Comstock Resources Inc. 10-Q Summary: Quarter Ended March 31, 2002
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended March 31, 2002, for Comstock Resources, Inc., an oil and gas exploration and production company. The filing reflects a challenging operating environment characterized by a significant decline in crude oil and natural gas prices compared to the prior year.
Key Financial Metrics
- Revenue: Total revenues were $26.8 million, a 60% decrease from $67.4 million in the prior year quarter, driven by lower commodity prices.
- Profitability: The company reported a net loss attributable to common stock of $5.4 million ($0.19 per share), compared to net income of $23.6 million ($0.81 per share) in the first quarter of 2001.
- Cash Flow: Net cash provided by operating activities was $7.8 million, down significantly from $59.8 million in the prior year. Net cash used in investing activities was $15.7 million.
- Debt: Total long-term debt (including current portion) was approximately $378.0 million. This includes $158.0 million under a revolving credit facility and $220.0 million in 11 1/4% Senior Notes due 2007.
- Liquidity: Cash and cash equivalents decreased from $6.1 million to $1.3 million during the quarter. The borrowing base under the credit facility was set at $240.0 million.
- Margins: The cash margin per Mcfe dropped to $1.70 from $5.74 in the prior year quarter.
Material Changes vs. Prior Period
- Price Decline: Average realized crude oil prices fell 27% to $20.67 per barrel, and natural gas prices fell 68% to $2.37 per Mcf.
- Production Increase: Despite price drops, production increased 4% year-over-year to 10,335 Mmcfe (natural gas equivalent).
- Derivative Losses: The company recorded a $2.0 million loss from derivatives, primarily due to unrealized losses on contracts not designated as cash flow hedges.
- Discontinued Operations: A loss of $769,000 (net of tax) was recognized from the write-down and subsequent sale of marginal properties, classified as discontinued operations.
- Capital Structure: On March 7, 2002, the company issued $75.0 million of Senior Notes to reduce borrowings under its bank credit facility.
Outlook, Risks, and Management Commentary
- Guidance: Management has budgeted approximately $75.0 million for development and exploration projects in 2002, intending to fund these through internally generated cash flow.
- Hedging Strategy: The company hedges approximately 45% to 50% of its expected 2002 natural gas production through April to October 2002 using swaps, floors, and collars to mitigate price risk.
- Counterparty Risk: A material risk involves derivative positions with a subsidiary of Enron Corporation, which filed for bankruptcy. As of March 31, 2002, Comstock held a net liability of $3.0 million owed to Enron. Management is monitoring credit exposure should these positions become net assets.
- Liquidity Risk: While current cash flow and borrowing capacity are deemed sufficient for current plans, the company notes that sustained weakness in commodity prices could adversely affect its ability to obtain capital.
Investor Verification Checklist
- Verify the impact of the Enron bankruptcy on the $3.0 million derivative liability and potential future credit exposure.
- Confirm the stability of the $240.0 million borrowing base given the volatility in oil and gas prices.
- Review the status of the South Timbalier Block 30 exploratory well, which was abandoned due to drilling problems but is planned for redrilling.
- Assess the company's ability to maintain financial covenants (current ratio, tangible net worth, interest coverage) if commodity prices remain depressed.
- Monitor the execution of the $75.0 million 2002 capital expenditure budget against actual cash flow generation.