Page
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets - September 30, 2007 and December 31, 2006		4
Consolidated Statements of Operations - Three months and nine months ended September 30, 2007 and 2006		5
Consolidated Statement of Stockholders' Equity - Nine months ended September 30, 2007		6
Consolidated Statements of Cash Flows - Nine months ended September 30, 2007 and 2006		7
Notes to Consolidated Financial Statements		8
Independent Accountants' Review Report		23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosure About Market Risk		30
Item 4. Controls and Procedures		31
PART II. Other Information
Item 6. Exhibits		32
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

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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

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CONSOLIDATED BALANCE SHEETS

(Unaudited)

		September 30,				December 31,
		2007				2006
ASSETS
		(In thousands)
Cash and Cash Equivalents		$	17,032			$	10,715
Accounts Receivable:
Oil and gas sales			59,384				56,328
Joint interest operations			17,407				19,233
Other Current Assets			17,066				12,552
Total current assets			110,889				98,828
Property and Equipment:
Unevaluated oil and gas properties			14,024				13,645
Oil and gas properties, successful efforts method			2,913,019				2,511,782
Other property and equipment			9,552				8,483
Accumulated depreciation, depletion and amortization			(915,859	)			(760,284	)
Net property and equipment			2,020,736				1,773,626
Other Assets			4,734				5,671
		$	2,136,359			$	1,878,125

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term Debt		$	5,176			$	3,250
Accounts Payable			116,300				132,504
Accrued Expenses			11,402				16,107
Total current liabilities			132,878				151,861
Long-term Debt			597,000				455,000
Deferred Income Taxes Payable			356,050				311,236
Reserve for Future Abandonment Costs			60,436				57,116
Minority Interest in Bois d'Arc Energy			251,443				220,349
Total liabilities			1,397,807				1,195,562
Commitments and Contingencies
Stockholders' Equity:
Common stock – $0.50 par, 50,000,000 shares authorized, 44,432,345 and 44,395,495 shares outstanding at September 30, 2007 and December 31, 2006, respectively			22,216				22,197
Additional paid-in capital			376,090				367,323
Retained earnings			340,246				293,043
Total stockholders' equity			738,552				682,563
		$	2,136,359			$	1,878,125

The accompanying notes are an integral part of these statements.

4

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CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
		(In thousands, except per share amounts)
Oil and gas sales		$	171,074			$	129,251			$	491,309			$	385,153
Operating expenses:
Oil and gas operating			34,005				26,904				91,268				78,220
Exploration			5,710				8,069				36,709				16,662
Depreciation, depletion and amortization			62,420				40,709				178,887				104,457
Impairment			826				1,389				826				10,169
General and administrative, net			8,676				7,370				26,540				22,738
Total operating expenses			111,637				84,441				334,230				232,246
Income from operations			59,437				44,810				157,079				152,907
Other income (expenses):
Interest income			410				258				1,041				724
Other income			154				187				505				616
Interest expense			(11,225	)			(6,733	)			(29,880	)			(18,322	)
Gain on derivatives			—				1,180				—				10,608
Total other income (expenses)			(10,661	)			(5,108	)			(28,334	)			(6,374	)
Income before income taxes and minority interest			48,776				39,702				128,745				146,533
Provision for income taxes			(21,570	)			(16,662	)			(55,955	)			(61,847	)
Minority interest in earnings of Bois d'Arc Energy			(10,778	)			(6,004	)			(25,587	)			(22,433	)
Net income		$	16,428			$	17,036			$	47,203			$	62,253
Net income per share:
Basic		$	0.38			$	0.40			$	1.09			$	1.48
Diluted		$	0.37			$	0.39			$	1.05			$	1.42
Weighted average common and common stock equivalent shares outstanding:
Basic			43,379				42,243				43,372				42,128
Diluted			44,434				43,553				44,345				43,505

 

The accompanying notes are an integral part of these statements.

5

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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

For the Nine Months Ended September 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			19				10				269				—				279
Stock-based compensation			18				9				7,896				—				7,905
Excess tax benefit from stock-based compensation			—				—				602				—				602
Net income			—				—				—				47,203				47,203
Balance at September 30, 2007			44,432			$	22,216			$	376,090			$	340,246			$	738,552

 

 

 

 

The accompanying notes are an integral part of these statements.

6

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine Months Ended
		September 30,
		2007				2006
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	47,203			$	62,253
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes			45,942				55,078
Dry hole costs and leasehold impairments			31,442				13,246
Depreciation, depletion and amortization			178,887				104,457
Impairment			826				10,169
Debt issuance cost amortization			854				878
Stock-based compensation			12,910				9,834
Excess tax benefit from stock-based compensation			(602	)			(922	)
Minority interest in earnings of Bois d'Arc Energy			25,587				22,433
Gain on derivatives			—				(10,608	)
(Increase) decrease in accounts receivable			(1,230	)			10,774
Increase in other current assets			(2,588	)			(139	)
Decrease in accounts payable and accrued expenses			(14,346	)			(3,153	)
Net cash provided by operating activities			324,885				274,300
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(461,824	)			(404,295	)
Payments to settle derivatives			—				(703	)
Net cash used for investing activities			(461,824	)			(404,998	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings			174,000				182,000
Principal payments on debt			(32,000	)			(39,000	)
Proceeds from issuance of common stock			789				1,756
Excess tax benefit from stock-based compensation			602				922
Debt issuance costs			(135	)			(28	)
Net cash provided by financing activities			143,256				145,650
Net increase in cash and cash equivalents			6,317				14,952
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		$	17,032			$	27,084

 

 

 

 

The accompanying notes are an integral part of these statements.

