Comstock Resources, Inc. — Q1 2013 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2013, with comparisons to Q1 2012. Comstock produces oil and natural gas. Results separate continuing operations from West Texas properties classified as discontinued operations following a pending sale.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Continuing oil and gas sales | $95.0 million | $103.8 million |
| Operating loss | $(20.9) million | $(1.4) million |
| Loss from continuing operations | $(24.5) million | Income of $1.4 million |
| Net loss | $(27.1) million, or $(0.58) per share | Net income of $1.4 million, or $0.03 per share |
| Operating cash flow, continuing operations | $73.8 million | $116.6 million |
| Operating cash flow, including discontinued operations | $97.4 million | $133.2 million |
| Capital expenditures, continuing operations | $58.2 million | $140.5 million |
- Continuing production was 18.2 Bcfe, down 27% from 24.9 Bcfe. Natural gas production fell to 15.6 Bcf from 22.3 Bcf; oil production was essentially unchanged at 432,000 barrels.
- Average realized prices improved: natural gas rose 21% to $3.15/Mcf; oil including realized hedging gains rose 9% to $111.19/barrel. Average realized price including hedging increased to $5.34/Mcfe from $4.11/Mcfe.
- DD&A increased 10% to $85.0 million; DD&A per Mcfe rose 44% to $4.65. Lease operating expense was $13.2 million, but increased to $0.72/Mcfe from $0.54/Mcfe as production declined.
- Other income included a $7.9 million gain on Stone Energy shares; the comparable quarter included a $26.6 million securities-sale gain and a $6.7 million property-sale gain. Q1 2013 also recorded an $8.8 million unrealized derivative loss.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $6.8 million, with $38.4 million of restricted cash held in escrow for the pending West Texas sale. Long-term debt was $1.335 billion, compared with $1.324 billion at year-end; total liabilities were $1.721 billion.
- The $850 million revolving credit facility had a $570 million borrowing base and $120 million available. The company reported compliance with its financial covenants. The facility matures November 2015 and is secured by substantially all company assets.
- Debt comprised $450 million drawn on the credit facility and senior notes due 2017, 2019 and 2020. The notes carry coupon rates of 8⅜%, 7¾% and 9½%, respectively.
- Net cash used in investing was $101.7 million; financing provided $6.7 million. Cash increased by $2.4 million during the quarter. Continuing operating cash flow fell 37%, primarily due to working-capital changes; excluding working-capital changes, management said it declined $5.3 million.
Material changes, outlook and risks
- Pending divestiture: On March 14, 2013, Comstock agreed to sell its Reeves and Gaines County, West Texas properties for $768 million, subject to customary adjustments and closing conditions. Closing was expected around May 14, 2013, with a January 1, 2013 effective date. The filing says proceeds were intended for debt retirement and other corporate purposes; the transaction had not yet closed at quarter-end.
- The West Texas assets had a reported net carrying value of $511.9 million. Their Q1 discontinued operations generated $16.3 million of sales and a $2.6 million net loss; Q1 2012 discontinued operations had a $42,000 net loss.
- Management expected approximately $358.9 million of 2013 spending on continuing-operations drilling and leasehold costs, to be funded by operating cash flow and asset-sale proceeds. It believed operating cash flow, asset-sale proceeds, cash and available credit would fund its plan, while noting that changed assumptions could require additional capital and financing might not be available on acceptable terms.
- Management attributed weaker continuing results mainly to lower Haynesville and Bossier gas production after drilling was curtailed amid low 2012 gas prices, higher DD&A, and the absence of prior-year gains. No specific earnings or production guidance was provided.
- Commodity prices are a significant risk. Management estimated that a $0.10/Mcf gas-price change would affect quarterly continuing cash flow by about $1.5 million, and a $1/barrel oil-price change by about $0.1 million after swaps. A 100-basis-point rate change was estimated to alter annual interest expense on variable-rate debt by about $1.1 million.
- As of March 31, oil swaps covered 1.62 million barrels for April–December 2013 at a weighted-average price of $98.67/barrel. The company had no interest-rate derivatives. It reported $58.2 million of contracted drilling commitments and $22.6 million of maximum natural-gas transportation commitments.
- The filing reiterates a previously reported material weakness in internal controls over accounting for oil-price derivatives. Comstock was not designating derivatives as cash-flow hedges in Q1 2013 and was recognizing derivative gains and losses in current earnings; remediation was ongoing. Management concluded disclosure controls were effective as of quarter-end.
- State tax returns in two jurisdictions were under review; management did not expect resolution to materially affect the financial statements. The company also disclosed ordinary-course litigation that it did not expect to have a material effect.
Key facts for investors to verify
- Whether the West Texas divestiture closed, final net proceeds after adjustments, and the amount of debt repaid with proceeds.
- Whether lower gas production and higher DD&A continued, and how the asset sale affects production, earnings and cash flow comparisons.
- Borrowing-base availability, covenant headroom and liquidity after the sale and planned debt reduction.
- Actual 2013 capital spending versus the $358.9 million estimate, and funding needs if operating cash flow or sale proceeds differ from expectations.
- Progress remediating the derivative-accounting material weakness and the effect of commodity-price and interest-rate changes on results.