Comstock Resources, Inc. — 2012 Q2 Form 10-Q
Business context and reporting period. Comstock is an oil and natural gas producer. This unaudited filing covers the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
- Revenue: Q2 oil and gas sales were $104.7 million, down 7% year over year; reported total revenue was $125.0 million, including a $20.3 million gain on oil and gas property sales. First-half oil and gas sales were $215.0 million, up 7%; total revenue was $242.1 million, including $27.1 million of property-sale gains.
- Production and prices: Q2 production rose 6% to 25.4 Bcfe; oil production increased to 583,000 barrels from 159,000, while natural gas production declined 5%. Average realized gas price fell 52% to $2.03/Mcf; oil price was $98.70/barrel before hedging. First-half production increased 16% to 50.8 Bcfe.
- Profitability: Q2 operating loss was $4.1 million and net loss was $10.3 million ($0.22 per diluted share), versus net income of $3.9 million ($0.08 per share) in Q2 2011. First-half operating loss was $2.6 million and net loss was $3.4 million ($0.07 per share), versus net income of $6.4 million ($0.13 per share) in 2011. Q2 DD&A was $90.1 million, or $3.58/Mcfe; the filing does not present a single conventional operating-margin measure.
- Cash flow and investment: First-half operating cash flow was $141.9 million, compared with $117.9 million in 2011. Investing cash flow was negative $164.6 million, including $348.3 million of cash capital expenditures and $183.8 million of asset-sale proceeds. Financing cash flow was positive $17.7 million. Accrual-basis capital expenditures were $331.6 million.
- Debt and liquidity: June 30 cash was $3.5 million; marketable securities were $15.2 million. Current assets of $86.1 million were below current liabilities of $176.7 million. Long-term debt was $1,223.2 million, including $340.0 million drawn on the credit facility. The facility borrowing base was $569.3 million, with $229.3 million available. The company reported covenant compliance.
Material changes versus the prior comparable period
- Lower natural gas prices drove Q2 oil and gas sales down despite higher production, particularly sharply higher oil volumes. First-half sales grew as production and oil prices rose, partly offset by lower gas prices.
- Q2 DD&A increased 21% and first-half DD&A increased 25%, reflecting higher production and per-unit depletion rates. The company reported a $5.4 million impairment of oil and gas properties in the first half; none was reported in first-half 2011.
- Interest expense rose to $14.5 million in Q2 and $27.8 million in the first half, largely reflecting higher borrowings. In June, Comstock issued $300 million of 9.5% senior notes due 2020 and used proceeds to reduce credit-facility borrowings.
- First-half results included $26.6 million of gains from Stone Energy share sales and $27.1 million of gains on property sales. Comstock held 600,000 Stone Energy shares worth $15.2 million at June 30.
Outlook, management commentary, risks and unusual items
- Management expected to spend approximately $475 million on developmental and exploratory drilling during 2012, funded with operating cash flow and asset-sale proceeds. It said current cash, operating cash flow, asset-sale proceeds and available credit were expected to fund its plans, while cautioning that changed assumptions could require additional capital.
- On July 30, 2012, after quarter-end, Comstock agreed to allow KKR to participate in development of its 28,000 net Eagle Ford acres. KKR may acquire a one-third working interest in participating wells, paying $25,000 per acre and one-third of well costs; subject to conditions, it committed to acquire acreage for the next 100 wells.
- Natural gas price weakness reduced estimated proved undeveloped gas reserves by approximately 330 Bcf, or 59%, relative to year-end 2011; this represented about 30% of year-end proved reserves. The change increased the per-unit DD&A rate, but management said it did not materially affect the standardized measure of future cash flows or its impairment assessment for the quarter.
- Commodity prices are a central risk. The filing estimates that a $1/Mcf gas-price change would affect cash flow by approximately $42.9 million, based on first-half production. A 100-basis-point change in rates would affect annual interest expense on variable-rate debt by approximately $1.7 million. The borrowing base is subject to periodic redetermination and may be affected by prices and property performance.
- Outstanding commitments included $71.5 million for contracted drilling services, $3.0 million for well completions and up to $31.5 million under natural gas transportation agreements. Management stated that ordinary-course litigation was not expected to materially affect financial position or results; certain state tax returns were under review, with no material effect expected.
Important facts for investors to verify
- How continued low gas prices could affect realized revenue, reserve estimates, depletion expense and the credit-facility borrowing base.
- Whether operating cash flow and asset sales can support the planned 2012 drilling program without additional borrowing or capital raising.
- The impact of the $1.2 billion debt load, including the 9.5% notes, interest expense and refinancing requirements.
- Actual proceeds and retained interests under the property dispositions and the post-quarter KKR participation agreement.
- How much the reported results depended on nonrecurring property-sale and securities gains, versus recurring operating performance.