Comstock Resources, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Comstock is an oil and natural gas exploration and production company. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Results are from continuing operations unless stated otherwise.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Oil and gas revenue | $145.0 million | $111.6 million | $442.6 million | $314.4 million |
| Operating income (loss) | $0.3 million | $(9.1) million | $48.2 million | $(47.9) million |
| Net income (loss) from continuing operations | $(1.9) million | $(24.0) million | $1.2 million | $(70.1) million |
| Net income (loss), including discontinued operations | $(1.9) million | $(24.0) million | $1.2 million | $78.5 million |
| Cash provided by operating activities | Not presented for quarter | Not presented for quarter | $329.0 million | $205.6 million |
- Production and prices: Q3 oil production rose 78% to 1.125 million barrels, while natural gas production fell 29% to 9.641 Bcf. Oil sales increased 63%; natural gas sales declined 18%. Realized oil price fell 8% to $95.92 per barrel, while realized gas price rose 16% to $3.85 per Mcf. For the nine months, oil production rose 96% and gas production fell 29%.
- Expenses and margins: Q3 DD&A increased 17% to $100.0 million; DD&A per Mcfe increased 24% to $6.08. Nine-month lease operating expense per Mcfe rose 24% to $0.90, reflecting lower gas volumes and higher lifting costs at new oil wells. The filing does not present a single consolidated margin measure.
- Cash flow and investment: Nine-month operating cash flow was $329.0 million. Cash capital expenditures were $502.4 million; accrual-basis capital expenditures from continuing operations were $446.0 million, net of joint-venture partner contributions. Financing cash flow was $176.8 million. Cash increased to $6.4 million from $3.0 million at year-end 2013.
- Debt and liquidity: Long-term debt was $1.000 billion, up from $798.7 million at December 31, 2013. It included $305.0 million drawn on the revolving facility, $405.3 million carrying value of 7.75% notes due 2019, and $290.0 million carrying value of 9.5% notes due 2020. The $1.0 billion facility had a $700.0 million borrowing base, with $395.0 million available. The company reported compliance with its financial covenants. Current assets were $86.2 million and current liabilities $184.9 million.
- Shareholder distributions: Dividends paid in the first nine months totaled $17.9 million; the quarterly dividend was $0.125 per share. No shares were repurchased in the 2014 nine-month period.
Changes versus prior comparable periods
- Revenue growth was led by increased oil production, principally from the Eagleville field, and higher natural gas prices; lower gas production and lower realized oil prices partly offset that growth.
- Continuing-operations results improved substantially from 2013, helped by higher oil sales, improved gas prices, lower interest expense, and smaller derivative losses for the nine-month period. Higher DD&A and operating costs offset some of the improvement.
- The 2013 nine-month net income included $148.6 million from discontinued operations, including a gain on the sale of West Texas properties. The 2013 continuing-operations comparison also included a $7.9 million gain on sale of marketable securities.
- Nine-month operating cash flow increased 54%, while cash capital expenditures rose to $502.4 million from $250.4 million. The company also issued $100 million of 2019 notes during 2014; net proceeds were used to reduce bank-facility borrowings.
Outlook, risks, and unusual items
- Management expected to spend approximately $580 million in 2014 on development and exploratory drilling and lease acquisitions, funded by operating cash flow and revolver borrowings. It said capital spending was largely discretionary and could be adjusted.
- Management believed operating cash flow, asset-sale proceeds, cash on hand, and available revolver capacity would fund operations and planned growth, but noted additional capital might be needed if plans or assumptions changed and could not be assured on acceptable terms.
- Commodity prices are a key risk. Management estimated that, based on nine-month production and after considering oil swaps, a $0.10/Mcf gas-price change would change continuing-operations cash flow by about $2.9 million, and a $1/barrel oil-price change by about $1.3 million.
- At September 30, 2014, oil swaps covered 633,000 barrels for October–December at a weighted-average price of $96.60 per barrel; the derivative asset was $3.9 million. Derivative fair-value movements are recorded in earnings, not designated as cash-flow hedges.
- Variable-rate debt was $305 million; a 100-basis-point rate change was estimated to alter annual interest expense by about $2.3 million. The borrowing base is redetermined semiannually and may change with commodity prices and property performance.
- Commitments included $56.3 million for contracted drilling services and maximum natural-gas transportation and treating commitments of $13.4 million. The company reported no litigation expected to materially affect its financial position or results, and no material effect anticipated from a state tax review.
- Q3 included $11.4 million of exploration expense from an exploratory well abandoned after mechanical problems during completion. The company reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether oil production growth and Eagleville development continue, and how declining gas production affects total volumes and unit costs.
- Actual 2014 capital spending versus the approximately $580 million expectation, and the resulting cash-flow and borrowing needs.
- Subsequent borrowing-base determinations, available revolver capacity, covenant compliance, and debt-service costs.
- Commodity prices, realized prices, and hedge positions, including their effect on revenue and reported derivative gains or losses.
- Whether the near-break-even nine-month continuing-operations result translates into sustained profitability, given higher DD&A and operating costs.