form10qcrkjune3007.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2007

OR
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 0-16741

COMSTOCK RESOURCES, INC.
(Exact name of registrant as specified in its charter)

NEVADA
(State or other jurisdiction of
 
94-1667468
(I.R.S. Employer
incorporation or organization)
 
Identification Number)

5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034
(Address of principal executive offices)

Telephone No.: (972) 668-8800

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ
 
No o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filerþ
 
Accelerated filer o
 
Non-accelerated filer o

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o
 
Noþ

      The number of shares outstanding of the registrant's common stock, par value $.50, as of August 9, 2007 was 44,406,995.
 
 
 


COMSTOCK RESOURCES, INC.

QUARTERLY REPORT

For The Quarter Ended June 30, 2007

INDEX
 
Page
 
PART I. Financial Information
     
       
Item 1. Financial Statements (Unaudited):
     
 
     
Consolidated Balance Sheets -
  June 30, 2007 and December 31, 2006
 
4
 
Consolidated Statements of Operations -
  Three months and six months ended June 30, 2007 and 2006
 
5
 
Consolidated Statement of Stockholders' Equity -
  Six months ended June 30, 2007
 
6
 
Consolidated Statements of Cash Flows -
  Six months ended June 30, 2007 and 2006
 
7
 
Notes to Consolidated Financial Statements
 
8
 
Independent Accountants' Review Report
 
21
 
       
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
22
 
       
Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
28
 
       
Item 4. Controls and Procedures
 
28
 
       
       
     
       
 
29
 
       
Awareness Letter of Ernst & Young LLP
     
Section 302 Certification of the Chief Executive Officer
     
Section 302 Certification of the Chief Financial Officer
     
Certification for the Chief Executive Officer as required by Section 906
     
Certification for the Chief Financial Officer as required by Section 906
     

 
 
 
 
 
 
 
 

 

2


PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)



INTRODUCTORY NOTE

In the third quarter of 2006, Comstock Resources, Inc. ("Comstock" or the "Company") acquired additional interests in Bois d'Arc Energy, Inc. ("Bois d'Arc Energy") and, as a result, began including Bois d'Arc Energy in its financial statements as a consolidated subsidiary.  In accordance with generally accepted accounting principles, Comstock has applied consolidation accounting for its ownership in Bois d'Arc Energy retroactively as of January 1, 2006.  Revenues and expenses have been adjusted beginning January 1, 2006 to include Bois d'Arc Energy as a consolidated subsidiary.  There was no effect on net income as a result of using the consolidation method.  A summary of the impact of consolidating Bois d'Arc Energy on the previously reported financial results for the three and six months ended June 30, 2006 is included in Note 1 to the consolidated financial statements.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
3

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)


   
June 30,
   
December 31,
  
   
2007
   
2006
  
   
(In thousands)
  
                  
ASSETS
                  
Cash and Cash Equivalents                                                                                                                     
 
$
48,882
   
$
10,715
  
Accounts Receivable:
                
Oil and gas sales 
   
68,011
     
56,328
  
Joint interest operations 
   
22,963
     
19,233
  
Other Current Assets    
   
19,630
     
12,552
  
Total current assets              
   
159,486
     
98,828
  
Property and Equipment:
                
Unevaluated oil and gas properties
   
13,009
     
13,645
  
Oil and gas properties, successful efforts method 
   
2,809,677
     
2,511,782
  
Other property and equipment      
   
9,423
     
8,483
  
Accumulated depreciation, depletion and amortization
   
(874,933
)
   
(760,284
) 
Net property and equipment                              
   
1,957,176
     
1,773,626
  
Other Assets                  
   
4,979
     
5,671
  
   
$
2,121,641
   
$
1,878,125
  

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term Debt                                                                                                                     
 
$
7,764
   
$
3,250
 
Accounts Payable                                                                                                                     
   
151,812
     
132,504
 
Accrued Expenses                                                                                                                     
   
10,714
     
16,107
 
Total current liabilities
   
170,290
     
151,861
 
Long-term Debt                                                                                                                     
   
594,000
     
455,000
 
Deferred Income Taxes Payable
   
339,554
     
311,236
 
Reserve for Future Abandonment Costs
   
59,605
     
57,116
 
Minority Interest in Bois d'Arc Energy
   
238,855
     
220,349
 
Total liabilities                                                                                                        
   
1,402,304
     
1,195,562
 
Commitments and Contingencies
               
Stockholders' Equity:
               
Common stock – $0.50 par, 50,000,000 shares authorized, 44,406,995 and 44,395,495
  shares outstanding at June 30, 2007 and December 31, 2006, respectively
   
22,203
     
22,197
 
Additional paid-in capital
   
373,316
     
367,323
 
Retained earnings                                                                                                                
   
323,818
     
293,043
 
Total stockholders' equity
   
719,337
     
682,563
 
   
$
2,121,641
   
$
1,878,125
 

 
 
 
 
 

The accompanying notes are an integral part of these statements.
 
4

 
 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands, except per share amounts)
 
 
 
       
Oil and gas sales
 
$
174,206
   
$
124,178
   
$
320,235
   
$
255,902
 
Operating expenses:
                               
Oil and gas operating
   
30,180
     
25,021
     
57,263
     
51,316
 
Exploration
   
19,866
     
3,718
     
30,999
     
8,593
 
Depreciation, depletion and amortization
   
59,760
     
33,063
     
116,467
     
63,748
 
Impairment
   
     
8,780
     
     
8,780
 
General and administrative, net
   
8,162
     
7,233
     
17,864
     
15,368
 
Total operating expenses
   
117,968
     
77,815
     
222,593
     
147,805
 
                                 
Income from operations
   
56,238
     
46,363
     
97,642
     
108,097
 
Other income (expenses):
                               
Interest income
   
335
     
229
     
631
     
466
 
Other income
   
221
     
375
     
351
     
429
 
Interest expense
   
(10,206
)
   
(6,106
)
   
(18,655
)
   
(11,589
)
Gain on derivatives
   
     
1,303
     
     
9,428
 
Total other income (expenses)
   
(9,650
)
   
(4,199
)
   
(17,673
)
   
(1,266
)
                                 
Income before income taxes and minority interest
   
46,588
     
42,164
     
79,969
     
106,831
 
Provision for income taxes
   
(19,561
)
   
(18,886
)
   
(34,385
)
   
(45,185
)
Minority interest in earnings of Bois d'Arc Energy
   
(8,810
)
   
(7,695
)
   
(14,809
)
   
(16,429
)
Net income
 
$
18,217
   
$
15,583
   
$
30,775
   
$
45,217
 
                                 
Net income per share:
                               
Basic
 
$
0.42
   
$
0.37
   
$
0.71
   
$
1.07
 
Diluted
 
$
0.41
   
$
0.35
   
$
0.69
   
$
1.03
 
                                 
Weighted average common and common stock equivalent shares outstanding:
                               
Basic
   
43,374
     
42,077
     
43,369
     
42,070
 
Diluted
   
44,361
     
43,521
     
44,300
     
43,481
 

 



 
 


The accompanying notes are an integral part of these statements.
5

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2007
(Unaudited)


 
   
Common
Stock
(Shares)
  
Common
Stock -
Par Value
  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Total
 
                 
                 
   
(In thousands)
 
       
Balance at January 1, 2007
 
$
44,395
  
$
22,197
  
$
367,323
  
$
293,043
  
$
682,563
 
  Exercise of stock options
   
12
    
6
    
133
    
    
139
 
  Stock-based compensation
   
    
    
5,260
    
    
5,260
 
  Excess tax benefit from stock-based
                   
 
          
 
  compensation
   
    
    
600
    
    
600
 
  Net income
   
    
    
    
30,775
    
30,775
 
Balance at June 30, 2007
 
$
44,407
  
$
22,203
  
$
373,316
  
$
323,818
  
$
719,337
 

 
 



















 






The accompanying notes are an integral part of these statements.
6

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended
 
   
June 30,
 
   
2007
   
2006
 
   
(In thousands)
 
                 
                 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
 
$
30,775
   
$
45,217
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Deferred income taxes
   
28,694
     
40,015
 
Dry hole costs and leasehold impairments
   
27,803
     
6,629
 
Depreciation, depletion and amortization
   
116,467
     
63,748
 
Impairment
   
     
8,780
 
Debt issuance cost amortization
   
563
     
579
 
Stock-based compensation
   
8,630
     
6,492
 
Excess tax benefit from stock-based compensation
   
(600
)
   
(922
)
Minority interest in earnings of Bois d'Arc Energy
   
14,809
     
16,429
 
Gain on derivatives
   
     
(9,428
)
(Increase) decrease in accounts receivable
   
(15,413
)
   
13,140
 
Increase in other current assets
   
(2,564
)
   
(949
)
Increase (decrease) in accounts payable and accrued expenses
   
18,389
     
(13,666
)
Net cash provided by operating activities
   
227,553
     
176,064
 
                 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(329,345
)
   
(203,026
)
Payments to settle derivatives
   
     
(703
)
Net cash used for investing activities
   
(329,345
)
   
(203,729
)
                 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings
   
146,000
     
60,000
 
Principal payments on debt
   
(7,000
)
   
(39,000
)
Proceeds from issuance of common stock
   
448
     
1,742
 
Excess tax benefit from stock-based compensation
   
600
     
922
 
Debt issuance costs
   
(89
)
   
(100
)
Net cash provided by financing activities
   
139,959
     
23,564
 
                 
Net increase (decrease) in cash and cash equivalents
   
38,167
     
(4,101
)
Cash and cash equivalents, beginning of period
   
10,715
     
89
 
Bois d'Arc Energy cash and equivalents as of January 1, 2006
   
     
12,043
 
Cash and cash equivalents, end of period
 
$
48,882
   
$
8,031
 
                 

 
 


The accompanying notes are an integral part of these statements.
7

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007
(Unaudited)



(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –

Basis of Presentation

In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of Comstock Resources, Inc. and subsidiaries ("Comstock" or the "Company") as of June 30, 2007 and the related results of operations for the three months and six months ended June 30, 2007 and 2006 and cash flows for the six months ended June 30, 2007 and 2006.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading.  These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto of the Company included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2006.

