Business context and reporting period
Comstock Resources, Inc. is an oil and natural gas producer. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the same periods of 2020. Unless otherwise noted, amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Oil and gas sales | $511.2 million | $178.0 million | $1,195.4 million | $583.4 million |
| Operating income | $295.7 million | $12.4 million | $602.0 million | $60.3 million |
| Net loss | $288.3 million | $126.5 million | $602.1 million | $134.3 million |
| Net loss available to common stockholders | $292.7 million | $130.9 million | $615.2 million | $160.9 million |
| Loss per share, basic and diluted | $1.26 | $0.57 | $2.66 | $0.77 |
| Cash from operating activities | Not separately presented for quarter | $618.6 million | $390.0 million | |
| Cash capital expenditures | Not separately presented for quarter | $508.1 million | $332.6 million |
Operating margin, calculated as operating income divided by oil and gas sales, was about 57.9% in Q3 2021 and 50.4% for the first nine months. Net losses were driven principally by derivative losses and, year to date, a debt-retirement charge.
Material changes and financial position
- Q3 sales rose 187% year over year, primarily reflecting higher realized commodity prices and 26% higher natural gas production. Average natural gas prices increased to $3.79/Mcf from $1.64; oil prices rose to $66.11/Bbl from $27.20. Nine-month sales rose 105%.
- Nine-month natural gas production was 366.3 Bcf versus 341.8 Bcf; oil production declined to 1.034 million barrels from 1.168 million. Q3 natural gas production was 128.9 Bcf and oil production was 346,000 barrels.
- At September 30, cash was $27.8 million; current assets were $309.6 million and current liabilities were $1,063.5 million. The resulting negative working capital of about $753.9 million chiefly reflects $627.2 million of current derivative liabilities.
- Long-term debt carrying value was $2.801 billion, versus $2.517 billion at year-end 2020. Total liabilities were $4.057 billion and stockholders’ equity was $655.3 million. The company had $425 million drawn on its $1.4 billion borrowing base and reported compliance with facility covenants.
- Operating cash flow increased to $618.6 million, while cash capital expenditures were $508.1 million; cash and cash equivalents decreased $2.4 million from year-end to $27.8 million.
Management commentary, outlook, risks and unusual items
- Derivative losses were $510.3 million in Q3 and $756.0 million for the nine months, largely reflecting fair-value changes as commodity prices rose. Cash settlements reduced realized prices: year-to-date natural gas averaged $2.72/Mcf and oil $54.24/Bbl including settlements, compared with unhedged averages of $3.10/Mcf and $59.55/Bbl.
- In March and June, Comstock issued $1.25 billion of 6.75% notes due 2029 and $965 million of 5.875% notes due 2030 to refinance existing notes. Repurchases and redemption generated a $352.6 million early-debt-retirement loss in the first nine months. Q3 interest expense declined 22% year over year to $50.0 million; nine-month interest expense was $170.6 million.
- Management expected to spend a further $115–$135 million in the final three months of 2021 on drilling, completions and other development. It planned to fund future development and exploration with operating cash flow, but cautioned that changed assumptions or circumstances could require additional financing, which may not be available on acceptable terms.
- After quarter-end, Comstock agreed to sell certain Bakken wells for $154 million cash, subject to adjustments and customary closing conditions. The sale was expected to close in Q4 2021; management estimated a pretax loss of $150–$160 million.
- Commodity prices are a significant risk. At September 30, natural gas hedges included swaps, collars and counterparty swaption rights; the filing estimates that a 10% gas-price increase would reduce the fair value of gas swaps and collars by approximately $125.0 million, while a 10% decrease would increase it by approximately $92.5 million. Management notes these sensitivities exclude the offsetting effect on physical sales.
- Federal and state net operating loss carryforwards were $960.3 million and $1.5 billion, respectively, but use is constrained, including by ownership-change limits. The company estimated $775.2 million of federal and $1.2 billion of state NOLs would expire unused. It also disclosed a minimum $19.2 million annual commitment for 2022–2024 under a pressure-pumping agreement.
- Management concluded disclosure controls were effective at September 30, 2021 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of derivative losses and liabilities reflects noncash fair-value movements versus cash settlements, and how hedge positions affect future realized prices.
- Liquidity and covenant headroom, including the impact of large current derivative liabilities and any subsequent borrowing-base changes.
- Completion, proceeds, adjustments and final accounting loss for the Bakken asset sale.
- Execution of the remaining 2021 capital program and its funding from operating cash flow.
- Actual debt-refinancing costs, interest burden and the usability or expiration of tax-loss carryforwards.