crk-10q_20200331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the Quarter Ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-03262

 

COMSTOCK RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

94-1667468

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034

(Address of principal executive offices)

Telephone No.: (972) 668-8800

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.50 (per share)

CRK

New York Stock Exchange

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.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No  

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

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer 

Smaller reporting company   

Emerging growth company  

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Yes      No  

The number of shares outstanding of the registrant's common stock, par value $0.50, as of May 7, 2020 was 190,354,945.

 

 

 

 


 

COMSTOCK RESOURCES, INC.

QUARTERLY REPORT

For the Quarter Ended March 31, 2020

INDEX

 

 

Page

PART I. Financial Information

 

 

Item 1. Financial Statements (Unaudited):

 

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

4

Consolidated Statements of Operations  –  For the three months ended March 31, 2020 and 2019

5

Consolidated Statements of Stockholders' Equity – For the three months ended March 31, 2020 and 2019

6

Consolidated Statements of Cash Flows – For the three months ended March 31, 2020 and 2019

7

Notes to Consolidated Financial Statements

8

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

18

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

21

 

Item 4. Controls and Procedures

22

 

PART II. Other Information

 

 

Item 1A. Risk Factors

23

 

Item 6. Exhibits

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3


 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

March 31,

2020

 

 

December 31,

2019

 

ASSETS

 

(In thousands)

 

Cash and Cash Equivalents

 

$

15,527

 

 

$

18,532

 

Accounts Receivable:

 

 

 

 

 

 

 

 

Oil and gas sales

 

 

83,594

 

 

 

120,111

 

Joint interest operations

 

 

16,706

 

 

 

24,761

 

From affiliates

 

 

25,744

 

 

 

35,469

 

Derivative Financial Instruments

 

 

101,821

 

 

 

75,304

 

Income Taxes Receivable

 

 

10,218

 

 

 

5,109

 

Other Current Assets

 

 

14,227

 

 

 

10,399

 

Total current assets

 

 

267,837

 

 

 

289,685

 

Property and Equipment:

 

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method:

 

 

 

 

 

 

 

 

Proved

 

 

4,234,229

 

 

 

4,077,513

 

Unproved

 

 

384,654

 

 

 

410,897

 

Other

 

 

6,821

 

 

 

6,866

 

Accumulated depreciation, depletion and amortization

 

 

(596,591

)

 

 

(486,473

)

Net property and equipment

 

 

4,029,113

 

 

 

4,008,803

 

Goodwill

 

 

335,897

 

 

 

335,897

 

Income Taxes Receivable

 

 

 

 

 

5,109

 

Derivative Financial Instruments

 

 

6,835

 

 

 

13,888

 

Operating Lease Right-of-Use Assets

 

 

3,828

 

 

 

3,509

 

Other Assets

 

 

231

 

 

 

231

 

 

 

$

4,643,741

 

 

$

4,657,122

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Accounts Payable

 

$

215,338

 

 

$

252,994

 

Accrued Expenses

 

 

107,081

 

 

 

137,166

 

Operating Leases

 

 

2,157

 

 

 

1,994

 

Derivative Financial Instruments

 

 

3,043

 

 

 

222

 

Total current liabilities

 

 

327,619

 

 

 

392,376

 

Long-term Debt

 

 

2,507,284

 

 

 

2,500,132

 

Deferred Income Taxes

 

 

223,104

 

 

 

211,772

 

Derivative Financial Instruments

 

 

4,380

 

 

 

4,220

 

Long-term Operating Leases

 

 

1,671

 

 

 

1,515

 

Reserve for Future Abandonment Costs

 

 

18,613

 

 

 

18,151

 

Other Non-current Liabilities

 

 

4,594

 

 

 

6,351

 

Total liabilities

 

 

3,087,265

 

 

 

3,134,517

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Mezzanine Equity:

 

 

 

 

 

 

 

 

Preferred Stock — 5,000,000 shares authorized, 385,000 shares issued and outstanding at March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

Series A 10% Convertible Preferred Stock, 210,000 shares issued and outstanding

 

 

207,083

 

 

 

204,583

 

Series B 10% Convertible Preferred Stock, 175,000 shares issued and outstanding

 

 

175,000

 

 

 

175,000

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock—$0.50 par, 400,000,000 shares authorized, 189,980,509 and 190,006,776 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

94,990

 

 

 

95,003

 

Additional paid-in capital

 

 

910,851

 

 

 

