View:
[LETTERHEAD
OF COMSTOCK RESOURCES, INC.]
CORRESP
September
19, 2007
BY
FACSIMILE (202-772-9369) AND EDGAR
Securities
and Exchange Commission
100
F
Street N.E.
Washington,
D.C. 20549
|
|
Re:
|
Comstock
Resources, Inc.
|
|
|
Form
10-K, for the Fiscal Year Ended December 31,
2006
|
Filed
March 1, 2007
File
No.: 1-3262
|
|
Ladies
and Gentlemen:
|
The
following are the responses of Comstock Resources, Inc. ("Comstock" or the
"Company") to the comments contained in the Staff's comment letter dated
September 11, 2007 (the "Comment Letter") concerning the above-referenced 10-K
(the "10-K"). The responses are numbered to correspond to the numbers
of the Comment Letter.
|
|
Form
10-K for the Fiscal Year Ended December 31, 2006
|
|
|
Business
and Properties, page 7
|
|
1.
|
We
note your presentation of the measure PV-10. Tell us how you
considered identifying this measure as a non-GAAP measure and including,
or providing a reference to, a reconciliation between PV-10 and the
standardized measure of discounted future net cash
flows.
|
References
in our Business and Properties discussion are made specifically to the defined
term of "PV-10 Value", as contained in the "DEFINITIONS" starting on page 3
of
our 10-K filing. In our future filings we propose to add the
following additional language to this definition:
"Although
PV-10 Value is not a financial measure calculated in accordance with GAAP,
management believes that the presentation of PV-10 Value is relevant and useful
to the Company's investors because it presents the discounted future net cash
flows attributable to the Company's proved reserves prior to taking into account
corporate future income taxes and its current tax
structure. Management uses this measure when assessing the potential
return on investment related to its oil and gas properties. Because
many factors that are unique to any given company affect the amount of estimated
future income taxes, the use of a pre-tax measure is helpful to investors when
comparing companies in our industry."
Securities
and Exchange Commission
September
19, 2007
Page
2
We
reconcile PV-10 Value to the Standardized Measure of Discounted Future Net
Cash
Flows in the tabular presentations of oil and natural gas reserves and PV-10
Value by operating area in our discussion of Primary Operating Areas on page
9
and again in the table disclosing oil and gas reserves contained in our
discussion of Oil and Natural Gas Reserves on page 17. The
reconciling difference is the discounted future value of income
taxes. We also disclose, in a footnote to our table of oil and
natural gas reserves on page 17, the non-GAAP nature of PV-10 Value and define
the standardized measure of discounted future net cash flows as being after
income tax, and discounted at 10%.
|
|
Primary
Operating Areas, page 9
|
|
2.
|
Within
the table of summarized information for your largest operating areas,
you
include a measure of PV-10 for each operating area. Item 10(e)
of Regulation S-K explains that when a registrant includes a non-GAAP
measure in a filing with the commission, the registrant must also
include
a presentation, with equal or greater prominence, the most directly
comparable financial measure calculated and presented in accordance
with
GAAP. We note within footnote one to the table, you provide the
standardized measure of future net cash flows in total for the year
ended
December 31, 2006. As you provide the measure of PV-10 per
operating area, and only provide the standardized measure of future
net
cash flows in total, please demonstrate to us how you complied with
the
guidance in Item 10(e) of Regulation
S-K.
|
As
discussed in our response to Comment 1 above, the difference between PV-10
Value
and the Standardized Measure of Discounted Future Net Cash Flows is the
discounted future net value of income taxes. Because many factors
that are unique to any given company affect the amount of estimated future
income taxes, and due to the fact that future income taxes contain items which
are not attributable to and/or identifiable to specific operating areas, we
compute our discounted future net value of income taxes at the corporate level
only, and our reconciliation of PV-10 Value and the Standardized Measure of
Discounted Future Net Cash Flows is presented only on a company-wide
basis.
