Comstock Resources, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited. Comparisons are with the corresponding 2013 periods unless noted. Comstock is an oil and natural gas producer.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $155.7 million | $107.9 million | $297.6 million | $202.9 million |
| Operating income (loss) | $27.7 million | $(18.0) million | $48.0 million | $(38.9) million |
| Income (loss) from continuing operations | $1.9 million | $(21.5) million | $3.1 million | $(46.0) million |
| Net income | $1.9 million | $129.7 million | $3.1 million | $102.6 million |
| Continuing-operations diluted EPS | $0.04 | $(0.45) | $0.06 | $(0.95) |
Q2 operating margin was approximately 17.8%, versus negative 16.7% a year earlier; six-month operating margin was approximately 16.1%, versus negative 19.2%. 2013 net income included discontinued operations, principally a $230.6 million pretax gain on the sale of West Texas properties; that transaction makes total net income comparisons misleading.
- Production and pricing: Q2 oil production rose 102% to 1.112 million barrels, while natural gas production fell 29%. Six-month oil production rose 108% to 2.047 million barrels; natural gas production declined 29%. Q2 realized oil price was $99.90/barrel and natural gas price was $4.42/Mcf. Oil sales increased with oil production; lower gas volumes partly offset improved gas prices.
- Costs and derivatives: Q2 DD&A increased 11% to $94.5 million; DD&A per Mcfe rose 16% to $5.62. Six-month DD&A was $183.4 million, up 8%. Derivative losses were $9.9 million in Q2 and $14.8 million in the first half; cash settlements reduced realized oil prices by $3.63/barrel in Q2 and $2.61/barrel for the first half.
- Cash flow and investment: First-half operating cash flow was $205.3 million, compared with $115.7 million from continuing operations in 2013. Investing cash flow was $(362.4) million, including $362.4 million in cash capital expenditures; financing cash flow was $157.9 million. Cash ended at $3.8 million. Accrual-basis capital expenditures were $308.3 million, net of joint-venture participation.
- Liquidity and debt: At June 30, current assets were $90.2 million and current liabilities $179.7 million (working capital deficit of $89.5 million). Long-term debt was $975.2 million, up from $798.7 million at year-end 2013. The $1.0 billion revolving facility had a $700 million borrowing base, with $420 million available; $280 million was drawn. The company reported compliance with debt covenants.
- Capital returns: Dividends paid in the first half totaled $12.0 million, or $0.25 per share.
Material changes and management outlook
Higher oil production and improved natural gas prices drove the first-half revenue and operating improvement; lower interest expense also helped. These gains were partly offset by higher DD&A and operating costs, and 2013 included a gain on marketable securities. Comstock issued $100 million face amount of 7¾% senior notes in Q2; net proceeds of $103.3 million were used to repay bank-facility borrowings. The company also redeemed $300 million of 8⅜% notes in October 2013, contributing to lower interest expense.
Management expected to spend approximately $565 million in 2014 on development and exploratory drilling and lease acquisitions, funded with operating cash flow and bank-facility borrowings. It stated that cash flow, asset-sale proceeds, cash on hand and available borrowing capacity should fund the current business plan, while noting additional capital might be needed if plans or assumptions change. The filing gives no specific production or earnings guidance.
Risks, contingencies and unusual items
- Results and access to capital are sensitive to volatile oil and gas prices. The company estimated that, based on first-half production, a $1/barrel oil-price change would affect continuing-operations cash flow by about $1.2 million, and a $0.10/Mcf gas-price change by about $2.9 million.
- Outstanding oil swaps covered 1.266 million barrels for July–December 2014 at a weighted-average price of $96.60/barrel. Their June 30 fair value was an $8.5 million liability; a 10% commodity-price change would change fair value by about $8.4 million.
- Variable-rate debt was $280 million; management estimated a 100-basis-point rate change would affect annual interest expense by about $1.4 million. Fixed-rate debt had an estimated fair value of $766 million.
- Commitments included $28.8 million for contracted drilling services and maximum natural-gas transportation and treating commitments of $15.4 million. Asset-retirement obligations were $15.6 million. The company said routine litigation was not expected to have a material effect.
- The company’s disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether oil-production growth and the planned $565 million capital program generate sufficient cash flow, and how production and costs develop.
- Borrowing-base availability and covenant headroom under the secured credit facility, especially if commodity prices or reserve estimates weaken.
- The effect of oil swaps and future commodity prices on realized prices, cash flow and derivative liabilities.
- The distinction between continuing operations and 2013 discontinued-operation gains when assessing earnings trends.
- Cash needs, debt service and the sustainability of dividends given the low cash balance and working capital deficit.