Comstock Resources, Inc. — Q3 2010 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Comstock is an oil and natural gas producer, with growth driven primarily by Haynesville shale activity. The interim financial statements were reviewed by Ernst & Young, not audited.
Financial results and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Oil and gas sales | $79.7 million | $67.4 million | $276.5 million | $200.7 million |
| Operating income (loss) | $2.1 million | $(11.5) million | $18.2 million | $(29.8) million |
| Net income (loss) | $(4.7) million | $(12.6) million | $1.0 million | $(29.7) million |
| Net income (loss) per diluted share | $(0.10) | $(0.28) | $0.02 | $(0.66) |
- Margins: Operating margin was approximately 2.6% in Q3 2010 versus negative 17.1% in Q3 2009; for the first nine months, approximately 6.6% versus negative 14.9%. These are calculated from reported operating income and sales.
- Production and prices: Q3 production was 17.2 Bcfe, broadly comparable with 17.0 Bcfe a year earlier. Nine-month production rose 21% to 56.0 Bcfe. Average realized equivalent prices, including hedging, were $4.64/Mcfe in Q3 and $4.94/Mcfe year to date; no derivatives were outstanding in 2010.
- Cash flow: Nine-month operating cash flow was $249.2 million, compared with $117.9 million in 2009. Investing cash flow was $(395.2) million, including $406.8 million of cash capital expenditures; financing cash flow was $59.8 million. Cash fell to $4.4 million from $90.5 million at year-end 2009.
- Liquidity and debt: September 30 current assets were $110.8 million and current liabilities $104.6 million. Marketable securities were $70.7 million, consisting of Stone Energy shares. Debt was $528.2 million: $60.0 million drawn on the revolver and senior notes of $172.0 million due 2012 and $296.2 million carrying amount due 2017. The credit facility borrowing base was $500 million, with $440 million available. The company reported compliance with its financial covenants.
- Balance sheet: Total assets were $1.94 billion and stockholders’ equity $1.07 billion at September 30, 2010. Long-term debt increased from $470.8 million at December 31, 2009.
Material changes and management commentary
- Nine-month sales rose 38%, reflecting higher production and stronger realized oil and gas prices. Q3 sales increased 18%, primarily on improved prices.
- Q3 production averaged 187 MMcfe per day, down from 219 MMcfe per day in Q2 2010 because high-pressure pumping services were unavailable to complete Haynesville wells. At quarter-end, 26 drilled wells awaited completion. Management said adequate pumping services became available in October and anticipated production would increase beginning in Q4.
- Gathering and transportation expense increased substantially with Haynesville production; nine-month expense was $12.3 million versus $4.0 million. Nine-month lease operating expense per Mcfe improved to $0.73 from $0.88, and DD&A per Mcfe declined to $2.91 from $3.27.
- Interest expense increased to $22.6 million for the first nine months from $8.3 million, mainly due to senior notes issued in October 2009. The 2010 year-to-date result also included a $4.9 million gain on asset sales, including a $5.7 million gain before tax from Stone Energy shares.
- Operating cash flow benefited from $48.8 million of income tax refunds. Nine-month accrual-basis capital expenditures were $404.4 million, primarily for drilling and acreage acquisition.
Outlook, risks, and contingencies
- For 2010, management expected approximately $385 million for development and exploratory drilling and an additional $130 million to acquire exploratory acreage. Funding was expected from operating cash flow, cash, asset-sale proceeds, and revolver borrowings. Management believed these sources and available credit would fund the current plan, but noted that changed assumptions could require additional capital and there was no assurance it would be available on acceptable terms.
- In October 2010, Comstock agreed to sell Mississippi properties for $75 million, expected to close in December subject to due diligence and closing conditions. Management estimated a fourth-quarter loss of $26.5 million before tax, or $16.6 million after tax; proceeds were expected to reduce revolver borrowings.
- Commodity prices are a key risk. Based on nine-month production, management estimated that a $1/Mcf change in natural gas prices would change cash flow by approximately $50.8 million, while a $1/barrel oil-price change would affect it by approximately $0.7 million.
- The company had $60.7 million of contracted drilling-service commitments and maximum natural-gas transportation commitments of $49.7 million. It also reported a $7.0 million asset-retirement obligation. Management did not expect ongoing litigation to materially affect financial position or results.
- The credit facility matures December 15, 2011 and its borrowing base is redetermined semiannually, with availability affected by reserve economics and commodity prices. Fixed-rate notes and floating-rate revolver borrowings expose the company to interest-rate risk.
- Management projected a 2010 pre-tax loss for tax-rate purposes; nondeductible stock compensation reduces the expected tax benefit. State tax reviews were ongoing, with no material impact expected by management.
Important facts for investors to verify
- Whether completion activity resumed as expected and Q4 production recovered from the Q3 sequential decline.
- Whether the Mississippi property sale closed on the stated terms, and how the proceeds and estimated loss affected debt and earnings.
- Capital-spending pace and funding needs relative to the stated 2010 drilling and acreage plans, given low cash and high investment outflows.
- Commodity-price exposure, realized pricing, and the effect of borrowing-base redeterminations on available liquidity.
- The status and refinancing or repayment plan for the $172 million of senior notes due in March 2012 and the revolver maturing in December 2011.
- The market value and concentration risk of the Stone Energy investment, and the reported unrealized changes in its fair value.