Comstock Resources, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and comparability
Comstock is an oil and natural gas producer, with Haynesville/Bossier natural gas properties and Bakken oil properties. The Jones Contribution in August 2018 brought in the Bakken properties and changed control and accounting basis. The filing labels 2019 results “Successor” and 2018 results “Predecessor” and cautions that they are not comparable; the prior-period business mix also included Eagle Ford assets sold in April 2018.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Oil and gas sales | $128.1 | $61.4 | $255.0 | $134.0 |
| Operating income | $43.6 | $7.7 | $96.8 | $2.6 |
| Net income (loss) | $21.4 | $(34.0) | $35.0 | $(75.9) |
| Diluted earnings (loss) per share | $0.20 | $(2.22) | $0.33 | $(4.99) |
Operating margin was approximately 34% in Q2 and 38% for the first six months of 2019; net margin was approximately 17% and 14%, respectively. These calculated ratios should be interpreted in light of the successor/predecessor comparability limitation.
- Production: Q2 natural gas output was 40.9 Bcf and oil output was 695,000 barrels. Six-month production was 74.1 Bcf of gas and 1.505 million barrels of oil.
- Prices: Q2 average realized prices were $2.25/Mcf for gas and $52.10/barrel for oil; including cash derivative settlements, $2.29/Mcf and $52.12/barrel. Six-month realized prices including settlements were $2.55/Mcf and $48.71/barrel.
- Costs: Q2 DD&A was $46.8 million; lease operating expense was $14.5 million. For the six months, DD&A was $84.4 million and lease operating expense was $29.3 million. Q2 and six-month DD&A rates were $1.04 and $1.01 per Mcfe.
- Cash flow and investment: Six-month operating cash flow was $173.0 million. Cash capital expenditures were $177.8 million, implying approximately $4.8 million of negative operating cash flow less cash capex before other investing and financing activity. Reported capital expenditures were $181.9 million. Cash increased by $23.6 million to $46.7 million.
- Debt and liquidity: June 30 long-term debt had a carrying value of $1,267.4 million, comprising $850 million of 9¾% senior notes due 2026 and $470 million drawn on a $700 million borrowing base facility. Cash was $46.7 million; current assets were $151.4 million and current liabilities $228.6 million. The company reported compliance with its credit-facility covenants.
Changes, outlook, risks, and unusual items
- Revenue and production increased versus reported 2018 periods, but the comparison reflects the addition of Bakken production and the sale of Eagle Ford properties, as well as the changed successor accounting basis. Management states the periods are not comparable.
- Management expected to spend a further $356.4 million in the second half of 2019, including Covey Park activities from July 16, to drill 58 gross (42.1 net) additional wells, complete 31 gross (19.9 net) wells, and fund other development. It expected to fund future activity with operating cash flow and described capital-spending timing as discretionary.
- Subsequent acquisition: On July 16, 2019, Comstock closed its approximately $2.2 billion acquisition of Covey Park. The transaction included cash, newly issued common and convertible preferred shares, assumed $625 million of 7½% notes due 2025, and a new revolving credit facility. The new facility had a $1.5 billion committed borrowing base, of which $1.24 billion was drawn at closing. Preferred shares carry a 10% annual dividend and a $4.00 conversion price. These are post-quarter-end developments and are not reflected in June 30 balances.
- Commodity exposure: Prices are volatile and materially affect results, cash flow, reserves, and access to capital. At June 30, hedges included gas swaps covering 16.2 Bcf at an average $3.00/Mcf, gas collars covering about 37.0 Bcf with a $2.43 floor and $3.47 ceiling, and oil collars covering 1.64 million barrels with a $48.75 floor and $67.36 ceiling.
- Debt and tax considerations: $470 million of pre-acquisition bank debt bore variable rates; management estimated a 100-basis-point rate change would affect interest expense by about $2.3 million. The Jones ownership change limits use of certain tax net operating losses, estimated at $3.3 million annually, subject to potential built-in-gain adjustments. Deferred-tax asset realization remains uncertain.
- Derivative gains contributed $14.7 million to Q2 2019 other income; six-month derivative gains were $7.1 million. The company reported transaction costs of $1.4 million for the six-month period. A $5.9 million acreage sale to a partnership owned by the majority stockholder was offset by a purchase of acreage for the same amount; Comstock also reported a $6.7 million receivable from related partnerships.
- Management said it was not aware of litigation expected to materially affect financial position or results. Disclosure controls were concluded effective as of June 30, 2019; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How Covey Park’s acquisition financing, assumed notes, preferred dividends, and share issuance affect pro forma leverage, interest expense, liquidity, and per-share ownership.
- Whether 2019 production, realized prices, operating costs, and capital spending track management’s second-half plan, particularly after incorporating Covey Park.
- Commodity-price sensitivity and the volume, duration, and economics of the company’s hedges.
- Availability under the borrowing base, covenant calculations, and the effect of variable interest rates on debt service.
- Potential limits on tax-attribute use, related-party balances and transactions, and any revisions to the preliminary Jones Contribution fair-value allocation or goodwill.