CRK

Comstock Resources, Inc. - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for Comstock Resources, Inc., an oil and gas exploration and production company. The financial statements are unaudited but have been reviewed by KPMG LLP. The company operates primarily in Texas and Louisiana, with recent production increases driven by the December 2001 acquisition of DevX Energy, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline (YTD): Oil and gas sales for the nine months ended September 30, 2002, decreased 30% to $100.0 million from $142.2 million in 2001. This was driven by a 42% drop in realized natural gas prices and an 11% drop in crude oil prices, despite a 10% increase in production volumes.
• Profitability Drop: Net income attributable to common stock for the nine months plummeted to $0.4 million from $38.5 million in the prior year period. This sharp decline is primarily due to lower commodity prices and higher interest expenses.
• Interest Expense Surge: Interest expense increased 45% year-over-year for the nine-month period to $22.4 million. This resulted from higher borrowings under the bank credit facility (average balance $176.5 million vs. $58.9 million) and the issuance of $75.0 million in Senior Notes in March 2002.
• Discontinued Operations: The company recorded a $1.8 million loss on the disposal of marginal properties in April and July 2002, classified as discontinued operations.

Outlook, Risks, and Management Commentary

• Hedging Strategy: Management utilized swaps, floors, and collars to hedge natural gas production. For the nine months ended September 30, 2002, 36% of production was hedged at an average fixed price of $3.46 per Mcf. Without these hedges, the realized price would have been lower ($2.99 per Mcf).
• Capital Allocation: The company spent $57.8 million on capital expenditures in the first nine months, primarily for development and exploration. Management has budgeted approximately $75.0 million for 2002 development and exploration, intending to fund this through internal cash flow.
• Liquidity Position: The company maintains a $350.0 million revolving credit facility with a borrowing base of $250.0 million. As of September 30, 2002, $98.0 million remained available. Management believes current cash flows and available borrowings are sufficient to fund operations.
• Risks: Significant risks include volatility in oil and natural gas prices, which directly impacts cash flow and borrowing base availability. The filing also notes risks associated with the September 11, 2001 terrorist attacks and potential market instability. Additionally, the adoption of SFAS 143 (Asset Retirement Obligations) in 2003 may impact future financial statements.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify the impact of current oil and gas prices on the company's borrowing base, as the $250 million limit is redetermined semiannually based on future net cash flows.
• Debt Covenants: Confirm continued compliance with financial covenants, specifically the interest coverage ratio and tangible net worth requirements, given the high debt load ($372.5 million).
• Derivative Settlements: Review the status of outstanding derivative instruments, particularly the $3.0 million settlement paid to Enron in July 2002 and the remaining open positions.
• Capital Expenditure Execution: Monitor the company's ability to fund the remaining 2002 capital budget of $75.0 million without requiring additional equity or debt financing.