Comstock Resources, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. A significant transaction on August 14, 2018—the Jones Contribution—created distinct “Predecessor” and “Successor” accounting periods, so full-year figures may not be directly comparable. The 2018 full-year combined operating data cited below is management’s non-GAAP arithmetic combination of those periods.
Business context and reporting period
Comstock is an independent oil and gas producer focused principally on developing the Haynesville and Bossier shale plays in Louisiana and Texas. The Jones Partnerships contributed Bakken properties in North Dakota and Montana in exchange for 88.6 million newly issued shares, giving the Jones Group approximately 84% ownership and control. Comstock also refinanced its debt in connection with the transaction.
At year-end, proved reserves were 2.424 Tcfe, 94% natural gas and 6% oil; 29% were developed. Approximately 90% of reserves were in the Haynesville/Bossier plays. Average daily production was 381.0 MMcfe during the Successor period and 253.2 MMcfe during the Predecessor period; those period rates are not full-year comparisons.
Financial and operating highlights
| Metric | Reported result |
|---|---|
| Fourth-quarter 2018 oil and gas sales | $153.5 million |
| Fourth-quarter operating income | $81.5 million, approximately 53% of sales |
| Fourth-quarter net income and diluted EPS | $50.3 million; $0.48 per share |
| 2018 combined oil and gas sales | $390.3 million, up 111% from 2017’s $255.3 million; non-GAAP combination of the Predecessor and Successor periods |
| 2018 combined production | 110.3 Bcfe, versus 79.2 Bcfe in 2017; management attributed growth principally to Haynesville drilling and the contributed Bakken properties |
| 2018 combined average realized prices | Natural gas $2.91/Mcf; oil $58.70/barrel; equivalent price $3.54/Mcfe |
| Operating cash flow | $85.7 million in the Predecessor period and $102.3 million in the Successor period |
| Capital expenditures | $331.998 million across the two 2018 periods, based on reported period totals; development spending was concentrated in Haynesville/Bossier |
| Year-end cash and debt | Cash $23.2 million; debt carrying value $1.244 billion and principal $1.3 billion |
| Credit facility | $700 million borrowing base, with $450 million drawn at year-end; the company reported compliance with its financial covenants |
| Reserves valuation | PV-10 of $1.755 billion before income taxes; standardized measure after income taxes of $1.474 billion. PV-10 is a non-GAAP measure, not market value. |
The filing reports actual net income of $64.1 million for the Successor period and a $92.8 million net loss for the Predecessor period; because the accounting bases differ, these figures should not be treated as a directly comparable full-year result. The filing provides pro forma 2018 net income of $82.5 million, but that presentation assumes the transaction and refinancing had occurred at the start of the year and excludes $2.6 million of transaction costs.
Material changes versus prior periods
- Combined oil and gas sales increased 111% year over year, reflecting higher production and higher natural gas prices. Natural gas production rose 36% versus 2017.
- Combined lease operating expense was $0.39/Mcfe, down from $0.48/Mcfe in 2017, primarily as higher gas volumes spread fixed costs over more production.
- The Jones Contribution added Bakken oil production and materially increased the share count. Shares outstanding were 105.9 million at year-end, compared with 15.4 million at December 31, 2017.
- Debt was refinanced: Comstock issued $850 million of 9.75% senior notes due 2026 and borrowed $450 million under a revolving credit facility maturing in 2023, retiring its prior notes.
- Proved reserves increased substantially, including a 1.0 Tcf increase in proved undeveloped natural gas reserves. Estimated future development costs for proved undeveloped reserves rose to $1.783 billion from $617.3 million, principally because 216 additional Haynesville/Bossier locations were included.
- The company sold its producing Eagle Ford properties in April 2018 for $106.4 million and retained undeveloped acreage; it recognized a $32.7 million loss on sale in the Predecessor period.
Guidance, outlook, risks and unusual items
- Management planned up to $364 million of 2019 development and exploration spending, subject to commodity prices and operating cash flow. Plans included drilling 58 Haynesville/Bossier wells, completing 16 wells drilled in 2018, and drilling four Eagle Ford wells. The filing separately cites approximately $339.8 million planned for Haynesville/Bossier drilling and completions.
- Management said cash, operating cash flow and available credit were expected to fund the 2019 plan, but warned that lower prices or production could require reduced drilling or additional borrowing. It expected oil production to decline absent new oil drilling and said gas production would depend on replacing natural declines with new wells.
- Commodity prices are a principal risk. Management noted that lower prices could reduce cash flow, reserves, borrowing capacity and the ability to fund development; reserve estimates and asset values are sensitive to price, costs and drilling results.
- Debt service and covenant restrictions are significant: the senior notes carry a 9.75% coupon, and the secured revolving facility has variable-rate borrowings. The facility requires a leverage ratio below 4.0 to 1.0 and a current ratio of at least 1.0 to 1.0; the company reported compliance at year-end.
- Hedging covered a portion of expected 2019 production: 8.7 Bcf of gas swaps at $3.84/Mcf, 34.1 Bcf of gas collars with a $2.44 floor and $3.45 ceiling, and 1.16 million barrels of oil collars with a $52.35 floor and $74.56 ceiling. Additional collars were entered into after year-end. Hedges can limit gains and may not fully offset realized-price changes.
- The Jones ownership change triggered Section 382 limits on use of pre-change tax losses. Comstock estimated its pre-change NOL use would generally be limited to $3.3 million annually and estimated that $843 million of federal and $1.3 billion of state NOL carryforwards could expire unused.
- Other material exposures include environmental and hydraulic-fracturing regulation, water availability, transportation constraints, operational hazards, cybersecurity, customer/counterparty credit risk and possible impairment of oil and gas assets or $350.2 million of goodwill. Management reported no legal proceedings expected to have a material adverse effect.
- The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of December 31, 2018.
Most important facts for investors to verify
- Confirm the transaction’s accounting and comparability effects: Predecessor/Successor results, the non-GAAP combined figures, the pro forma results, and the Jones Contribution’s final purchase-price allocation.
- Assess whether planned 2019 spending can be funded from operating cash flow and remaining borrowing capacity under realistic gas and oil price assumptions.
- Review debt costs, maturity and covenant headroom, including the $450 million variable-rate draw and the 9.75% notes.
- Test the economics and timing of the large undeveloped reserve base against the $1.783 billion estimated development requirement, reserve assumptions and planned well completions.
- Evaluate hedge volumes, floors, ceilings and post-year-end additions relative to expected production and regional price differentials.
- Monitor Section 382 NOL restrictions and potential impairment exposure, particularly if commodity prices, production outlook or market value weaken.