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COMSTOCK RESOURCES, INC.

(CRK)
  Report
Delayed Nyse  -  04:00 2022-12-06 pm EST
14.81 USD   -0.27%
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COMSTOCK RESOURCES INC : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/04/2022 | 04:19pm EST
This report contains forward-looking statements that involve risks and
uncertainties that are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those anticipated in our forward-looking statements due to many
factors. The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included in this report and
in our annual report filed on Form 10-K for the year ended December 31, 2021.

Results of Operations

                                           Three Months Ended              Six Months Ended
                                                June 30,                       June 30,
                                          2022           2021            2022            2021
     Net Production Data:                        (In thousands except per unit amounts)
     Natural gas (MMcf)                  123,950        124,083          238,856        237,376
     Oil (MBbls)                              24            362               45            688
     Natural gas equivalent (MMcfe)      124,092        126,260          239,127        241,506
     Revenues:
     Natural gas sales                 $ 858,838      $ 321,520      $ 1,381,795      $ 645,480
     Oil sales                             2,504         22,173            4,388         38,698
     Total oil and gas sales           $ 861,342      $ 343,693      $ 1,386,183      $ 684,178
     Expenses:

Production and ad valorem taxes $ 21,729 $ 10,141 $ 35,549 $ 19,793

     Gathering and transportation      $  36,964      $  31,736      $    69,057      $  61,194
     Lease operating                   $  25,079      $  26,011      $    51,265      $  50,574
     Exploration                       $   2,342      $       -      $     3,363      $       -
     Average Sales Price:
     Natural gas (per Mcf)             $    6.93      $    2.59      $      5.79      $    2.72
     Oil (per Bbl)                     $  104.33      $   61.25      $     97.51      $   56.25

Average equivalent (Mcfe) $ 6.94 $ 2.72 $ 5.80 $ 2.83

Expenses ($ per Mcfe):

Production and ad valorem taxes $ 0.18 $ 0.08 $ 0.15 $ 0.08

     Gathering and transportation      $    0.30      $    0.25      $      0.29      $    0.25
     Lease operating                   $    0.20      $    0.21      $      0.21      $    0.21


Revenues -

Oil and natural gas sales of $861.3 million for the second quarter of 2022
increased by $517.6 million (151%) as compared to $343.7 million for the second
quarter of 2021. The increase was primarily due to higher prices received for
our natural gas production. Our natural gas production for the second quarter of
2022 was 124.0 billion cubic feet ("Bcf") (1.4 Bcf per day), and was sold at an
average price of $6.93 per Mcf as compared to 124.1 Bcf (1.4 Bcf per day) sold
at an average price of $2.59 per Mcf in the second quarter of 2021. In October
2021, we sold our Bakken shale properties, which accounted for most of our oil
production.

Oil and natural gas sales of $1.4 billion for the six months ended June 30, 2022
increased by $702.0 million (103%) as compared to $684.2 million for the six
months ended June 30, 2021, which also was primarily due to higher prices
received for our natural gas production. Our natural gas production for the
first six months of 2022 increased 1% to 238.9 Bcf (1.3 Bcf per day), and was
sold at an average price of $5.79 per Mcf as compared to 237.4 Bcf (1.3 Bcf per
day) sold at an average price of $2.72 in the first six months of 2021.


                                       19
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We utilize natural gas and oil price derivative financial instruments to manage
our exposure to changes in prices of natural gas and oil and to protect returns
on investment from our drilling activities. The following table presents our
natural gas and oil prices before and after the effect of cash settlements of
our derivative financial instruments:

                                                       Three Months Ended June 30,            Six Months Ended June 30,
                                                          2022              2021                2022                2021
Average Realized Natural Gas Price:
Natural gas, per Mcf                                  $    6.93          $  

2.59 $ 5.79 $ 2.72 Cash settlements on derivative financial instruments, per Mcf

                                                   (2.08)           (0.13)                 (1.57)           (0.10)
Price per Mcf, including cash settlements on
derivative financial instruments                      $    4.85          $  2.46          $        4.22          $  2.62
Average Realized Oil Price:
Oil, per Bbl                                          $  104.33          $ 

61.25 $ 97.51 $ 56.25 Cash settlements on derivative financial instruments, per Bbl

                                                       -            (5.43)                     -            (4.19)
Price per Bbl, including cash settlements on
derivative financial instruments                      $  104.33          $ 

55.82 $ 97.51 $ 52.06



Gas service revenues of $84.9 million and $129.5 million for the three months
and six months ended June 30, 2022, respectively, included sales of natural gas
purchased from unaffiliated third parties for resale and fees received from
unaffiliated third parties for natural gas transportation and treating services.

Costs and Expenses -


Our production and ad valorem taxes increased $11.6 million (114%) to $21.7
million for the second quarter of 2022 from $10.1 million in the second quarter
of 2021. Production and ad valorem taxes increased $15.8 million (80%) to $35.5
million for the first six months of 2022 from $19.8 million in the first six
months of 2021. The increase was primarily related to higher natural gas sales
in 2022.