The results of operations for the six months ended June 30, 2007 are not necessarily an indication of the results expected for the full year.

These unaudited consolidated financial statements include the accounts of Comstock and subsidiaries in which it has a controlling interest.  Intercompany balances and transactions have been eliminated in consolidation.

In the third quarter of 2006, Comstock purchased additional shares of common stock in Bois d'Arc Energy, Inc. ("Bois d'Arc Energy") increasing its ownership of Bois d'Arc Energy's common stock to 32,220,761 shares.  As of June 30, 2007 Comstock owns 32,224,661 shares.  As a result, as of September 30, 2006, Comstock has voting control of Bois d'Arc Energy through the combined share ownership of the Company and members of its Board of Directors.  Upon obtaining voting control of Bois d'Arc Energy, Comstock began including Bois d'Arc Energy in its financial statements as a consolidated subsidiary.  As permitted by generally accepted accounting principles, consolidated revenues, expenses and cash flows for 2006 have been retroactively adjusted to reflect Bois d'Arc Energy as a consolidated subsidiary as of January 1, 2006.  The inclusion of Bois d'Arc Energy as a consolidated subsidiary in the Company's financial statements had no impact on the Company's net income.

 
 
 
 
 
 
 
 

 

8

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The following summarizes the impact of retroactively consolidating the results of Bois d'Arc Energy:

   
As of June 30, 2006
 
Balance Sheet:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Current assets                                                                     
 
$
40,723
   
$
51,450
   
$
92,173
 
Property and equipment, net
   
758,707
     
741,164
     
1,499,871
 
Investment in Bois d'Arc Energy
   
267,269
     
(267,269
)
   
 
Other assets                                                                     
   
4,340
     
703
     
5,043
 
Total assets                                                                
 
$
1,071,039
   
$
526,048
   
$
1,597,087
 
                         
Current liabilities                                                                     
 
$
51,086
   
$
73,196
   
$
124,282
 
Long-term debt                                                                     
   
243,000
     
90,000
     
333,000
 
Deferred income taxes payable
   
139,383
     
138,344
     
277,727
 
Reserve for future abandonment costs
   
3,357
     
37,988
     
41,345
 
Minority interest in Bois d'Arc Energy
   
     
186,520
     
186,520
 
Stockholders' equity                                                                     
   
634,213
     
     
634,213
 
Total liabilities and stockholders' equity
 
$
1,071,039
   
$
526,048
   
$
1,597,087
 

   
Three Months Ended June 30, 2006
 
Statement of Operations:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Revenues                                                                     
 
$
64,571
   
$
59,607
   
$
124,178
 
Operating expenses                                                                     
   
(42,294
)
   
(35,521
)
   
(77,815
)
Income from operations                                                                     
   
22,277
     
24,086
     
46,363
 
Other income (expenses)                                                                     
   
(3,014
)
   
(1,185
)
   
(4,199
)
Income before income taxes, minority interest in
                       
    earnings and equity in earnings of Bois d'Arc Energy
   
19,263
     
22,901
     
42,164
 
Provision for income taxes
   
(10,768
)
   
(8,118
)
   
(18,886
)
Minority interest in earnings of Bois d'Arc Energy
   
     
(7,695
)
   
(7,695
)
Equity earnings in earnings of Bois d'Arc Energy
   
7,088
     
(7,088
)
   
 
Net income                                                                     
 
$
15,583
   
$
   
$
15,583
 

   
Six Months Ended June 30, 2006
 
Statement of Operations:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Revenues                                                                     
 
$
134,462
   
$
121,440
   
$
255,902
 
Operating expenses                                                                     
   
(77,679
)
   
(70,126
)
   
(147,805
)
Income from operations                                                                     
   
56,783
     
51,314
     
108,097
 
Other income (expenses)                                                                     
   
927
     
(2,193
)
   
(1,266
)
Income before income taxes, minority interest in
                       
    earnings and equity in earnings of Bois d'Arc Energy
   
57,710
     
49,121
     
106,831
 
Provision for income taxes
   
(27,628
)
   
(17,557
)
   
(45,185
)
Minority interest in earnings of Bois d'Arc Energy
   
     
(16,429
)
   
(16,429
)
Equity earnings in earnings of Bois d'Arc Energy
   
15,135
     
(15,135
)
   
 
Net income                                                                     
 
$
45,217
   
$
   
$
45,217
 
9

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

   
Six Months Ended June 30, 2006
 
Statement of Cash Flows:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Cash flows provided by operating activities
 
$
92,037
   
$
84,027
   
$
176,064
 
Cash flows used for investing activities
 
$
(94,119
)
 
$
(109,610
)
 
$
(203,729
)
Cash flows provided by financing activities
 
$
2,664
   
$
20,900
   
$
23,564
 

In connection with its acquisitions of additional common shares of Bois d'Arc Energy, Comstock allocated the $36.5 million purchase price paid for the shares in excess of its underlying net book value in Bois d'Arc Energy of $19.0 million together with the related deferred income tax liability of $10.1 million to oil and gas properties.  This additional amount is being amortized over the productive lives of Bois d'Arc Energy's oil and gas properties using the unit-of-production method.  The pro forma impact of the acquisition of these shares was not material to the Company's results of operations for the six months ended June 30, 2006.

Asset Retirement Obligations

Comstock's asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal.  The following table summarizes the changes in Comstock's total estimated liability during the six months ended June 30, 2007 and 2006:

   
Six Months Ended
 
   
June 30,
 
   
2007
   
2006
 
   
(In thousands)
 
                 
Beginning asset retirement obligations                                                                               
 
$
57,116
   
$
3,206
 
Bois d'Arc abandonment liability(1)                                                                           
   
     
35,034
 
Accretion expense                                                                           
   
1,780
     
1,203
 
New wells placed on production and changes in estimates
   
807
     
1,923
 
Liabilities settled                                                                           
   
(98
)
   
(21
)
Future abandonment liability — end of period
 
$
59,605
   
$
41,345
 
                
 (1)
Concurrent with including Bois d'Arc Energy as a consolidated subsidiary as of January 1, 2006, the asset retirement obligations of Bois d'Arc Energy are included in the Company's financial statements. 
 

Derivative Instruments and Hedging Activities

Comstock periodically uses swaps, floors and collars to hedge oil and natural gas prices and interest rates.  Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts.  Generally, when the applicable settlement price is less than the price specified in the contract, Comstock receives a settlement from the counter party based on the difference multiplied by the volume or amounts hedged.  Similarly, when the applicable settlement price exceeds the price specified in the contract, Comstock pays the counter party based on the difference.  Comstock generally receives a settlement from the counter party for floors when the applicable settlement price is less than the price specified in the contract, which is based on the difference multiplied by the volume amounts hedged.  For collars, generally Comstock receives a settlement from the counter party when the settlement price is below the floor and pays a settlement to the counter party when the settlement price exceeds the cap.  No settlement occurs when the settlement price falls between the floor and cap.

10

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company had no derivative financial instruments outstanding during the three months and six months ended June 30, 2007.  The fair value of the Company's derivative contracts held for price risk management at June 30, 2006 was a liability of $1.1 million.  Comstock did not designate these instruments as cash flow hedges, and accordingly unrealized gains on derivatives of $1.3 million and $10.1 million were recorded for the three months and six months ended June 30, 2006.  The Company realized losses of $0.7 million for the six months ended June 30, 2006 to settle derivative positions.
 
       Stock-Based Compensation

Comstock Resources, Inc. and Bois d'Arc Energy maintain separate incentive compensation plans under which they grant common stock and stock options to key employees and directors.

Comstock accounts for employee stock-based compensation under the fair value method.  Compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period.  During the three months ended June 30, 2007 and 2006, the Company recognized $4.3 million and $3.3 million, respectively, in stock-based compensation expense within general and administrative expenses related to stock option and restricted stock grants, including $1.7 million and $1.6 million, respectively, attributable to Bois d'Arc Energy's incentive plan.  Stock based compensation expense for the six months ended June 30, 2007 and 2006 was $8.6 million and $6.5 million, respectively which includes $3.4 million and $3.0 million, respectively, attributable to Bois d'Arc Energy's incentive plan.  The excess income tax benefit realized from the deductions associated with stock-based compensation for the six months ended June 30, 2007 and 2006 was $0.6 million and $0.9 million, respectively.

The fair value of stock option grants is estimated on the date of the grant using a Black-Scholes option pricing model.  Some of the inputs to the option valuation model are subjective, including assumptions regarding expected stock price volatility.  During the six months ended June 30, 2007, Comstock granted options to purchase 40,000 shares at an exercise price of $29.49 per share.  The fair value of the Comstock options awarded was determined to be $10.32 per share.  Assumptions used to value these Comstock stock options included expected volatility of 36.1%, expected lives of 3.9 years, a risk-free interest rate of 4.9% and an expected dividend yield of zero.  Bois d'Arc Energy granted options to purchase 258,500 shares at a weighted average exercise price of $16.24 per share during the six months ended June 30, 2007.  The fair value of the Bois d'Arc Energy options awarded was determined to be $6.17 per option share.  Assumptions used to value the Bois d'Arc Energy stock options included expected volatility of 36.4%, expected lives of 4.5 years, a risk free interest rate of 4.9% and a dividend yield of zero.  As of June 30, 2007, total unrecognized compensation cost related to nonvested Comstock stock options of $2.9 million is expected to be recognized over a period of 3.5 years.  As of June 30, 2007, total unrecognized compensation cost related to nonvested Bois d'Arc Energy stock options of $10.4 million is expected to be recognized over a period of 5.4 years.