7

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2007 and the related results of operations for the three months and nine months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 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 three months and nine months ended September 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.

The Company currently owns a controlling ownership interest in Bois d'Arc Energy, Inc. ("Bois d'Arc Energy") and currently intends to maintain its controlling interest by acquiring additional shares of Bois d'Arc Energy common stock, through open market purchases and other negotiated transactions, as appropriate.  However, such actions are subject to the outcome of an evaluation of strategic alternatives by the board of directors of Bois d'Arc Energy, including the potential sale of Bois d'Arc Energy.  The Company includes Bois d'Arc Energy in its consolidated financial statements.

In connection with its acquisitions of 2,288,900 additional common shares of Bois d'Arc Energy in 2006 and 2007, 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 nine months ended September 30, 2006.

Reclassifications

Certain reclassifications have been made to prior periods' financial statements to conform to the current presentation.

 

 

 

 

8

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 nine months ended September 30, 2007 and 2006:

		Nine Months Ended
		September 30,
		2007				2006
		(In thousands)
Beginning asset retirement obligations		$	57,116			$	3,206
Bois d'Arc abandonment liability(1)			—				35,034
Accretion expense			2,702				1,849
Acquisition liabilities assumed			94				3,314
New wells placed on production and changes in estimates			1,279				953
Liabilities settled			(755	)			(23	)
Future abandonment liability — end of period		$	60,436			$	44,333

     

(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.

The Company had no derivative financial instruments outstanding during the three months and nine months ended September 30, 2007.  The fair value of the Company's derivative contracts held for price risk management at September 30, 2006 was an asset of $68,000.  Comstock did not designate these instruments as cash flow hedges, and accordingly unrealized gains on derivatives of $1.2 million and $11.3 million were recorded for the three months and nine months ended September 30, 2006.  The Company realized losses of $0.7 million for the nine months ended September 30, 2006 to settle derivative positions.

 

 

 

 

 

9

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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 September 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 $1.6 million and $1.7 million, respectively, attributable to Bois d'Arc Energy's incentive plan.  Stock based compensation expense for the nine months ended September 30, 2007 and 2006 was $12.9 million and $9.8 million, respectively which includes $5.0 million and $4.7 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 September 30, 2007, total unrecognized compensation cost related to nonvested Comstock stock options of $2.4 million is expected to be recognized over a period of 3.2 years.  As of September 30, 2007, total unrecognized compensation cost related to nonvested Bois d'Arc Energy stock options of $8.9 million is expected to be recognized over a period of 5.2 years.

As of September 30, 2007, Comstock had 1,041,000 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $28.46 per share.  During the nine months ended September 30, 2007 Comstock issued 18,000 new restricted stock grants with a weighted average grant date fair value of $29.38 per share.  Total unrecognized compensation cost related to Comstock unvested restricted stock grants of $18.4 million as of September 30, 2007 is expected to be recognized over a period of 3.8 years.  As of September 30, 2007, Bois d'Arc Energy had 854,000 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $6.80 per share.  Total unrecognized compensation cost related to Bois d'Arc Energy unvested restricted stock grants of $5.2 million as of September 30, 2007 is expected to be recognized over a period of 1.8 years.

 

 

 

 

 

 

 

 

 

 

10

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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							Nine Months Ended
		September 30,							September 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		7.5%				4.9%				6.8%				5.0%
Nondeductible stock-based compensation		1.7%				2.0%				2.0%				1.7%
Changes due to tax law changes		—%				—%				(0.6%	)			0.7%
State income taxes, net of federal benefit		0.9%				(0.4%	)			0.9%				—%
Other		(0.9%	)			0.5%				(0.6%	)			(0.2%	)
Effective tax rate		44.2%				42.0%				43.5%				42.2%

 

 

The following is an analysis of consolidated income tax expense:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(In thousands)
Current provision		$	4,322			$	1,599			$	10,013			$	6,769
Deferred provision			17,248				15,063				45,942				55,078
Provision for Income Taxes		$	21,570			$	16,662			$	55,955			$	61,847

 

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.

 

 

 

 

 

11

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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 nine months ended September 30, 2007 and 2006, respectively, were determined as follows:

 

		Nine Months Ended September 30,
		2007												2006
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(In thousands, except per share amounts)
Basic Earnings Per Share:
Net Income		$	16,428				43,379			$	0.38			$	17,036				42,243			$	0.40
Diluted Earnings Per Share:
Net Income		$	16,428				43,379							$	17,036				42,243
Effect of Dilutive Securities:
Stock Grants and Options			(186	)			1,055								(88	)			1,310
Net Income Available to Common Stockholders With Assumed Conversions		$	16,242				44,434			$	0.37			$	16,948				43,553			$	0.39

   

