CRK

Comstock Resources, Inc. - 10-Q Summary (Q2 2003)

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2003, for Comstock Resources, Inc., an oil and gas exploration and production company. The company operates primarily in Texas and Louisiana. The financial statements are unaudited but have been reviewed by independent accountants.

Key Financial Metrics

Margins: Cash margin per Mcfe was $4.01 in Q2 2003 and $4.58 for the six months ended June 30, 2003, compared to $2.70 and $2.20 respectively in 2002.

Material Changes vs. Prior Period

• Revenue Surge: Oil and gas sales increased 50% in Q2 2003 and 95% YTD 2003 compared to 2002. This was driven primarily by significantly higher realized prices (Natural gas +104%, Crude oil +38% YTD) rather than production volume, which increased only 4% YTD.
• Profitability Turnaround: The company shifted from a net loss of $2.6 million in the first half of 2002 to a net income of $34.8 million in the first half of 2003.
• Expense Increases: Operating expenses rose 32% YTD due to higher production and ad valorem taxes linked to higher commodity prices. General and administrative expenses increased 75% YTD due to the opening of an offshore operations office in Houston.
• Debt Reduction: Total debt decreased by approximately $30 million YTD as the company used strong operating cash flows to pay down its revolving credit facility.
• Equity Conversion: In April and June 2003, all outstanding Series A 1999 Preferred Stock was converted into common stock, eliminating $1.6 million in annual dividend requirements and increasing common equity by $17.6 million.

Guidance, Outlook, and Risks

• Capital Budget: Management has budgeted approximately $100 million for development and exploration projects in 2003, intending to fund these via internally generated cash flow. No specific acquisition budget is set.
• Liquidity: The company maintains a $350 million revolving credit facility with a borrowing base of $260 million as of June 30, 2003. Management believes operating cash flow and available borrowings are sufficient to fund operations and growth.
• Market Risks: Financial results are highly sensitive to oil and natural gas prices. A $1.00 change in oil price impacts cash flow by ~$0.8 million, while a $1.00 change in natural gas price impacts cash flow by ~$16.2 million (based on H1 2003 production).
• Hedging: The company holds natural gas price floors (1.125 million MMBtu at $2.00/Mcf) for the period July 1, 2003, through December 31, 2003. An interest rate swap covers $25 million of floating debt.
• Accounting Changes: Adoption of SFAS 143 (Asset Retirement Obligations) in Jan 2003 resulted in a one-time gain of $0.7 million included in YTD 2003 net income.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify current oil and natural gas prices against the company's hedged volumes to assess downside protection.
• Borrowing Base Re-determination: Confirm the status of the $260 million borrowing base, as it is re-determined semiannually and impacts liquidity.
• Capital Expenditure Execution: Monitor the $100 million 2003 capital budget against actual spending to ensure alignment with cash flow generation.
• Debt Covenants: Review compliance with financial covenants (current ratio, tangible net worth, interest coverage) given the high leverage relative to cash balances.
• Production Growth: Assess whether the 4% production increase YTD is sustainable or if revenue growth is solely price-dependent.