As of June 30, 2007, Comstock had 1,033,000 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $28.46 per share.  Total unrecognized compensation cost related to Comstock unvested restricted stock grants of $20.1 million as of June 30, 2007 is expected to be recognized over a period of 3.5 years.  As of June 30, 2007, Bois d'Arc Energy had 1,301,000 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $6.93 per share.  Total unrecognized compensation cost related to Bois d'Arc Energy unvested restricted stock grants of $6.2 million as of June 30, 2007 is expected to be recognized over a period of 3.8 years.
 
 
 
 
 
 

 

11

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Income Taxes

Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.  The difference between the Company's customary rate of 35% and the effective tax rate on income before income taxes and minority interest is due to the following:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
Tax at statutory rate                                                                                     
 
35.0%
     
35.0%
     
35.0%
     
35.0%
 
Tax effect of:
                             
Undistributed earnings of Bois d'Arc Energy, not consolidated for federal income tax purposes
 
6.5%
     
5.9%
     
6.3%
     
5.0%
 
Nondeductible stock-based compensation
 
1.5%
     
1.9%
     
2.1%
     
1.5%
 
Changes due to tax law changes
 
(1.7%
)
   
2.6%
     
(1.0%
)
   
1.0%
 
State income taxes, net of federal benefit        
 
1.0%
     
0.3%
     
0.9%
     
0.2%
 
Other                                                                                
 
(0.3%
)
   
(0.9%
)
   
(0.3%
)
   
(0.4%
)
Effective tax rate                                                                           
 
42.0%
     
44.8%
     
43.0%
     
42.3%
 
 
The following is an analysis of consolidated income tax expense:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
       
Current provision
 
$
3,304
   
$
2,595
   
$
5,691
   
$
5,170
 
Deferred provision
   
16,257
     
16,291
     
28,694
     
40,015
 
Provision for Income Taxes
 
$
19,561
   
$
18,886
   
$
34,385
   
$
45,185
 

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109" (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions.  The Company has analyzed its filing positions in all jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions.  The Company has identified its federal income tax return and its state income tax returns in Texas, Louisiana, Mississippi and Oklahoma in which it operates as "major" tax jurisdictions.  The Company's federal income tax returns for the years subsequent to December 31, 2004 remain subject to examination.  The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2004.  The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit.  Therefore, the Company has no significant reserves for uncertain tax positions and no adjustments to such reserves were required upon adoption of FIN 48.  Interest and penalties resulting from audits by tax authorities have been immaterial and are included in the provision for income taxes in the consolidated statements of operations.
 
 
 
 

 
12

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Earnings Per Share

Basic earnings per share is determined without the effect of any outstanding potentially dilutive stock options or unvested restricted stock and diluted earnings per share is determined with the effect of outstanding stock options and unvested restricted stock that are potentially dilutive.  Basic and diluted earnings per share for the three months and six months ended June 30, 2007 and 2006, respectively, were determined as follows:

   
Three Months Ended June 30,
 
   
2007
   
2006
 
                   
Per
                   
Per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(In thousands, except per share amounts)
 
Basic Earnings Per Share:
                                               
Net Income
 
$
18,217
     
43,374
   
$
0.42
   
$
15,583
   
 
42,077
   
$
0.37
 
                                                 
Diluted Earnings Per Share:
                                               
Net Income
 
$
18,217
     
43,374
           
$
15,583
     
42,077
         
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
(160
)
   
987
             
(147
)
   
1,444
         
                                         
Net Income Available to Common
                         
 
                   
Stockholders With Assumed Conversions
 
$
18,057
     
44,361
   
$
0.41
   
$
15,436
     
43,521
   
$
0.35
 

   
Six Months Ended June 30,
 
   
2007
   
2006
 
                   
Per
                   
Per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(In thousands, except per share amounts)
 
Basic Earnings Per Share:
                                               
Net Income
 
$
30,775
     
43,369
   
$
0.71
   
$
45,217
   
 
42,070
   
$
1.07
 
                                                 
Diluted Earnings Per Share:
                                               
Net Income
 
$
30,775
     
43,369
           
$
45,217
     
42,070
         
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
(255
)
   
931
             
(305
)
   
1,411
         
                                         
Net Income Available to Common
                         
 
                   
Stockholders With Assumed Conversions
 
$
30,520
     
44,300
   
$
0.69
   
$
44,912
     
43,481
   
$
1.03
 
 
 
 
 
 
 
 

 
13

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
Stock options to purchase common stock at exercise prices in excess of the average actual stock price for the period that were anti-dilutive and that were excluded from the determination of diluted earnings per share are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands except per share data)
 
                                 
Weighted average anti-dilutive stock options
   
256
     
114
     
244
     
103
 
Weighted average exercise price
 
$
32.48
   
$
32.49
   
$
32.64
   
$
32.49
 
 
Supplementary Information With Respect to the Consolidated Statements of Cash Flows –

For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  The following is a summary of cash payments made for interest and income taxes:

   
Six Months Ended
 
   
June 30,
 
   
2007
   
2006
 
   
(In thousands)
 
Cash Payments -
               
Interest payments
 
$
18,644
   
$
11,517
 
Income tax payments
 
$
7,087
   
$
6,606
 

(2)  LONG-TERM DEBT  –

At June 30, 2007, long-term debt was comprised of the following:

   
(In thousands)
 
Comstock Revolving Bank Credit Facility
 
$
294,000
 
Bois d'Arc Energy Revolving Bank Credit Facility
   
125,000
 
Comstock 6⅞% Senior Notes due 2012
   
175,000
 
   
$
594,000
 

Comstock has a $600.0 million bank credit facility with Bank of Montreal, as the administrative agent.  The credit facility is a five-year revolving credit commitment that matures on December 15, 2011.  Indebtedness under the credit facility is secured by Comstock and its wholly-owned subsidiaries' oil and gas properties and is guaranteed by all of its wholly-owned subsidiaries.  The credit facility is subject to borrowing base availability, which is redetermined semiannually based on the banks' estimates of the future net cash flows of Comstock's oil and natural gas properties.  The borrowing base may be affected by the performance of Comstock's properties and changes in oil and natural gas prices.  The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group.  As of June 30, 2007, the borrowing base was $400.0 million, $106.0 million of which was available.  Borrowings under the credit facility bear interest, based on the utilization of the borrowing base, at Comstock's option at either (1) LIBOR plus 1.0% to 1.75% or (2) the base rate (which is the higher of the prime rate or the federal funds rate) plus 0% to 0.25%.  A commitment fee of 0.25% to 0.375%, based on the utilization of the borrowing base, is payable on the unused borrowing base.  The credit facility contains covenants that, among other things, restrict the payment of cash dividends in excess of $40.0 million, limit the amount of consolidated debt that Comstock may incur and limit the Company's ability to make certain loans and investments.  The only financial covenants are the maintenance of a ratio of current assets, including availability under the bank credit facility, to current liabilities of at least one-to-one and maintenance of a minimum tangible net worth.  The Company was in compliance with these covenants as of June 30, 2007.
14

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Bois d'Arc Energy has a bank credit facility with The Bank of Nova Scotia and several other banks.  Borrowings under the credit facility are limited to a borrowing base that is re-determined semi-annually based on the banks' estimate of the future net cash flows of Bois d'Arc Energy's oil and natural gas properties.  The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group.  The borrowing base was $225.0 million as of June 30, 2007.  Availability under this credit facility was $100.0 million as of June 30, 2007.  The Bois d'Arc Energy credit facility matures on May 11, 2009.  Borrowings under the credit facility bear interest at Bois d'Arc Energy's option of either (1) LIBOR plus a margin that varies from 1.25% to 2.0% depending upon the ratio of the amounts outstanding to the borrowing base or (2) the base rate (which is the higher of the prime rate or the federal funds rate) plus a margin that varies from 0% to 0.75% depending upon the ratio of the amounts outstanding to the borrowing base.  A commitment fee ranging from 0.375% to 0.50% (depending upon the ratio of the amounts outstanding to the borrowing base) is payable on the unused borrowing base.  Indebtedness under the credit facility is secured by substantially all of Bois d'Arc Energy and its subsidiaries' assets, and all of Bois d'Arc Energy's subsidiaries are guarantors of the indebtedness.  The Bois d'Arc Energy credit facility contains covenants that restrict the payment of cash dividends in excess of $5.0 million, borrowings, sales of assets, loans to others, capital expenditures, investments, merger activity, hedging contracts, liens and certain other transactions without the prior consent of the lenders and requires Bois d'Arc Energy to maintain a ratio of current assets, including the availability under the bank credit facility, to current liabilities of at least one-to-one and a ratio of indebtedness to earnings before interest, taxes, depreciation, depletion, and amortization, exploration and impairment expense of no more than 2.5-to-one.  Bois d'Arc Energy was in compliance with these covenants as of June 30, 2007.

(3)  COMMITMENTS AND CONTINGENCIES 

From time to time, Comstock is involved in certain litigation that arises in the normal course of its operations.  The Company records a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  The Company does not believe the resolution of these matters will have a material effect on the Company's financial position or results of operations.

In connection with its exploration and development activities, the Company contracts for drilling rigs and for the acquisition of seismic data under terms of up to three years.  The Company has commitments to acquire seismic data totaling $11.0 million through December 2008.  As of June 30, 2007, the Company had commitments for contracted drilling services of $39.8 million through September 2008.

(4)  ACQUISITION OF OIL AND GAS PROPERTIES –

In June 2007, Comstock completed an acquisition of additional working interests in the Javelina field in Hildalgo County in South Texas for $32.0 million.  Comstock estimates that the additional interests acquired have proved reserves of approximately 10.6 billion cubic feet ("Bcf") of natural gas.  The transaction was funded with borrowings under Comstock's bank credit facility, and the pro forma impact of the transaction was not material to the Company's historical results of operations.

