
Comstock is an independent oil and gas producer focused primarily on the Haynesville and Bossier shales in East Texas and North Louisiana. The July 2019 Covey Park acquisition substantially expanded the company’s scale; 2019 results include Covey Park only from the acquisition’s July 16 closing date. The company reported its first full quarter including Covey Park in fourth-quarter 2019.
Financial and operating performance
| Metric | FY 2019 | Comparison or detail |
|---|---|---|
| Oil and gas sales | $768.7 million | Up 97% from combined 2018 sales of $390.3 million; increased volumes more than offset lower realized prices. |
| Operating income | $274.9 million | Calculated operating margin: approximately 35.8%. |
| Net income | $96.9 million | $74.5 million available to common stockholders after preferred dividends and accretion; diluted EPS was $0.52. |
| Fourth-quarter sales | $289.2 million | Quarterly operating income was $101.7 million; net income was $55.1 million; diluted EPS was $0.19. |
| Operating cash flow | $451.2 million | Compared with $188.0 million for the combined 2018 periods. |
| Capital expenditures | $510.8 million | Operating cash flow less capital expenditures was approximately negative $59.5 million, before acquisitions and other investing activity. |
| Cash and debt | $18.5 million cash; $2.725 billion debt principal | Debt carrying value was $2.500 billion after discounts and issuance costs. |
| Liquidity | $1.250 billion drawn under the bank facility | Initial committed borrowing base was $1.500 billion; borrowing base was $1.575 billion and reaffirmed in November. Company reported covenant compliance at year-end. |
Calculated net margin was approximately 12.6%. Interest expense was $161.5 million, including $16.3 million of non-cash interest. Debt includes $1.250 billion under the variable-rate credit facility, $625 million of 7.5% notes due 2025, and $850 million of 9.75% notes due 2026.
Natural gas sales volume rose to 292.8 Bcf from 100.3 Bcf in combined 2018, while total production increased to 308.9 Bcfe from 110.3 Bcfe. Realized natural gas price fell to $2.17/Mcf from $2.91/Mcf; realized oil price fell to $49.49/barrel from $58.70/barrel. Cash hedge settlements lifted realized natural gas price to $2.35/Mcf.
Material changes versus the prior comparable period
- Covey Park was acquired for approximately $2.2 billion, adding about 249,000 net acres, 2.9 Tcfe of proved reserves, and substantial Haynesville/Bossier production and drilling inventory. Comstock also acquired a smaller Haynesville-focused company for approximately $42.3 million in stock.
- Sales increased primarily from the acquisition and drilling program, while lower realized commodity prices partly offset the volume benefit. Lease operating expense per Mcfe declined to $0.29 from $0.39; total operating expense per Mcfe declined to $0.28 from $0.38.
- Debt principal increased from approximately $1.3 billion at year-end 2018 to $2.725 billion at year-end 2019, largely reflecting acquisition financing and assumed Covey Park notes. Shares outstanding also increased substantially through acquisition-related and financing issuances.
- Proved reserves increased to 5.442 Tcfe, of which approximately 93% were in Haynesville/Bossier and 98% were natural gas. Approximately 64% of proved reserves were undeveloped. SEC PV-10 was $3.252 billion; the standardized after-tax measure was $2.913 billion.
Outlook, risks, contingencies, and unusual items
- Management planned approximately $421 million of 2020 development and exploration spending, including drilling 46 operated horizontal wells and completing 18 wells drilled in 2019. Its stated 2020 priorities were lower leverage and free-cash-flow generation.
- Management expected oil production to decline, given limited planned new oil drilling, and natural gas production to increase if development activity offsets declines from existing wells. The filing emphasizes sensitivity to commodity prices and the risk that low gas prices could reduce cash flow, reserves, borrowing capacity, or require lower drilling activity.
- Year-end hedges covered substantial future gas volumes, including swaps, collars, and swaptions; hedges limit some downside exposure but also constrain benefits from price increases and carry basis, counterparty, and production-volume risks.
- Firm transportation commitments total approximately $266.9 million over their terms. A new 400,000 MMBtu/day commitment is expected to begin in October 2021 and run for ten years; insufficient deliveries could leave Comstock responsible for transportation costs.
- Convertible preferred stock carries a 10% annual dividend and may convert after July 16, 2020 into an aggregate 96.25 million common shares at $4.00 per share, subject to adjustment, creating potential dilution.
- Covey Park acquisition-related costs were $41.0 million. The company reported no oil and gas property impairment in 2019. Management said no legal proceeding was expected to materially affect consolidated results or financial condition.
- Management and the auditor reported effective financial reporting controls, but the assessment excluded Covey Park’s controls while integration continued. Covey Park represented about 48% of year-end assets and 34% of 2019 revenue.
Most important facts for investors to verify
- Whether production and operating cash flow can fund the planned drilling program while reducing debt, particularly if natural gas prices remain weak.
- Debt facility availability, covenant headroom, variable-rate exposure, and the company’s ability to meet interest and transportation commitments.
- Actual production, realized prices, hedge settlements, and basis differentials compared with assumptions underlying guidance and reserves.
- Development timing and capital requirements for the large undeveloped reserve base, including the estimated $3.17 billion of future development costs.
- Potential preferred-stock conversion and dividend burden, resulting dilution, and the ownership and governance influence of the Jones Group and former Covey Park owners.
- Progress integrating Covey Park’s internal controls and completing the acquisition purchase-price allocation.