Comstock Resources, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results. Comstock is an oil and natural gas producer.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Oil and gas sales | $343.7 million | $179.5 million | $684.2 million | $405.4 million |
| Operating income | $146.5 million | $3.9 million | $306.2 million | $47.9 million |
| Net loss | $179.7 million | $49.9 million | $313.8 million | $7.8 million |
| Net loss available to common stockholders | $184.1 million | $60.0 million | $322.5 million | $30.0 million |
| Loss per common share | $0.80 | $0.29 | $1.39 | $0.15 |
Q2 operating margin was approximately 42.6%, versus 2.2% a year earlier; first-half operating margin was approximately 44.8%, versus 11.8%. These margins exclude derivative results, interest, taxes and debt-retirement losses.
- Q2 production: 124.1 Bcf of natural gas and 362,000 barrels of oil. Average unhedged sales prices were $2.59/Mcf and $61.25/barrel, respectively. Equivalent production was 126.3 Bcfe.
- Six-month operating cash flow was $385.6 million, compared with $266.1 million in 2020. Cash capital expenditures were $338.8 million; net cash used in investing was $338.6 million. Cash declined to $19.7 million from $30.3 million at year-end 2020.
- At June 30, current assets were $224.9 million and current liabilities were $655.5 million. Current liabilities included $255.1 million of derivative liabilities. Long-term debt carrying value was $2.847 billion; principal outstanding across the credit facility and notes was approximately $2.934 billion.
- Stockholders’ equity was $947.4 million, down from $1.267 billion at year-end 2020. The company had $175 million of Series B convertible preferred stock outstanding, carrying a 10% dividend.
Material changes and unusual items
- Sales rose 91% in Q2 and 69% for the first half, primarily reflecting higher oil and gas prices; Q2 natural gas volumes also increased. First-half gas production was slightly lower year over year, and oil production fell from 814,000 to 688,000 barrels.
- Derivative losses were $224.0 million in Q2 and $245.7 million for the first half, compared with losses of $12.3 million and gains of $49.6 million in the respective 2020 periods. These include fair-value changes as well as settlements; Q2 realized oil and gas hedge losses were $18.8 million.
- Debt refinancing and redemptions produced early-retirement losses of $114.1 million in Q2 and $352.6 million for the first half. The company issued $1.25 billion of 6.75% notes due 2029 and $965 million of 5.875% notes due 2030, and retired all 9.75% notes due 2026. It also repurchased part of its 7.5% notes due 2025 and retained $244.4 million principal of those notes.
- Gathering and transportation costs increased; lease operating costs declined. DD&A rose to $0.96/Mcfe in Q2 from $0.87/Mcfe, while interest expense increased to $56.9 million from $52.1 million.
Liquidity, outlook and risks
- The revolving bank facility had $475 million drawn against a $1.4 billion borrowing base and matures July 2024. The company reported compliance with its leverage and adjusted-current-ratio covenants at June 30, 2021.
- Management expected to spend a further $200–$240 million in the second half of 2021 on drilling, completions and other development, funded primarily from operating cash flow. It planned 25 additional wells to drill and 29 to complete. Spending is described as adjustable; additional financing could be needed if plans or assumptions change.
- Commodity prices are a key risk. At quarter-end, natural gas swaps covered approximately 180.1 Bcf at an average $2.62/MMBtu, collars covered 188.2 Bcf with average floor/ceiling prices of $2.50/$3.29, and oil collars covered 276,000 barrels at $41.67/$51.67. The company cautioned that hedges can limit upside and produce losses as market prices change. Certain swaption counterparties could elect additional 2022 swaps.
- The company reported $946.1 million of federal and $1.5 billion of state NOL carryforwards, but estimated $800.5 million of federal and $1.2 billion of state NOLs would expire unused. Section 382 limits use of certain NOLs; deferred tax asset realization remains uncertain.
- A well-stimulation agreement signed in April 2021 requires minimum commitments of $19.2 million annually from 2022 through 2024. Management said ordinary-course litigation was not expected to have a material effect and no material amounts were accrued.
- Management identified no material change in internal control over financial reporting and concluded disclosure controls were effective as of June 30, 2021. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How hedge positions, settlement cash flows and fair-value changes affect realized prices and future earnings; derivative liabilities totaled $269.3 million at quarter-end.
- Whether operating cash flow can fund the planned second-half capital program while maintaining liquidity and meeting debt obligations.
- The economics and consequences of the 2021 refinancing, including the substantial debt-retirement charges and remaining debt maturities.
- Actual utilization and expiration of NOL carryforwards, and the assumptions underlying deferred tax assets and valuation allowances.
- Related-party exposure: the company reported a $17.8 million receivable from a partnership owned by its majority stockholder, collected in August 2021, and a separate $10.1 million receivable tied to hedging contracts.