Information
regarding the PV-10 Value of reserves by operating area as contained on page
9,
and our discussion of the operating and geological characteristics of these
operating areas on pages 10 through 17, provides information which is helpful
to
investors when comparing companies in our industry. In our future
filings we propose to include the same footnote disclosure reconciling the
PV-10
Value in the table on page 9 as that which we currently have provided in the
footnote to our table of oil and natural gas reserves on page 17, which
describes the non-GAAP nature of PV-10 Value and defines the standardized
measure of discounted future net cash flows as being after income tax, and
discounted at 10%. In future filings we will expand operating area
disclosures to present the Standardized Measure of Discounted Future Net Cash
Flows separately for the offshore properties and the onshore properties as
they
are determined separately at the corporate level at Bois d'Arc Energy and
Comstock Resources, respectively.
Securities
and Exchange Commission
September
19, 2007
Page
3
|
|
Available
Information, page 28
|
|
3.
|
Please
note that the Commission's address is 100 F Street N.E., Washington,
D.C.
20549.
|
We
acknowledge your address change and will disclose this new address in all future
filings.
|
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations,
page 40
|
|
4.
|
Given
the volatility and significance of your results of operations as
a result
of the accounting method applied to your investment in Bois d'Arc
Energy,
expand your disclosure to discuss your intentions with regard to
your
expected level of investment in Bois d'Arc
Energy.
|
As
discussed in the response to Comment 7 below, as a result of the acquisition
of
additional shares in Bois d'Arc Energy, Inc. in August and September, 2006
the
Company established voting control of Bois d'Arc Energy, Inc. and accordingly,
the Company adopted consolidation accounting for its interests in Bois d'Arc
Energy, Inc. In the fourth quarter of 2006 and during 2007, the
Company has maintained such voting control by acquiring additional shares in
the
open market to offset the impact of dilution from the exercise of stock options
by Bois d'Arc Energy, Inc. employees. Comstock currently intends to
continue to acquire sufficient shares to maintain its voting control of Bois
d'Arc Energy, Inc., subject to the outcome of the evaluation of strategic
alternatives by the Board of Directors of Bois d'Arc Energy, Inc., which
potentially could include the sale of Bois d'Arc Energy, Inc.
In
future
filings, we will include in the Company's Management's Discussion and Analysis
of Financial Condition and Results of Operations and in its footnotes to its
financial statements the following statement:
"The
Company currently owns a controlling ownership interest in Bois d'Arc Energy,
Inc. and currently intends to maintain its controlling interest by acquiring
additional shares of Bois d'Arc Energy, Inc. 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, Inc., including the potential sale of Bois d'Arc Energy,
Inc."
Securities
and Exchange Commission
September
19, 2007
Page
4
|
|
Results
of Operations, page 42
|
|
|
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004,
|
|
|
page
45
|
|
|
Net
Income, page 47
|
|
5.
|
Within
your discussion you include a measure of net income adjusted for
the
effects of Bois d'Arc's conversion to a corporation and its initial
public
offering, and the unrealized loss on derivatives. It appears
the adjustments applied to such a measure result in the presentation
of a
non-GAAP financial measure as defined in Item 10(e)(2) of Regulation
S-K. Please tell us if you believe the measure is a non-GAAP
measure, and if applicable, how you have complied with Item 10(3)
of
Regulation S-K.
|
In
making
the separate disclosure of net income adjusted for the effects of Bois d'Arc's
conversion to a corporation and its initial public offering, and the unrealized
loss on derivatives, it was management's intention to assist readers in
understanding the impact on net income of items which will not recur in the
future (the one-time conversion to a corporation by Bois d'Arc Energy) or which
are expected to be infrequent in the future (unrealized losses and gains from
derivative financial instruments). In our future filings, to the
extent that we make these or similar disclosures, we will disclose the impact
of
such factors on net income, or should we elect to explain fluctuations through
computations including and excluding certain amounts, we will ensure that
to the extent these disclosures include non-GAAP measures all appropriate
presentations, including reconciliation of the non-GAAP measure to the related
GAAP measure, are included.
|
|
Liquidity
and Capital Resources, page 47
|
|
6.
|
Within
your summary table of liabilities and commitments on page 49, you
have
excluded amounts related to asset retirement obligations. Item
303(a)(5) of Regulation S-K requires the table of contractual obligations
present all long-term liabilities reflected on the balance sheet
under
GAAP. Please explain to us how you have considered including
asset retirement obligations within your table of contractual
obligations.
|
The
Company recognizes that it has contractual obligations associated with plugging
and abandonment of oil and gas wells and facilities, and accounts for the fair
value of these liabilities under the accounting guidance provided in Statement
of Financial Accounting Standards No. 143, Asset Retirement
Obligations. Disclosures of the changes in the Company's asset
retirement obligations are disclosed in Footnote 1 to its consolidated financial
statements.
