Comstock Resources, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comstock is an oil and natural gas producer, with Q1 development activity focused on the Haynesville shale.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Oil and gas sales | $53.8 million | $36.2 million |
| Operating income (loss) | $2.4 million | $(56.5) million |
| Net loss | $(22.9) million | $(56.6) million |
| Net loss per share | $(1.61) | $(5.71) |
| Cash from (used in) operations | $3.2 million | $(31.0) million |
| Capital expenditures, cash-flow basis | $38.4 million | $14.2 million |
- Oil and gas sales rose 49%, primarily on higher realized commodity prices and natural gas production. Natural gas sales increased 63%; oil sales increased 17% despite a 36% decline in oil production.
- Production was 15,587 MMcfe, down from 16,325 MMcfe. Average realized prices were $3.45/Mcfe versus $2.22/Mcfe; realized natural gas and oil prices were $2.92/Mcf and $48.60/barrel, respectively.
- Operating margin was approximately 4.4% of sales, compared with a substantial operating loss in Q1 2016. The prior-year period included $22.7 million of property impairments and $7.8 million of exploration expense. Q1 2017 also benefited from lower DD&A and lease operating costs.
- Interest expense was $32.9 million, up from $29.9 million. A $7.9 million derivative gain partly offset interest and other costs; net loss remained primarily driven by interest expense.
- Cash declined to $30.4 million from $65.9 million at year-end. Operating cash flow less cash capital expenditures was negative approximately $35.2 million.
Financial position, debt and liquidity
- At March 31, 2017, current assets were $57.7 million and current liabilities were $74.5 million, a working-capital deficit of approximately $16.8 million. Stockholders’ deficit was $285.4 million.
- Carrying value of long-term debt was $1.051 billion; the company described principal debt as approximately $1.2 billion. Debt is predominantly secured and fixed-rate, with substantial interest paid or payable in kind. Convertible notes carry additional potential dilution.
- The $50 million revolving credit facility had no borrowings outstanding; Comstock reported compliance with its financial covenants. Debt maturities include convertible notes due in 2019 and 2020 and 10% secured toggle notes due in 2020.
- During the quarter, $9.9 million of convertible-note principal and accrued interest converted into 826,080 common shares. Shares outstanding increased from 13.94 million at year-end to 15.28 million at quarter-end.
Outlook, risks and notable items
- Management planned 19 additional Haynesville wells in 2017 and estimated $129.2 million of capital expenditures for the remaining nine months. It may reduce drilling depending on realized natural gas prices; funding is expected from operating cash flow and cash on hand.
- At quarter-end, natural gas swaps covered approximately 28.1 Bcf for April 2017–March 2018 at a weighted-average $3.38/MMBtu. Management reported that a 10% commodity-price change would alter swap fair value by approximately $5.5 million.
- Results are highly sensitive to oil and natural gas prices, production and costs. Lower prices could weaken cash flow and reserves and impair the ability to fund development or obtain capital. The filing notes potential future property impairments if estimates or market conditions change.
- Interest paid in kind and debt-discount amortization increase reported debt and interest burden. The company also disclosed a $2.9 million reduction to Q1 2017 interest expense correcting an effective-interest calculation error relating to September–December 2016; management considered the prior-period error immaterial.
- Commitments included $10.8 million for contracted drilling services through April 2018 and $3.8 million for gas transportation and treating through July 2019. Management did not expect existing litigation to materially affect financial position or results.
- Management said adoption of the new revenue standard was not expected to materially affect the financial statements, subject to continued evaluation; it anticipated adoption in Q1 2018. Certain operating leases are expected to be recognized on the balance sheet under the forthcoming lease standard.
Most important facts for investors to verify
- Whether operating cash flow and available cash can support the planned 2017 drilling program and debt obligations.
- Debt terms, interest paid in kind, maturity and conversion provisions, and the potential effect of conversion on dilution and tax-loss carryforwards.
- Realized commodity prices, hedge volumes and terms, and the sensitivity of drilling plans and liquidity to price changes.
- Actual well results, production trends and capital spending compared with management’s 2017 plans.
- The accounting-error correction and its stated immateriality, along with management’s continuing evaluation of future accounting-standard impacts.