909,423

 

Accumulated earnings

 

 

168,552

 

 

 

138,596

 

Total stockholders' equity

 

 

1,174,393

 

 

 

1,143,022

 

 

 

$

4,643,741

 

 

$

4,657,122

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

4


 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

Natural gas sales

 

$

207,239

 

 

$

90,132

 

Oil sales

 

 

18,639

 

 

 

36,749

 

Total oil and gas sales

 

 

225,878

 

 

 

126,881

 

Operating expenses:

 

 

 

 

 

 

 

 

Production taxes

 

 

5,567

 

 

 

5,939

 

Gathering and transportation

 

 

28,411

 

 

 

7,430

 

Lease operating

 

 

28,712

 

 

 

14,885

 

Depreciation, depletion and amortization

 

 

110,425

 

 

 

37,590

 

General and administrative

 

 

8,719

 

 

 

7,814

 

Exploration

 

 

27

 

 

 

 

Gain on sale of oil and gas properties

 

 

 

 

 

(1

)

Total operating expenses

 

 

181,861

 

 

 

73,657

 

Operating income

 

 

44,017

 

 

 

53,224

 

Other income (expenses):

 

 

 

 

 

 

 

 

Gain (loss) from derivative financial instruments

 

 

61,899

 

 

 

(7,657

)

Other income

 

 

313

 

 

 

93

 

Interest expense

 

 

(52,810

)

 

 

(27,851

)

Total other income (expenses)

 

 

9,402

 

 

 

(35,415

)

Income before income taxes

 

 

53,419

 

 

 

17,809

 

Provision for income taxes

 

 

(11,391

)

 

 

(4,234

)

Net income

 

 

42,028

 

 

 

13,575

 

Preferred stock dividends and accretion

 

 

(12,072

)

 

 

 

Net income available to common stockholders

 

$

29,956

 

 

$

13,575

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.13

 

Diluted

 

$

0.15

 

 

$

0.13

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

188,916

 

 

 

105,457

 

Diluted

 

 

285,166

 

 

 

105,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements

5


 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

Common

Shares

 

 

Common

Stock-

Par Value

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Earnings

 

 

Total

 

 

 

(In thousands)

 

Balance at December 31, 2018

 

 

105,871

 

 

$

52,936

 

 

$

452,513

 

 

$

64,122

 

 

$

569,571

 

Stock-based compensation

 

 

(3

)

 

 

(2

)

 

 

650

 

 

 

 

 

 

648

 

Net income

 

 

 

 

 

 

 

 

 

 

 

13,575

 

 

 

13,575

 

Balance at March 31, 2019

 

 

105,868

 

 

$

52,934

 

 

$

453,163

 

 

$

77,697

 

 

$

583,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

190,007

 

 

$

95,003

 

 

$

909,423

 

 

$

138,596

 

 

$

1,143,022

 

Stock-based compensation

 

 

(24

)

 

 

(12

)

 

 

1,442

 

 

 

 

 

 

1,430

 

Income tax withholdings related to equity awards

 

 

(2

)

 

 

(1

)

 

 

(14

)

 

 

 

 

 

(15

)

Net income

 

 

 

 

 

 

 

 

 

 

 

42,028

 

 

 

42,028

 

Preferred dividend accretion

 

 

 

 

 

 

 

 

 

 

 

(2,500

)

 

 

(2,500

)

Payment of preferred dividends

 

 

 

 

 

 

 

 

 

 

 

(9,572

)

 

 

(9,572

)

Balance at March 31, 2020

 

 

189,981

 

 

$

94,990

 

 

$

910,851

 

 

$

168,552

 

 

$

1,174,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements

6


 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

2019

 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

42,028

 

$

13,575

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Deferred and non-current income taxes

 

 

11,330

 

 

4,352

 

Exploration

 

 

27

 

 

 

Gain on sale of oil and gas properties

 

 

 

 

(1

)

Depreciation, depletion and amortization

 

 

110,425

 

 

37,590

 

Loss (gain) on derivative financial instruments

 

 

(61,899

)

 

7,657

 

Cash settlements of derivative financial instruments

 

 

45,416

 

 

5,388

 

Amortization of debt discount, premium and issuance costs

 

 

7,199

 

 

1,574

 

Stock-based compensation

 

 

1,430

 

 

648

 

Decrease in accounts receivable

 

 

54,297

 

 

10,783

 

Decrease (increase) in other current assets

 

