Comstock Resources, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated financial statements; amounts below are in millions unless stated otherwise.
Business context and results
Comstock is an oil and natural gas producer. Its Haynesville shale drilling program drove natural gas production growth, while oil production fell amid limited Eagle Ford drilling. In Q3, production was 21.4 Bcfe, up 34% year over year; for the first nine months it was 55.7 Bcfe, up 16%.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Oil and gas sales | $66.8 | $50.3 | $182.1 | $127.2 |
| Operating income (loss) | $11.2 | ($98.8) | $24.0 | ($178.0) |
| Net loss | ($24.7) | ($28.5) | ($69.1) | ($80.2) |
| Net loss per share | ($1.67) | ($2.32) | ($4.74) | ($7.13) |
Q3 operating margin was approximately 16.7%, versus a loss margin of 196% in Q3 2016, when exploration impairments were unusually high. Net loss margins were approximately (37.0%) and (56.6%), respectively. The nine-month 2016 results also included a $190.1 million gain on extinguishment of debt; 2017 did not.
Cash flow, liquidity and debt
- Cash flow: Operating activities provided $90.8 for the first nine months, versus $54.7 used in 2016. Investing activities used $131.0, including $132.5 of cash capital expenditures. Net cash declined $40.5 to $25.4.
- Capital spending: Accrual-basis expenditures were $129.8 for the first nine months, versus $36.7 a year earlier. The company estimated $38.0 of additional 2017 capital expenditures.
- Debt and liquidity: Long-term debt carrying value was $1,089.7; disclosed principal was approximately $1.17 billion. Cash was $25.4, current assets $65.5 and current liabilities $112.2. No borrowings were outstanding on the $50.0 revolving credit facility; the company reported compliance with its covenants.
- Capital structure: Debt includes $697.2 of 10% secured toggle notes due 2020 and convertible second-lien PIK notes due 2019 and 2020. Interest on the convertible notes is paid in kind. Interest expense rose to $37.6 in Q3 and $107.3 for nine months. Stockholders’ deficit was $328.4.
Material changes, outlook and risks
- Q3 sales rose 33%, led by a 42% increase in natural gas production and a 7% increase in realized gas price. Nine-month gas sales rose 68%; oil sales declined as production fell 33%, partly offset by higher oil prices.
- Q3 and nine-month 2017 operating results had no exploration impairment charges, unlike 2016, when lease impairments were $76.4 in Q3 and $84.1 for nine months. Lower lease operating costs and DD&A per Mcfe also supported results; G&A and interest expense increased.
- Management planned seven additional wells in 2017; 18 gross (13.0 net) wells had been drilled and 16 gross (11.9 net) Haynesville wells completed through September. Capital spending timing was described as discretionary and adjustable.
- On October 31, 2017, the company adopted a plan to sell its South Texas Eagle Ford oil properties, with a September 30 net book value of approximately $238.0. It intended to use proceeds to reduce debt and improve liquidity; sale proceeds and timing were not provided.
- At September 30, gas swaps covered approximately 11.7 Bcf for October 2017–March 2018 at a weighted-average $3.38 per MMBtu. Commodity price volatility could affect cash flow, results and economically recoverable reserves. Convertible-note conversion could dilute shareholders and may restrict use of tax loss carryforwards.
- Other commitments included $9.1 for contracted drilling services through April 2018 and $2.9 for gas transportation and treating through July 2019. Management said ordinary-course litigation was not expected to have a material effect. Disclosure controls were deemed effective; no material change in internal control was reported.
Key facts for investors to verify
- Progress, valuation and actual proceeds from the planned Eagle Ford divestiture, and whether proceeds reduce debt as intended.
- Funding and returns from the Haynesville drilling program, including production growth relative to capital spending.
- Debt maturities, PIK interest accretion, refinancing options, covenant headroom and potential dilution from convertible notes.
- Cash generation after capital expenditures and the effect of commodity prices and hedge settlements on liquidity.
- Future implications of the company’s substantial stockholders’ deficit and valuation allowances on deferred tax assets.