Comstock Resources, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context and results
Comstock is primarily a natural gas producer, with operations focused on the Haynesville and Bossier shale areas. Third-quarter natural gas production was 128.9 Bcf, essentially unchanged from a year earlier. Oil production fell substantially after the October 2021 sale of the Bakken properties. The company also reports gas-services activity, including gas resale and gathering and treating services; it acquired a pipeline and treating plant in April 2022.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1,190.0 | $511.2 | $2,705.7 | $1,195.4 |
| Operating income | $771.1 | $295.7 | $1,760.9 | $602.0 |
| Net income (loss) | $355.6 | $(288.3) | $621.1 | $(602.1) |
| Net income (loss) available to common stockholders | $351.2 | $(292.7) | $608.0 | $(615.2) |
| Cash from operating activities | Not provided quarterly in this filing excerpt | $1,204.5 | $618.6 | |
| Capital expenditures and acquisitions, cash basis | Not provided quarterly in this filing excerpt | $768.3 | $508.1 |
- Q3 diluted EPS was $1.28 (basic EPS $1.50); nine-month diluted EPS was $2.24 (basic EPS $2.61). Prior-year diluted EPS was a loss of $1.26 for Q3 and $2.66 for nine months.
- Operating margin, calculated as operating income divided by revenue, was approximately 64.8% in Q3 and 65.1% for the first nine months. Gas-services revenue and related expense were $193.1 million and $181.8 million in Q3, and $322.6 million and $305.3 million for nine months.
- Natural gas sales were $995.0 million in Q3 and $2,376.8 million for nine months. Average gas sales prices rose to $7.72/Mcf in Q3 and $6.46/Mcf for nine months, from $3.79 and $3.10, respectively. Average production volumes were broadly flat year over year.
- Derivative losses were $271.3 million in Q3 and $781.7 million for nine months. Cash settlements on derivatives reduced realized gas prices by $2.36/Mcf in Q3 and $1.84/Mcf for nine months. These hedge effects substantially offset higher market prices.
- Interest expense was $41.4 million in Q3 and $132.2 million for nine months. Nine-month results included a $46.8 million loss on early debt retirement.
- At September 30, cash was $38.6 million; total current assets were $708.8 million and current liabilities were $1,091.5 million. Long-term debt on the balance sheet was $2,261.7 million; disclosed debt principal was approximately $2.289 billion, including $100 million drawn on the bank facility. The filing reports $1.3 billion of liquidity, including cash and unused bank borrowing capacity.
Material changes versus prior periods
- Revenue nearly doubled year over year in both Q3 and the first nine months, principally because of higher natural gas prices, rather than material production growth.
- Operating cash flow increased 95% to $1.204 billion for the first nine months, primarily reflecting higher realized natural gas prices. Receivables and accounts payable also rose substantially from year-end, affecting working capital.
- Cash capital spending increased to $768.3 million from $508.1 million, reflecting greater drilling and completion activity, acreage purchases, and the pipeline and treating-plant acquisition.
- Comstock redeemed all $244.4 million principal of its 7.5% notes due 2025 in May 2022 and repurchased $26.1 million principal of its 6.75% notes due 2029 in June. It had $100 million outstanding on its credit facility at quarter-end, versus $235 million at year-end 2021.
- Operating lease right-of-use assets increased to $99.6 million from $6.5 million at year-end, primarily reflecting the natural-gas-powered fracturing fleet lease and other lease activity.
Outlook, risks and unusual items
- Management expected to spend a further $225 million to $275 million in the final three months of 2022 for drilling, completions and other development activity. It expected to fund future development largely from operating cash flow and described most future capital spending as discretionary. The filing does not provide a broader earnings or production forecast.
- At September 30, hedge positions included natural gas swaps covering about 29.4 Bcf of 2022 production at an average $2.68/MMBtu, and collars covering about 162.5 Bcf of 2022–2023 production with average floor and ceiling prices of $2.91 and $8.62/MMBtu. Derivative fair-value liabilities were $285.7 million. Management cautioned that commodity price changes can materially affect results and reserves.
- The company had a $1.4 billion committed borrowing base, maturing July 16, 2024, secured by substantially all company and subsidiary assets. It was in compliance with its financial covenants at quarter-end. The facility restricts, among other things, additional debt and cash dividends.
- A July 2022 fracturing-services agreement provides exclusive use of a natural-gas-powered fleet for three years, with a minimum commitment of $19.2 million per year. The company also disclosed $16.0 million of expected future payments for contracted drilling services.
- Federal and state net operating loss carryforwards were $909.9 million and $1.5 billion, respectively, but Section 382 limitations constrain utilization. Management estimated $767.3 million of federal and $1.2 billion of state NOLs may expire unused, and maintained valuation allowances on deferred tax assets.
- Management reported no material accrued litigation contingencies and no impairment of proved oil and gas properties in the periods presented. On October 31, 2022, the board authorized a $0.125-per-share common dividend, payable to holders of record December 1, 2022.
Important facts for investors to verify
- How much of the revenue and cash-flow improvement reflects sustainable realized pricing versus market volatility, and how future hedge settlements affect realized prices.
- Whether planned drilling and completion spending, production levels, and the acquired gas-services assets generate adequate returns and operating cash flow.
- Debt principal, upcoming maturities, interest exposure, borrowing-base redeterminations, covenant headroom, and compliance with restrictions on dividends and other financing actions.
- The financial and operational effects of the fracturing-fleet and other lease commitments, and whether working-capital growth—particularly receivables—is collected as expected.
- The realization and expiration risk of tax NOLs, and the potential for future impairment if reserve estimates, costs, or long-term commodity-price assumptions change.