		Nine Months Ended September 30,
		2007												2006
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(In thousands, except per share amounts)
Basic Earnings Per Share:
Net Income		$	47,203				43,372			$	1.09			$	62,253				42,128			$	1.48
Diluted Earnings Per Share:
Net Income		$	47,203				43,372							$	62,253				42,128
Effect of Dilutive Securities:
Stock Grants and Options			(441	)			973								(394	)			1,377
Net Income Available to Common Stockholders With Assumed Conversions		$	46,762				44,345			$	1.05			$	61,859				43,505			$	1.42

  

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								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(In thousands except per share data)
Weighted average anti-dilutive stock options			267				132				249				113
Weighted average exercise price		$	32.32			$	32.48			$	32.52			$	32.49
12

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

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:

 

		Nine Months Ended
		September 30,
		2007				2006
		(In thousands)
Cash Payments -
Interest payments		$	32,448			$	21,017
Income tax payments		$	9,978			$	7,105

(2)  LONG-TERM DEBT  –

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

   

		(In thousands)
Comstock Revolving Bank Credit Facility		$	322,000
Bois d'Arc Energy Revolving Bank Credit Facility			100,000
Comstock 6⅞% Senior Notes due 2012			175,000
		$	597,000

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 September 30, 2007, the borrowing base was $400.0 million, $78.0 million of which was available.  On November 5, 2007 the borrowing base was increased to $500.0 million.  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 September 30, 2007.

 

 

 

 

 

 

 

13

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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 redetermined 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 September 30, 2007.  Availability under this credit facility was $125.0 million as of September 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 September 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 $8.3 million through December 2008.  As of September 30, 2007, the Company had commitments for contracted drilling services of $30.5 million through September 2008.

(4)  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 sheets, statements of operations and statements 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.

 

 

 

 

 

 

 

14

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Balance Sheet:		As of September 30, 2007
		Comstock Resources				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Assets:
Cash and cash equivalents		$	—			$	2,286			$	14,746			$	—			$	17,032
Accounts receivable			—				42,793				33,998				—				76,791
Other current assets			392				6,122				10,552				—				17,066
Total current assets			392				51,201				59,296				—				110,889
Net property and equipment			28,622				1,107,822				884,292				—				2,020,736
Investment in subsidiaries			742,806				—				—				(742,806	)			—
Intercompany receivables			488,154				—				—				(488,154	)			—
Other assets			4,148				—				586				—				4,734
Total assets		$	1,264,122			$	1,159,023			$	944,174			$	(1,230,960	)		$	2,136,359
Liabilities and Stockholders' Equity:
Short-term debt		$	—			$	—			$	5,176			$	—			$	5,176
Accounts payable			28				75,822				40,450				—				116,300
Accrued expenses			3,953				6,109				1,340				—				11,402
Total current liabilities			3,981				81,931				46,966				—				132,878
Long-term debt			497,000				—				100,000				—				597,000
Intercompany payables			—				488,154				—				(488,154	)			—
Deferred income taxes payable			24,589				158,063				173,398				—				356,050
Reserve for future abandonment costs			—				9,307				51,129				—				60,436
Minority interest			—				—				—				251,443				251,443
Total liabilities			525,570				737,455				371,493				(236,711	)			1,397,807
Stockholders' equity			738,552				421,568				572,681				(994,249	)			738,552
Total liabilities and stockholders' equity		$	1,264,122			$	1,159,023			$	944,174			$	(1,230,960	)		$	2,136,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

 