The
timing of actual abandonment of oil and gas wells and facilities is highly
subjective, as the expected remaining life of oil and gas reserves fluctuates
based upon market forces (oil and natural gas prices, as well as the cost of
oilfield materials, supplies and labor), changes in technology, and the
regulatory environment. In evaluating the Company's future
abandonment liabilities as of December 31, 2006, the expected remaining
productive lives of its significant oil and gas reserves to which material
abandonment costs are attributable indicated that these costs would be incurred
primarily in years after 2011.
Securities
and Exchange Commission
September
19, 2007
Page
5
In
our
future filings, we propose to add a disclosure similar to the following as
a
footnote to our table of contractual obligations:
"The
information in this table does not include estimated 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 $57.1 million as
of
December 31, 2006. See Note 1, Asset Retirement Obligation to our
Consolidated Financial Statements in this report for further
discussion."
|
|
Notes
to Consolidated Financial Statements, page F-7
|
|
|
Note
1 Summary of Significant Accounting Policies, page
F-7
|
|
|
Formation
of and Investment in Bois d'Arc Energy, page
F-7
|
|
7.
|
You
explain that through the combined share ownership by you and the
members
of your board of directors, you have obtained voting control of Bois
d'Arc
Energy; therefore, effective January 1, 2006 you began reflecting
Bois
d'Arc Energy as a consolidated subsidiary. Please explain why
you believe it is appropriate to combine your share ownership with
those
of your board of directors in determining whether or not you have
voting
control over Bois d'Arc Energy. As part of your response,
please include any accounting literature you relied upon in forming
your
conclusion.
|
Securities
and Exchange Commission
September
19, 2007
Page
6
The
accounting literature addressing consolidated financial reporting is primarily
found in Accounting Research Bulletin 51, Consolidated Financial Statements
("ARB 51") and Statement of Financial Accounting Standards No. 94, Consolidation
of All Majority-Owned Subsidiaries ("SFAS 94").
Paragraph
1 of ARB 51 states the purpose of and preference for the presentation of
consolidated financial statements, as follows:
"1. The
purpose of consolidated statements is to present, primarily for the benefit
of
the shareholders and creditors of the parent company, the results of operations
and the financial position of a parent company and its subsidiaries essentially
as if the group were a single company with one or more branches or
divisions. There is a presumption that consolidated statements are
more meaningful than separate statements and that they are usually necessary
for
a fair presentation when one of the companies in the group directly or
indirectly has a controlling financial interest in the other
companies."
SFAS
94
modified paragraphs 2. and 3. of ARB 51 so as to further clarify the
requirements for consolidated financial reporting, as follows:
2. The
usual condition for a controlling financial interest is ownership of a majority
voting interest, and, therefore, as a general rule ownership by one company,
directly or indirectly, of over fifty percent of the outstanding voting shares
of another company is a condition pointing toward consolidation. However,
there are exceptions to this general rule. A majority-owned subsidiary
shall not be consolidated if control is likely to be temporary or if it does
not
rest with the majority owner (as, for instance, if the subsidiary is in legal
reorganization or in bankruptcy or operates under foreign exchange restrictions,
controls, or other governmentally imposed uncertainties so severe that they
cast
significant doubt on the parent's ability to control the
subsidiary).
3. All
majority-owned subsidiaries—all companies in which a parent has a controlling
financial interest through direct or indirect ownership of a majority voting
interest—shall be consolidated except those described in the last sentence of
paragraph 2."
SX
1-02(g) defines control as follows (emphasis added):
Control.
The term control (including the terms controlling, controlled by and under
common control with) means the possession, direct or indirect, of the power
to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting shares, by
contract, or otherwise.