(5)  CONSOLIDATING FINANCIAL STATEMENTS 

Comstock Resources, Inc. ("Parent") has $175.0 million of 6⅞% senior notes outstanding which are guaranteed by all of the Parent's wholly-owned subsidiaries.  There are no restrictions on the Parent's ability to obtain funds from any of the guarantor subsidiaries or on a guarantor subsidiary's ability to obtain funds from the Parent or their direct or indirect subsidiaries.  The 6⅞% senior notes are not guaranteed by Bois d'Arc Energy and its subsidiaries (the non-guarantor subsidiaries).  The following condensed consolidating balance sheet, statements of operations and statement of cash flows are provided for the Parent, all guarantor subsidiaries and all non-guarantor subsidiaries.  The information has been presented as if the Parent accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.
 

 
15

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 

 
Balance Sheet:
 
As of June 30, 2007
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Assets:
                                       
Cash and cash equivalents
 
$
   
$
27,167
   
$
21,715
   
$
   
$
48,882
 
Accounts receivable
   
     
47,896
     
43,078
     
     
90,974
 
Other current assets
   
768
     
2,932
     
15,930
     
     
19,630
 
Total current assets
   
768
     
77,995
     
80,723
     
     
159,486
 
                                         
Net property and equipment
   
29,341
     
1,058,367
     
869,468
     
     
1,957,176
 
Investment in subsidiaries
   
712,161
     
     
     
(712,161
)
   
 
Intercompany receivables
   
469,698
     
     
     
(469,698
)
   
 
Other assets
   
4,317
     
     
662
     
     
4,979
 
Total assets
 
$
1,216,285
   
$
1,136,362
   
$
950,853
   
$
(1,181,859
)
 
$
2,121,641
 
                                         
Liabilities and Stockholders' Equity:
                                       
Short-term debt
 
$
   
$
   
$
7,764
   
$
   
$
7,764
 
Accounts payable
   
19
     
98,951
     
52,842
     
     
151,812
 
Accrued expenses
   
6,305
     
3,168
     
1,241
     
     
10,714
 
Total current liabilities
   
6,324
     
102,119
     
61,847
     
     
170,290
 
                                         
Long-term debt
   
469,000
     
     
125,000
     
     
594,000
 
Intercompany payables
   
     
469,698
     
     
(469,698
)
   
 
Deferred income taxes payable
   
21,624
     
153,697
     
164,233
     
     
339,554
 
Reserve for future abandonment costs
   
     
9,474
     
50,131
     
     
59,605
 
Minority interest
   
     
     
     
238,855
     
238,855
 
Total liabilities
   
496,948
     
734,988
     
401,211
     
(230,843
)
   
1,402,304
 
Stockholders' equity
   
719,337
     
401,374
     
549,642
     
(951,016
)
   
719,337
 
Total liabilities and stockholders' equity
 
$
1,216,285
   
$
1,136,362
   
$
950,853
   
$
(1,181,859
)
 
$
2,121,641
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
   
As of December 31, 2006
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Assets:
                                       
Cash and cash equivalents
 
$
   
$
1,228
   
$
9,487
   
$
   
$
10,715
 
Accounts receivable
   
     
37,049
     
38,512
     
     
75,561
 
Other current assets
   
210
     
3,547
     
8,795
     
     
12,552
 
Total current assets
   
210
     
41,824
     
56,794
     
     
98,828
 
                                         
Net property and equipment
   
30,345
     
915,486
     
827,795
     
     
1,773,626
 
Investment in subsidiaries
   
654,840
     
     
     
(654,840
)
   
 
Intercompany receivables
   
374,858
     
     
     
(374,858
)
   
 
Other assets
   
4,757
     
2
     
912
     
     
5,671
 
Total assets
 
$
1,065,010
   
$
957,312
   
$
885,501
   
$
(1,029,698
)
 
$
1,878,125
 
                                         
Liabilities and Stockholders' Equity:
                                       
Short-term debt
 
$
   
$
   
$
3,250
   
$
   
$
3,250
 
Accounts payable
   
9,687
     
62,041
     
60,776
     
     
132,504
 
Accrued expenses
   
     
11,265
     
4,842
     
     
16,107
 
Total current liabilities
   
9,687
     
73,306
     
68,868
     
     
151,861
 
                                         
Long-term debt
   
355,000
     
     
100,000
     
     
455,000
 
Intercompany payables
   
     
374,858
     
     
(374,858
)
   
 
Deferred income taxes payable
   
17,760
     
141,517
     
151,959
     
     
311,236
 
Reserve for future abandonment costs
   
     
9,052
     
48,064
     
     
57,116
 
Minority interest
   
     
     
     
220,349
     
220,349
 
Total liabilities
   
382,447
     
598,733
     
368,891
     
(154,509
)
   
1,195,562
 
Stockholders' equity
   
682,563
     
358,579
     
516,610
     
(875,189
)
   
682,563
 
Total liabilities and stockholders' equity
 
$
1,065,010
   
$
957,312
   
$
885,501
   
$
(1,029,698
)
 
$
1,878,125
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Statement of Operations:
     
   
Three Months Ended June 30, 2007
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Oil and gas sales
 
$
   
$
83,160
   
$
91,046
   
$
   
$
174,206
 
Operating expenses:
                                       
Oil and gas operating
   
     
17,624
     
12,556
     
     
30,180
 
Exploration
   
     
1,878
     
17,988
     
     
19,866
 
Depreciation, depletion and amortization
   
847
     
30,134
     
28,779
     
     
59,760
 
General and administrative, net
   
7,993
     
(2,405
)
   
2,574
     
     
8,162
 
Total operating expenses
   
8,840
     
47,231
     
61,897
     
     
117,968
 
Income from operations
   
(8,840
)
   
35,929
     
29,149
     
     
56,238
 
Other income (expenses):
                                       
Interest income
   
     
197
     
138
     
     
335
 
Other income
   
     
39
     
182
     
     
221
 
Interest expense
   
(7,775
)
   
     
(2,431
)
   
     
(10,206
)
Intercompany interest income (expense)
   
1,443
 
   
(1,443
)
   
     
     
 
Total other income (expenses)
 
 
(6,332
)
   
(1,207
)
   
(2,111
)
           
(9,650
)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy
   
(15,172
)
   
34,722
     
27,038
     
     
46,588
 
(Provision for) benefit from income taxes
   
1,830
     
(11,784
)
   
(9,607
)
   
     
(19,561
)
Minority interest in earnings of Bois d'Arc Energy
   
     
     
     
(8,810
)
   
(8,810
)
Equity in earnings of subsidiaries
   
31,559
     
     
     
(31,559
)
   
 
Net income
 
$
18,217
   
$
22,938
   
$
17,431
   
$
(40,369
)
 
$
18,217
 
   
   
Three Months Ended June 30, 2006
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Oil and gas sales
 
$
   
$
64,571
   
$
59,607
   
$
   
$
124,178
 
Operating expenses:
                                       
Oil and gas operating
   
     
13,200
     
11,821
     
     
25,021
 
Exploration
   
     
     
3,718
     
     
3,718
 
Depreciation, depletion and amortization
   
58
     
16,510
     
16,495
     
     
33,063
 
Impairment
   
     
7,934
     
846
     
     
8,780
 
General and administrative, net
   
6,244
     
(1,652
)
   
2,641
     
     
7,233
 
Total operating expenses
   
6,302
     
35,992
     
35,521
     
     
77,815
 
Income from operations
   
(6,302
)
   
28,579
     
24,086
     
     
46,363
 
Other income (expenses):
                                       
Interest income
   
     
172
     
57
     
     
229
 
Other income
   
     
48
     
327
     
     
375
 
Interest expense
   
(4,664
)
   
127
     
(1,569
)
   
     
(6,106
)
Gain on derivatives
   
     
1,303
     
     
     
1,303
 
Intercompany interest income (expense)
   
2,401
     
(2,401
)
   
     
     
 
Total other income (expenses)
   
(2,263
)
   
(751
)
   
(1,185
)
           
(4,199
)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy
   
(8,565
)
   
27,828
     
22,901
     
     
42,164
 
Provision for income taxes
   
209
     
(10,977
)
   
(8,118
)
   
     
(18,886
)
Minority interest in earnings of Bois d'Arc Energy
   
     
     
     
(7,695
)
   
(7,695
)
Equity in earnings of subsidiaries
   
23,939
     
     
     
(23,939
)
   
 
Net income
 
$
15,583
   
$
16,851
   
$
14,783
   
$
(31,634
)
 
$
15,583
 
18

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
   
Statement of Operations:
     
   
Six Months Ended June 30, 2007
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Oil and gas sales
 
$
   
$
153,007
   
$
167,228
   
$
   
$
320,235
 
Operating expenses:
                                       
Oil and gas operating
   
     
31,679
     
25,584
     
     
57,263
 
Exploration
   
     
2,276
     
28,723
     
     
30,999
 
Depreciation, depletion and amortization
   
1,773
     
57,400
     
57,294
     
     
116,467
 
General and administrative, net
   
16,530
     
(4,692
)
   
6,026
     
     
17,864
 
Total operating expenses
   
18,303
     
86,663
     
117,627
     
     
222,593
 
Income from operations
   
(18,303
)
   
66,344
     
49,601
     
     
97,642
 
Other income (expenses):
                                       
Interest income
   
     
388
     
243
     
     
631
 
Other income
   
     
77
     
274
     
     
351
 
Interest expense
   
(14,059
)
   
(1
)
   
(4,595
)
   
     
(18,655
)
Intercompany interest income (expense)
   
1,381
     
(1,381
)
   
     
     