 

(3,828

)

 

1,577

 

Decrease in accounts payable and accrued expenses

 

 

(56,306

)

 

(8,428

)

Net cash provided by operating activities

 

 

150,119

 

 

74,715

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(143,490

)

 

(94,939

)

Advance payments for drilling costs

 

 

 

 

6,030

 

Proceeds from sales of oil and gas properties

 

 

 

 

415

 

Net cash used for investing activities

 

 

(143,490

)

 

(88,494

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Borrowings

 

 

57,000

 

 

45,000

 

Payments to retire debt

 

 

(57,000

)

 

(25,000

)

Preferred stock dividends paid

 

 

(9,572

)

 

 

Debt and equity issuance costs

 

 

(47

)

 

(90

)

Income tax withholdings related to equity awards

 

 

(15

)

 

 

Net cash provided by (used for) financing activities

 

 

(9,634

)

 

19,910

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,005

)

 

6,131

 

Cash and cash equivalents, beginning of the year

 

 

18,532

 

 

23,193

 

Cash and cash equivalents, end of the year

 

$

15,527

 

$

29,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

 

7


 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –

Basis of Presentation

These unaudited consolidated financial statements include the accounts of Comstock Resources, Inc. and its wholly-owned subsidiaries (collectively, "Comstock" or the "Company").  In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Comstock as of March 31, 2020, and the related results of operations and cash flows for the periods being presented.  Net income and comprehensive income are the same in all periods presented.  All adjustments are of a normal recurring nature unless otherwise disclosed.

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 included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2019.

The results of operations for the period through March 31, 2020 are not necessarily an indication of the results expected for the full year.

Covey Park Acquisition

On July 16, 2019, Comstock acquired Covey Park Energy LLC ("Covey Park") for total consideration of $700.0 million of cash, the issuance of Series A Convertible Preferred Stock with a redemption value of $210.0 million, and the issuance of 28,833,000 shares of common stock (the "Covey Park Acquisition").  In addition to the consideration paid, Comstock assumed $625.0 million of Covey Park's 7.5% senior notes, repaid $380.0 million of Covey Park's then outstanding borrowings under its bank credit facility and redeemed all of Covey Park's preferred equity for $153.4 million. Based on the fair value of the preferred stock issued and the closing price of the Company's common stock of $5.82 per share on July 16, 2019, the transaction was valued at approximately $2.2 billion.  Covey Park's operations are focused primarily in the Haynesville/Bossier shale in North Louisiana and East Texas. Funding for the Covey Park Acquisition was provided by the sale of 50.0 million newly issued shares of common stock for $300.0 million and 175,000 shares of newly issued Series B Convertible Preferred Stock for $175.0 million to the Company's majority stockholder and by borrowings under Comstock's bank credit facility and cash on hand. In connection with the Covey Park Acquisition, Comstock incurred $41.0 million of advisory and legal fees and other acquisition-related costs during the year ended December 31, 2019. These acquisition costs were included in transaction costs in the Company's consolidated statements of operations.  The operations of Covey Park are included in the financial results for the three months ended March 31, 2020.  The following pro forma condensed combined financial information for the three months ended March 31, 2019 gives effect to the Covey Park Acquisition as if the acquisition had occurred on January 1, 2019. The unaudited pro forma information reflects adjustments for the issuance of the Company's common stock and preferred stock, debt incurred in connection with the transaction, impact of the fair value of properties acquired on depletion and other adjustments the Company believes are reasonable for the pro forma presentation. In addition, the pro forma earnings exclude acquisition-related costs.  The unaudited pro forma results do not reflect any cost savings or other synergies that may arise in the future.

 

 

 

Pro Forma

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

 

(In thousands, except per share amount)

 

Revenues:

 

$

315,303

 

Net Income

 

$

62,077

 

 

 

 

 

 

Net income per share:

 

 

 

 

Basic

 

$

0.28

 

Diluted

 

$

0.22

 

8


 

 

Property and Equipment

The Company follows the successful efforts method of accounting for its oil and natural gas properties. Costs incurred to acquire oil and gas leasehold are capitalized.

The Company assesses the need for an impairment of the capitalized costs for its proved oil and gas properties on a property basis.  No impairments were recognized to adjust the carrying value of the Company's proved oil and gas properties during any of the periods presented. Unproved oil and gas properties are also periodically assessed and any impairment in value is charged to expense. The costs of unproved properties are transferred to oil and gas properties and amortized on an equivalent unit-of-production basis as wells are drilled on these properties. Exploratory drilling costs are initially capitalized as unproved property but charged to expense if and when the well is determined not to have found commercial quantities of proved oil and gas reserves. Exploratory drilling costs are evaluated within a one-year period after the completion of drilling.