Balance Sheet:		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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Statement of Operations:
		Three Months Ended September 30, 2007
		Comstock Resources				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Oil and gas sales		$	—			$	83,087			$	87,987			$	—			$	171,074
Operating expenses:
Oil and gas operating			—				17,030				16,975				—				34,005
Exploration			—				1,375				4,335				—				5,710
Depreciation, depletion and amortization			848				33,293				28,279				—				62,420
Impairment			—				482				344								826
General and administrative, net			8,372				(2,709	)			3,013				—				8,676
Total operating expenses			9,220				49,471				52,946				—				111,637
Income from operations			(9,220	)			33,616				35,041				—				59,437
Other income (expenses):
Interest income			—				256				154				—				410
Other income			—				39				115				—				154
Interest expense			(8,772	)			—				(2,453	)			—				(11,225	)
Intercompany interest income (expense)			2,749				(2,749	)			—				—				—
Total other income (expenses)			(6,023	)			(2,454	)			(2,184	)							(10,661	)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy			(15,243	)			31,162				32,857				—				48,776
(Provision for) benefit from income taxes			1,026				(10,968	)			(11,628	)			—				(21,570	)
Minority interest in earnings of Bois d'Arc Energy			—				—				—				(10,778	)			(10,778	)
Equity in earnings of subsidiaries			30,645				—				—				(30,645	)			—
Net income		$	16,428			$	20,194			$	21,229			$	(41,423	)		$	16,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Statement of Operations:
		Three Months Ended September 30, 2006
		Comstock Resources				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Oil and gas sales		$	—			$	62,255			$	66,996			$	—			$	129,251
Operating expenses:
Oil and gas operating			—				13,366				13,538				—				26,904
Exploration			—				—				8,069				—				8,069
Depreciation, depletion and amortization			329				18,648				21,732				—				40,709
Impairment			—				803				586				—				1,389
General and administrative, net			6,123				(1,783	)			3,030				—				7,370
Total operating expenses			6,452				31,034				46,955				—				84,441
Income from operations			(6,452	)			31,221				20,041				—				44,810
Other income (expenses):
Interest income			—				143				115				—				258
Other income			—				45				142				—				187
Interest expense			(4,851	)			—				(1,882	)			—				(6,733	)
Gain on derivatives			—				1,180				—				—				1,180
Intercompany interest income (expense)			2,621				(2,621	)			—				—				—
Total other income (expenses)			(2,230	)			(1,253	)			(1,625	)							(5,108	)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy			(8,682	)			29,968				18,416				—				39,702
Provision for income taxes			410				(10,240	)			(6,832	)			—				(16,662	)
Minority interest in earnings of Bois d'Arc Energy			—				—				—				(6,004	)			(6,004	)
Equity in earnings of subsidiaries			25,308				—				—				(25,308	)			—
Net income		$	17,036			$	19,728			$	11,584			$	(31,312	)		$	17,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Statement of Operations:
		Nine Months Ended September 30, 2007
		Comstock Resources				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Oil and gas sales		$	—			$	236,094			$	255,215			$	—			$	491,309
Operating expenses:
Oil and gas operating			—				48,709				42,559				—				91,268
Exploration			—				3,651				33,058				—				36,709
Depreciation, depletion and amortization			2,621				90,693				85,573				—				178,887
Impairment			—				482				344								826
General and administrative, net			24,902				(7,401	)			9,039				—				26,540
Total operating expenses			27,523				136,134				170,573				—				334,230
Income from operations			(27,523	)			99,960				84,642				—				157,079
Other income (expenses):
Interest income			—				644				397				—				1,041
Other income			—				116				389				—				505
Interest expense			(22,831	)			(1	)			(7,048	)			—				(29,880	)
Intercompany interest income (expense)			4,130				(4,130	)			—				—				—
Total other income (expenses)			(18,701	)			(3,371	)			(6,262	)							(28,334	)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy			(46,224	)			96,589				78,380				—				128,745
(Provision for) benefit from income taxes			5,492				(33,600	)			(27,847	)			—				(55,955	)
Minority interest in earnings of Bois d'Arc Energy			—				—				—				(25,587	)			(25,587	)
Equity in earnings of subsidiaries			87,935				—				—				(87,935	)			—
Net income		$	47,203			$	62,989			$	50,533			$	(113,522	)		$	47,203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Statement of Operations:
		Nine Months Ended September 30, 2006
		Comstock Resources				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries				Consolidated
		(In thousands)
Oil and gas sales		$	—			$	196,717			$	188,436			$	—			$	385,153
Operating expenses:
Oil and gas operating			—				40,421				37,799				—				78,220
Exploration			—				344				16,318				—				16,662
Depreciation, depletion and amortization			444				51,393				52,620				—				104,457
Impairment			—				8,737				1,432				—				10,169
General and administrative, net			18,659				(4,833	)			8,912				—				22,738
Total operating expenses			19,103				96,062				117,081				—				232,246
Income from operations			(19,103	)			100,655				71,355								152,907
Other income (expenses):
Interest income							483				241				—				724
Other income			—				147				469				—				616
Interest expense			(14,041	)			247				(4,528	)			—				(18,322	)
Gain on derivatives			—				10,608				—				—				10,608
Intercompany interest income (expense)			7,229				(7,229	)			—				—				—
Total other income (expenses)			(6,812	)			4,256				(3,818	)			—				(6,374	)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy			(25,915	)			104,911				67,537				—				146,533
Provision for income taxes			280				(37,738	)			(24,389	)			—				(61,847	)
Minority interest in earnings of Bois d'Arc Energy			—				—				—				(22,433	)			(22,433	)
Equity in earnings of subsidiaries			87,888				—				—				(87,888	)			—
Net income		$	62,253			$	67,173			$	43,148			$	(110,321	)		$	62,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Statement of Cash Flows:
		Nine Months Ended September 30, 2007
		Comstock				Guarantor				Non-Guarantor				Eliminating
		Resources				Subsidiaries				Subsidiaries				Entries				Consolidated
		(In thousands)
Net Cash Provided by (Used for) Operating Activities		$	(28,677	)		$	177,536			$	176,003			$	23			$	324,885
Cash Flows From Investing Activities:
Capital expenditures			(874	)			(289,774	)			(171,176	)			—				(461,824	)
Net Cash Used for Investing Activities			(874	)			(289,774	)			(171,176	)			—				(461,824	)
Cash Flows From Financing Activities:
Borrowings			142,000				—				32,000				—				174,000
Principal payments on debt			—				—				(32,000	)			—				(32,000	)
Advances to (from) parent			(113,296	)			113,296				—				—				—
Proceeds from issuance of common stock			279				—				510				—				789
Excess tax benefit from stock-based compensation			602				—				23				(23	)			602
Debt issuance costs			(34	)			—				(101	)			—				(135	)
Net Cash Provided by Financing Activities			29,551				113,296				432				(23	)			143,256
Net increase in cash and cash equivalents			—				1,058				5,259				—				6,317
Cash and cash equivalents, beginning of period			—				1,228				9,487				—				10,715
Cash and cash equivalents, end of period		$	—			$	2,286			$	14,746			$	—			$	17,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

