CRK

Comstock Resources, Inc. 2009 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: Comstock Resources, Inc.
Reporting Period: Fiscal year ended December 31, 2009
Industry: Independent oil and natural gas exploration and production.
Operations: Focused primarily in East Texas/North Louisiana (Haynesville shale) and South Texas. The company divested its offshore operations (Bois d'Arc Energy) in August 2008, which are reported as discontinued operations.

Key Financial Metrics (2009)

Note: 2008 Net Income included a $158.1 million gain from the sale of discontinued offshore operations and a $162.7 million impairment of marketable securities.

Material Changes vs. Prior Period

• Revenue Decline: Oil and gas sales decreased 48% to $290.9 million, driven by a 53% drop in realized natural gas prices ($4.13/Mcf vs. $8.83/Mcf) and a 42% drop in oil prices ($50.94/Bbl vs. $87.15/Bbl).
• Net Loss: The company reported a net loss of $36.5 million ($0.81 per share) compared to net income of $252.0 million in 2008. The 2008 income was significantly bolstered by the sale of discontinued operations.
• Production Increase: Despite lower prices, production increased 9% to 65.5 MMcfe/day, primarily due to successful drilling in the Haynesville shale formation.
• Debt Structure: Total debt increased to $470.8 million following the issuance of $300 million in 8 3/8% senior notes in October 2009. Proceeds were used to repay the bank credit facility and fund capital expenditures.
• Reserve Accounting: The company adopted new SEC rules for reserve reporting effective December 31, 2009, utilizing average first-of-month prices rather than year-end spot prices.

Guidance, Outlook, and Risks

2010 Outlook:

• Capital Budget: Budgeted to spend approximately $385.0 million on development and exploration, primarily focused on the Haynesville shale.
• Drilling Plan: Plans to drill approximately 59 wells (42.6 net), including 56 horizontal Haynesville shale wells.
• Funding: Expenditures will be funded primarily by operating cash flow, cash on hand, and borrowings under the bank credit facility.

Key Risks and Contingencies:

• Price Volatility: Financial results are heavily dependent on oil and natural gas prices, which remain volatile.
• Undeveloped Reserves: 45% of total proved reserves are undeveloped. Development is subject to capital availability and regulatory approval.
• Regulatory Environment: Potential federal legislation regarding hydraulic fracturing and climate change (carbon "cap and trade") could increase costs or restrict operations.
• Debt Covenants: The bank credit facility and senior notes contain covenants restricting dividends and additional debt, though the company was in compliance as of year-end.

Investor Verification Checklist

• Reserve Estimates: Verify the impact of the new SEC pricing rules on the reported PV 10 Value ($489.1 million) and standardized measure ($426.6 million) compared to prior year-end spot prices.
• Haynesville Execution: Monitor the success rate and production profiles of the 56 planned horizontal wells in 2010 to ensure reserve replacement targets are met.
• Liquidity Position: Confirm the utilization of the $500 million borrowing base under the bank credit facility and the company's ability to service $470.8 million in debt given current commodity prices.
• Operating Costs: Track lifting costs per Mcfe (reported at $0.82 in 2009) to ensure they remain competitive as the company scales up Haynesville production.
• Marketable Securities: Review the valuation of the remaining Stone Energy common stock ($96.0 million) held from the Bois d'Arc divestiture.