 
Total other income (expenses)
 
 
(12,678
)
   
(917
)
   
(4,078
)
           
(17,673
)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy
   
(30,981
)
   
65,427
     
45,523
     
     
79,969
 
(Provision for) benefit from income taxes
   
4,466
     
(22,632
)
   
(16,219
)
   
     
(34,385
)
Minority interest in earnings of Bois d'Arc Energy
   
     
     
     
(14,809
)
   
(14,809
)
Equity in earnings of subsidiaries
   
57,290
     
     
     
(57,290
)
   
 
Net income
 
$
30,775
   
$
42,795
   
$
29,304
   
$
(72,099
)
 
$
30,775
 
  
   
Six Months Ended June 30, 2006
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
  Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Oil and gas sales
 
$
   
$
134,462
   
$
121,440
   
$
   
$
255,902
 
Operating expenses:
                                       
Oil and gas operating
   
     
27,055
     
24,261
     
     
51,316
 
Exploration
   
     
344
     
8,249
     
     
8,593
 
Depreciation, depletion and amortization
   
115
     
32,745
     
30,888
     
     
63,748
 
Impairment
   
     
7,934
     
846
     
     
8,780
 
General and administrative, net
   
12,536
     
(3,050
)
   
5,882
     
     
15,368
 
Total operating expenses
   
12,651
     
65,028
     
70,126
     
     
147,805
 
Income from operations
   
(12,651
)
   
69,434
     
51,314
             
108,097
 
Other income (expenses):
                                       
Interest income
   
     
340
     
126
     
     
466
 
Other income
   
     
102
     
327
     
     
429
 
Interest expense
   
(9,190
)
   
247
     
(2,646
)
   
     
(11,589
)
Gain on derivatives
   
     
9,428
     
     
     
9,428
 
Intercompany interest income (expense)
   
4,608
     
(4,608
)
   
     
     
 
Total other income (expenses)
   
(4,582
)
   
5,509
     
(2,193
)
           
(1,266
)
Income (loss) before income taxes and minority interest in earnings of Bois d’Arc Energy
   
(17,233
)
   
74,943
     
49,121
             
106,831
 
Provision for income taxes
   
(130
)
   
(27,498
)
   
(17,557
)
   
     
(45,185
)
Minority interest in earnings of Bois d'Arc Energy
   
     
     
     
(16,429
)
   
(16,429
)
Equity in earnings of subsidiaries
   
62,580
     
     
     
(62,580
)
   
 
Net income
 
$
45,217
   
$
47,445
   
$
31,564
   
$
(79,009
)
 
$
45,217
 
19

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
Statement of Cash Flows:
     
   
Six Months Ended June 30, 2007
 
   
Comstock
   
Guarantor
   
Non-Guarantor
   
Eliminating
       
   
Resources
   
Subsidiaries
   
Subsidiaries
   
Entries
   
Consolidated
 
   
(In thousands)
 
                                         
Net Cash Provided by (Used for) Operating Activities
 
$
(19,153
)
 
$
136,222
   
$
110,435
   
$
49
   
$
227,553
 
                                         
Cash Flows From Investing Activities:
                                       
Capital expenditures
   
(746
)
   
(205,123
)
   
(123,476
)
   
     
(329,345
)
Net Cash Used for Investing Activities
   
(746
)
   
(205,123
)
   
(123,476
)
   
     
(329,345
)
                                         
Cash Flows From Financing Activities:
                                       
Borrowings
   
114,000
     
     
32,000
     
     
146,000
 
Advances to (from) parent
   
(94,840
)
   
94,840
     
     
     
 
Principal payments on debt
   
     
     
(7,000
)
   
     
(7,000
)
Proceeds from issuance of common stock
   
139
     
     
309
     
     
448
 
Excess tax benefit from stock-based compensation
   
600
     
     
49
     
(49
)
   
600
 
Debt issuance costs
   
     
     
(89
)
   
     
(89
)
Net Cash Provided by Financing Activities
   
19,899
     
94,840
     
25,269
     
(49
)
   
139,959
 
Net increase in cash and cash equivalents
   
     
25,939
     
12,228
     
     
38,167
 
Cash and cash equivalents, beginning of period
   
     
1,228
     
9,487
     
     
10,715
 
Cash and cash equivalents, end of period
 
$
   
$
27,167
   
$
21,715
   
$
   
$
48,882
 

       
   
Six Months Ended June 30, 2006
 
   
Comstock
   
Guarantor
 
 
Non-Guarantor
   
Eliminating
       
   
Resources
   
Subsidiaries
   
Subsidiaries
   
Entries
   
Consolidated
 
   
(In thousands)
 
                                         
Net Cash Provided by (Used for) Operating Activities
 
$
(9,404
)
 
$
101,441
   
$
84,027
   
$
   
$
176,064
 
                             
         
Cash Flows From Investing Activities:
                           
         
Capital expenditures
   
(214
)
   
(93,202
)
   
(109,610
)
   
     
(203,026
)
Payments to settle derivatives
   
     
(703
)
   
     
     
(703
)
Net Cash Used for Investing Activities
   
(214
)
   
(93,905
)
   
(109,610
)
   
     
(203,729
)
                             
         
Cash Flows From Financing Activities:
                           
         
Borrowings
   
4,000
     
     
56,000
     
     
60,000
 
Advances to (from) parent
   
6,954
     
(6,954
)
   
     
     
 
Principal payments on debt
   
(4,000
)
   
     
(35,000
)
   
     
(39,000
)
Proceeds from issuance of common stock
   
1,742
     
     
     
     
1,742
 
Excess tax benefit from stock-based compensation
   
922
     
     
     
     
922
 
Debt issuance costs
   
     
     
(100
)
   
     
(100
)
Net Cash Provided by Financing Activities
   
9,618
     
(6,954
)
   
20,900
     
     
23,564
 
Net increase in cash and cash equivalents
   
     
582
     
(4,683
)
   
     
(4,101
)
Cash and cash equivalents, beginning of period
   
     
89
     
     
     
89
 
Bois d'Arc Energy cash and cash equivalents as of January 1, 2006
   
     
     
12,043
     
     
12,043
 
Cash and cash equivalents, end of period
 
$
   
$
671
   
$
7,360
   
$
   
$
8,031
 
 
20

 

INDEPENDENT ACCOUNTANTS' REVIEW REPORT






We have reviewed the consolidated balance sheet of Comstock Resources, Inc. (a Nevada corporation) and subsidiaries (the Company) as of June 30, 2007, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2007 and 2006, the consolidated statement of stockholders' equity for the six months ended June 30, 2007, and the consolidated statements of cash flows for the six-month periods ended June 30, 2007 and 2006.  These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Comstock Resources, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended not presented herein, and in our report dated February 28, 2007 we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company's adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment," effective January 1, 2006.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Dallas, Texas
August 9, 2007
 
 
 
 
 
 
 
 
 
 
 
 
 

 
21

 
 
ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements that involve risks and uncertainties that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Actual results may differ materially from those anticipated in our forward-looking statements due to many factors.  The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this report and in our annual report filed on Form 10-K for the year ended December 31, 2006.

Results of Operations

Effective January 1, 2006 we are including Bois d'Arc Energy in our financial statements as a consolidated subsidiary.  The following table reflects certain summary operating data for our onshore operations and for Bois d'Arc Energy for the periods presented:

   
Three Months Ended June 30, 2007
   
Three Months Ended June 30, 2006
 
           
Bois d'Arc
                   
Bois d'Arc
       
   
Onshore
   
Energy
   
Total
   
Onshore
   
Energy
   
Total
 
   
(In thousands, except per unit amounts)
 
Net Production Data:
                                               
Oil (Mbbls)
   
255
     
417
     
672
     
237
     
345
     
582
 
Natural Gas (Mmcf)
   
9,215
     
8,194
     
17,409
     
7,549
     
5,218
     
12,767
 
Natural Gas equivalent (Mmcfe)
   
10,746
     
10,696
     
21,442
     
8,969
     
7,290
     
16,259
 
                                                 
Revenues:
                                               
Oil sales
 
$
14,311
   
$
27,638
   
$
41,949
   
$
13,847
   
$
23,943
   
$
37,790
 
Gas sales
   
68,849
     
63,408
     
132,257
     
50,724
     
35,664
     
86,388
 
Total oil and gas sales
 
$
83,160
   
$
91,046
   
$
174,206
   
$
64,571
   
$
59,607
   
$
124,178
 
                                                 
Expenses:
                                               
Oil and gas operating expenses(1)
 
$
17,624
   
$
12,556
   
$
30,180
   
$
13,200
   
$
11,821
   
$
25,021
 
Exploration expense
 
$
1,878
   
$
17,988
   
$
19,866
   
$
   
$
3,718
   
$
3,718
 
Depreciation, depletion and amortization
 
$
30,248
   
$
28,779
   
$
59,760
   
$
16,568
   
$
16,495
   
$
33,063
 
                                                 
Average Sales Price:
                                             
Oil (per Bbl)                                         
 
$
56.10
   
$
66.28
   
$
62.42
   
$
58.47
   
$
69.31
   
$
64.90
 
Natural gas (per Mcf)                              
 
$
7.47
   
$
7.74
   
$
7.60
   
$
6.72
   
$
6.84
   
$
6.77
 
Average equivalent (Mcfe)
 
$
7.74
   
$
8.51
   
$
8.12
   
$
7.20
   
$
8.18
   
$
7.64
 
                                                 
Expenses ($ per Mcfe):
                                               
Oil and gas operating(1)
 
$
1.64
   
$
1.17
   
$
1.41
   
$
1.47
   
$
1.62
   
$
1.54
 
Depreciation, depletion and amortization(2)
 
$
2.80
   
$
2.68
   
$
2.77
   
$
1.84
   
$
2.25
   
$
2.02
 
                                                
(1)  Includes lease operating costs and production and ad valorem taxes.                      
(2) Represents depreciation, depletion and amortization of oil and gas properties only.                      
 