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COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Statement of Cash Flows:
		Nine Months Ended September 30, 2006
		Comstock				Guarantor				Non-Guarantor				Eliminating
		Resources				Subsidiaries				Subsidiaries				Entries				Consolidated
		(In thousands)
Net Cash Provided by (Used for) Operating Activities		$	(12,639	)		$	148,968			$	137,971			$	—			$	274,300
Cash Flows From Investing Activities:
Capital expenditures and acquisitions			(929	)			(207,318	)			(196,048	)			—				(404,295	)
Acquisition of Bois d'Arc Energy, Inc. common stock			(35,865	)			—				—				35,865				—
Payments to settle derivatives			—				(703	)			—				—				(703	)
Net Cash Used for Investing Activities			(36,794	)			(208,021	)			(196,048	)			35,865				(404,998	)
Cash Flows From Financing Activities:
Borrowings			111,000				—				71,000				—				182,000
Principal payments on debt			(4,000	)			—				(35,000	)			—				(39,000	)
Advances to (from) parent			(60,245	)			60,245				—				—				—
Proceeds from issuance of common stock			1,756				—				35,990				(35,990	)			1,756
Excess tax benefit from stock-based compensation			922				—				29				(29	)			922
Debt issuance costs			—				(28	)			(154	)			154				(28	)
Net Cash Provided by Financing Activities			49,433				60,217				71,865				(35,865	)			145,650
Net increase in cash and cash equivalents			—				1,164				13,788				—				14,952
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		$	—			$	1,253			$	25,831			$	—			$	27,084

 

 

 

 

 

 

 

 

22

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INDEPENDENT ACCOUNTANTS' REVIEW REPORT

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

November 7, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

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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.

Investment in Bois d'Arc Energy

We own a controlling ownership interest in Bois d'Arc Energy and currently intend to maintain our controlling interest by acquiring additional shares of Bois d'Arc Energy common stock through open market purchases and other negotiated transactions, as appropriate.  However, such controlling position and any further actions are subject to the outcome of an evaluation of strategic alternatives by the board of directors of Bois d'Arc Energy, including the potential sale of Bois d'Arc Energy.  We include Bois d'Arc Energy in our consolidated financial statements.

Results of Operations

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 September 30, 2007												Three Months Ended September 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)			260				448				708				231				370				601
Natural Gas (Mmcf)			10,612				8,241				18,853				7,409				6,106				13,515
Natural Gas equivalent (Mmcfe)			12,170				10,930				23,100				8,792				8,328				17,120
Revenues:
Oil sales		$	16,628			$	34,738			$	51,366			$	13,696			$	25,935			$	39,631
Gas sales			66,459				53,249				119,708				48,559				41,061				89,620
Total oil and gas sales		$	83,087			$	87,987			$	171,074			$	62,255			$	66,996			$	129,251
Expenses:
Oil and gas operating expenses(1)		$	17,030			$	16,975			$	34,005			$	13,366			$	13,538			$	26,904
Exploration expense		$	1,375			$	4,335			$	5,710			$	—			$	8,069			$	8,069
Depreciation, depletion and amortization		$	33,413			$	28,279			$	62,420			$	18,707			$	21,732			$	40,709
Average Sales Price:
Oil (per Bbl)		$	64.06			$	77.50			$	72.57			$	59.42			$	70.01			$	65.95
Natural gas (per Mcf)		$	6.26			$	6.46			$	6.35			$	6.55			$	6.72			$	6.63
Average equivalent (Mcfe)		$	6.83			$	8.05			$	7.41			$	7.08			$	8.04			$	7.55
Expenses ($ per Mcfe):
Oil and gas operating(1)		$	1.40			$	1.55			$	1.47			$	1.52			$	1.63			$	1.57
Depreciation, depletion and amortization(2)		$	2.73			$	2.57			$	2.69			$	2.12			$	2.60			$	2.37

 

(1)	Includes lease operating costs and production and ad valorem taxes.
(2)	Represents depreciation, depletion and amortization of oil and gas properties only.

 

24

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			Nine Months Ended September 30, 2007												Nine Months Ended September 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)				766				1,233				1,999				696				1,033				1,729
Natural Gas (Mmcf)				28,462				24,136				52,598				22,327				16,388				38,715
Natural Gas equivalent (Mmcfe)				33,056				31,535				64,591				26,501				22,587				49,088
Revenues:
Oil sales			$	42,993			$	83,844			$	126,837			$	39,808			$	69,215			$	109,023
Gas sales				193,101				171,371				364,472				156,909				119,221				276,130
Total oil and gas sales			$	236,094			$	255,215			$	491,309			$	196,717			$	188,436			$	385,153
Expenses:
Oil and gas operating expenses(1)			$	48,709			$	42,559			$	91,268			$	40,421			$	37,799			$	78,220
Exploration expense			$	3,651			$	33,058			$	36,709			$	344			$	16,318			$	16,662
Depreciation, depletion and amortization			$	91,021			$	85,573			$	178,887			$	51,567			$	52,620			$	104,457
Average Sales Price:
Oil (per Bbl)			$	56.15			$	67.99			$	63.45			$	57.22			$	67.00			$	63.06
Natural gas (per Mcf)			$	6.78			$	7.10			$	6.93			$	7.03			$	7.27			$	7.13
Average equivalent (Mcfe)			$	7.14			$	8.09			$	7.61			$	7.42			$	8.34			$	7.85
Expenses ($ per Mcfe):
Oil and gas operating(1)			$	1.47			$	1.35			$	1.41			$	1.53			$	1.67			$	1.59
Depreciation, depletion and amortization(2)			$	2.74			$	2.70			$	2.76			$	1.94			$	2.32			$	2.12

