CRK

Comstock Resources Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Comstock Resources Inc. for the period ended June 30, 2006. Comstock is an independent oil and natural gas company engaged in exploration, development, and production. A significant portion of its offshore operations is conducted through its 48% equity interest in Bois d'Arc Energy, Inc., which was spun off and went public in May 2005. Consequently, Comstock accounts for its offshore results using the equity method rather than proportionate consolidation.

Key Financial Metrics

Liquidity: As of June 30, 2006, Comstock held $0.7 million in cash and cash equivalents. The company maintains a $400 million revolving credit facility with a borrowing base of $350 million; $68 million was outstanding under this facility at period end. Additionally, the company has $175 million in 6 7/8% Senior Notes due 2012.

Material Changes vs. Prior Period

• Revenue: Total oil and gas sales decreased 6% in Q2 2006 compared to Q2 2005 ($64.6M vs $68.5M) and 3% for the six-month period ($134.5M vs $138.4M). This decline is primarily due to the accounting change to the equity method for offshore operations (reducing reported revenue from 60% to 48% ownership) and hurricane-related production deferrals in the Gulf of Mexico. However, onshore sales increased 15% in Q2 due to higher production and prices.
• Profitability: Net income improved significantly to $15.6 million in Q2 2006 from a net loss of $10.9 million in Q2 2005. The prior year loss was heavily impacted by a one-time $64.6 million deferred tax provision related to Bois d'Arc Energy's conversion to a corporation. For the six months ended June 30, 2006, net income was $45.2 million compared to $5.0 million in 2005.
• Expenses: Exploration expenses dropped to $0 in Q2 2006 from $15.2 million in Q2 2005 (which included a dry hole cost). Operating expenses increased slightly due to higher production volumes and ad valorem taxes.
• Investing Activities: Capital expenditures decreased significantly to $93.4 million for the first six months of 2006 compared to $279.8 million in 2005, reflecting a shift in acquisition strategy and the separation of offshore capital spending into Bois d'Arc Energy.

Outlook, Risks, and Unusual Items

• Unusual Items:
  • Derivatives: The company recorded an unrealized gain of $1.3 million in Q2 and $9.4 million for the six months ended June 30, 2006, on derivative instruments used for price risk management.
  • Asset Sale: A $7.9 million loss was recorded on the pending sale of Kentucky oil and gas properties, expected to close in October 2006.
  • Tax Provision: A $1.1 million tax provision was recorded in Q2 2006 related to a new Texas business tax law.
• Guidance and Outlook: Management expects to fund development and exploration activities (budgeted at approximately $200 million for 2006) using internally generated cash flow. No specific acquisition budget is set for 2006.
• Risks:
  • Commodity Prices: Financial results are highly dependent on oil and natural gas prices. A $1.00 change in oil price impacts cash flow by ~$0.4 million, while a $1.00 change in gas price impacts cash flow by ~$14.2 million (based on H1 2006 production).
  • Interest Rates: The company has $68 million in variable-rate debt. A 100 basis point increase in rates would increase interest expense by approximately $340,000 for the six-month period.
  • Regulatory: The company is adopting FASB Interpretation No. 48 (FIN 48) regarding uncertainty in income taxes, effective for fiscal years beginning after December 15, 2006.

Investor Verification Checklist

• Verify the impact of the equity method accounting on reported revenue and asset values compared to the prior year's proportionate consolidation.
• Confirm the status and closing date of the Kentucky property sale and the associated $7.9 million loss.
• Review the borrowing base redetermination schedule for the $400 million credit facility, as it is subject to semiannual review based on commodity prices and production.
• Assess the sensitivity of cash flows to fluctuations in natural gas prices, given the high exposure noted in the market risk disclosure.
• Monitor the adoption of FIN 48 and its potential impact on deferred tax liabilities in the upcoming fiscal year.