The Company determines the fair values of its oil and gas properties using a discounted cash flow model and proved and risk-adjusted probable oil and natural gas reserves.  Undrilled acreage can also be valued based on sales transactions in comparable areas.  Significant Level 3 assumptions associated with the calculation of discounted future cash flows included in the cash flow model include management's outlook for oil and natural gas prices, production costs, capital expenditures, and future production as well as estimated proved oil and gas reserves and risk-adjusted probable oil and natural gas reserves.  Management's oil and natural gas price outlook is developed based on third-party longer-term price forecasts as of each measurement date.  The expected future net cash flows are discounted using an appropriate discount rate in determining a property's fair value.

It is reasonably possible that the Company's estimates of undiscounted future net cash flows attributable to its oil and gas properties may change in the future.  The primary factors that may affect estimates of future cash flows include future adjustments, both positive and negative, to proved and appropriate risk-adjusted probable oil and gas reserves, results of future drilling activities, future prices for oil and natural gas, and increases or decreases in production and capital costs.  As a result of these changes, there may be future impairments in the carrying values of these or other properties.

Goodwill

The Company had goodwill of $335.9 million as of March 31, 2020 that was recorded in 2018. Goodwill represents the excess of value of the Company over fair value of net tangible and identifiable intangible assets at the time of the change in control, which occurred on August 14, 2018.  The Company is not required to amortize goodwill as a charge to earnings; however, the Company is required to conduct an annual review of goodwill for impairment. The Company performs annual assessment of goodwill on October 1st of each year to allow sufficient time to assess goodwill impairment and performs interim assessments if indicators of impairment are present. If the carrying value of goodwill exceeds the fair value, an impairment charge would be recorded for the difference between fair value and carrying value.

Leases

The Company has right-of-use lease assets of $3.8 million related to its corporate office lease, certain office equipment and leased vehicles used in oil and gas operations with corresponding short-term and long-term liabilities of $2.1 million and $1.7 million, respectively.  The value of the lease assets and liabilities are determined based upon discounted future minimum cash flows contained within each of the respective contracts. The Company determines if contracts contain a lease at inception of the contract. To the extent that contract terms representing a lease are identified, leases are identified as being either an operating lease or a finance-type lease. Comstock currently has no finance-type leases. Right-of-use lease assets representing the Company's right to use an underlying asset for the lease term and the related lease liabilities represent our obligation to make lease payments under the terms of the contracts.  Short-term leases that have an initial term of one year or less are not capitalized; however, amounts paid for those leases are included as part of its lease cost disclosures. Short-term lease costs exclude expenses related to leases with a lease term of one month or less. Leases for the right to explore for and develop oil and natural gas reserves and the related rights to use the land associated with those leases are reflected as oil and gas properties.

Comstock contracts for a variety of equipment used in its oil and natural gas exploration and development operations.  Contract terms for this equipment vary broadly, including the contract duration, pricing, scope of services included along with the equipment, cancellation terms, and rights of substitution, among others. The Company's drilling operations routinely change due to changes in commodity prices, demand for oil and natural gas, and the overall operating and economic environment.  Comstock accordingly manages the terms of its contracts for drilling rigs so as to allow for maximum flexibility in responding to these changing conditions.  The Company's rig contracts are presently either for periods of less than one year, or they are on terms that provide for cancellation with thirty days advance notice without a specified expiration date.  Accordingly, the Company has elected not to recognize right-of-use lease assets for these rig contracts.  The costs associated with drilling rig operations are accounted for under the successful efforts method, which generally require that these costs be capitalized as part of our proved oil and natural gas properties on our balance sheet unless they are incurred on exploration wells that are unsuccessful, in which case they are charged to exploration expense.

 

9


 

Lease costs recognized during the three months ended March 31, 2020 were as follows:

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

 

(In thousands)

 

Operating lease cost included in general and administrative expense

 

$

411

 

Operating lease cost included in lease operating expense

 

 

137

 

Short-term lease cost (drilling rig costs included in proved oil and gas properties)

 

 

12,309

 

 

 

$

12,857

 

 

Cash payments for operating leases associated with right-of-use assets included in cash provided by operating activities were $0.5 million for the three months ended March 31, 2020.

