Comstock Resources, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unless otherwise indicated, financial amounts below are in millions. Results are presented for continuing operations unless noted.
Business context and reporting period
Comstock is an oil and natural gas producer. On May 14, 2013, it sold its West Texas properties for $823.7 million; those properties are reported as discontinued operations. The sale materially changed the company’s asset base, production mix, cash position and debt.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Oil and gas sales | $111.6 | $97.1 | $314.4 | $291.2 |
| Operating loss | $(9.1) | $(28.8) | $(47.9) | $(41.8) |
| Continuing-operations loss | $(24.0) | $(44.2) | $(70.1) | $(26.1) |
| Net income (loss), including discontinued operations | $(24.0) | $(30.4) | $78.5 | $(21.9) |
| Continuing-operations production | 17.4 Bcfe | 23.0 Bcfe | 53.1 Bcfe | 72.4 Bcfe |
- Q3 oil production rose 30% to 632,000 barrels, while natural gas production fell 32% to 13.6 Bcf. Nine-month oil production rose 17% to 1.615 million barrels; natural gas production fell 32% to 43.4 Bcf.
- Higher oil volumes and improved natural gas prices lifted sales. Average natural gas prices rose 37% in Q3 and 44% for the nine months. Oil prices including realized hedging effects fell 7% in Q3 and 1% for the nine months.
- Q3 continuing-operations interest expense was $20.5 million, up from $15.5 million; nine-month interest expense was $57.3 million, up from $41.2 million. Management cited debt issuance and reduced capitalized interest as factors in the nine-month increase.
- Nine-month net income included $148.6 million from discontinued operations, including a $230.6 million pretax gain on the West Texas sale. Excluding that gain, discontinued operations recorded a $0.9 million net loss.
- Operating cash flow was $205.6 million for the nine months, compared with $225.7 million. Cash provided by continuing operations was $213.3 million versus $194.2 million; management attributed the overall decline primarily to working-capital changes. Investing cash flow was $485.5 million, reflecting divestiture proceeds.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $228.4 million at September 30, 2013, compared with $4.5 million at December 31, 2012. Current assets were $325.2 million and current liabilities were $378.6 million; the current-liability total included $195.6 million of debt classified as current.
- Total debt carrying value, including current maturities, was $883.9 million. The company had no bank-facility borrowings at September 30 and reported $500 million available under its borrowing base. Its $850 million revolving facility matures November 30, 2015; the company said it was in compliance with its covenants.
- After quarter-end, on October 15, Comstock redeemed the 2017 senior notes. The $310.2 million redemption was funded with $210.2 million of cash and bank-facility borrowings. The company expected to recognize an approximately $17.9 million pretax early-extinguishment loss in Q4.
- Nine-month capital expenditures were $248.6 million for continuing operations and $91.5 million for discontinued operations. Operating cash flow and capital expenditures for continuing operations imply negative cash flow after those expenditures, before other items and financing.
- Comstock paid $12.0 million in dividends during the first nine months and repurchased 631,096 shares for $9.2 million under a $100 million authorization.
Outlook, risks and unusual items
- For 2013, management expected approximately $345 million of drilling expenditures and an additional $140 million for leasehold acquisitions, funded with operating cash flow and bank-facility borrowings. It stated that cash flow, asset-sale proceeds, cash on hand and available borrowings were expected to fund the current business plan, while noting that changed or inaccurate assumptions could require additional capital.
- Commodity prices are a significant risk. Based on nine-month continuing production, a $0.10/Mcf change in natural gas prices would change cash flow by about $4.2 million, and a $1/barrel oil-price change by about $1.6 million, before hedging effects.
- Oil swaps covered 540,000 barrels for October–December 2013 at a weighted-average $98.67/barrel and 1.985 million barrels for 2014 at $96.31/barrel. Their net fair value was a $0.3 million liability at quarter-end; derivative gains and losses affected reported results.
- Exploration expense rose to $15.3 million for the nine months from $2.8 million, primarily because of impairments of unevaluated leases expected to expire before drilling. The company also reported a $2.0 million settlement with a joint-interest property owner.
- Commitments included $50.3 million for contracted drilling services and maximum natural-gas transportation and treating commitments of $21.1 million. The company reported a $17.1 million asset-retirement obligation.
- Management reported that a control framework had been implemented to address the prior-year material weakness involving accounting for oil-price derivatives. The CEO and CFO concluded disclosure controls were effective at September 30, 2013; the filing said there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the West Texas divestiture and lower gas production affect ongoing production, reserves and revenue comparability.
- The post-quarter funding and resulting debt, cash and interest costs after redemption of the 2017 notes.
- Whether projected 2013 drilling and leasehold spending, and the stated liquidity sources, remain consistent with actual cash generation and borrowing-base availability.
- The effect of commodity prices and hedge settlements on realized revenue and derivative valuations.
- Progress in sustaining controls over derivative accounting and the outcome of state tax reviews and other contingencies.