 
 
 
 
 
 
 
 

22

 

   
Six Months Ended June 30, 2007
   
Six Months Ended June 30, 2006
 
           
Bois d'Arc
                   
Bois d'Arc
       
   
Onshore
   
Energy
   
Total
   
Onshore
   
Energy
   
Total
 
   
(In thousands, except per unit amounts)
 
Net Production Data:
                                               
Oil (Mbbls)
   
506
     
785
     
1,291
     
465
     
663
     
1,128
 
Natural Gas (Mmcf)
   
17,850
     
15,895
     
33,745
     
14,918
     
10,282
     
25,200
 
Natural Gas equivalent (Mmcfe)
   
20,886
     
20,605
     
41,491
     
17,709
     
14,259
     
31,968
 
                                                 
Revenues:
                                               
Oil sales
 
$
26,365
   
$
49,106
   
$
75,471
   
$
26,112
   
$
43,280
   
$
69,392
 
Gas sales
   
126,642
     
118,122
     
244,764
     
108,350
     
78,160
     
186,510
 
Total oil and gas sales
 
$
153,007
   
$
167,228
   
$
320,235
   
$
134,462
   
$
121,440
   
$
255,902
 
                                                 
Expenses:
                                               
Oil and gas operating expenses(1)
 
$
31,679
   
$
25,584
   
$
57,263
   
$
27,055
   
$
24,261
   
$
51,316
 
Exploration expense
 
$
2,276
   
$
28,723
   
$
30,999
   
$
344
   
$
8,249
   
$
8,593
 
Depreciation, depletion and amortization
 
$
57,608
   
$
57,294
   
$
116,467
   
$
32,860
   
$
30,888
   
$
63,748
 
                                                 
Average Sales Price:
                                             
Oil (per Bbl)                                         
 
$
52.10
   
$
62.55
   
$
58.46
   
$
56.12
   
$
65.31
   
$
61.52
 
Natural gas (per Mcf)                              
 
$
7.09
   
$
7.43
   
$
7.25
   
$
7.26
   
$
7.60
   
$
7.40
 
Average equivalent (Mcfe)
 
$
7.33
   
$
8.12
   
$
7.72
   
$
7.59
   
$
8.52
   
$
8.01
 
                                                 
Expenses ($ per Mcfe):
                                               
Oil and gas operating(1)
 
$
1.52
   
$
1.24
   
$
1.38
   
$
1.53
   
$
1.70
   
$
1.61
 
Depreciation, depletion and amortization(2)
 
$
2.75
   
$
2.77
   
$
2.79
   
$
1.85
   
$
2.15
   
$
1.98
 
                                                
(1)  Includes lease operating costs and production and ad valorem taxes.                      
(2) Represents depreciation, depletion and amortization of oil and gas properties only.                      
 
Revenues –

Our oil and gas sales in the second quarter of 2007 of $174.2 million increased $50.0 million (40%) over our sales of $124.2 million in the second quarter of 2006.  The growth in sales resulted from our higher production in the second quarter of 2007 as well as higher natural gas prices.  Production in the second quarter of 2007 increased 32% to 21.4 Bcfe as compared to production of 16.3 Bcfe in the second quarter of 2006.  Our average realized natural gas price of $7.60 per Mcf in the second quarter of 2007 was $0.83 or 12% higher than our average natural gas price of $6.77 per Mcf for the three months ended June 30, 2006.  Realized oil prices in the second quarter of 2007 averaged $62.42 per barrel, 4% lower than the $64.90 per barrel realized in the second quarter of 2006.

Oil and gas sales from our onshore properties increased $18.6 million to $83.2 million for the three months ended June 30, 2007 from $64.6 million for the second quarter of 2006.  Our onshore production in the second quarter of 2007 increased by 20% to 10.7 Bcfe from production in the second quarter of 2006 of 9.0 Bcfe.  The production increase was attributable to our development drilling activity primarily in our East Texas/North Louisiana region.  Our average onshore realized crude oil price decreased by 4% and our average onshore realized natural gas price increased by 11% in the second quarter of 2007 as compared to the second quarter of 2006.  Oil and gas sales from Bois d'Arc Energy's operations for the second quarter of 2007 of $91.0 million increased $31.4 million or 53% compared with the second quarter of 2006.  Bois d'Arc Energy's production of 10.7 Bcfe in the second quarter of 2007 increased by 47% from the production in the second quarter of 2006 of 7.3 Bcfe.  The increase was due to production from new wells and the return to service of third party pipelines damaged by the 2005 hurricanes which caused 1.6 Bcfe in production to be deferred in 2006's second quarter.  Bois d'Arc Energy's average oil price decreased by 4% and Bois d'Arc Energy's average natural gas price increased by 13% in the second quarter of 2007 as compared to the second quarter of 2006.


 
23

 
Our oil and gas sales in the first six months of 2007 of $320.2 million increased $64.3 million (25%) over our sales of $255.9 million in the first six months of 2006.  The growth in sales which resulted from our higher production in the first six months of 2007 was offset in part by lower oil and natural gas prices.  Production in the first six months of 2007 increased 30% to 41.5 Bcfe as compared to production of 32.0 Bcfe in the first six months of 2006.  Our average realized natural gas price of $7.25 per Mcf in the first six months of 2007 was $0.15 or 2% less than our average natural gas price of $7.40 per Mcf for the six months ended June 30, 2006.  Realized oil prices in the first six months of 2007 averaged $58.46 per barrel, 5% lower than the $61.52 per barrel realized in the first six months of 2006.

Oil and gas sales from our onshore properties increased $18.5 million to $153.0 million for the six months ended June 30, 2007 from $134.5 million for the first six months of 2006.  Our onshore production in the first six months of 2007 increased by 18% to 20.9 Bcfe from production in the first six months of 2006 of 17.7 Bcfe.  The production increase was attributable to our development drilling activity primarily in our East Texas/North Louisiana region.  Our average onshore realized crude oil price decreased by 7% and our average onshore realized natural gas price decreased by 2% in the first six months of 2007 as compared to the first six months of 2006.  Oil and gas sales from Bois d'Arc Energy's operations for the first six months of 2007 of $167.2 million increased $45.8 million or 38% compared with the first six months of 2006.  Bois d'Arc Energy's production of 20.6 Bcfe in the first six months of 2007 increased by 45% from the production in the first six months of 2006 of 14.3 Bcfe.  The increase was due to production from new wells and restoration of 3.3 Bcfe of deferred production Bois d'Arc Energy had in the first half of 2006 which resulted from the 2005 hurricanes.  Bois d'Arc Energy's average oil price decreased by 4% and Bois d'Arc Energy's average natural gas price decreased by 2% in the first six months of 2007 as compared to the first six months of 2006.
 
Costs and Expenses -
 
Our oil and gas operating expenses, including production taxes, increased $5.2 million (21%) to $30.2 million in the second quarter of 2007 from $25.0 million in the second quarter of 2006.  Oil and gas operating expenses from our onshore operations increased $4.4 million (34%) to $17.6 million from $13.2 million in the second quarter of 2006 primarily due to the 20% increase in production in the second quarter of 2007.  Oil and gas operating expenses per equivalent Mcf produced for our onshore operations increased $0.17 (11%) to $1.64 in the second quarter of 2007 from $1.47 in the second quarter of 2006 due to higher severance taxes resulting from higher natural gas prices and higher field lifting costs.  Bois d'Arc Energy's oil and gas operating costs for the second quarter of 2007 of $12.6 million increased $0.8 million (6%) from $11.8 million in the second quarter of 2006.  Oil and gas operating expenses per equivalent Mcf produced for Bois d'Arc Energy operations decreased $0.45 (28%) to $1.17 in the second quarter of 2007 from $1.62 in the second quarter of 2006.  The decrease is due to the fixed nature of a substantial portion of Bois d'Arc Energy's lifting costs and lower repair and maintenance costs in 2007.  Operating expenses in the second quarter of 2006 included $0.8 million of offshore repair costs related to the 2005 hurricanes.
 
Oil and gas operating expenses increased $6.0 million (12%) to $57.3 million in the first six months of 2007 from $51.3 million in the first six months of 2006.  Onshore oil and gas operating expenses increased $4.6 million (17%) as the result of the higher production level and the costs associated with new wells.  Onshore oil and gas operating expenses per Mcfe produced decreased $0.01 to $1.52 for the six months ended June 30, 2007 from $1.53 for the same period in 2006.  Offshore oil and gas operating expenses increased $1.3 million (5%) to $25.6 million for the first six months of 2007 primarily due to lifting costs associated with new wells placed on production.  Oil and gas operating expenses per equivalent Mcf produced for Bois d'Arc Energy operations decreased $0.46 (27%) to $1.24 in the first six months of 2007 from $1.70 in the first six months of 2006.  The decrease is due to the fixed nature of a substantial portion of Bois d'Arc Energy's lifting costs and lower repair and maintenance costs in 2007.  Operating expenses in 2006 included $2.7 million of offshore repair costs related to the 2005 hurricanes.
 
In the second quarter of 2007, we had $19.9 million of exploration expense as compared to $3.7 million in the second quarter of 2006.  Exploration expense in the second quarter of 2007 primarily related to three offshore exploratory dry holes and two onshore exploratory dry holes in Mississippi.  In the second quarter of 2006, we had one offshore exploratory dry hole and the cost of seismic data acquired.  In the first six months of 2007, we had $31.0 million of exploration expense as compared to $8.6 million in the first six months of 2006.  Exploration expense in the first six months of 2007 primarily related to five offshore and two onshore exploratory dry holes and the cost of seismic data acquired by Bois d'Arc Energy.  The provision in the first six months of 2006 primarily related to two offshore exploratory dry holes and seismic data acquired by Bois d'Arc Energy.
 