As of March 31, 2020, Comstock had the following liabilities under contracts that contain operating leases:

 

(In thousands)

 

April 1 to December 31, 2020

$

2,293

 

2021

 

1,518

 

2022

 

196

 

Total lease payments

 

4,007

 

Imputed interest

 

(179

)

Total lease liability

$

3,828

 

 

The weighted average term of these operating leases was 1.8 years and the weighted average rate used in lease computations was 4.8%. As of March 31, 2020, the Company also had expected future payments for contracted drilling services of $4.4 million.

Accrued Expenses

Accrued expenses at March 31, 2020 and December 31, 2019 consisted of the following:

 

 

 

 

 

 

As of

March 31,

2020

 

 

As of

December 31,

2019

 

 

 

(In thousands)

 

Accrued interest payable

 

$

29,906

 

 

$

39,501

 

Accrued drilling costs

 

 

29,003

 

 

 

42,193

 

Accrued transportation costs

 

 

26,359

 

 

 

26,907

 

Accrued transaction costs

 

 

6,690

 

 

 

10,830

 

Accrued employee compensation

 

 

4,562

 

 

 

8,653

 

Accrued lease operating expenses

 

 

6,200

 

 

 

4,990

 

Other

 

 

4,361

 

 

 

4,092

 

 

 

$

107,081

 

 

$

137,166

 

 

Reserve for Future Abandonment Costs

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 for such obligations during the periods presented:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Reserve for future abandonment costs at beginning of period

 

$

18,151

 

 

$

5,136

 

New wells placed on production

 

 

186

 

 

 

40

 

Liabilities settled and assets disposed of

 

 

(11

)

 

 

(29

)

Accretion expense

 

 

287

 

 

 

96

 

Reserve for future abandonment costs at end of period

 

$

18,613

 

 

$

5,243

 

 

 


10


 

Derivative Financial Instruments and Hedging Activities

All of the Company's derivative financial instruments are used for risk management purposes and, by policy, none are held for trading or speculative purposes.  Comstock minimizes credit risk to counterparties of its derivative financial instruments through formal credit policies, monitoring procedures, and diversification. The Company is not required to provide any credit support to its counterparties other than cross collateralization with the assets securing its bank credit facility. None of the Company's derivative financial instruments involve payment or receipt of premiums.  The Company classifies the fair value amounts of derivative financial instruments as net current or noncurrent assets or liabilities, whichever the case may be, by commodity contract.

All of Comstock's natural gas derivative financial instruments are tied to the Henry Hub-NYMEX price index and all of its crude oil derivative financial instruments are tied to the WTI-NYMEX index price. Basis swaps are tied to Henry Hub.  The Company had the following outstanding commodity-based derivative financial instruments, excluding basis swaps which are discussed separately below, at March 31, 2020:

 

 

Future Production Period

 

 

 

Nine Months Ending December 31, 2020

 

 

Year Ending December 31, 2021

 

 

Total

 

Natural Gas Swap Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Volume (MMBtu)

 

 

78,222,890

 

 

 

62,883,140

 

 

 

141,106,030

 

Average Price per MMBtu

 

 

$2.73

 

 

 

$2.57

 

 

 

$2.66

 

Natural Gas 2-Way Collar Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Volume (MMBtu)

 

 

7,200,000

 

 

 

 

 

7,200,000

 

Price per MMBtu:

 

 

 

 

 

 

 

 

 

 

 

 

Average Ceiling

 

 

$2.92

 

 

 

 

 

$2.92

 

Average Floor

 

 

$2.41

 

 

 

 

 

$2.41

 

Natural Gas 3-Way Collar Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Volume (MMBtu)

 

 

13,750,000

 

 

 

 

 

13,750,000

 

Price per MMBtu:

 

 

 

 

 

 

 

 

 

 

 

 

Average Ceiling

 

 

$2.99

 

 

 

 

 

$2.99

 

Average Floor

 

 

$2.63

 

 

 

 

 

$2.63

 

Average Put

 

 

$2.32

 

 

 

 

 

$2.32

 

Natural Gas Swaptions Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Volume (MMBtu)

 

 

57,750,000

 

(a)

 

23,650,000

 

(b)

 

81,400,000

 

Average Price per MMBtu

 

 

$2.52

 

 

 

$2.52

 

 

 

$2.52

 

Crude Oil Collar Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Volume (Barrels)

 

 

820,600

 

 

 

 

 

820,600

 

Price per Barrel:

 

 

 

 

 

 

 

 

 

 

 

 

Average Ceiling

 

 

$64.13

 

 

 

 

 

$64.13

 

Average Floor

 

 

$49.51

 

 

 

 

 

$49.51

 

 

 

 

(a)

The counterparty has the right to extend hedged volumes of 71,250,000 MMBtu of swaptions placed in 2020 into 2021 at an average price of $2.52 per MMBtu.

