CRK

Comstock Resources, Inc. - 10-Q Summary (Quarter Ended Sept 30, 2009)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Comstock Resources, Inc., an independent oil and natural gas exploration and production company. The report covers the three and nine months ended September 30, 2009. The company's operations are presented as continuing operations, while its former offshore subsidiary, Bois d'Arc Energy, Inc., was sold in August 2008 and is reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Oil and gas sales decreased 59% in Q3 2009 and 57% in the first nine months of 2009 compared to the same periods in 2008. This was driven by a 64% drop in average realized natural gas prices and a 45% drop in crude oil prices in Q3.
• Profitability Shift: The company reported a net loss from continuing operations in 2009, contrasting with significant net income in 2008. The 2008 results included $169.9 million in income from discontinued operations (Bois d'Arc Energy sale), which did not occur in 2009.
• Production Increase: Despite price declines, production increased 13% in Q3 2009 and 3% in the first nine months of 2009, primarily due to drilling activity in the Haynesville shale formation.
• Expense Management: Operating expenses decreased 26% in Q3 and 24% in the nine-month period, largely due to lower production taxes resulting from lower commodity prices.
• Debt Position: Long-term debt increased from $210.0 million at year-end 2008 to $340.0 million at Sept 30, 2009, reflecting increased borrowings under the bank credit facility to fund capital expenditures.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: Management expects to spend approximately $355.0 million on development and exploration projects for the full year 2009, funded by operating cash flow, cash on hand, and borrowings.
• Subsequent Event (Debt Issuance): On October 9, 2009, the company issued $300.0 million of 8.5% senior notes due 2017. Net proceeds of $289.2 million were used to repay borrowings under the bank credit facility.
• Market Risk: Financial results are highly dependent on natural gas and oil prices. A $1.00 change in natural gas price would impact cash flow by approximately $37.1 million based on nine-month production volumes.
• Liquidity: The company maintains a $850.0 million revolving credit facility. As of Sept 30, 2009, the borrowing base was $550.0 million with $385.0 million available. The company was in compliance with all financial covenants.
• Contingencies: The company has commitments for contracted drilling services totaling $101.8 million and natural gas transportation agreements totaling $37.5 million.

Key Facts for Investor Verification

• Verify the impact of the October 2009 senior note issuance on the company's leverage ratios and interest expense for the remainder of 2009 and 2010.
• Confirm the current borrowing base availability under the credit facility, as it is subject to semiannual redetermination based on commodity prices and production performance.
• Assess the sustainability of the 13% production increase in Q3 2009 given the significant decline in commodity prices and the associated reduction in operating cash flow.
• Review the valuation of the $86.7 million investment in Stone Energy Corporation common stock (marketable securities) and its classification as available-for-sale.
• Monitor the company's ability to meet its $355 million full-year capital expenditure plan given the reduced cash flow from operations.