Comstock Resources, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Comstock is an oil and natural gas producer. Comparisons below are year over year unless noted.
Financial performance
- Revenue: Oil and gas sales were $340.5 million, up 51% from $225.9 million. Natural gas sales rose to $324.0 million from $207.2 million; oil sales declined to $16.5 million from $18.6 million.
- Production and realized prices: Natural gas production was 113.3 Bcf versus 122.8 Bcf, with an average realized price of $2.86/Mcf versus $1.69. Oil production was 326 thousand barrels versus 454 thousand, at $50.69/barrel versus $41.01. Including derivative cash settlements, realized prices were $2.79/Mcf for gas and $47.87/barrel for oil.
- Operating results: Operating income was $159.7 million versus $44.0 million; operating margin was approximately 46.9% versus 19.5%. Net loss was $134.1 million, and loss available to common stockholders was $138.4 million, or $0.60 per share, compared with common-stockholder income of $30.0 million, or $0.15 diluted per share.
- Key expenses and unusual item: DD&A was $109.1 million, down from $110.4 million; interest expense was $63.8 million, up from $52.8 million. A $238.5 million loss on early debt retirement was the principal cause of the quarterly net loss. Derivatives produced a $21.7 million loss versus a $61.9 million gain a year earlier.
- Cash flow and investment: Cash from operations was $193.3 million versus $150.1 million. Cash capital expenditures were $165.8 million; MD&A reports total capital expenditures of $168.9 million. Investing cash outflow was $165.6 million. Cash increased to $77.4 million from $30.3 million.
- Debt and liquidity: Balance-sheet long-term debt was $2.800 billion, up from $2.517 billion at year-end. The company had $550 million drawn on its $1.4 billion borrowing base facility, which matures July 2024; it reported compliance with its financial covenants. Current assets were $244.0 million and current liabilities $433.6 million. The filing reports an adjusted current-ratio covenant minimum of 1.0 but does not provide a clear quarter-end adjusted ratio.
Material changes and management outlook
- On March 4, Comstock issued $1.25 billion of 6.75% notes due 2029 and used the proceeds to repurchase $375 million of 7.50% notes due 2025 and $777.1 million of 9.75% notes due 2026. Repurchases included premiums and other costs and resulted in the $238.5 million early-retirement loss.
- Q1 production was lower, but higher commodity prices drove revenue growth. Management attributed increased interest expense partly to 9.75% notes issued in 2020.
- For the remaining nine months of 2021, management expected to spend an additional $350 million to $390 million on drilling, completions, and other development, and planned 46 gross (37 net) additional wells drilled and 45 gross (40 net) wells completed. It expected to fund development and exploration with future operating cash flow, while noting spending levels are adjustable.
- The company reported $1.0 billion of federal and $1.5 billion of state NOL carryforwards, but estimated that $822.3 million of federal and $1.4 billion of state carryforwards would expire unused, in part due to ownership-change limitations.
Risks, contingencies, and other disclosures
- Results and capital resources are highly sensitive to volatile oil and gas prices. Comstock used gas swaps and collars, oil collars, and interest-rate swaps; hedge fair values can fluctuate, and derivative losses affected Q1 results.
- At March 31, gas swaps covered approximately 182.9 Bcf of 2021–2022 production at an average $2.54/MMBtu; gas collars covered 129.0 Bcf with average floor and ceiling prices of $2.48 and $3.06/MMBtu. Oil collars covered 412,500 barrels with a $41.67 floor and $51.67 ceiling. Subsequent to quarter-end, the company added 2022 gas swaps covering 14.6 million MMBtu at $2.70/MMBtu.
- Management warned that sustained lower commodity prices could harm results, reserves, and access to capital. It also noted potential need for additional financing if plans or assumptions change; availability and terms are not assured.
- The company reported ordinary-course litigation but no material accrued amounts and did not expect resolution to materially affect its financial position, results, or cash flows. No proved-property impairments were recognized in the periods presented.
- Comstock’s majority stockholder held Series B convertible preferred stock with a $175 million face value and a 10% dividend rate. The company also reported related-party operations and marketing services; a $13.0 million receivable from the partnership was collected in full in May 2021.
- Management concluded disclosure controls were effective as of March 31, 2021 and reported no material change in internal controls over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash flow can support the planned remaining-2021 capital program and debt service.
- The debt-refinancing economics, remaining maturities, facility availability, and ongoing covenant compliance.
- How commodity prices and derivative settlements affect realized prices, cash flow, and reported earnings.
- The basis for the adjusted current-ratio covenant calculation, given reported current assets and current liabilities.
- Actual production, realized prices, capital spending, and drilling/completion progress against management’s stated plans.
- Use and expected expiration of NOL carryforwards, and the effect of ownership-change restrictions on future cash taxes.