 

(b)

The counterparty has the right to extend hedged volumes of 49,200,000 MMBtu of swaptions placed in 2020 and 2021 into 2022 at an average price $2.51 per MMBtu.

In addition to the swaps, collars and swaptions above, at March 31, 2020, the Company had basis swap contracts that lock-in the differential between NYMEX Henry Hub and certain physical pricing indices.  These contracts settle monthly through December 2022 and include a total volume of 42,050,000 MMBtu.  The fair value of these contracts was a net asset of $1.9 million at March 31, 2020.


11


 

 

None of the Company's derivative contracts were designated as cash flow hedges. The aggregate fair value of the Company's derivative instruments reported in the accompanying consolidated balance sheets by type, including the classification between assets and liabilities, consists of the following:

Type

 

Consolidated

Balance Sheet

Location

 

March 31, 2020

 

 

December 31, 2019

 

 

 

 

 

(in thousands)

 

Fair Value of Derivative Instruments

 

 

 

 

 

 

 

 

 

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

 

Natural gas price derivatives

 

Derivative Financial Instruments  – current

 

$

85,349

 

 

$

75,123

 

Oil price derivatives

 

Derivative Financial Instruments  – current

 

 

16,472

 

 

 

181

 

 

 

 

 

$

101,821

 

 

$

75,304

 

Natural gas price derivatives

 

Derivative Financial Instruments  – long-term

 

$

6,835

 

 

$

13,888

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

Natural gas price derivatives

 

Derivative Financial Instruments  – current

 

$

3,043

 

 

$

222

 

Natural gas price derivatives

 

Derivative Financial Instruments  – long-term

 

$

4,380

 

 

$

4,220

 

 

The Company recognized cash settlements and changes in the fair value of its derivative financial instruments as a single component of other income (expenses). Gains and losses related to the change in the fair value recognized on the Company's derivative contracts recognized in the consolidated statement of operations were as follows:

 

 

 

 

Gain/(Loss) Recognized in

 

Three Months Ended March 31,

 

Earnings on Derivatives

 

2020

 

 

2019

 

 

 

(In thousands)

 

Swaps

 

$

22,147

 

 

$

3,157

 

Collars

 

 

24,087

 

 

 

(10,814

)

Swaptions

 

 

15,665

 

 

 

 

 

 

$

61,899

 

 

$

(7,657

)

 

Subsequent to March 31, 2020, the Company entered into additional natural gas swap contracts for 2,300,000 MMBtu for the fourth quarter of 2020 with a weighted average price of $2.60 per MMBtu, 56,100,000 MMBtu for 2021 with a weighted average price of $2.54 per MMBtu and 10,950,000 MMBtu in 2022 with a weighted average price of $2.53 per MMBtu. The Company also entered into natural gas collars covering 4,600,000 MMBtu for the fourth quarter of 2020 with an average ceiling price of $3.01 per MMBtu and an average floor price of $2.50 per MMBtu and 54,750,000 MMBtu in 2021 with an average ceiling price of $2.94 per MMBtu and an average floor price of $2.43 per MMBtu. Comstock entered into interest rate swap agreements to fix LIBOR at 0.33% for $500.0 million of amounts outstanding under the bank credit facility from April 2020 through April 2023.

Stock-Based Compensation

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 and included in general and administrative expenses for awards of restricted stock and performance stock units ("PSUs") to the Company's employees and directors. The Company recognized $1.4 million and $0.6 million of stock-based compensation expense within general and administrative expenses related to awards of restricted stock and PSUs to its employees and directors during the three months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, Comstock had 1,060,248 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $6.10 per share. Total unrecognized compensation cost related to unvested restricted stock grants of $4.6 million as of March 31, 2020 is expected to be recognized over a period of 2.0 years.

