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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 September 30, 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)

Nevada94-1667468
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
5300 Town and Country Blvd.Suite 500FriscoTexas 75034
(Address of principal executive offices)
Telephone No.: (972668-8800

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.50 (per share)CRKNew 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 x 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 x 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
Emerging growth company
Accelerated filer

Non-accelerated

Smaller reporting 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 x
The number of shares outstanding of the registrant's common stock, par value $0.50, as of November 5, 2020 was 232,421,385.




COMSTOCK RESOURCES, INC.
QUARTERLY REPORT
For the Quarter Ended September 30, 2020
INDEX
Page

2

















PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
3



COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
2020
December 31,
2019
ASSETS(In thousands)
Cash and cash equivalents$28,268 $18,532 
Accounts receivable:
Oil and gas sales
87,965 120,111 
Joint interest operations
10,792 24,761 
From affiliates
2,202 35,469 
Derivative financial instruments8,830 75,304 
Income taxes receivable 5,109 
Other current assets11,773 10,399 
Total current assets
149,830 289,685 
Property and equipment:
Oil and natural gas properties, successful efforts method:
Proved
4,419,285 4,077,513 
Unproved
384,763 410,897 
Other
6,588 6,866 
Accumulated depreciation, depletion and amortization
(798,288)(486,473)
Net property and equipment
4,012,348 4,008,803 
Goodwill335,897 335,897 
Income taxes receivable5,109 
Derivative financial instruments1,185 13,888 
Operating lease right-of-use assets3,554 3,509 
Other assets40 231 
$4,502,854 $4,657,122 
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable$202,174 $252,994 
Accrued costs112,695 137,166 
Operating leases2,318 1,994 
Derivative financial instruments63,595 222 
Total current liabilities
380,782 392,376 
Long-term debt2,507,669 2,500,132 
Deferred income taxes163,550 211,772 
Derivative financial instruments66,373 4,220 
Long-term operating leases1,236 1,515 
Reserve for future abandonment costs19,402 18,151 
Other non-current liabilities1,162 6,351 
Total liabilities
3,140,174 3,134,517 
Commitments and contingencies
Mezzanine equity:
Preferred stock — 5,000,000 shares authorized, 175,000 shares and 385,000 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively:
Series A 10% convertible preferred stock
 204,583 
Series B 10% convertible preferred stock
175,000 175,000 
Stockholders' equity:
Common stock—$0.50 par, 400,000,000 shares authorized, 232,421,385 and 190,006,776 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
116,210 95,003 
Additional paid-in capital
1,093,811 909,423 
Accumulated earnings (deficit)
(22,341)138,596 
Total stockholders' equity
1,187,680 1,143,022 
$4,502,854 $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 September 30,Nine Months Ended September 30,
2020201920202019
(In thousands, except per share amounts)
Revenues:
Natural gas sales
$168,374 $193,506 $547,975 $375,589 
Oil sales
9,637 30,938 35,449 103,852 
Total oil and gas sales
178,011 224,444 583,424 479,441 
Operating expenses:
Production and ad valorem taxes
9,798 9,381 27,768 22,703 
Gathering and transportation
22,422 23,414 77,423 41,346 
Lease operating
25,412 26,696 79,110 54,477 
Depreciation, depletion and amortization
99,056 80,247 312,828 164,684 
General and administrative
8,974 8,105 25,991 22,760 
Exploration
 241 27 241 
(Gain) loss on sale of assets
(16) (16)25 
Total operating expenses
165,646 148,084 523,131 306,236 
Operating income12,365 76,360 60,293 173,205 
Other income (expenses):
Gain (loss) from derivative financial instruments
(121,579)24,858 (71,978)31,945 
Other income
489 92 793 340 
Transaction costs
 (39,657) (41,100)
Interest expense
(63,890)(51,015)(168,764)(107,434)
Loss on early extinguishment of debt
  (861) 
Total other income (expenses)
(184,980)(65,722)(240,810)(116,249)
Income (loss) before income taxes(172,615)10,638 (180,517)56,956 
Benefit from (provision for) income taxes46,123 (3,847)46,177 (15,183)
Net income (loss)(126,492)6,791 (134,340)41,773 
Preferred stock dividends and accretion(4,398)(8,128)(26,596)(8,128)
Net income (loss) available to common stockholders$(130,890)$(1,337)$(160,936)$33,645 
Net income (loss) per share:
Basic
$(0.57)$(0.01)$(0.77)$0.26 
Diluted
$(0.57)$(0.01)$(0.77)$0.26 
Weighted average shares outstanding:
Basic
231,223 171,487 209,760 127,709 
Diluted
231,223 171,487 209,760 127,709 