 
 
24

Depreciation, depletion and amortization ("DD&A") increased $26.7 million (81%) to $59.8 million in the second quarter of 2007 from DD&A expense of $33.1 million in the second quarter of 2006.  DD&A for our onshore properties increased $13.6 million to $30.2 million for the three months ended June 30, 2007 from $16.6 million in the second quarter of 2006 due to our 20% higher production level and an increase in our onshore average DD&A rate.  Our onshore DD&A per equivalent Mcf produced increased by $0.96 to $2.80 for the three months ended June 30, 2007 from $1.84 for the three months ended June 30, 2007.  This increased rate was primarily attributable to the higher capitalized costs associated with our drilling program and our acquisitions completed in 2006 and 2007.  DD&A related to Bois d'Arc Energy for the second quarter of 2007 increased $12.3 million to $28.8 million from $16.5 million in the second quarter of 2006 million due primarily to the 47% higher production level and a higher amortization rate.  The DD&A rate per Mcfe produced for Bois d'Arc Energy's operations in the second quarter of 2007 increased $0.43 per Mcfe to $2.68 per Mcfe from $2.25 in the second quarter of 2006 due to higher capitalized costs related to Bois d'Arc Energy's drilling program which reflect the increased costs for drilling and construction services in the Gulf of Mexico.
 
For the six months ended June 30, 2007, DD&A increased $52.8 million (83%) to $116.5 million from $63.7 million for the six months ended June 30, 2006.  DD&A for our onshore properties increased $24.7 million (75%) to $57.6 million from $32.9 million in the first six months of 2006.  The increase is due to the 18% increase in onshore production and the increased amortization rate of $2.75 per Mcfe in the first half of 2007 as compared to $1.85 per Mcfe for the first half of 2006.  The higher rate is attributable to higher costs of the acquisitions we made in 2006 and 2007 and higher drilling costs associated with our onshore drilling program.  The DD&A associated with Bois d'Arc Energy's offshore properties of $57.3 million for the first six months of 2007 increased $26.4 million (86%) from $30.9 million for the six months ended June 30, 2006 due to the 45% increase in produced volumes and a higher amortization rate.  The DD&A rate per Mcfe produced for Bois d'Arc Energy's operations in the first six months of 2007 increased $0.62 per Mcfe to $2.77 per Mcfe from $2.15 in the first six months of 2006 due to higher capitalized costs related to Bois d'Arc Energy's drilling program which reflect the increased costs for drilling and construction services in the Gulf of Mexico.
 
General and administrative expenses, which are reported net of overhead reimbursements, increased by $1.0 million to $8.2 million for the second quarter of 2007 as compared to general and administrative expenses of $7.2 million for the second quarter of 2006.  Included in general and administrative expenses are stock-based compensation of $4.3 million and $3.3 million for the three months ended June 30, 2007 and 2006, respectively.  For the first six months of 2007, general and administrative expenses increased to $17.9 million from $15.4 million for the six months ended June 30, 2006. Included in general and administrative expenses are stock-based compensation of $8.6 million and $6.5 million for the six months ended June 30, 2007 and 2006, respectively.  These increases primarily reflect the additional personnel we have added since the beginning of 2007.

Interest expense increased $4.1 million (67%) to $10.2 million for the second quarter of 2007 from interest expense of $6.1 million in the second quarter of 2006.  The increase was primarily due to increased borrowings under our bank credit facilities during the second quarter of 2007 and higher interest rates.  The average borrowings outstanding increased to $387.9 million during the second quarter of 2007 as compared to $152.8 million in the second quarter of 2006.  The average interest rate we were charged on the outstanding borrowings under our credit facilities increased to 6.7% in the second quarter of 2007 as compared to 6.4% in the second quarter of 2006.  Interest expense for the six months ended June 30, 2007 increased $7.1 million (61%) to $18.7 million from $11.6 million for the six months ended June 30, 2006.  The increase is attributable to higher average borrowings under the bank credit facilities and higher interest rates.  Average borrowings outstanding increased to $346.8 million during the first six months of 2007 as compared to $144.7 million for the six months ended June 30, 2006.  The average interest rate under our bank credit facilities increased to 6.6% in the first half of 2007 as compared to 6.1% in the first half of 2006.
 
We had no outstanding derivatives during the three months and six months ended June 30, 2007.  We had natural gas price derivatives outstanding during the three and six months ended June 31, 2006 and we did not designate these derivatives as cash flow hedges in 2006 and accordingly, we recognized gains from the change in the fair value of these liabilities in 2006.  During 2006, the fair value of our liability for these derivatives decreased during the six months ended June 30, 2006 resulting in net gains of $1.3 million and $9.4 million for the three months and six months ended June 30, 2006, respectively.
 
    Income tax expense increased $0.7 million (4%) to $19.6 million in the three months ended June 30, 2007 from income tax expense of $18.9 million in the second quarter of 2006.  The increase was mainly due to higher income in the second quarter of 2007.  Income tax expense decreased $10.8 million (24%) to $34.4 million in the six months ended June 30, 2007 from income tax expense of $45.2 million in the first six months of 2006.  The decrease was mainly due to lower income in the first six months of 2007.
 
 
25

    Minority interest in earnings of Bois d'Arc Energy of $8.8 million for the three months ended June 30, 2007 increased $1.1 million (15%) from the minority interest in earnings of $7.7 million for the comparable period in 2006 due to Bois d'Arc Energy's higher net income for the three months ended June 30, 2007.  Minority interest in earnings of Bois d'Arc Energy of $14.8 million for the first six months of 2007 decreased $1.6 million (10%) from the minority interest in earnings of $16.4 million for the comparable period in 2006 due to Bois d'Arc Energy's lower net income for the six months ended June 30, 2007.
 
    We reported net income of $18.2 million for the three months ended June 30, 2007, as compared to $15.6 million for the three months ended June 30, 2006.  The net income per share for the second quarter of 2007 was $0.41 on weighted average diluted shares outstanding of 44.4 million as compared to $0.35 for the second quarter of 2006 on weighted average diluted shares outstanding of 43.5 million.  Net income for the six months ended June 30, 2007 was $30.8 million, as compared to net income of $45.2 million for the six months ended June 30, 2006.  Net income per share for the six months ended June 30, 2007 was $0.69 on weighted average diluted shares outstanding of 44.3 million as compared to net income of $1.03 on weighted average diluted shares outstanding of 43.5 million for the six months ended June 30, 2006.  Increases in exploration expense and DD&A in the first half of 2007 as compared to the same period in 2006 offset the higher oil and gas sales in the first half of 2007.  The 2006 results also included a $9.4 million gain from derivatives.

Liquidity and Capital Resources

Funding for our activities has historically been provided by our operating cash flow, debt or equity financings or asset dispositions.  For the six months ended June 30, 2007, our primary sources of funds were net cash flow from operations of $227.6 million and net borrowings under our credit facilities of $139.0 million.  Our net cash flow from operating activities increased $51.5 million (29%) in the first six months of 2007 from $176.1 million for the six months ended June 30, 2006.  This increase is primarily due to the higher revenues we had in the first half of 2007 driven by the 30% increase in our oil and gas production.

Our primary needs for capital, in addition to funding our ongoing operations, relate to the acquisition, development and exploration of our oil and gas properties and the repayment of our debt.  In the first six months of 2007, we incurred capital expenditures of $325.1 million primarily for our acquisition, development and exploration activities.
 
The following table summarizes our capital expenditure activity, on an accrual basis, for the six months ended June 30, 2007 and 2006:
     
Six Months Ended June 30, 2007
   
Six Months Ended June 30, 2006
 
             
Bois d'Arc
                   
Bois d'Arc
       
     
Onshore
   
Energy
   
Total
   
Onshore
   
Energy
   
Total
 
     
(In thousands)
 
Acquisitions of oil and gas properties
   
$
31,965
   
$
   
$
31,965
   
$
912
   
$
   
$
912
 
Leasehold costs
     
4,741
     
350
     
5,091
     
1,553
     
3,023
     
4,576
 
Development drilling
     
154,522
     
22,360
     
176,882
     
77,822
     
21,836
     
99,658
 
Exploratory drilling
     
7,589
     
65,379
     
72,968
     
75
     
64,791
     
64,866
 
Other development
     
3,318
     
34,075
     
37,393
     
11,920
     
24,648
     
36,568
 
       
202,135
     
122,164
     
324,299
     
92,282
     
114,298
     
206,580
 
Other
     
678
     
82
     
760
     
194
     
181
     
375
 
     
$
202,813
   
$
122,246
   
$
325,059
   
$
92,476
   
$
114,479
   
$
206,955
 
 
The timing of most of our capital expenditures is discretionary because we have no material long-term capital expenditure commitments except for commitments for contract drilling services and for seismic data acquisitions.  Consequently, we have a significant degree of flexibility to adjust the level of our capital expenditures as circumstances warrant.  As of June 30, 2007 we have contracted for the services of onshore drilling rigs through September 2008 at an aggregate cost of $39.8 million.  As of June 30, 2007, Bois d'Arc Energy has long term commitments to acquire seismic data totaling $11.0 million through December 2008.  We have obligations to incur future payments for dismantlement, abandonment and restoration costs of oil and gas properties.  These payments are currently estimated to be incurred primarily after 2011.  We record a separate liability for the fair value of these asset retirement obligations which totaled $59.6 million and $41.3 million as of June 30, 2007 and 2006, respectively.

