Comstock Resources, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. This is an annual filing; it also provides fourth-quarter results. Amounts are U.S. dollars unless stated otherwise.
Business context and reporting period
Comstock is an independent oil and natural gas exploration and production company, operating primarily in East Texas/North Louisiana, South Texas, and West Texas. Its strategy shifted toward oil development as natural gas prices weakened, particularly through Eagle Ford and West Texas drilling.
At year-end, proved reserves were 711.9 Bcfe, approximately 67% natural gas and 33% oil; 62% were developed. Average 2012 production was 263.3 MMcfe/day. The company operated 90% of its proved reserve base.
Financial and operating metrics
| Metric | FY 2011 | FY 2012 |
|---|---|---|
| Oil and gas sales | $434.4 million | $431.9 million |
| Total revenue, including property-sale gains | $434.4 million | $456.2 million |
| Operating loss | $41.3 million | $131.7 million |
| Net loss | $33.5 million | $100.1 million |
| Loss per share | $0.73 | $2.16 |
| Cash from operating activities | $284.9 million | $262.2 million |
| Cash used in investing activities | $952.1 million | $383.7 million |
| Capital expenditures | $1,047.7 million | $550.6 million |
- Production was 96.3 Bcfe in 2012, up 1% from 2011. Oil production rose 175% to 2.309 million barrels; natural gas production fell 9% to 82.5 Bcf.
- Average realized oil price was $96.95/barrel, or $101.18 including hedging gains; natural gas averaged $2.52/Mcf, down 36%. Equivalent realized price including hedging was $4.58/Mcfe.
- Lease operating expense increased to $60.6 million, or $0.63/Mcfe; DD&A rose to $365.3 million, or $3.83/Mcfe. Exploration expense was $61.4 million, including $61.3 million of unevaluated leasehold impairments. Proved-property impairments were $25.4 million.
- Year-end cash was $4.5 million; current assets were $77.1 million versus current liabilities of $139.1 million. Total assets were $2.57 billion and stockholders’ equity was $933.5 million.
- Total debt was $1.324 billion, up from $1.197 billion. Debt included $440 million drawn on the revolving facility and three senior-note issues of $300 million each. The facility’s year-end borrowing base was $570 million, with $130 million available. The company reported compliance with its covenants.
- Proved reserves fell from approximately 1.31 Tcfe at year-end 2011 to 711.9 Bcfe at year-end 2012. The standardized measure of discounted future net cash flows declined from $1.113 billion to $784.2 million; the non-GAAP PV-10 value was $1.027 billion.
Material changes versus the prior comparable period
- Oil-focused drilling materially increased oil output, but lower gas prices and reduced gas production left oil and gas sales slightly lower year over year.
- Net loss widened to $100.1 million from $33.5 million. Higher DD&A, impairment and exploration expense, and interest expense were key pressures. Results also included gains from property sales ($24.3 million), marketable-security sales ($26.6 million), and oil derivatives ($9.8 million realized and $11.5 million unrealized).
- Natural gas proved undeveloped reserves declined by about 460 Bcf, primarily because lower year-end gas prices rendered reserves uneconomic. Total proved-reserve revisions included a 531 Bcf reduction in natural gas.
- Debt increased, while cash from operations declined by $22.7 million. Investing outflows and capital spending were substantially lower than in 2011, largely reflecting the prior year’s major property acquisitions.
- Fourth-quarter 2012 revenue was $106.6 million and net loss was $78.2 million, or $1.68 per share; the fourth quarter accounted for most of the full-year loss.
Outlook, risks, contingencies, and unusual items
- For 2013, management budgeted approximately $420 million for exploration and development plus $25 million for lease acquisitions. The plan was to drill 85 wells, primarily oil targets: 42 Eagle Ford wells, 33 West Texas wells, and 10 Haynesville/Bossier gas wells. Management stated activity could change with commodity prices.
- Management expected operating cash flow and available credit to fund the current business plan, but noted that weaker prices or changed assumptions could require additional capital. Natural gas price weakness could reduce cash flow, reserves, borrowing capacity, and the economics of drilling.
- The company hedged 2.16 million barrels of expected 2013 oil production at a fixed WTI price of $98.67/barrel. These swaps had a year-end fair value asset of $11.7 million. The filing estimates that a $1/barrel oil-price change would affect annual cash flow by about $0.6 million and a $0.10/Mcf gas-price change by about $8.0 million, based on 2012 production.
- Control weakness and restatement: Comstock determined that its documentation for cash-flow hedge accounting was not timely and did not satisfy ASC 815 requirements. It restated its first-, second-, and third-quarter 2012 financial statements, moving derivative fair-value changes and realized derivative results into earnings rather than hedge-related accumulated other comprehensive income or oil and gas sales. Management identified a material weakness in internal control over financial reporting and concluded disclosure controls were ineffective at year-end. Ernst & Young issued an adverse opinion on internal control, while its opinion on the financial statements was unqualified.
- Other significant risks include commodity-price volatility, reserve-estimation uncertainty, drilling and completion risks, hydraulic-fracturing regulation, environmental compliance, customer and transportation concentration, and substantial debt. Future development costs for proved undeveloped reserves were estimated at $1.068 billion.
- Management reported no legal proceedings expected to have a material adverse effect and no material litigation accrual. The company paid no dividends and did not expect to pay them in the foreseeable future.
Important facts for investors to verify
- Review the restated 2012 quarterly statements, derivative accounting disclosures, and the status and effectiveness of remediation controls.
- Assess borrowing-base availability, covenant headroom, debt service needs, and the company’s ability to fund its 2013 capital program with limited cash on hand.
- Evaluate whether planned oil drilling can replace production and support reserve growth, and how much the reserve decline reflects gas-price assumptions versus underlying well performance.
- Check the sensitivity of reserve value, impairments, and liquidity to commodity prices, including the 2013 hedge terms and transportation commitments.
- Compare the disclosed 2013 budget and well plan with subsequent spending, drilling results, production, and actual financing needs.