Comstock Resources, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Comstock is an oil and natural gas producer; management attributed production growth mainly to Haynesville and Bossier shale development and resumed well completions. Dollar amounts below are in millions unless otherwise noted.
Financial and operating highlights
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Oil and gas sales | $119.4 | $79.7 | $319.9 | $276.5 |
| Net income (loss) | $1.3 | $(4.7) | $7.7 | $1.0 |
| Diluted EPS | $0.03 | $(0.10) | $0.16 | $0.02 |
| Operating income | $12.1 | $2.1 | $12.2 | $17.4 |
| Operating margin | 10.1% | 2.6% | 3.8% | 6.3% |
Production and pricing. Q3 production was 26.2 Bcfe, up 53%; nine-month production was 70.1 Bcfe, up 25%. Q3 realized gas price was $4.09/Mcf (down 4% year over year) and oil was $87.55/Bbl (up 35%). For nine months, realized gas price was $4.09/Mcf (down 10%) and oil was $92.59/Bbl (up 39%). Average Q3 production of 285 MMcfe/day was 8% above Q2. Haynesville and Bossier output averaged 200 MMcf/day in Q3, versus 85 MMcf/day a year earlier.
Costs and earnings drivers. Q3 DD&A rose 66% to $77.5 million; nine-month DD&A rose 30% to $212.5 million, reflecting higher production and higher DD&A rates. Gathering and transportation costs increased with shale output. Lease operating cost per Mcfe declined to $0.47 in Q3 and $0.52 for nine months, attributed partly to the 2010 sale of higher-cost Mississippi properties. Nine-month exploration expense included $9.8 million of leasehold impairments. Earnings included a $32.2 million nine-month pretax gain on sales of Stone Energy shares, versus $5.7 million in 2010; Q3 gain was $2.5 million. Thus, reported net income benefited materially from investment-sale gains, while nine-month operating income declined.
Cash flow and investment. Nine-month operating cash flow was $217.5 million, down from $249.2 million, in part because 2010 included a $48.8 million income-tax refund and working-capital movements differed. Investing cash outflow was $440.5 million, including $489.6 million of cash capital expenditures; management reports accrual-basis capital expenditures of $496.1 million. Financing provided $225.8 million, including $520.0 million of borrowings and $287.0 million of debt repayments. Cash ended at $4.5 million, compared with $1.7 million at year-end 2010.
Debt and liquidity. Long-term debt was $746.8 million at September 30, 2011, versus $513.4 million at December 31, 2010. Debt comprised $150 million drawn on the credit facility, $296.8 million carrying value of 8 5/8% notes due 2017, and $300 million of 7 3/4% notes due 2019. Comstock issued $300 million of 2019 notes and redeemed $172 million principal of 6 7/8% notes due 2012, recording a $1.1 million extinguishment loss. The $850 million revolving facility had a $500 million borrowing base at quarter-end, with $350 million available; the borrowing base increased to $550 million effective October 31. Current assets were $89.7 million and current liabilities $153.4 million; the company reported compliance with its covenants, including the current-assets-to-current-liabilities test that counts available facility capacity. It held $31.7 million of Stone Energy securities at quarter-end, with $18.0 million cost basis. No derivatives were outstanding.
Outlook, risks, and contingencies
- Management expected 2011 spending of approximately $575 million on development and exploratory drilling and $125 million on additional acreage. It said operating cash flow, cash on hand, asset-sale proceeds and available borrowings were expected to fund the plan, but additional capital could be needed if assumptions or plans change; access and terms are not assured.
- Commodity prices are a principal risk. The filing estimates that, based on nine-month production, a $1/Mcf change in natural gas price would change cash flow by approximately $66.7 million, and a $1/Bbl oil-price change by approximately $0.8 million. A 100-basis-point interest-rate change was estimated to alter nine-month interest expense by approximately $1.1 million.
- Commitments included $56.1 million for contracted drilling services, $4.5 million of minimum well-completion payments, and maximum natural-gas transportation commitments of $37.5 million. Estimated asset-retirement obligations were $7.2 million. The company said ordinary-course litigation was not expected to have a material effect; two state tax returns were under review, with no material impact expected.
- Management cautioned that interim results are not necessarily indicative of full-year results. The CEO and CFO concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- How much earnings and cash generation are sustainable from operations without Stone Energy share-sale gains?
- Whether production growth and completion activity can continue at planned levels, and how DD&A, gathering and transportation costs evolve.
- Funding needs and leverage relative to the 2011 capital program, borrowing-base redeterminations, and debt maturities and interest costs.
- Exposure to natural-gas prices, including the filing’s stated price sensitivity, and the effect of commodity prices on reserves and borrowing availability.
- Execution and final cost of contracted drilling, completion and transportation commitments, and resolution of tax reviews or other contingencies.