We spent $170.2 million and $91.4 million on our onshore development and exploration activities in the six months ended June 30, 2007 and 2006, respectively.  We expect to spend approximately $301.0 million for onshore development and exploration projects in 2007.  Bois d'Arc Energy spent $122.2 million and $114.3 million on offshore development and exploration activities in the six months ended June 30, 2007 and 2006, respectively, and expects to spend $200.0 million for offshore development and exploration projects in 2007.  Development and exploration activities are funded primarily with operating cash flow and with borrowings under our bank credit facilities.
26

We spent $32.0 million on an acquisition of oil and gas properties in South Texas in the first six months of 2007.  We do not have a specific acquisition budget for 2007 since the timing and size of acquisitions are not predictable.  We intend to use borrowings under our bank credit facilities, or other debt or equity financings to the extent available, to finance significant acquisitions.  The availability and attractiveness of these sources of financing will depend upon a number of factors, some of which will relate to our financial condition and performance and some of which will be beyond our control, such as prevailing interest rates, oil and natural gas prices and other market conditions.

We have a $600.0 million bank credit facility with the Bank of Montreal, as the administrative agent.  The credit facility is a five-year revolving credit commitment that matures on December 15, 2011.  The credit facility is subject to borrowing base availability, which is redetermined semiannually based on the banks' estimates of the future net cash flows of our oil and natural gas properties.  The borrowing base may be affected by the performance of our properties and changes in oil and natural gas prices.  As of June 30, 2007 the borrowing base was $400.0 million, $106.0 million of which was available.  Indebtedness under the bank credit facility is secured by substantially all of our wholly-owned subsidiaries' oil and gas properties and is guaranteed by all of our wholly-owned subsidiaries.  Borrowings under the credit facility bear interest, based on the utilization of the borrowing base, at our option of either LIBOR plus 1.0% to 1.75% or the base rate (which is the higher of the prime rate or the federal funds rate) plus 0% to 0.5%.  A commitment fee of 0.25% to 0.375% based on the utilization of the borrowing base is payable on the unused borrowing base.  The credit facility contains covenants that, among other things, restrict the payment of cash dividends in excess of $40.0 million, limit the amount of consolidated debt that we may incur and limit our ability to make certain loans and investments.  The only financial covenants are the maintenance of a current ratio and maintenance of a minimum tangible net worth.  We were in compliance with these covenants as of June 30, 2007.  We also have $175.0 million of 6⅞% senior notes due March 1, 2012, with interest payable semiannually on each March 1 and September 1.  The notes are unsecured obligations and are guaranteed by all of our wholly owned subsidiaries.
 
Bois d'Arc Energy has a bank credit facility with the Bank of Nova Scotia and several other banks.  The credit facility matures on May 11, 2009.  Borrowings under the credit facility are limited to a borrowing base that is redetermined semi-annually based on the banks' estimates of the future net cash flows of Bois d'Arc Energy's oil and natural gas properties.  The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group.  The borrowing base is $225.0 million as of June 30, 2007.  Availability under the borrowing base was $100.0 million as of June 30, 2007.  Indebtedness under the credit facility is secured by substantially all of Bois d'Arc Energy and its subsidiaries' assets, and all of Bois d'Arc Energy's subsidiaries are guarantors of the indebtedness.  The credit facility contains covenants that restrict the payment of cash dividends in excess of $5.0 million, borrowings, sales of assets, loans to others, capital expenditures, investments, merger activity, hedging contracts, liens and certain other transactions without the prior consent of the lenders and requires Bois d'Arc Energy to maintain a ratio of current assets, including the availability under the bank credit facility, to current liabilities of at least one-to-one and a ratio of indebtedness to earnings before interest, taxes, depreciation, depletion, and amortization, exploration and impairment expense of no more than 2.5-to-one.

We believe that our cash flow from operations and available borrowings under our bank credit facilities will be sufficient to fund our operations and future growth as contemplated under our current business plan.  However, if our plans or assumptions change or if our assumptions prove to be inaccurate, we may be required to seek additional capital.  We cannot provide any assurance that we will be able to obtain such capital, or if such capital is available, that we will be able to obtain it on terms acceptable to us.
 
Critical Accounting Policies

The information included in "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies" in our annual report filed on Form 10-K for the year ended December 31, 2006 is incorporated herein by reference.

Effective January 1, 2007 we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109 ("FIN 48") which clarifies the accounting and disclosures for uncertainty in income tax positions, as defined.  The adoption of FIN 48 had no impact on the amounts recorded by us related to uncertain tax positions.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS No. 157).  This statement establishes a framework for fair value measurements in the financial statements by providing a single definition of fair value, provides guidance on the methods used to estimate fair value and increases disclosures about estimates of fair value.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is generally applied prospectively.  We are currently evaluating the impact of this statement on our consolidated financial statements.
 
 
27


 
ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Oil and Natural Gas Prices

Our financial condition, results of operations and capital resources are highly dependent upon the prevailing market prices of oil and natural gas.  These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors, some of which are beyond our control.  Factors influencing oil and natural gas prices include the level of global demand for crude oil, the foreign supply of oil and natural gas, the establishment of and compliance with production quotas by oil exporting countries, weather conditions that determine the demand for natural gas, the price and availability of alternative fuels and overall economic conditions.  It is impossible to predict future oil and natural gas prices with any degree of certainty.  Sustained weakness in oil and natural gas prices may adversely affect our financial condition and results of operations, and may also reduce the amount of oil and natural gas reserves that we can produce economically.  Any reduction in our oil and natural gas reserves, including reductions due to price fluctuations, can have an adverse effect on our ability to obtain capital for our exploration and development activities.  Similarly, any improvements in oil and natural gas prices can have a favorable impact on our financial condition, results of operations and capital resources.  Based on our oil and natural gas production for the six months ended June 30, 2007, a $1.00 change in the price per barrel of oil would have resulted in a change in our cash flow for such period by approximately $1.3 million and a $1.00 change in the price per Mcf of natural gas would have changed our cash flow by approximately $33.0 million.

Interest Rates

At June 30, 2007, we had total long-term debt of $594.0 million.  Of this amount, $175.0 million bears interest at a fixed rate of 6⅞%.  We had $419.0 million outstanding under our bank credit facilities, which bear interest at a fluctuating rate that is linked to LIBOR or the corporate base rate, at our option.  Any increases in these interest rates can have an adverse impact on our results of operations and cash flow.  Based on borrowings outstanding at June 30, 2007, a 100 basis point change in interest rates would change our interest expense for the six month period ended June 30, 2007 by approximately $2.1 million.

ITEM 4:  CONTROLS AND PROCEDURES

As of June 30, 2007, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2007 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to provide reasonable assurance that information required to be disclosed by us is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2007, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
 
 
 
 
 
 
 
 
 

28

 

PART II — OTHER INFORMATION

ITEM 6:
EXHIBITS

     
Exhibit No.
 
Description
     
15.1*
 
Awareness Letter of Ernst & Young LLP.
 
31.1*
 
Section 302 Certification of the Chief Executive Officer.
 
31.2*
 
Section 302 Certification of the Chief Financial Officer.
 
32.1*
 
Certification for the Chief Executive Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2*
 
Certification for the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.
 
     

*  Filed herewith.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
29


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

         
 
COMSTOCK RESOURCES, INC.
 
     
     
Date:           August 9, 2007
/s/ M. JAY ALLISON
 
 
M. Jay Allison, Chairman, President and Chief
 
 
Executive Officer (Principal Executive Officer)
 
 
         
     
Date:           August 9, 2007
/s/ ROLAND O. BURNS
 
 
Roland O. Burns, Senior Vice President,
 
 
Chief Financial Officer, Secretary, and Treasurer
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30

 
exhibit15pnt1.htm

Exhibit 15.1

August 9, 2007

Comstock Resources, Inc.
5300 Town & Country Boulevard
Suite 500
Frisco, Texas 75034

Shareholders and Board of Directors
Comstock Resources, Inc.

We are aware of the incorporation by reference in the Registration Statements (Nos. 33-20981 and 33-88962 filed on Form S-8 and Nos. 333-111237, 333-112100 and 333-128813 filed on Form S-3) of Comstock Resources, Inc. and of the related Prospectuses of our report dated August 9, 2007 relating to the unaudited consolidated interim financial statements of Comstock Resources, Inc. that are included in its Form 10-Q for the quarter ended June 30, 2007.

/s/ Ernst & Young LLP

Dallas, Texas
exhibit31pnt1.htm

Exhibit 31.1

Section 302 Certification

I, M. Jay Allison, certify that:

 
1.
 
I have reviewed this June 30, 2007 Form 10-Q of Comstock Resources, Inc.;
 
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
 
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 

 
(a)
 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
(b)
 
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
(c)
 
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
(d)
 
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 

 
5.
 
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 
(a)
 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
(b)
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 9, 2007
         
     
 
/s/ M. JAY ALLISON
 
 
President and Chief Executive Officer
 

exhibit31pnt2.htm
 
Exhibit 31.2

Section 302 Certification

I, Roland O. Burns, certify that:

 
1.
 
I have reviewed this June 30, 2007 Form 10-Q of Comstock Resources, Inc.;
 
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
 
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 

 
(a)
 
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
(b)
 
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
(c)
 
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
(d)
 
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 

 
5.
 
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 
(a)
 
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
(b)
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 9, 2007
         
     
 
/s/ ROLAND O. BURNS
 
 
Sr. Vice President and Chief Financial Officer
 
     
exhibit32pnt1.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Comstock Resources, Inc. (the "Company") on Form 10-Q for the three months ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, M. Jay Allison, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 
(1)
 
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
         
 
(2)
 
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
  
/s/ M. JAY ALLISON
       
M. Jay Allison
Chief Executive Officer
August 9, 2007

exhibit32pnt2.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Comstock Resources, Inc. (the "Company") on Form 10-Q for the three months ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roland O. Burns, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 
(1)
 
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
         
 
(2)
 
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
 
/s/ ROLAND O. BURNS
   
Roland O. Burns
Chief Financial Officer
August 9, 2007