 

(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 third quarter of 2007 of $171.1 million increased $41.8 million (32%) over our sales of $129.3 million in the third quarter of 2006.  The growth in sales resulted from our higher production in the third quarter of 2007.  Production in the third quarter of 2007 increased 35% to 23.1 Bcfe as compared to production of 17.1 Bcfe in the third quarter of 2006. Our realized oil prices in the third quarter of 2007 averaged $72.57 per barrel, 10% higher than the $65.95 per barrel realized in the third quarter of 2006.  Our average realized natural gas price of $6.35 per Mcf in the third quarter of 2007 was 4% lower than our average natural gas price of $6.63 per Mcf for the three months ended September 30, 2006.

Oil and gas sales from our onshore properties increased $20.8 million to $83.1 million for the three months ended September 30, 2007 from $62.3 million for the third quarter of 2006.  Our onshore production in the third quarter of 2007 increased by 38% to 12.2 Bcfe over production in the third quarter of 2006 of 8.8 Bcfe.  The production increase was attributable to our development drilling activity primarily in our East Texas/North Louisiana and South Texas regions.  Our average onshore realized crude oil price increased by 8% and our average onshore realized natural gas price decreased by 4% in the third quarter of 2007 as compared to the third quarter of 2006.  Oil and gas sales from Bois d'Arc Energy's operations for the third quarter of 2007 of $88.0 million increased $21.0 million or 31% compared with the third quarter of 2006.  Bois d'Arc Energy's production of 10.9 Bcfe in the third quarter of 2007 increased by 31% from the production in the third quarter of 2006 of 8.3 Bcfe.  The increase was due primarily to production from new wells we drilled.  Bois d'Arc Energy's average oil price increased by 11% and Bois d'Arc Energy's average natural gas price decreased by 4% in the third quarter of 2007 as compared to the third quarter of 2006.

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Our oil and gas sales in the first nine months of 2007 of $491.3 million increased $106.1 million (28%) over our sales of $385.2 million in the first nine months of 2006.  The growth in sales was attributable to our higher production.  Production in the first nine months of 2007 increased 32% to 64.6 Bcfe as compared to production of 49.1 Bcfe in the first nine months of 2006.  Our realized oil prices in the first nine months of 2007 averaged $63.45 per barrel, slightly higher than the $63.06 per barrel realized in the first nine months of 2006. Our average realized natural gas price of $6.93 per Mcf in the first nine months of 2007 was 3% less than our average natural gas price of $7.13 per Mcf for the nine months ended September 30, 2006.

Oil and gas sales from our onshore properties increased $39.4 million to $236.1 million for the nine months ended September 30, 2007 from $196.7 million for the first nine months of 2006.  Our onshore production in the first nine months of 2007 increased by 25% to 33.1 Bcfe from production in the first nine months of 2006 of 26.5 Bcfe.  The production increase was attributable to our development drilling activity primarily in our East Texas/North Louisiana and South Texas regions.  Our average onshore realized crude oil price decreased by 2% and our average onshore realized natural gas price decreased by 3% in the first nine months of 2007 as compared to the first nine months of 2006.  Oil and gas sales from Bois d'Arc Energy's operations for the first nine months of 2007 of $255.2 million increased $66.8 million or 35% as compared with the first nine months of 2006.  Bois d'Arc Energy's production of 31.5 Bcfe in the first nine months of 2007 increased by 40% from the production in the first nine months of 2006 of 22.6 Bcfe.  The increase was due to production from new wells and restoration of 3.5 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 increased by 1% and Bois d'Arc Energy's average natural gas price decreased by 2% in the first nine months of 2007 as compared to the first nine months of 2006.

 

Costs and Expenses -

 

Our oil and gas operating expenses, including production taxes, increased $7.1 million (26%) to $34.0 million in the third quarter of 2007 from $26.9 million in the third quarter of 2006.  Oil and gas operating expenses from our onshore operations increased $3.6 million (27%) to $17.0 million from $13.4 million in the third quarter of 2006 primarily due to the 38% increase in production in the third quarter of 2007.  Oil and gas operating expenses per equivalent Mcf produced for our onshore operations decreased $0.12 (8%) to $1.40 in the third quarter of 2007 from $1.52 in the third quarter of 2006.  Bois d'Arc Energy's oil and gas operating costs for the third quarter of 2007 of $17.0 million increased $3.5 million (25%) from $13.5 million in the third quarter of 2006.  Oil and gas operating expenses per equivalent Mcf produced for Bois d'Arc Energy's operations decreased $.07 (4%) to $1.55 in the third quarter of 2007 from $1.63 in the third 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.

 

Oil and gas operating expenses increased $13.1 million (17%) to $91.3 million in the first nine months of 2007 from $78.2 million in the first nine months of 2006.  Onshore oil and gas operating expenses increased $8.3 million (21%) 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 $0.06 to $1.47 for the nine months ended September 30, 2007 from $1.53 for the same period in 2006.  Offshore oil and gas operating expenses increased $4.8 million (13%) to $42.6 million for the first nine 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 $.32 (19%) to $1.35 in the first nine months of 2007 from $1.67 in the first nine 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 $3.1 million of offshore repair costs related to the 2005 hurricanes.

