Business context and reporting period
Comstock Resources, Inc. is an oil and natural gas producer. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Management attributed production growth primarily to drilling in the Haynesville shale of East Texas and North Louisiana.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Oil and gas sales | $90.7 million | $64.9 million | $196.8 million | $133.2 million |
| Operating income (loss) | $0.9 million | ($12.6 million) | $16.1 million | ($18.3 million) |
| Net income (loss) | ($1.6 million) | ($11.5 million) | $5.7 million | ($17.1 million) |
| Diluted earnings (loss) per share | ($0.04) | ($0.26) | $0.12 | ($0.38) |
- Q2 production was 20.0 Bcfe, up 30%; first-half production was 38.8 Bcfe, up 32%. First-half natural gas volume increased to 36.5 Bcf from 26.9 Bcf, while oil volume decreased to 386 Mbbls from 421 Mbbls.
- Six-month average realized prices were $4.68/Mcf for natural gas and $67.24/barrel for oil, versus $3.81/Mcf and $41.95/barrel in 2009. Prior-year gas prices included hedge gains; Comstock had no derivative instruments outstanding in 2010.
- Six-month operating cash flow was $199.2 million, compared with $69.4 million. Investing cash outflow was $246.9 million, including $258.5 million of capital expenditures; financing cash outflow was $0.2 million. Cash fell to $42.7 million from $90.5 million. Operating cash flow benefited from $48.8 million in income tax refunds.
- At June 30, current assets were $147.1 million and current liabilities $109.8 million. Cash and marketable securities together were $96.2 million. Long-term debt was $468.1 million; stockholders’ equity was $1.059 billion.
- The $850 million revolving facility had a $500 million borrowing base, all available, and no borrowings outstanding. The company reported compliance with its covenants. Debt comprised $172 million of 6⅞% notes due 2012 and $300 million principal of 8⅝% notes due 2017; the latter’s balance-sheet carrying value was $296.1 million.
Material changes versus prior periods
- Revenue rose 40% in Q2 and 48% in the first half, reflecting higher production and stronger realized prices. Operating results improved from losses to income, while first-half net income also benefited from a securities-sale gain.
- Lease operating expense per Mcfe declined 20% in Q2 and 25% in the first half. DD&A per Mcfe also fell, by 13% and 10%, respectively, which management linked to reserve growth. Production taxes and gathering and transportation costs increased; the latter reflected Haynesville production.
- Interest expense increased to $15.4 million from $5.1 million for the first half, primarily due to senior notes issued in October 2009. The company repurchased $3 million principal of 2012 notes at 99% of par.
- Marketable securities were $53.5 million at June 30, versus $96.0 million at year-end. Accumulated other comprehensive income fell to $6.1 million from $30.6 million, largely reflecting changes in the Stone Energy investment’s fair value.
Outlook, risks, contingencies and unusual items
- Management expected 2010 spending of approximately $350 million on developmental and exploratory drilling and an additional $150 million for exploratory acreage. Funding was expected from operating cash flow, cash on hand, asset sales and possible facility borrowings. Management believed available resources would support its current plan, but noted additional capital might be needed if assumptions or plans change.
- Commodity prices are a significant risk. Based on first-half production, management estimated a $1/Mcf natural-gas price change would change cash flow by approximately $35.2 million, and a $1/barrel oil-price change by approximately $0.4 million.
- Contracted drilling commitments were $70.8 million through September 2012; maximum natural-gas transportation commitments were $52.1 million through July 2019. Asset-retirement obligations were $6.8 million. The company said ordinary-course litigation was not expected to materially affect its financial position or results.
- Q2 included a $4.9 million net gain on asset sales: a $5.7 million pretax gain from selling 520,000 Stone Energy shares, partly offset by a $0.8 million loss on other property and equipment. The Stone Energy holding’s reported fair value was $53.5 million at quarter-end.
- Management projected a pretax loss for 2010 and said nondeductible stock compensation reduced the expected tax benefit; the effective tax rate also reflected adjustments related to 2009 net-operating-loss carryback refund claims. The interim statements were reviewed, not audited; the auditor reported no material modifications needed based on its review.
Important facts for investors to verify
- Whether Haynesville production growth, realized commodity prices and unit-cost improvements continue, and how production compares with capital spending.
- Updated capital-spending plans, cash generation, liquidity and borrowing-base determinations, particularly as the credit facility matures in December 2011.
- The valuation and concentration risk of the remaining Stone Energy shares, and the effect of further fair-value changes or sales on earnings and equity.
- Debt repayment and refinancing needs, covenant compliance, and the scale and timing of drilling, transportation and abandonment obligations.
- The filing’s stated commodity-price sensitivities and the tax assumptions underlying management’s expected 2010 pretax loss and tax benefit.