Comstock Resources, Inc. — Q2 2022 Form 10-Q
Business context and period. This unaudited filing covers the three and six months ended June 30, 2022, with comparisons to 2021. Comstock is primarily a natural gas producer operating in the Haynesville and Bossier shale areas. It also reports gas-services revenue, including resale of purchased gas and pipeline and treating services. In April 2022, the company acquired a 145-mile pipeline, a treating plant and undeveloped deep rights on approximately 60,000 net acres in East Texas for $35.6 million.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $946.3 million | $343.7 million | $1,515.7 million | $684.2 million |
| Operating income | $649.1 million | $146.5 million | $989.8 million | $306.2 million |
| Net income (loss) attributable to common stockholders | $372.5 million | $(184.1) million | $256.8 million | $(322.5) million |
| Diluted earnings (loss) per share | $1.36 | $(0.80) | $0.96 | $(1.39) |
| Operating margin | 68.6% | 42.6% | 65.3% | 44.8% |
Revenue includes gas-services revenue of $84.9 million in Q2 and $129.5 million in the first half of 2022; there was none reported in the 2021 comparable periods. Natural gas sales were $858.8 million in Q2, versus $321.5 million a year earlier. Q2 gas production was essentially flat at 124.0 Bcf, while the average realized gas price rose to $6.93/Mcf from $2.59. Oil production and sales declined substantially after the October 2021 sale of the Bakken properties.
- Cash flow: First-half operating cash flow was $685.9 million, compared with $385.6 million. Investing activities used $515.4 million, primarily for capital expenditures; financing activities used $169.0 million. Cash increased $1.6 million to $32.3 million. Operating cash flow less cash capital expenditures was approximately $170.5 million; this is a simple calculation, not a company-defined measure.
- Costs and margins: Q2 total operating expenses were $297.1 million. Production and ad valorem taxes increased with higher sales; gathering and transportation costs also rose. DD&A was $119.2 million, or $0.96/Mcfe, broadly consistent with the prior-year quarter.
- Derivatives: The company recorded derivative losses of $72.8 million in Q2 and $510.3 million in the first half. First-half cash settlements were $374.5 million; management reported realized net losses of $257.4 million for Q2 and $374.5 million for the first half. Derivative results can materially affect reported earnings and realized prices.
- Debt and liquidity: Book long-term debt was $2.51 billion at June 30, including $350 million drawn on the bank facility. Cash plus reported unused borrowing capacity provided $1.1 billion of liquidity. The facility had a $1.4 billion borrowing base and matures July 16, 2024; the company was in compliance with its financial covenants. Current liabilities of $964.7 million exceeded current assets of $530.8 million, principally including $318.6 million of current derivative liabilities.
- Other items: The company redeemed its remaining 7.5% notes due 2025 and repurchased $26.1 million principal of its 6.75% notes due 2029. Q2 included a $46.8 million loss on early debt retirement. The Series B preferred stock carries a 10% annual dividend and is convertible into 43.75 million common shares; diluted share count reflects its potential conversion.
Changes, outlook and risks
- First-half natural gas production increased 1% year over year, but the sharp increase in realized gas prices was the principal driver of higher oil-and-gas sales and operating cash flow. The 2021 Bakken sale reduced oil production.
- Capital expenditures were $515.5 million in the first half. Management expected to spend an additional $440 million to $490 million in the second half of 2022, including drilling 42 net 28.9 wells and completing 33 net 27.0 wells. Management said development spending is generally discretionary and expected to be funded from future operating cash flow.
- Natural gas hedges included swaps covering approximately 58.9 Bcf of 2022 production at an average $2.68/MMBtu and collars covering approximately 196.1 Bcf of 2022–2023 production, with an average $2.86 floor and $7.81 ceiling. These hedges may limit realized-price upside and contribute to earnings volatility.
- Management highlighted exposure to volatile oil and gas prices and variable interest rates on the bank facility. Lower commodity prices could weaken cash flow and economically recoverable reserves. The company also disclosed that substantial federal and state net operating loss carryforwards may expire unused because of ownership-change limitations.
- No material litigation accruals were reported, and management did not expect the resolution of disclosed ordinary-course litigation to materially affect financial position, results or cash flows. No proved-property impairments were recorded in the periods presented.
Important facts for investors to verify
- How much of future production is hedged, the timing and cash impact of settlements, and the sensitivity of derivative values to commodity prices.
- Whether planned second-half capital spending and production targets are achieved, and whether operating cash flow funds the program without additional borrowing.
- Available borrowing capacity after future borrowing-base redeterminations, facility covenant headroom, and the July 2024 maturity.
- The extent to which the East Texas acquisition and gas-services activity contribute to recurring revenue and cash flow, given the associated service costs.
- Potential dilution and dividend burden from the convertible preferred stock, and the realizability and expiration risk of tax-loss carryforwards.