CRK

Comstock Resources, Inc. 2004 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: Comstock Resources, Inc.
Reporting Period: Fiscal year ended December 31, 2004.
Business Overview: Comstock is an independent exploration and production company focused on oil and natural gas in the United States. Operations are concentrated in the Gulf of Mexico, East Texas/North Louisiana, Southeast Texas, and South Texas. A significant corporate event in 2004 was the formation of Bois d'Arc Energy, LLC in July, a joint venture holding Comstock's Gulf of Mexico assets. Comstock holds a 59.9% interest in this entity, which is proportionately consolidated.

Key Financial Metrics

Production & Pricing (2004):

• Production: 1,534 MBbls oil; 33,519 MMcf gas (42.7 Bcfe total).
• Average Realized Price: $39.86 per barrel (oil); $5.98 per Mcf (gas).
• Operating Costs: $1.22 per Mcfe.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 11% to $261.6 million, driven primarily by higher commodity prices (oil +30%, gas +11%), partially offset by a 2% decrease in gas production and 5% decrease in oil production.
• Production Decline: Production volumes decreased due to Hurricane Ivan, which forced shut-ins in the Gulf of Mexico, deferring approximately 1.3 Bcfe of production.
• Net Income Decline: Net income decreased 13% to $46.9 million. This was significantly impacted by a $19.6 million loss on the early extinguishment of $220 million in senior notes and a $1.1 million charge for the formation of Bois d'Arc Energy.
• Debt Restructuring: Comstock refinanced its 11 1/4% senior notes with $175 million in new 6 7/8% senior notes and a new $400 million bank credit facility. Total debt increased to $403.2 million.
• Acquisitions: Acquired properties from Ovation Energy for $62.0 million, adding 41.0 Bcfe of proved reserves.

Guidance, Outlook, and Risks

2005 Outlook:

• Capital Expenditures: Budgeted approximately $175.0 million for development and exploration (114 development wells, 29 exploratory wells).
• Funding: Primarily funded by operating cash flow; acquisitions may require additional debt or equity financing.

Key Risks and Contingencies:

• Bois d'Arc Energy IPO: The joint venture filed for an IPO in October 2004. If not completed by May 1, 2005, the entity faces dissolution and liquidation, which could impact Comstock's asset base and debt structure.
• Commodity Price Volatility: Financial results are highly sensitive to oil and natural gas prices. A $1.00 change in oil price impacts cash flow by ~$1.4 million; a $1.00 change in gas price impacts cash flow by ~$32.1 million.
• Weather Events: Gulf of Mexico operations are susceptible to hurricanes, as evidenced by the production losses from Hurricane Ivan in 2004.
• Regulatory: Subject to extensive federal and state regulations regarding environmental protection, pipeline access, and offshore drilling.

Investor Verification Checklist

• Bois d'Arc Energy Status: Verify the status of the proposed IPO and the potential impact of the May 1, 2005 dissolution deadline on Comstock's consolidated assets.
• Debt Covenants: Review the borrowing base limitations on the $400 million credit facility and compliance with financial covenants (current ratio, tangible net worth).
• Reserve Estimates: Confirm the 128% reserve replacement ratio and the quality of the 41.0 Bcfe acquired from Ovation Energy.
• Stock-Based Compensation: Note the $6.2 million expense in 2004 due to the adoption of SFAS 123 (fair value method), which increased G&A expenses significantly compared to prior years.
• Hedging Activity: Review the collar agreements for 2005 and 2006 natural gas production (floors at $4.50, varying ceilings) to understand downside protection.