Comstock Resources, Inc. — Q1 2023 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2023, compared with the same period in 2022. Comstock produces natural gas and oil, primarily from its Haynesville and Bossier shale operations, and also reports gas services revenue.
Financial performance
- Revenue: $489.6 million, down 6.7% from $524.8 million. Natural gas and oil sales fell 27.6% to $380.0 million, mainly due to lower natural gas prices; gas services added $109.6 million of revenue, with $101.3 million of related expense.
- Production and prices: Natural gas production rose 11% to 127.1 Bcf. The average natural gas sales price fell to $2.98/Mcf from $4.55/Mcf. Including derivative cash settlements, realized natural gas price was $3.06/Mcf versus $3.53/Mcf.
- Profitability: Operating income was $145.6 million, down from $336.8 million. Net income available to common stockholders was $134.5 million, or $0.49 per diluted share, compared with a loss of $115.7 million, or $0.50 per share. Q1 2023 net income included a $66.4 million derivative gain; Q1 2022 included a $437.5 million derivative loss. Operating margin on reported revenue was approximately 29.7%, versus 64.2%.
- Cash flow and capital spending: Operating cash flow was $386.4 million, up from $285.6 million. Cash capital expenditures were $372.6 million, leaving approximately $13.7 million before dividends and other financing items. Receivables declined by $256.0 million and contributed materially to operating cash flow. Cash and cash equivalents ended the quarter at $33.7 million, down from $54.7 million at year-end.
- Debt and liquidity: Long-term debt carrying value was $2.15 billion; senior-note principal totaled approximately $2.19 billion. No borrowings were outstanding on the bank credit facility. The company reported $1.5 billion of total liquidity, including cash and unused facility capacity. The facility has $1.5 billion of commitments, matures in November 2027, and had a $2.0 billion borrowing base. The company was in compliance with its financial covenants.
- Dividends: Common dividends of $0.125 per share were paid in the quarter. The board authorized another $0.125-per-share dividend on May 1, 2023, payable June 15 to holders of record June 1.
Material changes versus the prior comparable period
- Natural gas sales prices declined substantially, while gas production increased. Natural gas and oil sales decreased despite higher production.
- Gas services, which began following the April 2022 acquisition of a pipeline and treating plant, contributed $109.6 million of revenue and $101.3 million of expense; this new activity affects year-over-year revenue and margin comparability.
- Operating expenses increased, including gathering and transportation, lease operating costs, DD&A, and G&A. Management attributed increases to production growth in higher-cost areas, higher personnel and production costs, and higher drilling and completion costs.
- Capital spending increased, principally due to higher drilling and completion activity and $40.7 million of unproved-property acquisitions. The company drilled 44 gross (16.3 net) wells and completed 29 gross (12.8 net) Haynesville and Bossier wells.
- Interest expense declined to $38.3 million from $46.5 million, primarily reflecting 2022 senior-note retirements and repayment of credit-facility borrowings.
Outlook, risks and contingencies
- Management expects to spend an additional $750 million to $850 million during the remaining nine months of 2023 on drilling, completion, infrastructure and other activity. It expects to fund development and exploration principally from operating cash flow and, if needed, the credit facility; spending is described as adjustable.
- At March 31, 2023, natural gas collars covered approximately 107.4 Bcf of 2023 production, with an average floor of $3.00/MMBtu and ceiling of $10.22/MMBtu. The company remains exposed to commodity-price volatility on unhedged production; management notes that sustained low prices could affect cash flow, economic reserves and access to capital.
- Contractual commitments include expected future payments of $148.7 million for contracted drilling services, a three-year fracturing-fleet agreement with a $19.2 million annual minimum, and three drilling-rig agreements with a $12.2 million annual minimum per rig.
- The company reported $767.5 million of federal and $1.5 billion of state net operating loss carryforwards. Section 382 limitations and expiration timing constrain their use; management estimates substantial portions may expire unused.
- Management stated that routine litigation is not expected to have a material effect and that no material amounts were accrued. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How gas prices, production, and hedge settlements affect realized revenue and cash generation in subsequent quarters.
- Whether planned remaining-2023 capital spending is funded by operating cash flow without materially increasing debt.
- The quality and sustainability of operating cash flow, given the large quarter-over-quarter reduction in receivables.
- Utilization and availability of the credit facility, covenant headroom, and the impact of borrowing costs if the company draws on it.
- The economics and cash obligations of the new gas services, fracturing-fleet, and drilling-rig commitments.
- Potential usability and expiration of tax NOLs, including the effects of Section 382 limitations.