Comstock Resources, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Comstock is an oil and natural gas producer. Management cited sustained low commodity prices and emphasized Haynesville shale gas development.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparator |
|---|---|---|
| Oil and gas sales | $36.2 million | $66.5 million; down 46% |
| Operating loss | $56.5 million | $96.9 million loss |
| Net loss | $56.6 million; $1.14 per share | $78.5 million; $1.71 per share |
| Operating cash flow | $(31.0) million | $60.2 million |
| Cash capital expenditures | $14.2 million | $140.4 million |
| Cash and cash equivalents | $89.3 million | $134.0 million at Dec. 31, 2015 |
| Long-term debt | $1.21 billion | $1.25 billion at Dec. 31, 2015 |
Average realized prices fell to $1.82/Mcf for natural gas from $2.51 and $26.44/barrel for oil from $44.34. Production was 16.325 Bcfe, up from 14.418 Bcfe: gas production rose 69%, while oil production fell 60%. No conventional gross margin was reported. Operating expenses were $93.4 million, including $38.8 million DD&A and $22.7 million of property impairments.
Interest expense increased to $29.9 million from $20.8 million. A $33.4 million gain on extinguishment of debt, principally from exchanging $40 million face value of 2019 notes for shares, reduced the reported net loss. The tax provision was $4.5 million; the company recorded valuation allowances against deferred tax assets and cited state tax law changes.
At quarter-end, the company had no revolver borrowings under its $50 million facility and reported compliance with its financial covenants. Fixed-rate debt had a reported fair value of $415.4 million versus approximately $1.2 billion carrying value. Management stated that cash, operating cash flow, anticipated asset-sale proceeds, and available revolver capacity were expected to fund its current plan, while noting additional capital might be needed if assumptions change.
Material changes and unusual items
- Oil and gas sales declined primarily because of lower commodity prices; gas sales nevertheless increased 22% as higher production partly offset lower gas prices.
- Exploration expense fell to $7.8 million from $42.2 million, largely reflecting lower lease impairments and the absence of prior-year rig termination costs. DD&A fell 58%, partly reflecting prior impairments and increased production from lower-cost Haynesville properties.
- The company recognized a $20.8 million impairment to classify South Texas gas properties held for sale at $42.5 million net realizable value, plus $1.9 million of proved-property impairment. It also recorded $7.8 million of exploration expense related primarily to unevaluated leases.
- Cash declined by $44.7 million during the quarter. Operating cash use reflected lower revenues and working-capital movements, including reduced accounts payable and accrued liabilities.
- In January, Comstock exchanged South Texas acreage and producing wells for 3,637 net Haynesville acres and four producing wells, recognizing a $0.7 million gain. It also sold properties for $0.9 million in proceeds.
- In April and May 2016, after quarter-end, Comstock retired $64.3 million of note principal through transactions involving 7.6 million shares and $3.5 million cash; the filing estimated a $54.5 million gain on retirement.
Outlook, risks, and contingencies
- Management expected oil production to continue declining until drilling resumes and anticipated higher natural gas production from its 2016 Haynesville program. Planned 2016 drilling and development spending was approximately $81.2 million for nine Haynesville wells and other activity; spending could be reduced depending on gas prices and liquidity.
- Management warned that persistent low oil and gas prices could reduce cash flow and economically recoverable reserves and lead to further impairments. Commodity-price exposure is material; the company estimated a $0.10/Mcf gas-price change would affect quarterly cash flow by about $1.3 million and a $1/barrel oil-price change by about $0.4 million.
- Quarter-end gas swaps covered 900,000 MMBtu for April–June 2016 at a weighted-average $3.20/MMBtu. The company reported a $1.1 million derivative asset and $1.0 million of cash settlement receipts in Q1. Derivatives are for risk management, not trading.
- On March 24, 2016, the NYSE notified the company it was below continued-listing standards for share price and market capitalization. As of May 3, the 30-day average share price was $0.78 and average market capitalization $43.8 million. The company planned to submit a compliance plan; failure to meet applicable cure periods could lead to suspension or delisting and impair trading liquidity and access to equity financing.
- Commitments included $1.0 million for contracted drilling services through May 2016 and up to $5.9 million for gas transportation and treating through July 2019. Management said ordinary-course litigation was not expected to have a material effect. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress on the NYSE compliance plan, cure periods, and any effect on the stock’s listing and financing access.
- Realized oil and gas prices, production trends, and whether the planned Haynesville drilling program and spending are maintained.
- Cash generation, asset-sale proceeds, revolver availability, covenant compliance, and the ability to meet substantial fixed-rate debt and interest obligations.
- Completion and accounting effects of the post-quarter debt retirements, including shares issued, cash paid, and the reported gain.
- Potential additional property impairments and the valuation and sale status of South Texas assets held for sale.