Comstock Resources, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Comstock is a natural gas and oil producer, with operations concentrated in the Haynesville and Bossier shale regions. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $376.7 | $1,190.0 | $1,154.5 | $2,705.7 |
| Operating income | $47.3 | $771.1 | $175.8 | $1,760.9 |
| Net income | $14.7 | $355.6 | $103.5 | $621.1 |
| Net income per diluted share | $0.05 | $1.28 | $0.37 | $2.24 |
- Q3 operating margin was approximately 12.5%, versus 64.8% in Q3 2022; nine-month operating margin was approximately 15.2%, versus 65.1%. Margins are calculated from reported revenue and operating income.
- Natural gas production rose 1% in Q3 to 130.5 Bcf and 4% for the nine months to 383.9 Bcf. Average realized gas price fell to $2.33/Mcf in Q3 from $7.72, and to $2.37/Mcf year to date from $6.46.
- Q3 gas and oil sales fell 69% year over year; nine-month sales declined 62%, primarily due to lower natural gas prices. Gas services revenue also fell year over year, mainly reflecting lower prices on purchased gas resold.
- Cash provided by operations was $788.6 for the nine months, down 36%. Cash capital expenditures were $1,103.5, leaving an operating-cash-flow shortfall relative to cash capex of approximately $314.9 before financing and other cash flows.
Balance sheet and liquidity
- At September 30, cash was $19.8; long-term debt carrying value was $2,503.4. Debt included $345.0 outstanding under the bank credit facility, $1,223.9 principal of 6.75% notes due 2029, and $965.0 principal of 5.875% notes due 2030.
- Management reported liquidity of approximately $1.2 billion, including unused borrowing capacity and cash. The credit facility has $1.5 billion of aggregate commitments, matures November 15, 2027, and is secured by substantially all company and subsidiary assets.
- The company reported compliance with its credit-facility covenants: leverage below 3.5-to-1.0 and adjusted current ratio of at least 1.0-to-1.0. The borrowing base was redetermined October 27, 2023 at $2.0 billion.
- Current assets were $327.2 and current liabilities $660.0. Accounts receivable from natural gas and oil sales and gas services decreased to $157.1 from $415.1 at year-end 2022.
Material changes and unusual items
- Derivative results shifted materially: Comstock recorded Q3 derivative gains of $14.3 versus losses of $271.3 in Q3 2022; nine-month gains were $76.2 versus losses of $781.7. These accounting gains and losses are distinct from cash settlements and can materially affect reported earnings.
- Operating cash flow declined with lower commodity sales, while cash capex rose to $1,103.5 from $793.9, reflecting higher drilling and completion activity and $76.6 of unproved-property acquisitions. The company drilled 52 gross wells and completed 57 gross operated wells during the first nine months.
- Interest expense was $43.6 in Q3, up from $41.4, primarily due to bank-credit-facility borrowings. Nine-month interest expense decreased to $121.1 from $132.2. The prior-year period included a $46.8 loss on early retirement of debt.
- Comstock paid $104.2 in common dividends during the first nine months, at $0.125 per share quarterly. The board subsequently authorized another $0.125-per-share dividend, payable December 15, 2023.
Outlook, risks and contingencies
- Management expected to spend an additional $300–$400 on drilling, completion, infrastructure and other activity in Q4 2023. It said operating cash flow and available credit were expected to cover foreseeable liquidity and capital needs for at least 12 months, while noting that changed assumptions or restricted financing access could require additional capital.
- At September 30, gas hedges included collars on approximately 23.0 Bcf of 2023 production, with a $3.00/Mmbtu average floor and $10.28 ceiling, and swaps on approximately 91.5 Bcf of 2024 production at $3.55/Mmbtu. Subsequent to quarter-end, the company added 47.58 million MMBtu of 2024 swaps at an average $3.56/Mmbtu.
- On October 30, Comstock entered a midstream partnership for Western Haynesville acreage with Quantum Capital Solutions. Comstock contributed its Pinnacle gathering and treating system; QCS committed $300 million to fund future system build-out, while Comstock will control and operate the system.
- Commodity-price volatility, higher production and gathering costs, and variable-rate borrowings are key exposures. Management stated that sustained weak gas and oil prices could adversely affect results, reserves and access to capital. A 10% gas-price increase was estimated to reduce hedge fair value by about $2.6; a 10% decrease was estimated to increase it by about $3.5, before considering effects on physical sales.
- The company had $767.5 of federal and $1.5 billion of certain state net operating loss carryforwards, subject to limitations; management estimated that substantial portions would expire unused. No material litigation accruals were recorded, and management did not expect the disclosed ordinary-course litigation to have a material effect. No material change to previously disclosed risk factors was reported.
Key investor verification points
- Assess whether low realized gas prices and the Q4 spending plan can be supported by operating cash flow without sustained increases in facility borrowings.
- Review hedge coverage, settlement cash flows, and the sensitivity of earnings and cash generation to commodity prices.
- Verify the impact and terms of the QCS partnership, including the $300 million commitment, contributed midstream assets, and future build-out obligations.
- Monitor debt, borrowing-base redeterminations, covenant headroom, and interest costs on variable-rate borrowings.
- Track production growth against rising unit costs, capital spending, and the company’s ability to fund dividends and development together.