Comstock Resources, Inc. - 10-Q Summary (Quarter Ended Sept 30, 2006)
Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended September 30, 2006. A material accounting change occurred during the quarter: Comstock acquired additional shares of Bois d'Arc Energy, Inc., gaining voting control. Consequently, Bois d'Arc Energy is now reported as a consolidated subsidiary. Financial results for 2006 have been retroactively adjusted to reflect this consolidation as of January 1, 2006, though net income was not impacted by the change in accounting method.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2006 | 9 Months Ended Sept 30, 2006 |
|---|---|---|
| Oil and Gas Sales | $129,251 | $385,153 |
| Net Income | $17,036 | $62,253 |
| Diluted EPS | $0.39 | $1.42 |
| Operating Cash Flow | N/A | $274,300 |
| Capital Expenditures | N/A | ($404,295) |
| Total Debt (Short + Long Term) | $461,500 | $461,500 |
| Cash and Equivalents | $27,084 | $27,084 |
Note: Debt consists of $6.5 million short-term and $455.0 million long-term. Long-term debt includes $175 million in 6.25% Senior Notes and $280 million in revolving credit facility borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Oil and gas sales increased 80% to $129.3 million for the quarter and 84% to $385.2 million for the nine months compared to the prior year periods. This growth is driven by the consolidation of Bois d'Arc Energy and higher production volumes, partially offset by lower natural gas prices in the third quarter.
- Profitability: Net income rose 21% to $17.0 million for the quarter and 225% to $62.3 million for the nine months. The nine-month increase is significantly aided by the absence of a $54.9 million equity loss from Bois d'Arc Energy recorded in the prior year and a $28.8 million gain on the sale of Bois d'Arc stock in 2005.
- Expenses: Operating expenses increased due to higher production levels and the inclusion of Bois d'Arc Energy. Depreciation, depletion, and amortization (DD&A) rose 75% for the quarter and 47% for the nine months on a pro forma basis, reflecting higher capitalized costs and production volumes.
- Derivatives: The company recorded a gain of $1.2 million on derivatives for the quarter and $10.6 million for the nine months, contrasting with significant unrealized losses in the same periods of 2005.
Outlook, Risks, and Management Commentary
- Capital Allocation: Capital expenditures for the first nine months totaled approximately $406.7 million. Management expects to spend approximately $70.0 million on onshore projects and $40.0 million on offshore projects in the fourth quarter of 2006.
- Liquidity: The company maintains a $400 million credit facility with a borrowing base of $350 million as of September 30, 2006. Bois d'Arc Energy has a separate facility with a borrowing base increased to $200 million in October 2006. Management believes operating cash flow and available borrowings are sufficient to fund operations.
- Market Risks: Results are highly sensitive to oil and natural gas prices. A $1.00 change in oil price impacts cash flow by approximately $1.7 million, while a $1.00 change in natural gas price impacts cash flow by approximately $37.7 million (based on nine-month production).
- Contingencies: The company has entered an agreement to sell Kentucky properties for $7.0 million, recording a $7.9 million loss on the pending sale. These assets are classified as "Assets Held for Sale."
Investor Verification Checklist
- Consolidation Impact: Verify the pro forma adjustments made to 2005 data to ensure accurate year-over-year comparisons, as the 2006 results include Bois d'Arc Energy as a consolidated subsidiary.
- Debt Covenants: Review compliance with financial covenants on the $400 million credit facility and the $175 million senior notes, specifically regarding current ratios and tangible net worth.
- Asset Retirement Obligations: Note the significant increase in the reserve for future abandonment costs to $44.3 million, largely due to the consolidation of Bois d'Arc Energy liabilities.
- Derivative Exposure: Assess the remaining volume of natural gas hedges (collars) outstanding through December 31, 2006, and their potential impact on future earnings given current market prices.
- Capital Expenditure Discipline: Monitor the execution of the $110 million expected fourth-quarter capital spend against actual cash flow generation.