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 (Deficit)
Total
(In thousands)
Balance at January 1, 2019105,871 $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, 2019105,868 52,934 453,163 77,697 583,794 
Stock-based compensation
74 37 586 — 623 
Net income
— — — 21,407 21,407 
Balance at June 30, 2019105,942 52,971 453,749 99,104 605,824 
Issuance of common stock78,833 39,416 428,392 — 467,808 
Stock-based compensation780 391 697 — 1,088 
Income tax withholdings on equity awards(31)(16)(151)— (167)
Jones contribution adjustment— — (1,969)— (1,969)
Equity issuance costs— — (1,049)— (1,049)
Net income— — — 6,791 6,791 
Payment of preferred dividends— — — (8,128)(8,128)
Balance at September 30, 2019185,524 $92,762 $879,669 $97,767 $1,070,198 
Balance at January 1, 2020190,007 $95,003 $909,423 $138,596 $1,143,022 
Stock-based compensation
(24)(12)1,442 — 1,430 
Income tax withholdings on 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, 2020189,981 94,990 910,851 168,552 1,174,393 
Stock-based compensation
507 254 1,298 — 1,552 
Issuances of common stock
42,092 21,046 190,592 — 211,638 
Stock issuance costs
— — (10,079)— (10,079)
Net loss
— — — (49,876)(49,876)
Preferred dividend accretion
— — — (2,917)(2,917)
Payment of preferred dividends
— — — (7,210)(7,210)
Balance at June 30, 2020232,580 116,290 1,092,662 108,549 1,317,501 
Stock-based compensation(46)(22)1,774 — 1,752 
Income tax withholdings on equity awards(113)(58)(619)— (677)
Stock issuance costs— — (6)— (6)
Net loss— — — (126,492)(126,492)
Payment of preferred dividends— — — (4,398)(4,398)
Balance at September 30, 2020232,421 $116,210 $1,093,811 $(22,341)$1,187,680 





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



COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
20202019
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$(134,340)$41,773 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income taxes
(46,443)15,205 
Exploration
27  
(Gain) loss on sale of assets
(16)25 
Depreciation, depletion and amortization
312,828 164,684 
(Gain) loss on derivative financial instruments
71,978 (31,945)
Cash settlements of derivative financial instruments
132,725 33,382 
Amortization of debt discount and issuance costs
24,231 9,206 
Stock-based compensation
4,734 2,359 
Loss on early extinguishment of debt
861  
Decrease in accounts receivable
79,382 48,404 
Decrease in other current assets
8,291 7,137 
Decrease in accounts payable and accrued expenses
(64,303)(7,424)
Net cash provided by operating activities
389,955 282,806 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(332,628)(308,742)
Acquisition of Covey Park Energy LLC, net of cash acquired (693,869)
Prepaid drilling costs
 9,319 
Proceeds from sales of assets
283 390 
Net cash used for investing activities
(332,345)(992,902)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on bank credit facility
157,000 887,000 
Repayments on bank credit facility
(907,000)(72,000)
Repayments of Covey Park Energy LLC debt and preferred equity (533,390)
Issuance of 9¾% Senior Notes
751,500  
Issuance of common stock
206,626 300,000 
Issuance of Series B Preferred Stock 175,000 
Redemption of Series A Preferred Stock
(210,000) 
Preferred stock dividends paid
(21,180)(8,128)
Debt and stock issuance costs
(24,128)(8,169)
Income tax withholdings related to equity awards
(692)(167)
Net cash provided by (used for) financing activities
(47,874)740,146 
Net increase in cash and cash equivalents
9,736 30,050 
Cash and cash equivalents, beginning of period
18,532 23,193 
Cash and cash equivalents, end of period
$28,268 $53,243 





