Comstock Resources, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Comparisons are with Q1 2013 unless otherwise noted. Dollar amounts are in millions except per-share data and where specified.
Business context and results
Comstock is an oil and natural gas exploration and production company. Growth in South Texas Eagleville oil production drove higher sales, while natural gas production declined amid limited drilling on gas properties.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Oil and gas sales | $141.9 | $95.0 |
| Operating income (loss) | $20.2 | $(20.9) |
| Net income (loss) | $1.2; $0.02 diluted EPS | $(27.1); $(0.58) diluted EPS |
| Operating cash flow | $95.7 | $97.4 |
| Capital expenditures, cash-flow statement | $237.5 | $62.1 |
Financial metrics, liquidity, and material changes
- Sales rose 49%: oil sales increased 97% to $90.3 million and natural gas sales increased 5% to $51.6 million. Oil production increased 116% to 935 thousand barrels; natural gas production fell 30% to 10,979 MMcf. Total production was 16,589 MMcfe, down from 18,221 MMcfe.
- Average realized oil price declined 9% to $96.59 per barrel; natural gas price rose 49% to $4.70 per Mcf. Average equivalent sales price increased to $8.55 per Mcfe from $5.21.
- Operating margin was approximately 14.3% of sales, versus an operating loss in the prior-year quarter. DD&A rose 5% to $88.9 million, and DD&A per Mcfe rose 15% to $5.34. Lease operating expense increased 14% to $15.1 million; per-unit cost rose 25% to $0.90 per Mcfe.
- Net income from continuing operations was $1.2 million, versus a $24.5 million loss. Higher oil production, improved gas prices, and lower interest expense helped; higher DD&A and operating costs, and a $7.9 million securities-sale gain in Q1 2013, affected the comparison. Q1 2013 also included a $2.6 million discontinued-operations loss.
- Operating cash flow from continuing operations increased 30% to $95.7 million. Cash from operating activities was less than reported cash capital expenditures, and the company borrowed $150.0 million. Cash declined by $1.2 million to $1.8 million.
- At March 31, current assets were $79.3 million and current liabilities $168.5 million; long-term debt was $949.1 million, up from $798.7 million at year-end 2013. Debt comprised $360.0 million under the revolver and $589.1 million of fixed-rate notes. Cash was limited relative to near-term liabilities, with liquidity also dependent on operating cash flow and available credit.
- Q1 capital expenditures on an accrual basis were $188.3 million for continuing operations, compared with $58.2 million. The cash-flow statement reports $237.5 million of total capital expenditures; the filing text does not provide a clear reconciliation between the cash-flow and accrual figures.
- The company paid a $0.125-per-share dividend, totaling $6.0 million. The 130,232 shares reported as purchased in Q1 were received for employee stock-plan tax withholding, not purchases under the public repurchase plan; $90.8 million remained available under that plan.
Outlook, risks, and contingencies
- Management expected to spend approximately $565 million in 2014 on development and exploratory drilling and lease acquisitions, funded by operating cash flow and revolver borrowings. It stated that current resources and available credit should fund its business plan, but noted additional capital might be needed if plans or assumptions change.
- The $1.0 billion revolving facility matures in November 2018. Its borrowing base was $625 million at March 31, with $265 million available; on May 5, 2014, the borrowing base was increased to $700 million, effective June 15. Availability is subject to lender redetermination and can change with property performance and commodity prices. The company reported compliance with financial covenants at March 31.
- Commodity prices are a major risk. Q1 production sensitivity, after considering oil swaps, was approximately $1.5 million of cash flow for a $0.10/Mcf gas-price change and $0.6 million for a $1/barrel oil-price change. Outstanding oil swaps covered 1,897,500 barrels from April through December 2014 at a weighted-average $96.60 per barrel; their March 31 fair-value liability was $2.7 million. A 10% commodity-price change would alter swap fair value by $11.8 million, potentially as a gain or loss.
- $360 million of debt carried variable rates; management estimated that a 100-basis-point rate change would alter annual interest expense by approximately $0.9 million. The company also had $300 million of 7.75% notes due 2019 and $300 million of 9.5% notes due 2020.
- Commitments included $34.0 million for contracted drilling services and maximum natural-gas transportation and treating commitments of $17.4 million through July 2019. Asset-retirement obligations were $15.1 million, with most related payments expected after 2019. The company said ordinary-course litigation was not expected to materially affect its financial position or results.
- Management identified commodity-price volatility and the possibility that lower prices could reduce economically recoverable reserves and access to capital. It cautioned that quarterly results are not necessarily indicative of full-year results. Disclosure controls were concluded effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether Eagleville oil growth and the higher oil-weighted production mix can be sustained, alongside the decline in natural gas volumes.
- The reconciliation of $237.5 million of cash capital expenditures with $188.3 million of continuing-operations capital expenditures on an accrual basis, and the resulting funding needs.
- The effective June 15 borrowing-base increase, actual revolver availability, and ongoing covenant compliance as drilling spending proceeds.
- Oil-swap settlements, remaining hedge coverage, and exposure to commodity-price changes; also monitor variable-rate debt costs.
- Execution of the 2014 spending plan, future operating cash flow, debt levels, and the capacity to sustain dividends and any future share repurchases.