Comstock Resources, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated financial statements; amounts below are in U.S. dollars. Comstock is an oil and natural gas producer.
Financial performance and liquidity
- Q2 revenue: Oil and gas sales were $40.7 million, down 47% from $77.3 million a year earlier. Natural gas sales were $25.7 million; oil sales were $15.0 million.
- Q2 earnings: Net income was $4.9 million ($0.41 per share), versus a $135.1 million net loss ($14.64 per share) in Q2 2015. The 2016 quarter included a $56.2 million gain on debt extinguishment. Operating loss was $22.7 million.
- First-half results: Oil and gas sales were $76.9 million, down 47%. Net loss was $51.7 million ($4.82 per share), compared with a $213.6 million loss ($23.18 per share) in first-half 2015. The 2016 results included an $89.6 million debt-extinguishment gain and $24.5 million of oil and gas property impairments.
- Production and realized prices: Q2 natural gas production rose 22% to 13,519 Mmcf, while oil production fell 62% to 355 Mbbls. Average realized prices declined to $1.90/Mcf for gas and $42.21/Bbl for oil. First-half production was 27,344 Mmcf of gas and 772 Mbbls of oil.
- Cash flow: First-half operating cash flow was negative $31.2 million, compared with positive $24.2 million in 2015. Investing cash outflow was $31.6 million; cash capital expenditures were $33.7 million. Cash declined to $67.4 million from $134.0 million at year-end 2015.
- Balance sheet and debt: June 30 long-term debt carrying value was $1.145 billion; fixed-rate debt fair value was $730.2 million. Cash was $67.4 million, current assets $130.8 million, and current liabilities $86.8 million. Stockholders’ deficit was $207.3 million. No borrowings were outstanding under the $50 million revolver, and the company reported compliance with its financial covenants.
Changes versus prior comparable periods
- Lower oil prices and sharply lower oil production drove the revenue decline; higher gas volumes partly offset lower gas prices. First-half oil sales fell 73%, while gas sales rose 9%.
- Q2 operating expenses were $63.4 million versus $259.5 million in 2015, which included a $111.8 million loss on property sales and $23.0 million of exploration expense. First-half DD&A fell to $74.9 million from $182.5 million, partly reflecting prior-period impairments and the production mix.
- First-half capital expenditures fell to $30.3 million from $176.6 million. The company retired $87.5 million principal of 2019 Notes and $19.8 million of 2020 Notes through exchanges involving 2.75 million common shares and $3.5 million cash.
Outlook, risks and unusual items
- Management said low commodity prices were reducing revenue and cash flow, and that operating cash flow at then-current prices was insufficient to cover fixed debt service. Oil production was expected to continue declining until drilling resumed; gas production was expected to increase through the 2016 Haynesville program.
- Management planned five additional wells in the second half of 2016 and 19 in 2017, with estimated capital expenditures of approximately $46 million and $147 million, respectively. Restarting the program depended on successful completion of the debt Exchange Offer. If it failed, management said it would pursue other liquidity measures, including asset sales or a drilling joint venture; sufficiency of those alternatives was not assured.
- An August 1, 2016 Exchange Offer proposed new secured notes and, for certain existing notes, second-lien convertible notes and warrants. Terms could allow payment of interest in kind; conversion was subject to stockholder approval. The filing does not report the offer’s eventual outcome.
- South Texas gas properties were classified as held for sale at $42.5 million, after a $20.8 million impairment. Further impairments were possible if prices, reserves, costs, or access to development capital changed.
- There were no outstanding commodity derivatives at June 30, 2016. The company disclosed commodity-price sensitivity and significant exposure to volatile oil and gas prices. It also recorded valuation allowances against deferred tax assets and cautioned that an ownership change could restrict use of tax-loss carryforwards.
- The NYSE had notified the company of noncompliance with listing standards for share price and market capitalization. A one-for-five reverse stock split became effective July 29, 2016; failure to regain compliance could lead to suspension or delisting.
- Management reported no material expected effect from ordinary-course litigation. Natural gas transportation and treating commitments totaled up to $5.3 million through July 2019.
Key facts for investors to verify
- Whether the Exchange Offer was completed and how its final terms changed interest, maturities, collateral priority, dilution, and liquidity.
- Available cash, revolver availability, covenant compliance, and the company’s ability to meet debt service and fund planned drilling.
- Whether planned 2016–2017 drilling and production targets were achieved, and the effect of reduced drilling on production and reserves.
- Current NYSE listing status and whether the reverse split resolved the share-price requirement and market-capitalization issue.
- Any subsequent changes in commodity prices, asset-sale plans, property impairment estimates, or tax-loss carryforward limitations.