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



COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 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. Certain amounts in prior periods have been reclassified to conform with current period presentation.
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 September 30, 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 7½% 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 were 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 and nine months ended September 30, 2020.  The following pro forma condensed combined financial information for the three and nine months ended September 30, 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, the 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.
8



Pro Forma
Three Months Ended
September 30, 2019
Nine Months Ended
September 30, 2019
(In thousands, except per share amounts)
Revenues:$247,192 $858,042 
Net Income$36,755 $201,338 
Net income per share:
Basic
$0.15 $0.93 
Diluted
$0.13 $0.72 
The Covey Park Acquisition was accounted for as a business combination using the acquisition method. During the three months ended September 30, 2020, the Company completed the final purchase allocation of the assets acquired and liabilities assumed based on their fair value at the acquisition date. The following table summarizes the preliminary and final fair value allocations of the assets acquired and liabilities assumed in the Covey Park Acquisition:
Original AllocationMeasurement Period AdjustmentsFinal Allocation
(In thousands)
Consideration:
Cash Paid$700,000 $— $700,000 
Fair Value of Common Stock Issued167,808 — 167,808 
Fair Value of Series A Preferred Stock Issued200,000 — 200,000 
Total Consideration1,067,808 — 1,067,808 
Liabilities Assumed:
Accounts Payable and Accrued Liabilities129,622 — 129,622 
Derivative Financial Instruments388 — 388 
Other Current Liabilities9,930 706 10,636 
Long Term Debt826,625 — 826,625 
Covey Park Preferred Equity153,390 — 153,390 
Non-current Derivative Financial Instruments186 — 186 
Asset Retirement Obligations5,374 — 5,374 
Deferred Income Taxes23,466 (1,780)21,686 
Other Non-current Liabilities9,893 — 9,893 
Liabilities Assumed1,158,874 (1,074)1,157,800 
Total Consideration and Liabilities Assumed$2,226,682 $(1,074)$2,225,608 
Assets Acquired:
Cash and Cash Equivalents$6,131 $— $6,131 
Accounts Receivable86,285 — 86,285 
Current Derivative Financial Instruments51,004 — 51,004 
Other Current Assets5,511 (554)4,957 
Proved Oil and Natural Gas Properties1,818,413 (520)1,817,893 
Unproved Oil and Natural Gas Properties237,210 — 237,210 
Other Property, Plant and Equipment2,262 — 2,262 
Non-current Derivative Financial Instruments19,866 — 19,866 
Total Assets Acquired$2,226,682 $(1,074)$2,225,608 

9



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 related to unproved properties are transferred to proved oil and gas properties and amortized on an equivalent unit-of-production basis when they are reflected in proved oil and natural gas reserves. 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 September 30, 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 $3.6 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.  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 activities.  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 45 days advance notice without a specified expiration date.  Accordingly,
10



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.
Lease costs recognized during the three months and nine months ended September 30, 2020 were as follows:
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
(In thousands)
Operating lease cost included in general and administrative expense$422 $1,249 
Operating lease cost included in lease operating expense229 578 
Short-term lease cost (drilling rig costs included in proved oil and gas properties)7,324 26,605 
$7,975 $28,432 
Cash payments for operating leases associated with right-of-use assets included in cash provided by operating activities were $0.7 million and $1.8 million for the three months and nine months ended September 30, 2020, respectively.
As of September 30, 2020, expected future payments related to contracts that contain operating leases were as follows:
(In thousands)
October 1 to December 31, 2020$647 
20212,329 
2022529 
2023182 
Total lease payments
3,687 
Imputed interest(133)
Total lease liability$3,554 
The weighted average term of these operating leases was 1.7 years and the weighted average interest rate used in lease computations was 4.4%. As of September 30, 2020, the Company also had expected future payments for contracted drilling services of $5.2 million.
Accrued Costs
Accrued costs at September 30, 2020 and December 31, 2019 consisted of the following:
As of September 30,
2020
As of December 31,
2019
(In thousands)
Accrued interest payable$38,910 $39,501 
Accrued transportation costs25,465 26,907 
Accrued capital expenditures25,422 42,193 
Accrued lease operating expenses11,817 4,990 
Accrued employee compensation6,508 8,653 
Other3,485 4,092 
Accrued transaction costs1,088 10,830 
$112,695 $137,166 

