Business context and reporting period
Comstock Resources, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The company explores, develops and produces oil and natural gas, principally in Texas and Louisiana. Results exclude West Texas operations sold in 2013, which are presented as discontinued operations.
Year-end proved reserves were 620.4 Bcfe, 80% natural gas and 20% oil; 68% were developed. Average 2014 production was 179.9 MMcfe per day. The company spent 98% of its 2014 capital expenditures on oil projects, but said it would redirect much of its 2015 drilling toward Haynesville/Bossier natural gas.
Financial and operating highlights
| Metric | 2014 | 2013 |
|---|---|---|
| Oil and gas sales | $555.2 million | $420.3 million |
| Operating loss | $32.1 million | $72.3 million |
| Loss from continuing operations | $57.1 million; $1.24 per share | $106.7 million; $2.22 per share |
| Cash from continuing operating activities | $401.0 million | $269.0 million |
| Capital expenditures | $588.6 million | $480.9 million |
| Year-end debt | $1,070.4 million | $798.7 million |
| Cash and cash equivalents | $2.1 million | $3.0 million |
Revenue rose 32%. Oil sales increased 68% to $389.8 million as oil production grew 86%, partly offset by a 10% decline in realized oil prices. Natural-gas sales fell 12% to $165.5 million: production declined 29%, while the realized gas price increased 23%. Total production decreased about 6% to 65.6 Bcfe. The average realized equivalent price rose to $8.46/Mcfe from $6.04/Mcfe.
Operating margin was approximately negative 5.8% and net margin approximately negative 10.3%. Lease operating expense increased to $60.3 million, or $0.92/Mcfe from $0.76/Mcfe; oil wells generally cost more to operate per Mcfe. DD&A rose to $378.3 million, or $5.74/Mcfe. Operating cash flow did not cover reported capital expenditures; cash used in investing activities was $634.8 million, and financing activities provided $232.9 million.
Year-end liquidity included $300 million available under the revolving credit facility’s $675 million borrowing base, against $375 million drawn. Current assets were $61.2 million and current liabilities $162.2 million. The filing reports a working-capital deficit of approximately $101 million. The borrowing base is subject to semiannual redetermination and could decline with lower commodity prices.
Proved reserves increased from 604.6 Bcfe in 2013 to 620.4 Bcfe in 2014, with oil reserves declining and gas reserves increasing. The filing reports PV-10 of $1.144 billion and a standardized measure of discounted future net cash flows of $1.091 billion. These reserve-based estimates are not market valuations.
Material changes versus the prior comparable period
- Continuing-operations net loss narrowed to $57.1 million from $106.7 million, despite a $60.3 million impairment charge in 2014. The 2014 fourth quarter included $60.0 million of proved-property impairments; quarterly net loss was $58.3 million.
- 2013 net income of $41.0 million included $147.8 million of discontinued-operations income, largely a $230.0 million pretax gain on the West Texas property sale. It is therefore not directly comparable to 2014 net loss.
- Debt increased by $271.7 million, mainly alongside higher capital spending and a $100 million additional issuance of 7.75% senior notes. Interest expense nevertheless fell to $58.6 million from $73.2 million, partly due to the 2013 retirement of 8⅜% notes.
- Production mix shifted toward oil during 2014: oil accounted for 39% of production versus 20% in 2013, while overall production declined.
Outlook, risks and unusual items
- Management budgeted approximately $307 million for 2015 exploration and development and $10 million for lease acquisitions. Plans included 14 Haynesville/Bossier gas wells and four Giddings oil wells, with gas recompletions and refracs also planned. Management expected oil production to decline until drilling resumes and gas production to increase with the Haynesville program.
- Management said crude and gas prices had fallen sharply after mid-2014; by the filing date NYMEX oil and gas prices were down approximately 50% and 37%, respectively, from June 30, 2014. Continued weakness could reduce cash flow, reserves, borrowing capacity and property values, and could cause further impairments or require additional borrowing.
- The quarterly dividend was temporarily suspended in February 2015. The company paid $23.8 million in dividends during 2014 and repurchased 1 million shares for $8.1 million that year.
- Other 2014 items included $11.8 million of dry-hole costs, $6.7 million of rig termination fees, and an $8.2 million derivative gain. No commodity derivatives were outstanding at year-end.
- Key risks include commodity-price volatility, substantial debt and covenant compliance, borrowing-base redeterminations, reserve-estimation uncertainty, drilling and completion risk, environmental and hydraulic-fracturing regulation, water availability, transportation commitments, and potential future impairment charges. Management stated it expected covenant compliance in 2015; the permitted maximum leverage ratio was amended to 5:1 for 2015.
- The company reported no legal proceedings management believed would materially affect its financial condition or results. Ernst & Young issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether the borrowing base and available revolver capacity remain adequate after commodity-price declines and the next bank redetermination.
- Whether 2015 operating cash flow can fund the planned capital program, debt service and contractual commitments without additional financing.
- Actual results from the Haynesville drilling, recompletion and refrac program, and the associated production, costs and reserve conversions.
- The impact of lower prices on reserve values, impairment testing, undeveloped acreage and lease expirations.
- Whether management’s expected production shifts, covenant compliance and liquidity assumptions remain achievable; the filing does not provide a guaranteed production or earnings forecast.