Comstock Resources, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; financial statements are unaudited. Comstock is an oil and natural gas producer, with operations primarily in the Haynesville shale. Results include Covey Park, acquired in July 2019, so comparisons with 2019 are not on a like-for-like basis.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Oil and gas sales | $179.5 million | $128.1 million | $405.4 million | $255.0 million |
| Operating income | $3.9 million | $43.6 million | $47.9 million | $96.8 million |
| Net income (loss) | $(49.9) million | $21.4 million | $(7.8) million | $35.0 million |
| Net income (loss) available to common stockholders | $(60.0) million | $21.4 million | $(30.0) million | $35.0 million |
| Basic and diluted EPS | $(0.29) | $0.20 | $(0.15) | $0.33 |
- Q2 natural gas production rose to 116.5 Bcf from 40.9 Bcf, primarily reflecting the Covey Park acquisition. Average realized gas price fell to $1.48/Mcf from $2.25/Mcf. Oil production declined to 360,000 barrels from 695,000 barrels, and average realized oil price fell to $19.97/barrel from $52.10/barrel.
- Including cash derivative settlements, realized prices were $1.88/Mcf for gas and $37.89/barrel for oil in Q2. Six-month realized prices including settlements were $1.96/Mcf and $42.59/barrel, respectively.
- Q2 operating margin was approximately 2.2% of sales, compared with 34.1% in Q2 2019. Higher production-related costs and DD&A, lower commodity prices, increased interest expense, derivative losses and preferred dividends weighed on results. Q2 interest expense was $52.1 million versus $28.6 million.
- For the first six months, operating cash flow was $266.1 million, capital expenditures were $233.9 million in the cash flow statement ($205.2 million of development and exploration expenditures in MD&A), and cash ended at $11.6 million. Cash flow from operations less cash-flow-statement capital expenditures was approximately $32.2 million.
Balance sheet, liquidity and financing
- At June 30, cash was $11.6 million; current assets were $187.6 million and current liabilities $291.0 million, implying negative working capital of approximately $103.4 million.
- Long-term debt carrying value was $2.502 billion; principal outstanding was approximately $2.769 billion: $800 million under the bank facility, $619.4 million of 7.5% notes due 2025 and $1.35 billion of 9.75% notes due 2026. The bank facility had a $1.4 billion borrowing base and matures in July 2024. The company reported compliance with its financial covenants.
- In June, Comstock issued $500 million of 9.75% notes, receiving $441.1 million net, and used proceeds to repay bank borrowings. It also sold 41.325 million common shares for $196.5 million net proceeds, primarily to fund redemption of $210 million of Series A preferred stock, plus accrued dividends. The Series B preferred stock carries a 10% dividend and became convertible after July 16, 2020 into 43.75 million common shares at $4 per share.
Outlook, risks and notable items
- Management expected to spend a further $195 million–$235 million on development and exploration in the second half of 2020, funded from operating cash flow. Capital spending timing was described as discretionary and adjustable.
- Management said the company’s natural gas operations had not been adversely affected so far in 2020, while non-operated oil production was substantially affected by low prices and shut-ins. COVID-19, reduced demand, commodity-price volatility, and availability of people, equipment and services made the overall impact uncertain.
- Commodity hedges included natural gas swaps, collars and swaptions and oil collars. Six-month cash settlements generated $98.7 million of net gains; derivative fair-value and settlement results can be volatile. A 10% gas-price change would alter swap fair value by an estimated $46.3 million. $500 million of floating-rate debt had interest-rate swaps fixing LIBOR at 0.33%.
- Long-term natural gas transportation commitments were $7.3 million for the rest of 2020, $15.1 million for 2021, and $169.6 million for the remaining contract term after 2024. The filing reported no material litigation accruals. Pre-2018 tax net operating losses are subject to Section 382 limits; management estimated an annual limit of $3.3 million, subject to potential built-in-gain adjustments.
- The company recorded no impairment of proved oil and gas properties in the periods presented, but disclosed that changes in commodity-price assumptions, reserves, production costs or capital costs could result in future impairments. It maintained $335.9 million of goodwill and performed its annual impairment review in the fourth quarter.
Important facts for investors to verify
- Whether operating cash flow and liquidity can sustain planned capital spending, debt service and transportation commitments amid commodity-price volatility.
- Debt maturities, refinancing options, borrowing-base redeterminations and ongoing compliance with credit-facility covenants.
- Expected production, realized prices and hedge coverage, including counterparty extension rights under gas swaptions and subsequent hedge additions disclosed in the filing.
- The potential dilution and cash dividend burden associated with Series B preferred stock conversion, as well as the effect of the 2020 common-stock issuance.
- Whether changes in prices, reserves and costs could trigger impairment charges or affect realization of deferred tax assets.