11



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:
Nine Months Ended
September 30,
20202019
(In thousands)
Reserve for future abandonment costs at beginning of period$18,151 $5,136 
New wells placed on production
451 256 
     Wells acquired  5,374 
Liabilities settled and assets disposed of
(80)(40)
Accretion expense
880 369 
Reserve for future abandonment costs at end of period$19,402 $11,095 
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, except for certain basis swaps, 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. 
12



The Company had the following oil and natural gas price derivative financial instruments, excluding basis swaps which are discussed separately below, at September 30, 2020:
Future Production Period
Three Months Ending December 31, 2020Year Ending December 31, 2021Year Ending December 31, 2022Total
Natural Gas Swap Contracts:
Volume (MMBtu)
47,658,438 (1)142,633,140 (2)10,950,000 201,241,578 
Average Price per MMBtu
$2.63 (1)$2.55 (2)$2.53 $2.57 
Natural Gas 2-Way Collar Contracts:
Volume (MMBtu)
8,720,000 109,550,000 3,600,000 121,870,000 
Price per MMBtu:
Average Ceiling
$2.95 $2.93 $3.36 $2.94 
Average Floor
$2.43 $2.45 $2.50 $2.45 
Natural Gas 3-Way Collar Contracts:
Volume (MMBtu)
4,600,000 — — 4,600,000 
Price per MMBtu:
Average Ceiling
$2.99 — — $2.99 
Average Floor
$2.63 — — $2.63 
Average Put
$2.32 — — $2.32 
Natural Gas Swaptions Call Contracts:
Volume (MMBtu)
— 71,250,000 (3)49,200,000 (4)120,450,000 
Average Price per MMBtu
— $2.52 (3)$2.51 (4)$2.52 
Crude Oil Collar Contracts:
Volume (Barrels)
259,500 182,500 — 442,000 
Price per Barrel:
Average Ceiling
$63.83 $45.00 — $56.06 
Average Floor
$49.35 $40.00 — $45.49 
_____________________________
(1)For the three months ending December 31, 2020, natural gas price swap contracts include 19,320,000 MMBtu at an average price of $2.52 that are part of certain natural gas price swaption contracts which include a call to extend the price swap by the counterparty as described in (3) below.
(2)For the year ending December 31, 2021, natural gas price swap contracts include 23,650,000 MMBtu at an average price of $2.52 that are part of certain natural gas price swaption contracts which include a call to extend the price swap by the counterparty as described in (4) below.
(3)The counterparty has the right to exercise a call option to enter into a price swap with the Company on 71,250,000 MMBtu in 2021 at an average price of $2.52.  The call option expires for 47,450,000 MMBtu at an average price of $2.53 in October 2020; for 7,300,000 MMBtu at an average price of $2.50 in November 2020 and for 16,500,000 MMBtu at an average price of $2.50 in March 2021.
(4)The counterparty has the right to exercise a call option to enter into a price swap with the Company on 49,200,000 MMBtu in 2022 at an average price $2.51. The call option expires for 5,400,000 MMBtu at an average price of $2.50 in March 2021; for 36,500,000 MMBtu at an average price of $2.52 in October 2021 and 7,300,000 MMBtu at an average price of $2.50 in November 2021.
In addition to the swaps, collars and swaptions above, at September 30, 2020, the Company has basis swap contracts that fix the differential between NYMEX Henry Hub and Houston Ship Channel indices. These contracts settle monthly through December 2022 on a total volume of 31,070,000 MMBtu. The fair value of these contracts was a net asset of $1.3 million at September 30, 2020.
The Company has interest rate swap agreements that fix LIBOR at 0.33% for $500.0 million of its floating rate long-term debt.  These contracts settle monthly through April 2023.  The fair value of these contracts was a net liability of $2.5 million at September 30, 2020.
13



