Comstock Resources, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results; financial amounts below are in millions of dollars unless stated otherwise.
Business context and operating performance
Comstock is an oil and natural gas producer. Growth in its Haynesville Shale drilling program increased natural gas production, while oil production fell amid limited Eagle Ford drilling. Management reported nine operated Haynesville wells drilled and ten completed during the first half of 2017.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Oil and gas sales | $61.5 | $40.7 | $115.3 | $76.9 |
| Operating income (loss) | $10.5 | ($22.7) | $12.9 | ($79.2) |
| Net income (loss) | ($21.4) | $4.9 | ($44.4) | ($51.7) |
| Net loss per share | ($1.45) | $0.41 income | ($3.06) | ($4.82) |
| Operating cash flow | Not provided by quarter | $55.5 | ($31.2) | |
| Capital expenditures, cash basis | Not provided by quarter | $85.8 | $33.7 |
- Q2 operating margin was approximately 17%; the first-half margin was approximately 11%. Net margins were approximately (35%) and (38%), respectively.
- Q2 natural gas sales rose 96% to $50.4 million; production increased 28% and realized price increased 53% to $2.91/Mcf. Oil sales declined 26% to $11.0 million as production fell 32%, partly offset by higher oil prices.
- For the first half, natural gas production rose 15% and realized price increased 57%; oil production fell 34%, partly offset by a 40% increase in realized oil price.
- Cash and equivalents were $35.3 million at June 30, down from $65.9 million at year-end. Current assets of $75.4 million were below current liabilities of $110.6 million, a working-capital deficit of about $35.2 million.
- Long-term debt carrying value was $1.070 billion; principal debt was approximately $1.2 billion. Stockholders’ deficit was $305.3 million.
Changes versus prior periods
- First-half sales increased 50%, and operating results improved substantially, reflecting greater Haynesville gas volumes and prices, lower lease operating costs, lower DD&A per unit, and no comparable 2017 impairment charges.
- Q2 2017 nevertheless swung to a net loss from prior-year income. Q2 2016 included a $56.2 million debt-extinguishment gain, making the comparison unusually favorable to 2016. First-half 2016 included an $89.6 million debt-extinguishment gain.
- Interest expense rose to $69.7 million for the first half from $58.8 million, mainly due to amortization of debt discounts and issuance costs associated with prior debt exchanges. The company also recorded $18.6 million of interest paid in kind.
- Operating cash flow improved from a $31.2 million use to $55.5 million provided, while cash capital expenditures increased materially. Cash decreased $30.6 million during the first half.
Outlook, risks and unusual items
- Management planned 18 additional wells in 2017 and estimated $81.0 million of capital expenditures for the remainder of the year. It may reduce drilling depending on realized natural gas prices; spending is described as adjustable.
- Comstock had a $50 million revolver with no borrowings outstanding and was compliant with its financial covenants at quarter-end. The facility matures in March 2019; debt maturities include substantial notes due in 2019 and 2020. Most debt is secured, and the convertible notes accrue interest in kind.
- Outstanding natural gas swaps covered approximately 20.7 Bcf at a weighted-average $3.38/Mcf for July 2017 through March 2018. Derivatives generated reported gains of $5.3 million in Q2 and $13.2 million in the first half; these include fair-value changes and should not be treated as equivalent to realized cash proceeds.
- Management identified commodity-price volatility as a key risk to cash flow, reserves, and access to capital. A $0.10/Mcf gas-price change was estimated to affect first-half cash flow by approximately $1.7 million, after considering production and hedges.
- The company disclosed a $2.9 million reduction to 2017 interest expense to correct an effective-interest calculation error relating to 2016, which management deemed immaterial to the affected 2016 periods.
- Commitments included $9.9 million for contracted drilling services through April 2018 and $3.3 million for gas transportation and treating through July 2019. Management did not expect ordinary-course litigation to materially affect results.
- Future use of tax loss carryforwards may be limited by a change in ownership; management said future conversion of convertible notes would likely trigger such limitations. The company had established valuation allowances against deferred tax assets.
Important facts for investors to verify
- Debt repayment, refinancing, PIK interest accumulation, and liquidity relative to the working-capital deficit and planned capital spending.
- Gas-price exposure, hedge volumes and terms, production performance, and whether drilling plans change with prices.
- Convertible-note conversion thresholds and potential dilution, alongside any resulting restrictions on tax loss carryforwards.
- Whether operating cash flow can sustainably fund development spending and debt service as cash balances decline.