Comstock Resources, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 26, 2018. Comstock is a U.S. oil and natural gas exploration and production company focused primarily on Texas and Louisiana, with operations concentrated in the Haynesville and Bossier shale formations.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Oil and gas sales | $255.3 million | $175.7 million |
| Operating income (loss) | $(0.2) million | $(183.8) million |
| Net loss | $(111.4) million; $(7.61) per share | $(135.1) million; $(11.52) per share |
| Operating cash flow | $174.6 million | $(23.7) million |
| Capital expenditures | $178.9 million | $59.6 million |
| Cash and cash equivalents, year-end | $61.3 million | $65.9 million |
| Long-term debt, carrying value | $1.11 billion | $1.04 billion |
Fourth-quarter 2017 sales were $73.2 million, operating loss was $24.2 million, and net loss was $42.3 million. The quarter included a $44.0 million proved-property impairment, primarily to reduce South Texas assets held for sale to estimated fair value less selling costs.
Annual production rose to 79.2 Bcfe from 62.0 Bcfe. Natural gas production increased 37% to 73.5 Bcf, while oil production fell 31% to 951 thousand barrels. Average realized prices improved to $2.84/Mcf for gas and $49.02/barrel for oil, from $2.28/Mcf and $38.24/barrel, respectively. Average equivalent price was $3.22/Mcfe. Lease operating expense declined to $0.48/Mcfe from $0.76/Mcfe; DD&A declined to $1.55/Mcfe from $2.26/Mcfe.
Year-end proved reserves were 1,162.3 Bcfe, approximately 96% natural gas, up from 879.7 Bcfe in 2016. The standardized measure of discounted future net cash flows increased to $881.5 million from $429.3 million; this measure is not a market valuation. About 59% of proved reserves were undeveloped. South Texas reserves and properties were classified as held for sale.
Material changes and notable items
- Sales increased 45%, principally from Haynesville drilling, higher gas production, and improved commodity prices. Gas sales rose 70%; oil sales declined.
- Operating cash flow recovered to $174.6 million, but investment cash outflow was $179.0 million. Cash decreased by $4.6 million during the year.
- Interest expense rose 14% to $146.4 million, mainly due to amortization of debt discounts and financing costs related to the 2016 debt exchange. The annual net loss improved, but remained substantial.
- Comstock recorded a $16.8 million derivative gain and received $9.4 million in net cash settlements from derivatives. It also recorded a $17.9 million income tax benefit, including the effect of the Tax Cuts and Jobs Act.
- Total stockholders’ deficit widened to $369.3 million from $271.3 million. The company issued shares in connection with convertible-note conversions; weighted-average shares increased to 14.6 million from 11.7 million.
Debt, liquidity, outlook, and risks
At year-end, principal debt was approximately $1.2 billion, with maturities concentrated in 2019 and 2020. The $50 million revolving credit facility had no borrowings outstanding and matures in March 2019. The company reported compliance with its credit-facility covenants; the minimum current-assets-to-current-liabilities ratio is scheduled to increase from 0.9:1 to 1.0:1 on March 31, 2018. Most debt is secured by substantially all company assets. Convertible notes may dilute shareholders: the filing states that conversion of all outstanding convertible notes at December 31, 2017 would represent 72% of then-outstanding shares. Certain interest may be paid in kind, increasing debt.
Management planned up to $170 million of 2018 development and exploration spending, including drilling 31 horizontal Haynesville wells, completing 14 wells drilled in 2017, and restimulating five existing wells. The plan is discretionary and depends on natural gas prices; management may reduce drilling if conditions weaken. Management stated that cash, operating cash flow, and available revolver capacity were expected to fund planned 2018 operations, while warning that low prices or changed assumptions could require spending cuts or additional financing.
Key risks include volatile oil and gas prices, high leverage and refinancing needs, possible dilution and restrictions on tax-loss utilization from note conversions, reserve-estimation uncertainty, impairment exposure, dependence on successful drilling and access to transportation, and environmental, hydraulic-fracturing, water-availability, and induced-seismicity regulation. The South Texas asset sale was not assured; the company’s $198.6 million held-for-sale carrying value was based on estimated value and bids, not a completed transaction. The filing reports no legal proceedings management believed would materially adversely affect the company.
Important facts for investors to verify
- Progress, timing, and proceeds from the proposed sale of South Texas properties, including whether the estimated $198.6 million value is realized.
- 2018 drilling pace, costs, production performance, and whether operating cash flow covers capital spending and interest.
- Debt maturities, cash versus payment-in-kind interest, covenant headroom, and refinancing options before 2019–2020 maturities.
- Potential dilution from convertible notes and the related effect on the company’s substantial federal and state net operating loss carryforwards.
- Reserve additions, conversion of undeveloped reserves, and sensitivity of reserve values and impairments to commodity prices and development costs.