Comstock Resources, Inc. — Q2 2015 Form 10-Q
Business context and reporting period: Comstock is an oil and natural gas producer. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the same periods in 2014. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Oil and gas revenue | $77.3 million | $155.7 million | $143.8 million | $297.6 million |
| Operating income (loss) | $(182.2) million | $27.7 million | $(279.1) million | $48.0 million |
| Net income (loss) | $(135.1) million | $1.9 million | $(213.6) million | $3.1 million |
| Basic and diluted loss per share | $(2.93) | $0.04 income per share | $(4.64) | $0.06 income per share |
- Prices and production: Q2 realized oil price fell 45% to $55.34 per barrel and natural gas price fell 46% to $2.37 per Mcf. Oil production declined 17%; natural gas production increased 10%. For the six months, oil production declined about 4% and natural gas production declined 9%.
- Cash flow: Operating cash flow was $24.2 million for the first half, down from $205.3 million in 2014. Investing cash outflow was $197.3 million, principally capital expenditures; financing cash inflow was $301.2 million. Cash increased to $130.2 million from $2.1 million at year-end 2014.
- Liquidity and debt: Current assets were $268.6 million and current liabilities were $110.7 million. Long-term debt was $1.379 billion, versus $1.070 billion at year-end. Debt included $700 million of 10% secured notes, $400 million of 7.75% notes and approximately $275 million of 9.5% notes. The company had no borrowings under its $50 million revolver at June 30 and reported compliance with its covenants.
- Capital spending and distributions: First-half capital expenditures on an accrual basis were $176.6 million, compared with $308.3 million in 2014. No dividends were paid in the first half of 2015; the comparable 2014 amount was $12.0 million.
Material changes and unusual items
- Q2 and first-half results included a $111.8 million loss on the planned sale of Burleson County, Texas properties. The assets were carried at $103.4 million as held for sale at June 30. The approximately $115 million sale closed July 22, 2015, subject to customary adjustments; debt terms require net proceeds to be reinvested in oil and gas activities or used to retire debt.
- Exploration expense was $23.0 million in Q2 and $65.3 million for the first half, primarily reflecting unevaluated lease impairments and rig termination fees. The company also recorded $2.4 million of producing-property impairment for the first half.
- Interest expense rose to $33.8 million in Q2 and $54.6 million for the first half, primarily reflecting higher debt following the March issuance of $700 million of secured notes.
- The first-half net loss also reflected lower commodity prices and a $114.3 million income tax benefit, largely deferred.
Outlook, risks and contingencies
- Management expected oil production to continue declining until drilling resumes on those properties, while natural gas production was expected to increase through the 2015 Haynesville drilling and recompletion program. It planned approximately $68 million of drilling and lease-acquisition spending during the second half of 2015, funded from operating cash flow and cash on hand.
- Management said cash from operations, asset-sale proceeds, cash on hand and available revolver capacity were expected to fund operations and planned growth, but noted additional capital might be needed if plans or assumptions change; availability on acceptable terms is not assured.
- Commodity prices remain a significant risk. Management warned that sustained low prices could reduce revenues, cash flows and economically recoverable reserves, and lead to further impairments. The Eagleville field had a $779 million carrying value and no impairment at June 30 under then-current assumptions; a 7% decline in estimated future cash flows could trigger impairment. Oil futures had fallen about 15% since quarter-end, and a September 30 impairment, if required, could be at least $325 million.
- Outstanding natural gas swaps covered 3,600 Mmcf from July 2015 through June 2016 at a weighted-average price of $3.20 per Mcf. The company noted that federal net operating loss carryforwards could be limited by a qualifying ownership change. It disclosed routine litigation, $3.8 million of contracted drilling commitments through November 2015, and up to $8.1 million of gas transportation and treating commitments through July 2019; management did not expect litigation to materially affect results.
Important facts for investors to verify
- Closing adjustments and use of proceeds from the July 22 property sale, including compliance with debt-document requirements.
- Subsequent commodity prices, updated Eagleville cash-flow assumptions and whether an impairment was recorded after quarter-end.
- Production trends and execution of the Haynesville program and second-half capital-spending plan.
- Cash generation, debt-service capacity, revolver availability and continued compliance with credit-facility covenants.
- Potential limits on tax loss carryforwards and the status or outcome of the state tax review.