 

In the third quarter of 2007, we had $5.7 million of exploration expense as compared to $8.1 million in the third quarter of 2006.  Exploration expense in the third quarter of 2007 primarily related to an exploratory dry hole drilled and the acquisition of seismic data.  In the third quarter of 2006, we had one offshore exploratory dry hole and the cost of seismic data acquired.  In the first nine months of 2007, we had $36.7 million of exploration expense as compared to $16.7 million in the first nine months of 2006.  Exploration expense in the first nine months of 2007 primarily related to five offshore and three onshore exploratory dry holes and the cost of seismic data acquired by Bois d'Arc Energy.  The provision in the first nine months of 2006 primarily related to three offshore exploratory dry holes and seismic data acquired by Bois d'Arc Energy.

 

 

 

 

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    Depreciation, depletion and amortization ("DD&A") increased $21.7 million (53%) to $62.4 million in the third quarter of 2007 from DD&A expense of $40.7 million in the third quarter of 2006.  DD&A for our onshore properties increased $14.7 million to $33.4 million for the three months ended September 30, 2007 from $18.7 million in the third quarter of 2006 due to our 38% higher production level and an increase in our onshore average DD&A rate.  Our onshore DD&A per equivalent Mcf produced increased by $0.61 to $2.73 for the three months ended September 30, 2007 from $2.12 for the three months ended September 30, 2006.  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 third quarter of 2007 increased $6.6 million to $28.3 million from $21.7 million in the third quarter of 2006 million due primarily to the 31% higher production level.  The DD&A rate per Mcfe produced for Bois d'Arc Energy's operations in the third quarter of 2007 decreased to $2.57 per Mcfe from $2.60 in the third quarter of 2006.

 

For the nine months ended September 30, 2007, DD&A increased $74.4 million (71%) to $178.9 million from $104.5 million for the nine months ended September 30, 2006.  DD&A for our onshore properties increased $39.4 million (77%) to $91.0 million from $51.6 million in the first nine months of 2006.  The increase is due to the 25% increase in onshore production and the increased amortization rate of $2.74 per Mcfe in the first half of 2007 as compared to $1.94 per Mcfe for the first nine months 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 $85.6 million for the first nine months of 2007 increased $33.0 million (63%) from $52.6 million for the nine months ended September 30, 2006 due to the 40% 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 nine months of 2007 increased $0.38 per Mcfe to $2.70 per Mcfe from $2.32 in the first nine months of 2006 due to higher capitalized costs related to Bois d'Arc Energy's drilling program.

 

Impairment expense of $0.8 million for the three months ended September 30, 2007 and $1.4 million for the three months ended September 30, 2006 relate to impairments of minor valued fields.  Impairment expense for the first nine months of 2007 of $0.8 million decreased $9.4 million from impairment expense of $10.2 million for the nine months ended September 30, 2006 mainly as a result of the impairment in 2006 of a property held for resale for which the plan to sell the property was subsequently cancelled.

 

General and administrative expense, which is reported net of overhead reimbursements, increased by $1.3 million to $8.7 million for the third quarter of 2007 as compared to general and administrative expense of $7.4 million for the third quarter of 2006.  Included in general and administrative expense is stock-based compensation of $4.3 million and $3.3 million for the three months ended September 30, 2007 and 2006, respectively.  For the first nine months of 2007, general and administrative expense increased to $26.5 million from $22.7 million for the nine months ended September 30, 2006.  These increases primarily reflect the additional personnel we have added since the beginning of 2007.  Included in general and administrative expense is stock-based compensation of $12.9 million and $9.8 million for the nine months ended September 30, 2007 and 2006, respectively.

Interest expense increased $4.5 million (67%) to $11.2 million for the third quarter of 2007 from interest expense of $6.7 million in the third quarter of 2006.  The increase was primarily due to increased borrowings under our bank credit facilities during the third quarter of 2007 and higher interest rates.  The average borrowings outstanding increased to $427.5 million during the third quarter of 2007 as compared to $180.5 million in the third quarter of 2006.  The average interest rate we were charged on the outstanding borrowings under our credit facilities increased to 6.9% in the third quarter of 2007 as compared to 6.8% in the third quarter of 2006.  Interest expense for the nine months ended September 30, 2007 increased $11.6 million (63%) to $29.9 million from $18.3 million for the nine months ended September 30, 2006.  The increase is attributable to higher average borrowings under the bank credit facilities and higher interest rates.  Average borrowings outstanding increased to $374.0 million during the first nine months of 2007 as compared to $157.0 million for the nine months ended September 30, 2006.  The average interest rate under our bank credit facilities increased to 6.7% in the first nine months of 2007 as compared to 6.4% in the first nine months of 2006.

We had no outstanding derivatives during the three months and nine months ended September 30, 2007.  We had natural gas price derivatives outstanding during the three and nine months ended September 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 nine months ended September 30, 2006 resulting in net gains of $1.2 million and $10.6 million for the three months and nine months ended September 30, 2006, respectively.

