Comstock Resources, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018. The Jones Contribution closed August 14, 2018, when Comstock issued 88.6 million shares to the Jones Partnerships for Bakken Shale properties. The Jones Group obtained control and approximately 84% ownership. Pushdown accounting created a new accounting basis; the filing cautions that Successor and Predecessor results are not directly comparable.
Financial performance and position
- Successor period, August 14–September 30 (48 days): Oil and gas sales were $70.1 million; operating income was $34.6 million; net income was $13.8 million, or $0.13 per diluted share. Interest expense was $14.8 million and income-tax expense was $3.9 million.
- Predecessor period, July 1–August 13 (42 days): Sales were $32.6 million; operating income was $8.2 million; net loss was $16.9 million, or $1.09 per share. Interest expense was $22.1 million.
- Production and pricing in the Successor period: 17.4 Bcfe produced, including 14.1 Bcf of gas and 542,200 barrels of oil. Average realized prices were $2.58/Mcf for gas and $66.21/barrel for oil; equivalent sales price was $4.04/Mcfe.
- Cash flow: Successor operating cash flow was $3.6 million and investing cash outflow was $50.0 million. Capital expenditures were $75.2 million. Cash and equivalents were $31.8 million at September 30, down from $61.3 million at December 31, 2017; the intervening refinancing and debt repayments materially affected cash balances.
- Debt and liquidity: Debt principal totaled approximately $1.30 billion: $850 million of 9.75% senior notes due 2026 and $450 million drawn under a revolving facility with a $700 million initial borrowing base, maturing in 2023. Carrying-value long-term debt was $1.243 billion. Current assets of $131.5 million were below current liabilities of $180.1 million. The credit facility’s minimum current-ratio covenant of 1.0 and maximum leverage covenant of 4.0-to-1.0 begin with the quarter ending December 31, 2018.
- Pro forma comparison: For the nine months ended September 30, reflecting the Jones Contribution and refinancing as if effective January 1, 2017, sales were $390.4 million and net income was $30.3 million in 2018, versus sales of $318.5 million and net income of $1.4 million in 2017. The 2018 pro forma figure excludes $2.6 million of transaction costs and is illustrative, not actual reported performance.
Material changes and operating developments
- The Jones Contribution added Bakken properties and substantially increased the share count; 105.9 million shares were outstanding at September 30, compared with 15.4 million at December 31, 2017.
- Comstock refinanced its prior debt with the new senior notes and revolving facility, using proceeds and cash on hand to retire previously outstanding notes.
- Comstock sold its producing Eagle Ford properties for $125 million in April 2018 and recorded a $32.7 million loss in the Predecessor period to adjust the carrying value of assets held for sale and retained acreage. It sold part of the remaining undeveloped acreage for $13.7 million in September.
- A July acquisition added North Louisiana and Texas properties for $39.3 million, including 12,000 net acres and producing gas wells. The company also paid $17.9 million to reacquire interests in wells when the strategic drilling venture was terminated.
Outlook, risks and unusual items
- Management expected to spend a further $90 million in fourth-quarter 2018 on drilling and completions. It expected to fund future development from operating cash flow and cash on hand; spending timing was described as substantially discretionary.
- Commodity prices are a key risk. At September 30, hedges covered 9.6 Bcf of gas swaps at $3.00/Mcf, 19.5 Bcf of gas collars with a $2.50 floor and $3.40 ceiling, and 1.17 million barrels of oil collars with a $55 floor and approximately $77.94 ceiling. Derivatives had a net liability fair value of $2.8 million.
- The company reported $349.7 million of goodwill from the Jones Contribution. The purchase-price allocation was preliminary and could change; the first annual goodwill impairment review was planned for October 2019. Management noted that future oil and gas property impairments are possible if prices, reserves, production, or cost assumptions change.
- The ownership change limits use of pre-existing net operating losses; the estimated annual Section 382 limit is $3.3 million, subject to potential increases from recognized built-in gains. Deferred tax assets are subject to valuation allowances.
- Commitments included $16.5 million for contracted drilling services through September 2019 and $1.0 million for gas transportation and treating through July 2019. Management said it did not expect pending ordinary-course litigation to materially affect financial position or results.
- No specific earnings or production guidance was provided. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How the preliminary purchase-price allocation, including goodwill and property values, changes when finalized.
- Liquidity available under the borrowing base, covenant compliance at year-end, and the effect of planned capital spending on cash.
- Production, realized prices, and operating costs after the Bakken assets are included; the short Successor period is not directly comparable with prior periods.
- Interest burden and refinancing terms, including variable-rate exposure and the high coupon on the $850 million notes.
- How commodity prices and hedges affect realized cash flows, and whether Section 382 limits or tax valuation allowances change.