Comstock Resources, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited. Unless noted otherwise, dollar amounts below are in millions.
Business context and reporting period
Comstock is an oil and natural gas exploration and production company. Results distinguish continuing operations from discontinued operations. On May 14, 2013, the company sold its West Texas properties in Reeves and Gaines counties, classifying those operations as discontinued.
Financial and operating results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Oil and gas sales, continuing operations | $107.8 | $90.3 | $202.8 | $194.1 |
| Operating loss, continuing operations | $(18.0) | $(11.5) | $(38.9) | $(13.0) |
| Net income (loss) from continuing operations | $(21.5) | $16.7 | $(46.0) | $18.1 |
| Net income from discontinued operations | $151.2 | $(9.5) | $148.6 | $(9.6) |
| Net income | $129.7 | $7.2 | $102.6 | $8.5 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $108.0 | $141.9 |
- Reported Q2 net income included $151.2 million from discontinued operations, including a $230.6 million pretax gain on the West Texas sale. Excluding that sale gain, discontinued operations generated $1.3 million of net income for Q2 and a $1.3 million net loss for the first half.
- Continuing-operations production was 17.5 Bcfe in Q2, down 29% year over year; first-half production was 35.7 Bcfe, down 28%. Oil volumes rose 20% in Q2 and 10% in the first half, while natural gas production declined.
- Higher realized natural gas prices helped lift continuing-operations sales: the average realized gas price rose 86% in Q2 and 48% in the first half. Oil price including realized hedging gains fell 2% in Q2 and rose 3% in the first half.
- Q2 continuing-operations sales rose 19%, but operating losses widened. First-half continuing-operations sales rose 4%, while the operating loss increased to $38.9 million. The filing does not provide a clear reported operating-margin measure.
- First-half continuing-operations DD&A was $170.2 million, up 4%; DD&A per Mcfe rose 41% to $4.75. Lease operating expense per Mcfe increased 40% to $0.73, reflecting lower gas volumes and largely fixed lifting costs. First-half exploration expense rose to $12.3 million, primarily from expiring unevaluated leases.
- Interest expense from continuing operations increased to $36.8 million for the first half from $25.7 million, mainly due to the 2022 note issuance and reduced capitalized interest. First-half continuing operations recorded an $8.1 million unrealized derivative loss, versus a $24.6 million gain in 2012.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $263.7 million, compared with $4.5 million at year-end 2012. Current assets were $334.5 million and current liabilities were $122.1 million.
- Long-term debt was $883.3 million, down from $1,324.4 million at December 31, 2012. The company repaid $537.2 million of debt after the divestiture. Debt consisted of $295.5 million of 8⅜% notes due 2017, $300.0 million of 7¾% notes due 2019, and $287.8 million of 9½% notes due 2020.
- The $850 million revolving credit facility had a $500 million borrowing base, all available, and no outstanding borrowings at quarter-end. The company reported compliance with its covenants. Fixed-rate debt had a reported fair value of $947.5 million.
- First-half operating cash flow was $108.0 million. Investing activities provided $603.2 million, reflecting $823.7 million of proceeds from discontinued-operation property sales, offset in part by capital spending. Financing activities used $452.0 million, principally for debt repayment.
- First-half capital expenditures on an accrual basis were $133.5 million for continuing operations and $91.5 million for discontinued operations. Management expected approximately $359 million of 2013 spending for continuing-operations drilling and leasehold acquisition, funded with operating cash flow and available cash.
- The company paid a $0.125-per-share dividend totaling $6.0 million in June and authorized a common-stock repurchase plan of up to $100 million; no shares had been repurchased under the plan by June 30.
Outlook, risks and unusual items
- Management stated that operating cash flow, asset-sale proceeds, cash on hand and available credit were expected to fund operations and planned growth. It cautioned that changed or inaccurate assumptions could require additional capital, which might not be available on acceptable terms. No earnings or production guidance was provided in the filing.
- Oil and gas prices, production levels and reserve economics are significant risks. Based on first-half production, a $0.10/Mcf gas-price change would have changed continuing-operations cash flow by approximately $2.9 million, and a $1/barrel oil-price change by approximately $1.2 million, before hedging.
- At June 30, outstanding oil swaps covered 1.04 million barrels for July–December 2013 at a weighted-average price of $98.69 per barrel. A 10% commodity-price change was estimated to change swap fair value by $6.4 million. Derivatives were not designated as cash-flow hedges.
- The 2012 Form 10-K identified a material weakness in controls over accounting for oil-price derivatives. In response, the company did not designate derivatives as cash-flow hedges and entered into no new derivatives in the first half of 2013; management reported disclosure controls effective at June 30 and said it continued additional monitoring and procedures.
- Contracted drilling commitments totaled $53.9 million through November 2015; maximum natural-gas transportation commitments were $19.9 million through July 2019. Asset-retirement obligations were $16.7 million. The company said routine litigation was not expected to materially affect its financial position or results.
Important facts for investors to verify
- How the West Texas divestiture changes the company’s ongoing production base, cash generation and reserve profile; reported net income was substantially affected by the one-time sale gain.
- Whether continuing-operations production and operating performance can improve given lower natural-gas volumes and higher per-unit DD&A and lease operating costs.
- Whether the stated 2013 spending plan can be funded while maintaining liquidity and servicing the remaining high-coupon notes.
- Future borrowing-base determinations, covenant headroom and the effect of commodity prices on collateral values and borrowing capacity.
- Progress in remediating the derivative-accounting control weakness and the earnings volatility from marking derivatives to market.
- Resolution of state tax reviews and the company’s ability to meet drilling, transportation and abandonment obligations.