Securities
and Exchange Commission
September
19, 2007
Page
7
In
assessing Comstock's control over Bois d'Arc Energy, Inc. the Company considered
the following factors:
|
•
|
Following
the acquisition of additional shares of common stock of Bois d'Arc
Energy,
Inc. in the third quarter of 2006, Comstock held 48.50% of the voting
shares of Bois d'Arc Energy, Inc. Further, Comstock's
directors, most notably its Chief Executive Officer and Chief Financial
Officer, held an additional 1.53% of the voting shares, giving management
of the Company the ability to exercise control over Bois d'Arc Energy,
Inc.
|
|
•
|
Having
achieved control of Bois d'Arc Energy, Inc. during the third quarter
of
2006 through the combination of a private placement of Bois d'Arc
Energy,
Inc. stock and open market purchases of Bois d'Arc Energy, Inc. stock,
Comstock has the intent and the financial ability to retain voting
control
of Bois d'Arc Energy, Inc. through the open market purchase of additional
shares of Bois d'Arc Energy, Inc. common
stock.
|
|
•
|
In
addition to having the ability to exercise voting control over Bois
d'Arc
Energy, Inc., the Chief Executive Officer and the Chief Financial
Officer
of Comstock serve as the Chairman of the Board of Directors and the
Chief
Financial Officer of Bois d'Arc Energy, Inc. respectively. Both
of these individuals are directors of Comstock and Bois d'Arc Energy,
Inc. Also, a majority of the current Board of Directors of Bois
d'Arc Energy, Inc. is represented by members of Comstock's Board
of
Directors (five of the nine Bois d'Arc Energy, Inc. directors are
directors of the Company). Because of its controlling voting
interest, the Company has the ability to maintain this representation
on
the Board of Directors of Bois d'Arc Energy,
Inc.
|
Based
upon management's assessment of these factors, we believe that, under the
definitions of control within S-X 1-02(g) and under existing accounting rules
as
promulgated in ARB 51 and SFAS 94, the Company has a controlling interest in
Bois d'Arc Energy, Inc. Based upon this assessment of control,
management has determined that consolidation accounting is the appropriate
accounting method for its investment in Bois d'Arc Energy, Inc. common stock
beginning with the period in which the controlling interest was acquired, which
was the quarterly period ended September 30, 2006.
In
considering the presentation of financial and operating results concurrent
with
its adoption of consolidation accounting for its investment in Bois d'Arc
Energy, Inc. stock, the Company researched the proper accounting regarding
the
adoption of the consolidation accounting, and found that ARB 51 paragraph 11
contained the following guidance:
Securities
and Exchange Commission
September
19, 2007
Page
8
Based
upon this guidance, Comstock management determined that the most appropriate
presentation was to give effect to the consolidation of the financial results
of
Bois d'Arc Energy, Inc. in the Company's consolidated statement of operations
and its consolidated statement of cash flows as of January 1,
2006. To assist investors in understanding the pro forma effect of
consolidation on financial results for the year ended December 31, 2005 the
Company also presented selected financial pro forma financial consolidated
results in Footnote 1 to its Consolidated Financial Statements on pages F-9
and
F-10 in the 10-K.
|
|
Major
Purchasers, page F-13
|
|
8.
|
You
explain that for the years ended December 31, 2006, 2005 and 2004
revenues
from two purchasers accounted for greater than 10% of your total
oil and
gas sales. However, we were unable to locate your disclosure of
the identity of these customers in your disclosures outside of your
financial statements, as required by FRR 503.02. Please revise
your disclosure accordingly, to identify any purchaser that accounts
for
greater than 10% of your consolidated
revenues.
|
Disclosure
of sales of greater than 10% of our consolidated revenues by purchaser,
including the identity of each purchaser, for the year ended December 31, 2006
are disclosed on Pages 19-20 of our Form 10-K under the caption of Markets
and
Customers. Within this caption, management also discloses that the
loss of any of these purchasers would not have a material adverse effect on
the
Company, as there is an available market for our crude oil and natural gas
production from other purchasers.
