Business context and reporting period
Comstock Resources, Inc. is a U.S. oil and natural gas exploration and production company. This Form 10-K covers the fiscal year ended December 31, 2011; fourth-quarter results are also summarized below. Operations are concentrated in East Texas/North Louisiana, South Texas and West Texas.
Key financial and operating metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Oil and gas sales | $434.4 million | $349.1 million |
| Operating income (loss) | $(41.3) million | $(12.0) million |
| Net income (loss) | $(33.5) million; $(0.73) per share | $(19.6) million; $(0.43) per share |
| Operating margin | Approximately (9.5)% | Approximately (3.4)% |
| Net margin | Approximately (7.7)% | Approximately (5.6)% |
| Operating cash flow | $284.9 million | $311.7 million |
| Investing cash flow | $(952.1) million | $(440.5) million |
| Cash and cash equivalents at year-end | $8.5 million | $1.7 million |
| Total debt at year-end | $1.197 billion | $513.4 million |
Production rose 31% to 95.6 Bcfe (90.6 Bcf of gas and 838,000 barrels of oil). Average realized prices were $95.73 per barrel of oil and $3.91 per Mcf of natural gas, compared with $68.35 and $4.35, respectively, in 2010. Lease operating expense declined to $0.48 per Mcfe from $0.72; DD&A was $3.00 per Mcfe, up from $2.91.
Year-end proved reserves were 1.311 Tcfe, up from 1.030 Tcfe, with 85% natural gas and 15% oil; 46% were developed. The filing reports pre-tax PV-10 of $1.487 billion and standardized measure of discounted future net cash flows of $1.113 billion. These reserve valuation measures are not market values.
At year-end, current assets were $113.1 million versus current liabilities of $187.2 million, a current ratio of approximately 0.60. The $850 million revolving credit facility had $600 million drawn and $100 million available under the disclosed borrowing base. The company reported compliance with its credit covenants. Debt to total capitalization was approximately 54%.
Fourth-quarter 2011 sales were $114.5 million, operating loss was $53.5 million, and net loss was $41.1 million, or $0.89 per share. Fourth-quarter 2010 sales were $72.7 million, operating loss $29.4 million, and net loss $20.6 million, or $0.45 per share.
Material changes versus the prior comparable period
- Annual sales increased 24%, and production increased 31%, reflecting drilling in the Haynesville/Bossier and Eagle Ford formations and late-year acquisitions. Oil prices strengthened, while realized natural gas prices declined 10%.
- Despite sales growth, the annual net loss widened to $33.5 million from $19.6 million. The 2011 result included $60.8 million of proved-property impairment and $9.8 million of unproved leasehold impairment, partly offset by $35.1 million in pre-tax gains from sales of marketable securities. Interest expense rose 45% to $42.7 million, primarily due to higher debt.
- Capital expenditures increased to $1.048 billion from $545.7 million. Operating cash flow fell by $26.8 million, while debt increased by approximately $683.5 million. The company issued $300 million of 7.75% notes, redeemed $172 million of 2012 notes, and increased revolver borrowings.
- The December Delaware Basin acquisition added oil-weighted reserves and acreage. The filing describes a $345.5 million transaction in its business discussion; the purchase accounting note reports $334.7 million cash consideration, before final purchase-price adjustments. A separate North Louisiana acquisition was also completed in December.
Outlook, risks and unusual items
Management budgeted approximately $458 million for 2012 development and exploration, including 43 Delaware Basin wells, 24 Eagle Ford wells and 17 Haynesville/Bossier wells. The plan prioritizes oil development in response to the low natural gas price outlook; drilling levels may change with commodity prices. The company expects to fund the program primarily with operating cash flow, asset-sale proceeds and credit-facility borrowings.
For 2012, the company hedged approximately 60%–70% of expected oil price exposure: 1.71 million barrels at an average WTI price of $99.46. It also disclosed 1.08 million barrels of 2013 oil swaps at $100.33 per barrel. Natural gas price exposure remains a key sensitivity; management estimated that a $1 per Mcf price change would affect annual cash flow by approximately $89.8 million based on 2011 production.
In January 2012, Comstock adopted a plan to sell certain South Texas and North Louisiana properties, with a December 31, 2011 net carrying value of $91.7 million and associated asset retirement obligation of $0.8 million. Sale proceeds and timing are not stated. Other significant risks include commodity-price volatility, substantial debt and covenant restrictions, reserve-estimation uncertainty, execution and financing of development plans, pipeline and transportation commitments, hydraulic-fracturing regulation, environmental liabilities and potential impairment charges. The company said it had no legal proceedings expected to materially affect financial condition or results. Management and the independent auditor reported effective internal controls; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Review the debt maturities, borrowing-base redetermination terms, covenants and actual liquidity available after year-end.
- Assess whether the $458 million 2012 capital program and planned well count are supportable by cash flow, commodity prices and financing capacity.
- Verify reserve additions, acquisition valuation and the development schedule for the substantial undeveloped reserve base; reserve estimates depend on prices, costs and engineering assumptions.
- Track execution and proceeds from the planned $91.7 million carrying-value asset divestiture, as well as final purchase-price adjustments for the Delaware Basin acquisition.
- Evaluate the impact of natural gas prices, oil hedges, transportation commitments, and the 2011 impairments on future earnings, cash flow and borrowing capacity.