Comstock Resources, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results. Comstock’s operations are focused primarily on natural gas production in the Haynesville shale. Comparisons with 2019 are affected by the July 2019 Covey Park acquisition; 2020 includes Covey Park for the full periods shown.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Oil and gas sales | $178.0 million | $224.4 million | $583.4 million | $479.4 million |
| Operating income | $12.4 million | $76.4 million | $60.3 million | $173.2 million |
| Net income (loss) available to common shareholders | $(130.9) million | $(1.3) million | $(160.9) million | $33.6 million |
| Basic and diluted EPS | $(0.57) | $(0.01) | $(0.77) | $0.26 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $390.0 million | $282.8 million |
- Production and realized prices: Q3 natural gas production was 102.6 Bcf versus 97.2 Bcf; average gas price was $1.64/Mcf versus $1.99. Oil production was 354,000 barrels versus 603,000; average oil price was $27.20/barrel versus $51.24. Including derivative cash settlements, realized prices were $1.95/Mcf for gas and $33.52/barrel for oil in Q3.
- Costs: Q3 DD&A was $99.1 million, up 23% year over year; DD&A per Mcfe rose to $0.95 from $0.80. Nine-month interest expense was $168.8 million, compared with $107.4 million, reflecting the 9¾% notes issued in 2020.
- Cash and liquidity: Cash was $28.3 million at September 30, versus $18.5 million at year-end 2019. Current assets were $149.8 million and current liabilities $380.8 million. The filing says the company complied with its credit-facility covenants; the adjusted current ratio required by the facility was at least 1.0.
- Debt: Principal outstanding was $2.769 billion: $1.650 billion of 9¾% senior notes due 2026, $619.4 million of 7½% notes due 2025, and $500 million under the bank facility. Balance-sheet long-term debt, net of discounts and issuance costs, was $2.508 billion. The facility had a $1.4 billion borrowing base and matures in July 2024.
- Capital spending: Nine-month cash capital expenditures were $332.6 million; MD&A reports capital expenditure activity of $315.7 million, reflecting a different presentation. Operating cash flow exceeded either disclosed capital-spending measure.
Material changes versus the prior comparable period
- Q3 oil and gas sales fell 21%, primarily because of lower commodity prices; higher gas production partly offset the decline. Nine-month sales increased 22%, principally reflecting the full-period contribution of Covey Park, despite lower average realized prices.
- Q3 operating income declined to $12.4 million from $76.4 million. The company recorded a $121.6 million derivative loss, compared with a $24.9 million gain in Q3 2019. Management attributed the 2020 loss to improving future natural gas prices since June 30; realized net gains from the risk-management program were $34.0 million in Q3.
- For the first nine months, derivative instruments produced a $72.0 million accounting loss versus a $31.9 million gain in 2019, while realized net gains were $132.7 million versus $33.4 million. Fair-value movements make reported derivative results volatile.
- In 2020, Comstock issued $800 million principal amount of 9¾% notes and used proceeds to repay bank-facility borrowings. It also issued 41.325 million common shares for net proceeds of $196.5 million and redeemed Series A preferred stock for $210 million plus accrued dividends. Common shares outstanding increased to 232.4 million from 190.0 million at year-end 2019.
Outlook, risks and contingencies
- Management expected to spend a further $150–$170 million in the final three months of 2020 on drilling, completions and other development, including plans for 17 additional wells to be drilled and 22 to be completed. It expected to fund future development from operating cash flow and described capital spending as substantially adjustable.
- COVID-19 and related disruption created uncertainty around commodity demand and prices, personnel, equipment, services and operating restrictions. Management said its natural gas operations had not been adversely affected to that point, while non-operated oil operations were substantially affected by low oil prices.
- Commodity prices remain a key risk. At quarter-end, disclosed hedges included natural gas swaps, collars and swaptions and oil collars. The filing estimates a 10% change in commodity prices would change the fair value of natural gas swaps by $45 million; this could be a gain or loss. The filing also reports a $129.968 million total derivative liability at quarter-end.
- Transportation contracts carry commitments of $21.5 million for 2021, $31.2 million for 2022 and $24.8 million for 2023, with further commitments thereafter. The company reported no material litigation accruals and did not expect pending routine litigation to materially affect its financial position, results or cash flows.
- Use of tax loss carryforwards is subject to Section 382 limitations; management estimated pre-change NOL use would generally be limited to $3.3 million annually, subject to potential increases for recognized built-in gains. Deferred tax assets are subject to valuation allowances.
- Management concluded disclosure controls were effective at September 30, 2020 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How production, commodity prices and derivative settlements affect realized cash margins, and how much of future production is hedged.
- The distinction between derivative cash settlements and fair-value accounting losses, including the effect of swaption counterparties exercising options.
- Debt service and refinancing capacity given the 9¾% notes, facility covenants, borrowing-base redeterminations and relatively low reported cash balance.
- Whether planned capital spending can be funded from operating cash flow under lower-price or weaker-demand scenarios.
- The effect of the Covey Park acquisition on year-over-year comparability, and the consequences of increased common shares and Series B preferred conversion rights.
- Tax asset realizability, NOL restrictions, and the carrying value of oil and gas properties and goodwill under changing commodity-price assumptions.