In
assessing the appropriateness of this disclosure, we have reviewed the
provisions of FFR 503.02, which retain the disclosure requirements as defined
in
Regulation S-K101-Description of Business, as follows (emphasis
added):
"c.1.(vii) The
dependence of the segment upon a single customer, or a few customers, the loss
of any one or more of which would have a material adverse effect on the
segment. The name of any customer and its relationship, if any, with
the registrant or its subsidiaries shall be disclosed if sales to the customer
by one or more segments are made in an aggregate amount equal to 10 percent
or
more of the registrant's consolidated revenues and the loss of such
customer would have a material adverse effect on the registrant and its
subsidiaries taken as a whole. The names of other
customers may be included, unless in the particular case the effect of including
the names would be misleading. For purposes of this paragraph, a
group of customers under common control or customers that are affiliates of
each
other shall be regarded as a single customer."
Based
upon management's understanding of these rules, disclosure of purchasers that
account for greater than 10% of total revenues for the current year is not
required, unless it is determined that the loss of any such customer would
have
a material adverse effect on the Company. Management does not believe
the loss of any such customer for the year ended December 31, 2006 or prior
periods would result in a material adverse effect. However, the
Company has historically disclosed in its filings on Form 10-K the names of
customers that account for greater than 10% of revenues for the current
reporting period as we believe this information is meaningful to
investors. Management will continue to assess the meaningfulness of
this disclosure and provide this information as appropriate in all future
filings.
Securities
and Exchange Commission
September
19, 2007
Page
9
|
|
Note
13 Consolidating Financial Statements, page
F-32
|
|
9.
|
We
note you have provided condensed consolidating financial statements
to
comply with the requirements of Rule 3-10 of Regulation
S-X. Please tell us why you have provided such condensed
consolidating financial statements only as of and for the year ended
December 31, 2006.
|
Based
upon management's analysis of Rule 3-10 of Regulation S-X, we determined that
separate condensed consolidating financial statements for the year ended
December 31, 2005 were not required. In making this assessment, we
considered the following factors:
|
•
|
During
2005, all subsidiaries were 100% owned, and all subsidiaries were
guarantors of the debt. There were no restrictions on the
ability of the parent company to obtain funds from these subsidiaries,
and
there were no restricted net assets of consolidated subsidiaries
with
respect to transfers of assets to the parent company or any of the
other
guarantors.
|
|
•
|
Prior
to 2006, the Company's investment in the common stock of Bois d'Arc
Energy, Inc. was held by one of the guarantor subsidiaries. As
a result, the parent company had no assets or operating activities
that
were independent of its consolidated subsidiaries as of December
31, 2005,
and for the years ended December 31, 2004 and
2005.
|
Based
upon these factors, the Company determined that condensed consolidating
financial statements for the year ended December 31, 2005 were not required
in
the Annual Report on Form 10-K based upon the exemptions provided in Note 1
to
Paragraph (f) of Rule SX-3 (10).
Securities
and Exchange Commission
September
19, 2007
Page
10
During
2006, the Company's investment in the common stock of Bois d'Arc Energy, Inc.
held by the subsidiary was transferred to the parent company. As a
result of this transfer, the parent now holds the investment in Bois d'Arc
Energy, Inc., which is not a guarantor of the debt, and we included condensed
consolidating financial statements in the notes to our consolidated financial
statements beginning in the third quarter of 2006. As a result of the
adoption of consolidation accounting for Comstock's investment in Bois d'Arc
Energy, Inc., and the election to present the results of Bois d'Arc Energy,
Inc.
in the Company's consolidated statement of operations and statement of cash
flows on a consolidated basis retroactive to January 1, 2006, we also presented
Bois d'Arc Energy, Inc. as a non guarantor subsidiary retroactive to January
1,
2006. Because there is no provision to restate financial results for
periods prior to January 1, 2006 under the accounting guidance related to
adopting consolidation accounting (ARB 51, paragraph 11. as contained in our
response to Comment 7 above), management concluded that it would also not be
appropriate for the Company to include condensed consolidating financial
statements for periods prior to that date.
The
management of Comstock Resources, Inc. acknowledges that:
|
•
|
the
Company is responsible for the adequacy and accuracy of the disclosures
in
its filings;
|
|
•
|
staff
comments or changes to disclosures in response to staff comments
do not
foreclose the Commission from taking any action with respect to the
filing; and
|
|
•
|
the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
If
you
have any questions, please do not hesitate to contact the undersigned at (972)
668-8811.
Very
truly yours,
/s/
Roland O.
Burns
Roland
O.
Burns
Senior
Vice President and Chief Financial Officer
RDS/