CRK

Comstock Resources, Inc. - 10-Q Summary (Q3 2007)

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2007. Comstock Resources, Inc. is an independent oil and gas exploration and production company. The company consolidates the results of its onshore operations and its controlling interest in Bois d'Arc Energy, Inc., an offshore operator. The company is a large accelerated filer and is not a shell company.

Key Financial Metrics

Note: YTD figures represent the nine months ended September 30. Q3 operating cash flow is not explicitly broken out in the summary tables, but YTD operating cash flow increased 18% year-over-year.

Material Changes vs. Prior Period

• Revenue Growth: Oil and gas sales increased 32% in Q3 2007 and 28% YTD 2007 compared to the prior year. This was driven primarily by a 35% increase in production volumes (23.1 Bcfe in Q3 2007 vs. 17.1 Bcfe in Q3 2006).
• Production Mix: Onshore production increased 38% in Q3 2007, while Bois d'Arc Energy production increased 31%. The increase is attributed to development drilling in East Texas/North Louisiana and new offshore wells.
• Expense Increases:
  • DD&A: Depreciation, depletion, and amortization rose 53% in Q3 and 71% YTD due to higher production volumes and increased amortization rates from recent acquisitions and drilling costs.
  • Exploration: Exploration expenses increased significantly YTD ($36.7 million vs. $16.7 million) due to dry holes and seismic data acquisition.
  • Interest: Interest expense increased 67% in Q3 and 63% YTD due to higher average borrowings ($427.5 million in Q3 2007 vs. $180.5 million in Q3 2006) and higher interest rates.
• Net Income Decline: Despite revenue growth, YTD net income decreased 24% ($47.2 million vs. $62.3 million). This was caused by higher exploration and DD&A expenses and the absence of a $10.6 million gain on derivatives recorded in the prior year.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: The company expects to spend approximately $330.0 million on onshore development and exploration for the full year 2007. Bois d'Arc Energy expects to spend $215.0 million on offshore capital expenditures for 2007.
• Liquidity: The company maintains a $600.0 million revolving credit facility. As of September 30, 2007, the borrowing base was $400.0 million with $78.0 million available. On November 5, 2007, the borrowing base was increased to $500.0 million. Bois d'Arc Energy has a separate facility with $125.0 million available.
• Derivatives: The company had no outstanding derivative instruments as of September 30, 2007, having settled all positions from the prior year.
• Strategic Alternatives: Management intends to maintain its controlling interest in Bois d'Arc Energy but notes that this is subject to the outcome of an evaluation of strategic alternatives by the Bois d'Arc board, including a potential sale.
• Risks: Financial results are highly dependent on oil and natural gas prices. A $1.00 change in oil price impacts cash flow by approximately $1.9 million, and a $1.00 change in gas price impacts cash flow by approximately $51.3 million (based on YTD 2007 production).

Key Facts for Investor Verification

• Debt Utilization: Verify the impact of the increased borrowing base ($500 million) on future leverage ratios and interest expense.
• Bois d'Arc Status: Monitor announcements regarding the strategic evaluation of Bois d'Arc Energy, as a sale could significantly alter the company's asset base and revenue mix.
• Exploration Success: Review future drilling results, as YTD exploration expenses were high ($36.7 million) due to dry holes; future success is critical to offsetting these costs.
• Commodity Price Sensitivity: Assess exposure to natural gas price volatility, given the significant cash flow sensitivity ($51.3 million per $1.00 change) relative to the company's market cap.
• Capital Discipline: Confirm if the projected $545 million total capital expenditure for 2007 ($330M onshore + $215M offshore) is sustainable given current cash flows and debt levels.