 

 

 

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Income tax expense increased $4.9 million (30%) to $21.6 million for the three months ended September 30, 2007 from income tax expense of $16.7 million for the third quarter of 2006.  The increase was mainly due to higher income during the third quarter of 2007.  Income tax expense decreased $5.8 million (10%) to $56.0 million for the nine months ended September 30, 2007 from income tax expense of $61.8 million for the first nine months of 2006.  The decrease was primarily due to lower income during the first nine months of 2007.

 

Minority interest in earnings of Bois d'Arc Energy of $10.8 million for the three months ended September 30, 2007 increased $4.8 million (80%) from the minority interest in earnings of $6.0 million for the comparable period in 2006 due to Bois d'Arc Energy's higher net income for the three months ended September 30, 2007.  Minority interest in earnings of Bois d'Arc Energy of $25.6 million for the first nine months of 2007 increased $3.2 million (14%) from the minority interest in earnings of $22.4 million for the comparable period in 2006 due to Bois d'Arc Energy's higher net income for the nine months ended September 30, 2007.

 

We reported net income of $16.4 million for the three months ended September 30, 2007, as compared to $17.0 million for the three months ended September 30, 2006.  The net income per share for the third quarter of 2007 was $0.37 on weighted average diluted shares outstanding of 44.4 million as compared to $0.39 for the third quarter of 2006 on weighted average diluted shares outstanding of 43.6 million.  Net income for the nine months ended September 30, 2007 was $47.2 million, as compared to net income of $62.3 million for the nine months ended September 30, 2006.  Net income per share for the nine months ended September 30, 2007 was $1.05 on weighted average diluted shares outstanding of 44.3 million as compared to net income per share of $1.42 on weighted average diluted shares outstanding of 43.5 million for the nine months ended September 30, 2006.  Increases in exploration expense and DD&A in the first nine months of 2007 as compared to the same period in 2006 offset the higher oil and gas sales in the first nine months of 2007.  The 2006 results also included a $10.6 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 nine months ended September 30, 2007, our primary sources of funds were net cash flow from operations of $324.9 million and net borrowings under our credit facilities of $142.0 million.  Our net cash flow from operating activities increased $50.6 million (18%) in the first nine months of 2007 from $274.3 million for the nine months ended September 30, 2006.  This increase is primarily due to the higher revenues we had in the first nine months of 2007 driven by the 32% increase in our oil and gas production.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The following table summarizes our capital expenditure activity, on an accrual basis, for the nine months ended September 30, 2007 and 2006:

			Nine Months Ended September 30, 2007												Nine Months Ended September 30, 2006
							Bois d'Arc												Bois d'Arc
			Onshore				Energy				Total				Onshore				Energy				Total
			(In thousands)
Acquisitions of oil and gas properties			$	31,189			$	—			$	31,189			$	68,175			$	18,178			$	86,353
Leasehold costs				7,546				1,727				9,273				3,383				2,108				5,491
Development drilling				231,870				41,268				273,138				123,916				39,027				162,943
Exploratory drilling				10,424				82,275				92,699				75				87,771				87,846
Other development				5,775				41,799				47,574				17,389				44,714				62,103
				286,804				167,069				453,873				212,938				191,798				404,736
Other				806				83				889				388				1,595				1,983
			$	287,610			$	167,152			$	454,762			$	213,326			$	193,393			$	406,719

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 September 30, 2007 we have contracted for the services of onshore drilling rigs through September 2008 at an aggregate cost of $24.4 million.  As of September 30, 2007, Bois d'Arc Energy has long term commitments to acquire seismic data totaling $8.3 million through December 2008 and has commitments for drilling services through January 31, 2008 of $6.1 million.  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 $60.4 million and $44.3 million as of September 30, 2007 and 2006, respectively.

We spent $255.6 million and $144.8 million on our onshore development and exploration activities during the nine months ended September 30, 2007 and 2006, respectively.  We expect to spend approximately $330.0 million for onshore development and exploration projects for all of 2007.  Bois d'Arc Energy spent $167.1 million and $173.6 million on offshore development and exploration activities in the nine months ended September 30, 2007 and 2006, respectively, and expects to spend $215.0 million for offshore capital expenditures for all of 2007.  Development and exploration activities are funded primarily with operating cash flow and with borrowings under our bank credit facilities.

We spent $31.2 million on an acquisition of oil and gas properties in South Texas that was completed in June 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 September 30, 2007 the borrowing base was $400.0 million, $78.0 million of which was available.  The borrowing base was increased to $500.0 million on November 5, 2007.  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 September 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.

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  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 was $225.0 million as of September 30, 2007, and availability under the borrowing base was $125.0 million.  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.

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 nine months ended September 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 $1.9 million and a $1.00 change in the price per Mcf of natural gas would have changed our cash flow by approximately $51.3 million.

Interest Rates

At September 30, 2007, we had total long-term debt of $597.0 million.  Of this amount, $175.0 million bears interest at a fixed rate of 6⅞%.  We had $422.0 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 September 30, 2007, a 100 basis point change in interest rates would change our interest expense for the nine month period ended September 30, 2007 by approximately $3.2 million.

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ITEM 4:  CONTROLS AND PROCEDURES

As of September 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 September 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 September 30, 2007, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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:           November 7, 2007	/s/ M. JAY ALLISON
	M. Jay Allison, Chairman, President and Chief
	Executive Officer (Principal Executive Officer)
Date:           November 7, 2007	/s/ ROLAND O. BURNS
	Roland O. Burns, Senior Vice President,
	Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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