Comstock Resources, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Dollar figures below are in millions unless noted.
Business context and operating performance
Comstock is an oil and natural gas producer, with production growth driven principally by its Haynesville and Bossier shale drilling and completion program in East Texas and North Louisiana.
- Q2 production was 24.0 Bcfe, up 20% year over year; average daily production was 263 MMcfe, up 19% from Q1 2011. Haynesville/Bossier production averaged 176 MMcf per day, up 72% year over year.
- First-half production was 43.9 Bcfe, up 13%. Natural gas volume increased, while oil volume declined.
- Q2 oil and gas sales rose 24% to $112.5 million. First-half sales increased 2% to $200.5 million.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Oil and gas sales | $112.5m | $90.7m | $200.5m | $196.8m |
| Operating income | $8.4m | $0.1m | $0.1m | $15.3m |
| Net income (loss) | $3.9m | $(1.6)m | $6.4m | $5.7m |
| Diluted EPS | $0.08 | $(0.04) | $0.13 | $0.12 |
| Operating cash flow | Not separately stated | Not separately stated | $117.9m | $199.2m |
- Q2 operating margin was approximately 7.4%; first-half operating margin was approximately 0.1%. Q2 net margin was approximately 3.5%; first-half net margin was approximately 3.2%.
- Q2 DD&A was $74.7 million, up 30%; the oil-and-gas DD&A rate rose to $3.11/Mcfe from $2.87. First-half DD&A increased 16% to $135.0 million.
- Q2 interest expense increased to $10.4 million from $7.6 million; first-half interest expense was $20.7 million versus $15.4 million. Higher debt contributed to the increase.
- First-half investing cash outflow was $286.9 million, including $332.5 million of cash capital expenditures, partly offset by $45.6 million of asset-sale proceeds. Financing provided $170.8 million. Cash increased $1.8 million to $3.6 million.
- At June 30, current assets were $130.5 million and current liabilities $172.0 million; marketable securities were $62.5 million. Long-term debt was $691.6 million, up from $513.4 million at year-end 2010. Stockholders’ equity was $1,077.3 million.
Material changes and notable items
- Q2 sales growth reflected higher production and, to a lesser extent, improved realized prices. Average natural gas price was $4.19/Mcf versus $4.09; oil was $101.02/barrel versus $67.37. First-half realized gas prices fell 13%, while oil prices rose 43%.
- First-half net income included $29.7 million in pretax gains from Stone Energy share sales, compared with $5.7 million in the prior-year period. The company held 2.056 million shares at June 30, with a reported fair value of $62.5 million and cost basis of $18.9 million.
- First-half cash from operations fell 41%, primarily because of working-capital changes and a $48.8 million income-tax refund received in 2010.
- In March 2011, Comstock issued $300 million of 7.75% notes due 2019. It also redeemed $172 million of 6.875% notes due 2012, recording a $1.1 million early-extinguishment loss. At quarter-end, debt also included $296.6 million of 8.375% notes due 2017 and $95 million outstanding on the bank facility.
- First-half exploration expense included a $9.5 million impairment of leases expected to expire before drilling. No oil-and-gas-property impairment was recorded in the quarter.
Outlook, risks and commitments
- Management expected to spend approximately $570 million on developmental and exploratory drilling in 2011, plus $40 million to acquire exploratory acreage. Planned funding sources included operating cash flow, asset sales (including marketable securities) and borrowings.
- Management believed operating cash flow, cash on hand and available bank borrowings would fund operations and planned growth, but noted additional capital might be needed if plans or assumptions change and that acceptable financing cannot be assured.
- The $850 million revolving credit facility had a $500 million borrowing base, with $405 million available at June 30. The company was in compliance with its covenants, which include a minimum 1:1 current-assets-plus-availability to current-liabilities ratio and minimum tangible net worth.
- Contractual commitments included $34.6 million for drilling services, $6.0 million minimum for well completions, and up to $41.2 million for natural-gas transportation. The credit facility’s borrowing base can be reset based on reserve cash-flow estimates and commodity prices.
- Commodity prices are a significant exposure: management estimated that a $1/Mcf natural-gas price change would change first-half cash flow by about $41.6 million; a $1/barrel oil-price change by about $0.3 million. A 100-basis-point interest-rate change was estimated to affect first-half interest expense by about $0.5 million.
- Routine litigation was not expected to have a material effect. The company reported no outstanding commodity derivatives. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and liquidity depends on Stone Energy share sales and the remaining marketable-securities position.
- Whether production growth and the 2011 drilling/acquisition budget can be sustained within operating cash flow and available borrowing capacity.
- How changes in commodity prices, reserve-based borrowing availability, and higher debt costs could affect cash generation and covenant headroom.
- The basis for first-half operating income of only $0.1 million despite $200.5 million in sales, including DD&A, impairments, and other operating costs.
- Whether the stated contractual commitments and transportation obligations remain consistent with future production and capital plans.