CRK

Comstock Resources, Inc. - 10-Q Summary (Quarter Ended June 30, 2004)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 2004, for Comstock Resources, Inc., an independent oil and gas exploration and production company. The company operates primarily in the Gulf of Mexico and onshore Texas. As of August 6, 2004, there were 34,730,262 shares of common stock outstanding.

Key Financial Metrics

Production Data (Six Months): Oil production increased to 862 Mbbls (from 797 Mbbls in 2003). Natural gas production remained relatively flat at 16,818 MMcf. Average realized oil price increased to $36.24/bbl, while natural gas price decreased slightly to $5.71/Mcf.

Material Changes vs. Prior Period

• Debt Restructuring: The company retired $220 million of 11.25% Senior Notes due 2007. This resulted in a $19.6 million loss on early extinguishment of debt, significantly impacting net income for the six-month period.
• Refinancing: To replace the retired debt, Comstock issued $175 million in new 6.875% Senior Notes due 2012 and entered a new $400 million revolving credit facility. This reduced the average interest rate on borrowings from 3.1% to 2.6%.
• Accounting Change: Effective January 1, 2004, the company adopted SFAS 123, requiring fair value accounting for stock-based compensation. This resulted in an additional $2.4 million in general and administrative expenses for the six months ended June 30, 2004.
• Exploration Costs: Exploration expenses increased to $5.2 million (from $2.1 million in 2003) due to four exploratory dry holes and seismic data acquisition.

Outlook, Risks, and Unusual Items

• Joint Venture Formation: On July 16, 2004 (subsequent to the reporting period), Comstock contributed its Gulf of Mexico properties to a new joint venture, Bois d'Arc Energy, LLC, in which it holds a 59.9% interest. Comstock provided a $200 million revolving line of credit to the venture, with $152 million outstanding at formation. The venture must refinance this debt by December 1, 2004, or face dissolution.
• Liquidity: Cash and cash equivalents decreased to $0.7 million. The company relies on operating cash flow and its $300 million borrowing base under the new credit facility to fund operations and capital expenditures.
• Market Risks: Financial results are highly sensitive to oil and natural gas prices. A $1.00 change in oil price impacts cash flow by approximately $0.8 million, while a $1.00 change in natural gas price impacts cash flow by $16.1 million (based on H1 2004 production).
• Capital Budget: The company has budgeted approximately $150 million for development and exploration in 2004, including its share of the new joint venture's expenditures.

Investor Verification Checklist

• Debt Covenant Compliance: Verify continued compliance with the new credit facility's borrowing base and financial covenants (current ratio, tangible net worth).
• Joint Venture Financing: Monitor the status of Bois d'Arc Energy's refinancing efforts to ensure the $152 million loan from Comstock is repaid by the December 1, 2004 deadline.
• Production Growth: Assess whether the 5% production increase in Q2 2004 is sustainable given the high capital expenditure rate ($72.3 million in H1).
• Stock-Based Compensation: Review the impact of the new SFAS 123 accounting standard on future earnings per share calculations.