Comstock Resources, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results; dollar amounts are in millions unless otherwise noted. Comstock is an oil and natural gas producer. Its producing Eagle Ford properties were sold in April 2018.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Oil and gas sales | $61.4 | $61.5 | $134.0 | $115.3 |
| Operating income | $7.4 | $10.5 | $2.3 | $12.9 |
| Net loss | $(34.0) | $(21.4) | $(75.9) | $(44.4) |
| Loss per share, diluted | $(2.22) | $(1.45) | $(4.99) | $(3.06) |
| Operating cash flow | Not separately provided | Not separately provided | $87.0 | $55.5 |
- Q2 natural gas sales rose 12% to $56.3 million as production increased 25%; realized gas price fell 11% to $2.59/Mcf. Oil sales declined 53% to $5.2 million, mainly following the Eagle Ford producing-property sale.
- Six-month natural gas production increased 38%, while realized gas price declined 9%. Total oil and gas sales grew 16% year over year.
- Operating margin, calculated as operating income divided by oil and gas sales, was approximately 12.0% in Q2 and 1.7% for the first half, versus 17.0% and 11.2%, respectively, in 2017.
- Interest expense increased to $40.2 million in Q2 and $79.1 million for six months, versus $36.8 million and $69.7 million. The company attributed the increase mainly to amortization of debt discounts and costs from its 2016 debt exchange.
- Six-month capital expenditures were $89.9 million. Cash and equivalents were $158.4 million at June 30, compared with $61.3 million at year-end. Operating cash flow less cash capital expenditures was negative approximately $3.6 million.
- Debt carrying value was $1.153 billion, compared with $1.111 billion at year-end; principal debt was approximately $1.2 billion. Current assets were $202.1 million and current liabilities $189.1 million. No revolver borrowings were outstanding under the $50 million facility, and the company reported compliance with its covenants.
- Stockholders’ deficit increased to $442.4 million from $369.3 million at year-end. Shares outstanding were 16.26 million at June 30.
Material changes, outlook, and risks
- On April 27, Comstock completed the sale of its producing Eagle Ford properties for $125 million. It retained approximately 8,400 undeveloped acres. The company recorded a $35.4 million six-month loss on property sales, including write-downs and a $2.7 million final settlement related to a 2012 sale.
- Management expected to spend a further $96 million in the second half of 2018 on drilling and development, plus $51.5 million on the Bakken properties. It expected to fund future development from operating cash flow and cash on hand; capital spending timing was described as discretionary.
- A May 9 agreement provided for Arkoma and Williston to contribute Bakken properties valued at approximately $620 million for about 88.6 million newly issued shares. The transaction was subject to shareholder approval and other closing conditions; the contributors were expected to own approximately 84.5% of pro forma shares.
- In connection with the proposed contribution, Comstock launched a tender offer to repurchase its outstanding debt and planned a refinancing. It sold $850 million of 9.75% senior notes due 2026 on August 3 at 95.988% of principal; proceeds were held in escrow pending the expected contribution closing. These were post-quarter events, and completion remained conditional as of the filing.
- On July 31, Comstock acquired North Louisiana properties for $37 million, including 9,900 net acres and producing natural gas wells.
- Commodity prices are a key risk. At June 30, gas hedges included swaps covering 15.0 Bcf at $3.00/Mcf and collars covering 21.6 Bcf with $2.50 floors and $3.30/$3.50 ceilings. Management warned that price weakness could harm cash flow, reserves and access to capital.
- Other notable exposures include substantial debt and interest costs, potential limits on tax-loss carryforwards following ownership changes, and valuation uncertainty in oil and gas properties. The company had approximately $19.3 million of contracted drilling commitments and $1.3 million of transportation and treating commitments.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. The filing provides no full-year earnings guidance.
Key facts for investors to verify
- Whether the Bakken contribution, shareholder approval, tender offer, and refinancing closed on the expected terms and dates, including the final debt repayment and new credit-facility borrowing base.
- Post-transaction share count, ownership dilution, and the effect of the expected ownership change on tax-loss carryforwards.
- Actual second-half capital spending and drilling results compared with management’s expectations, and the contribution of the acquired Bakken and North Louisiana properties.
- Debt balances, cash interest requirements, covenant headroom, and the company’s ability to fund operations and planned investment from cash flow.
- Commodity-price exposure and hedge settlements, including whether production and realized prices track the assumptions underlying the outlook.