As of March 31, 2020, Comstock had 904,400 PSUs outstanding at a weighted average grant date fair value of $9.58 per unit. The number of shares of common stock to be issued related to the PSUs is based on the Company's stock price performance as compared to its peers which could result in the issuance of anywhere from zero to 1,808,800 shares of common stock. Total unrecognized compensation cost related to these grants of $5.6 million as of March 31, 2020 is expected to be recognized over a period of 2.1 years.


12


 

Revenue Recognition

Comstock produces oil and natural gas and reports revenues separately for each of these two primary products in its statements of operations.  Revenues are recognized upon the transfer of produced volumes to the Company's customers, who take control of the volumes and receive all the benefits of ownership upon delivery at designated sales points.  Payment is reasonably assured upon delivery of production.  All sales are subject to contracts that have commercial substance, contain specific pricing terms, and define the enforceable rights and obligations of both parties.  These contracts typically provide for cash settlement within 25 days following each production month and are cancellable upon 30 days' notice by either party.  Prices for sales of oil and natural gas are generally based upon terms that are common in the oil and gas industry, including index or spot prices, location and quality differentials, as well as market supply and demand conditions.  As a result, prices for oil and natural gas routinely fluctuate based on changes in these factors.  Each unit of production (barrel of crude oil and thousand cubic feet of natural gas) represents a separate performance obligation under the Company's contracts since each unit has economic benefit on its own and each is priced separately according to the terms of the contracts.

Comstock has elected to exclude all taxes from the measurement of transaction prices, and its revenues are reported net of royalties and exclude revenue interests owned by others because the Company acts as an agent when selling crude oil and natural gas, on behalf of royalty owners and working interest owners.  Revenue is recorded in the month of production based on an estimate of the Company's share of volumes produced and prices realized.  The Company recognizes any differences between estimates and actual amounts received in the month when payment is received.  Historically, differences between estimated revenues and actual revenue received have not been significant.  The amount of oil or natural gas sold may differ from the amount to which the Company is entitled based on its revenue interests in the properties. The Company did not have any significant imbalance positions at March 31, 2020. Sales of oil and natural gas generally occur at or near the wellhead. When sales of oil and gas occur at locations other than the wellhead, the Company accounts for costs incurred to transport the production to the delivery point as gathering and transportation expenses.  The Company recognized accounts receivable of $83.6 million as of March 31, 2020 from customers for contracts where performance obligations have been satisfied and an unconditional right to consideration exists.

Credit Losses

On January 1, 2020, the Company adopted Financial Accounting Standards Board Accounting Standards Codification 326, Credit Losses ("ASC 326"). In adopting ASC 326, the Company determined Topic 326 is limited to the trade accounts receivables relating to purchaser receivables and joint interest receivables of the Company. The Company performs quarterly impairment analysis using the Current Expected Credit Losses ("CECL") impairment model. The Company concluded there is no cumulative-effect adjustment required as of January 1, 2020 and credit impairment at March 31, 2020 is immaterial.

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.

In recording deferred income tax assets, the Company considers whether it is more likely than not that its deferred income tax assets will be realized in the future.  The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible.  The Company believes that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, management is not able to determine that it is more likely than not that all of its deferred tax assets will be realized.  As a result, the Company established valuation allowances for its deferred tax assets and U.S. federal and state net operating loss carryforwards that are not expected to be utilized due to the uncertainty of generating taxable income prior to the expiration of the carryforward periods. The Company will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future periods.

The following is an analysis of the consolidated income tax provision:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Current - Federal

 

$

 

 

$

 

Current - State

 

 

61

 

 

 

(118

)

Deferred - Federal

 

 

11,503

 

 

 

3,942

 

Deferred - State

 

 

(173

)

 

 

410

 

 

 

$

11,391

 

 

$

4,234

 

 

 

 

 

 

13


 

The difference between the federal statutory rate of 21% and the effective tax rate is due to the following:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Tax at statutory rate

 

21.0%

 

 

21.0%

 

Tax effect of:

 

 

 

 

 

 

 

 

Valuation allowance on deferred tax assets

 

 

(0.5

)

 

 

1.5

 

State income taxes, net of federal benefit

 

 

0.3

 

 

 

0.7

 

Nondeductible stock-based compensation

 

 

0.5

 

 

 

0.6

 

Effective tax rate

 

 

21.3

%

 

 

23.8

%

  

The Company's federal income tax returns for the years subsequent to December 31, 2015 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, 2012. The Company currently believes that all other significant filing positions are highly certain and that all of its other significant income tax positions and deductions would be sustained under audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions.

