CRK

Comstock Resources, Inc. - 10-K Summary (Fiscal Year Ended Dec 31, 1998)

Business Context and Reporting Period

Comstock Resources, Inc. is an independent energy company focused on the acquisition, development, production, and exploration of oil and natural gas properties. Its operations are concentrated in the Gulf of Mexico (43% of reserves), Southeast Texas (26%), and East Texas/North Louisiana (31%). The reporting period covers the fiscal year ended December 31, 1998. The company operates 83% of its Present Value of Proved Reserves, allowing for significant cost control.

Key Financial Metrics

Note: The company reported a net loss in 1998 primarily due to a $17.0 million impairment charge on oil and gas properties and a significant increase in interest expense.

Material Changes vs. Prior Period

• Revenue vs. Profitability: While oil and gas sales increased 5% to $93.0 million due to a 17% increase in natural gas production and a 92% increase in oil production, the company swung from a net income of $21.7 million in 1997 to a net loss of $17.2 million in 1998.
• Commodity Prices: Realized prices declined significantly. The average oil price dropped 35% to $12.73 per barrel, and the natural gas price dropped 18% to $2.25 per Mcf.
• Impairment Charge: A non-cash impairment charge of $17.0 million was recorded in 1998 due to the substantial drop in oil and gas prices, which was not present in 1997.
• Interest Expense: Interest expense surged 186% to $17.0 million from $5.9 million in 1997. This was driven by higher outstanding borrowings following the December 1997 Bois d' Arc Acquisition and a higher weighted average interest rate (7.2% in 1998 vs. 6.6% in 1997).
• Capital Expenditures: Total capital expenditures were $67.4 million in 1998, a significant decrease from $254.8 million in 1997, reflecting a shift from major acquisitions to development and exploration drilling.

Guidance, Outlook, and Risks

• 1999 Capital Budget: The company anticipates spending between $10.0 million and $36.0 million on development and exploration in 1999. However, management noted that without an improvement in commodity prices or new financing, total capital expenditures may be limited to $10.0 million to $15.0 million.
• Liquidity and Debt: The company has a $280.0 million revolving credit facility. The borrowing base is scheduled to reduce to $240.0 million by December 31, 1999, and an additional $20.0 million by January 1, 2000. The company plans to use operating cash flow to meet these reductions but warned that further price declines could necessitate asset sales or additional financing.
• Price Sensitivity: Management estimates that a $0.10 decrease in natural gas prices would reduce cash flow by approximately $1.5 million, and a $1.00 decrease in oil prices would reduce cash flow by approximately $2.9 million.
• Risks: Key risks include the volatility of oil and gas prices, the scheduled reduction in the borrowing base, and the potential inability to secure additional debt or equity financing on acceptable terms if commodity prices remain depressed.

Investor Verification Checklist

• Verify the scheduled reduction of the borrowing base to $240 million by year-end 1999 and the company's ability to generate sufficient cash flow to meet this requirement.
• Monitor commodity price trends (oil and natural gas) as they directly impact the company's ability to service debt and fund capital expenditures.
• Review the April 1999 borrowing base redetermination results, as the bank group can request redeterminations at any time.
• Assess the success rate of the 1999 exploration and development drilling program, particularly in the Gulf of Mexico region.
• Confirm the status of the $20.0 million debt reduction scheduled for January 2000 and the company's strategy to refinance or pay down this amount.