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:
TypeConsolidated Balance Sheet LocationSeptember 30, 2020December 31, 2019
(in thousands)
Asset Derivative Financial Instruments:
Natural gas price derivativesDerivative Financial Instruments  – current$6,405 $75,123 
Oil price derivativesDerivative Financial Instruments  – current2,425 181 
$8,830 $75,304 
Natural gas price derivativesDerivative Financial Instruments  – long-term$1,185 $13,888 
Liability Derivative Financial Instruments:
   Natural gas price derivativesDerivative Financial Instruments  – current$62,652 $ 
   Oil price derivativesDerivative Financial Instruments  – current 222 
   Interest rate derivativesDerivative Financial Instruments  – current943  
$63,595 $222 
   Natural gas price derivativesDerivative Financial Instruments  – long-term$64,814 $4,220 
Oil price derivativesDerivative Financial Instruments – long-term20  
   Interest rate derivativesDerivative Financial Instruments – long-term1,539  
$66,373 $4,220 
The Company recognized cash settlements and changes in the fair value of its derivative financial instruments as a single component of other income (expenses). Gains and losses related to cash settlements and changes in the fair value recognized on the Company's derivative contracts recognized in the consolidated statement of operations were as follows:
Gain (Loss) on Derivatives
Recognized in Earnings
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Natural gas price derivatives$(120,706)$22,664 $(82,872)$37,722 
Oil price derivatives(989)2,194 13,529 (5,777)
Interest rate derivatives116  (2,635) 
$(121,579)$24,858 $(71,978)$31,945 
Subsequent to September 30, 2020, the Company entered into additional natural gas 2-way collar contracts to hedge 20,000 MMBtu per day of natural gas production from March 2021 to February 2022 at an average ceiling price of $3.70 per MMBtu and an average floor price of $2.60 per MMBtu. In addition, counterparties to the Company's swaption contracts exercised their option to enter into additional natural gas swap contracts to hedge 47,450,000 MMBtu of the Company's 2021 natural gas production at an average price of $2.53.
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 $1.8 million and $1.1 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 September 30, 2020 and 2019, respectively, and $4.7 million and $2.4 million for the nine months ended September 30, 2020 and 2019, respectively.
14



In June 2020, the Company granted 514,258 shares of restricted stock to its directors and employees.  The 2020 grants had a weighted average fair value of $5.38 per share on the grant date.  As of September 30, 2020, Comstock had 1,044,673 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $5.80 per share.  Total unrecognized compensation cost related to unvested restricted stock grants of $5.4 million as of September 30, 2020 is expected to be recognized over a period of 1.9 years.
As of September 30, 2020, Comstock had 1,136,488 PSUs outstanding at a weighted average grant date fair value of $9.33 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 2,272,976 shares of common stock. Total unrecognized compensation cost related to these grants of $5.8 million as of September 30, 2020 is expected to be recognized over a period of 1.9 years.
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 for oil and vary for natural gas based upon the terms set out in the confirmations between both parties.  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 September 30, 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 $88.0 million as of September 30, 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 September 30, 2020 was 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
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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
September 30,
Nine Months Ended
September 30,
2020201920202019
(In thousands)
Current - Federal$ $ $ $ 
Current - State67 72 216 (22)
Deferred - Federal(35,645)3,184 (37,662)13,959 
Deferred - State(10,545)591 (8,731)1,246 
$(46,123)$3,847 $(46,177)$15,183 
The difference between the federal statutory rate of 21% and the effective tax rate is due to the following:

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Tax at statutory rate21.0 %21.0 %21.0 %21.0 %
Tax effect of:
Valuation allowance on deferred tax assets
1.5 4.5 1.0 2.3 
State income taxes, net of federal benefit
5.2 (1.8)4.3  
Nondeductible stock-based compensation
(1.0)1.2 (