Fair Value Measurements

The Company holds or has held certain financial assets and liabilities that are required to be measured at fair value.  These include cash and cash equivalents held in bank accounts and derivative financial instruments in the form of oil and natural gas price swap agreements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-level hierarchy is followed for disclosure to show the extent and level of judgment used to estimate fair value measurements:

Level 1 — Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.

Level 2 — Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3 — Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

The Company's oil and natural gas price swap agreements and its natural gas price collars were not traded on a public exchange, and their value is determined utilizing a discounted cash flow model based on inputs that are readily available in public markets and, accordingly, the valuation of these swap agreements, is categorized as a Level 2 measurement. The Company’s swaption agreements are measured at fair value using a third-party pricing service, categorized as a Level 3 measurement.

The Company had no derivative instruments classified as Level 3 as of March 31, 2019. The following is a reconciliation of the beginning and ending balances for derivative instruments classified as Level 3 in the fair value hierarchy:

 

Three Months Ended

 

 

March 31, 2020

 

 

(In thousands)

 

Balance at beginning of year

$

4,351

 

Total gain included in earnings

 

15,665

 

Settlements, net

 

(7,328

)

Balance at end of period

$

12,688

 

 

 

 

 

 

 

14


 

Fair Values – Reported

The following presents the carrying amounts and the fair values of the Company’s financial instruments as of March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Assets:

 

(In thousands)

 

Commodity-based derivatives (a)(b)

 

$

108,656

 

 

$

108,656

 

 

$

89,192

 

 

$

89,192

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity-based derivatives (a)(b)

 

 

7,423

 

 

 

7,423

 

 

 

4,442

 

 

 

4,442

 

Bank credit facility (c)

 

 

1,250,000

 

 

 

1,250,000

 

 

 

1,250,000

 

 

 

1,250,000

 

7.5% senior notes due 2025 (d)

 

 

461,023

 

 

 

362,500

 

 

 

455,768

 

 

 

534,375

 

9.75% senior notes due 2026 (d)

 

 

820,854

 

 

 

569,500

 

 

 

820,057

 

 

 

765,000

 

     _____________

 

(a)

The Company's oil and natural gas swaps, options, and basis swap agreements and its natural gas price collars are classified as Level 2 and measured at fair value using a market approach using third party pricing services and other active markets or broker quotes that are readily available in the public markets.  

 

 

(b)

As of March 31, 2020, a portion of our natural gas derivatives contain swaptions where the counterparty has the right, but not the obligation, to extend terms of an existing swap on predetermined dates. Due to subjectivity of the inputs used to value the counterparty rights in swaptions, these rights are classified as Level 3 in the fair value hierarchy.

 

 

(c)

The carrying value of our floating rate debt outstanding approximates fair value because of its floating rate structure.

 

 

(d)

The fair value of the Company's fixed rate debt was based on quoted prices as of December 31, 2019, a Level 1 measurement.

 

 

Earnings Per Share

Unvested share-based payment awards containing nonforfeitable rights to dividends are considered to be participating securities and included in the computation of basic and diluted earnings per share pursuant to the two-class method. PSUs represent the right to receive a number of shares of the Company's common stock that may range from zero to up to two times the number of PSUs granted on the award date based on the achievement of certain performance measures during a performance period. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, which would be issuable at the end of the respective period, assuming that date was the end of the contingency period. The treasury stock method is used to measure the dilutive effect of PSUs.  The shares that would have been issuable upon exercise of the conversion rights contains in the Predecessor Company's convertible debt are based on the if-converted method for computing potentially dilutive shares of common stock that could be issued upon conversion. None of the Company's participating securities participate in losses and as such are excluded from the computation of basic earnings per share during periods of net losses. The Series A and Series B Convertible Preferred Stock issued in connection with the Covey Park Acquisition will become convertible into in the aggregate 96,250,000 shares of common stock beginning on July 16, 2020 at a conversion price of $4.00 per share. The dilutive effect of preferred stock is computed using the if-converted method as if conversion of the preferred shares had occurred at the earlier of the date of issuance or the beginning of the period. For the three months ended March 31, 2020, the preferred stock was dilutive.

Basic and diluted income per share were determined as follows:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

Income

 

 

Shares

 

 

Per Share

 

 

Income

 

 

Shares

 

 

Per Share

 

 

 

(In thousands, except per share amounts)

 

Net income attributable to common stock

 

$

29,956