Comstock Resources, Inc. — First Quarter 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed May 4, 2011. Comstock is an oil and natural gas exploration and production company. Unaudited interim statements were reviewed by Ernst & Young, not audited.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Oil and gas sales | $88.0 million | $106.1 million; down 17% |
| Net income; diluted EPS | $2.4 million; $0.05 | $7.3 million; $0.16 |
| Operating income (loss) | $(8.3) million | $15.2 million |
| Operating cash flow | $50.9 million | $124.7 million |
| Capital expenditures, cash basis | $158.1 million | $95.4 million |
| Long-term debt at quarter end | $596.5 million | $513.4 million at Dec. 31, 2010 |
- Production was 19.9 Bcfe, up 6% year over year; average daily production of 222 MMcfe was up 18% from Q4 2010. Haynesville and Bossier output rose 43% year over year to 133 MMcf per day.
- Average realized natural gas price fell 25% to $3.96/Mcf; oil price rose 34% to $89.94/barrel. The average equivalent price declined 21% to $4.42/Mcfe.
- Operating expenses totaled $96.3 million, exceeding revenue and resulting in an operating loss. DD&A was $60.3 million, or $3.01/Mcfe, versus $59.4 million, or $3.15/Mcfe, a year earlier.
- Cash and cash equivalents were $4.2 million and marketable securities were $81.0 million at quarter end. Current assets were $140.9 million versus current liabilities of $161.6 million. The filing states the company complied with its credit-facility covenants.
- Cash flow less cash capital expenditures was approximately negative $107.2 million. Operating cash flow fell partly because Q1 2010 included a $48.8 million income tax refund.
Changes, financing, and unusual items
- Lower gas prices drove the sales and earnings decline, partly offset by higher production and oil prices. Lower operating costs reflected the prior-year sale of higher-cost Mississippi properties.
- Q1 2011 net income included a $21.2 million pretax gain from selling about 1.4 million Stone Energy shares. The remaining 2.426 million shares had a reported fair value of $81.0 million; their cost basis was $22.3 million. The gain materially supported reported pretax income of $3.0 million despite the operating loss.
- Exploration expense included a $9.5 million impairment of unevaluated acreage expected to expire before drilling. The company reported no impairment of producing oil and gas properties in Q1 2011.
- Comstock issued $300 million of 7.75% senior notes due 2019 and redeemed $172 million principal amount of 6.875% notes due 2012, recording a $1.1 million early-extinguishment loss. It also had $300 million of 8.375% notes due 2017. Total reported debt was $596.5 million. The filing describes bank borrowings during the quarter but reports none outstanding at quarter end.
- Management expected to spend about $570 million on development and exploratory drilling in 2011 and another $40 million on exploratory acreage. It expected to fund the program with operating cash flow, asset-sale proceeds, and borrowings, and believed available resources sufficient under its current plan; additional capital could be needed if plans or assumptions change.
Outlook, risks, and commitments
- The $850 million revolving credit facility matures in November 2015. Its borrowing base was $468.8 million at March 31, all available, and increased to $500 million effective April 28, 2011. Availability depends on lender redeterminations and estimates of future property cash flows.
- Commodity prices are a central risk. Based on Q1 production, management estimated that a $1/Mcf change in gas price would change period cash flow by about $19.0 million; a $1/barrel oil-price change would change it by about $0.1 million.
- Contractual commitments included $42.2 million for drilling services, $55.4 million for well completions through 2011, and maximum natural gas transportation commitments of $42.1 million through July 2019. Estimated asset-retirement obligations were $6.8 million.
- Management cited uncertainty in commodity prices, reserve economics, credit-facility borrowing-base determinations, and potential access to additional capital. Litigation was described as arising in the normal course, with no expected material effect; two state tax returns were under review, also not expected to have a material effect.
- No specific production or commodity-price guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether production growth and the planned 2011 drilling program translate into sustained volumes and cash flow, particularly given weaker gas prices.
- How much reported earnings depended on the Stone Energy sale gain, and the value and disposition of the remaining investment.
- Quarter-end bank-facility borrowings and availability, reconciling the reported quarterly borrowing and repayment cash flows with the filing’s statement that no facility borrowings were outstanding at quarter end.
- Funding needs and liquidity after planned capital spending, debt service, and the disclosed drilling, completion, and transportation commitments.
- Future borrowing-base redeterminations, debt covenant headroom, and any developments in the state tax reviews or other contingencies.