Gathering and transportation costs for the second quarter of 2022 increased $5.2
million (16%) to $37.0 million as compared to $31.7 million in the second
quarter of 2021. Gathering and transportation costs for the first six months of
2022 increased $7.9 million (13%) to $69.1 million as compared to $61.2 million
for the first six months of 2021. The increase is due to additional
transportation costs related to our operated natural gas production.

Our lease operating expense of $25.1 million ($0.20 per Mcfe) for the second
quarter of 2022 decreased $0.9 million (4%) from lease operating expense of
$26.0 million ($0.21 per Mcfe) for the second quarter of 2021. Lease operating
expense of $51.3 million ($0.21 per Mcfe) for the first six months of 2022
increased $0.7 million (1%) from lease operating expense of $50.6 million ($0.21
per Mcfe) for the first six months of 2021.

Gas service expenses were $82.8 million and $123.5 million for the three months
and six months ended June 30, 2022 and include the cost of unaffiliated third
party natural gas purchased for resale and the operating expenses of the
pipeline and natural gas treating plant acquired in April 2022.

Depreciation, depletion and amortization ("DD&A") decreased $2.2 million (2%) to
$119.2 million in the second quarter of 2022 from $121.4 million in the second
quarter of 2021. Our DD&A per equivalent Mcf produced was $0.96 per Mcfe for
both the quarter ended June 30, 2022 and 2021. DD&A decreased $4.6 million (2%)
to $225.9 million in the first six months of 2022 from $230.6 million in the
first six months of 2021. Our DD&A per equivalent Mcf produced decreased $0.01
to $0.94 per Mcfe for the first six months of 2022 from $0.95 per Mcfe for the
first six months of 2021.

General and administrative expenses, which are reported net of overhead reimbursements, increased to $9.1 million for the second quarter of 2022 as compared to $7.9 million in the second quarter of 2021. General and administrative expenses increased to $17.3 million for the first six months of 2022 from $15.9 million in the first six months of 2021. The increases were primarily related to higher compensation expense.


We use derivative financial instruments as part of our price risk management
program to protect our capital investments. During the quarter ended June 30,
2022, we had losses related to our derivative financial instruments of $72.8
million, as compared to net losses on derivative financial instruments of $224.0
million during the quarter ended June 30, 2021. Realized net losses from our oil
and natural gas price risk management program were $257.4 million for the
quarter ended June 30, 2022 as compared to realized net losses of $18.8 million
for the quarter ended June 30, 2021. Net losses on derivative financial
instruments were $510.3 million for the first six months of 2022 as compared to
net losses of $245.7 million for the first six months of 2021. Realized net
losses from our oil and natural gas price risk management program were $374.5
million for the first six months of 2022 as compared to realized net losses of
$27.3 million for the first six months of 2021.

                                       20
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Interest expense was $44.3 million and $56.9 million for the quarters ended
June 30, 2022 and 2021, respectively, and $90.8 million and $120.7 million for
the six months ended June 30, 2022 and 2021, respectively. The decrease in
interest expense is due primarily to the refinancing of our senior notes in 2021
and the early retirements of senior notes in May and June 2022.

Loss on extinguishment of debt was $46.8 million and $114.1 million for the
quarter ended June 30, 2022 and 2021, respectively, and $46.8 million and $352.6
million for the six months ended June 30, 2022 and 2021, respectively. In May
and June 2022, we retired $244.4 million and $26.1 million, respectively,
principal amount of our 7.5% senior notes due in 2025 and 6.75% senior notes due
in 2029. In March and June 2021, we redeemed all of our outstanding 9.75% senior
notes due in 2026 and $375.0 million principal amount of our 7.5% senior notes
due in 2025.

Income taxes for the quarter ended June 30, 2022 and 2021 were an expense of
$108.4 million and a benefit of $68.2 million, respectively. Income taxes for
the six months ended June 30, 2022 and 2021 were an expense of $76.8 million and
a benefit of $98.1 million, respectively. Income tax expense for the three
months and six months ended June 30, 2022 reflect an effective tax rate of 22.3%
and 22.4%, respectively. The income tax benefit for the three months and six
months ended June 30, 2021 reflect an effective tax rate of 27.5% and 23.8%,
respectively. The difference between the federal statutory tax rate of 21% and
our effective rate is primarily attributable to revisions to the estimated
future utilization of federal and state net operating loss carryforwards ("NOL")
and the impact of state income taxes.

We reported net income available to common stockholders of $372.5 million or
$1.36 per diluted share, for the quarter ended June 30, 2022 which included a
$72.8 million net loss from derivative financial instruments and a $46.8 million
loss on early retirement of debt. Income from operations for the second quarter
of 2022 was $649.1 million and we had interest expense of $44.3 million and $4.4
million in preferred stock dividends. We reported net loss available to common
stockholders of $184.1 million or $0.80 per share for the three months ended
June 30, 2021. In the first six months of 2022, we reported net income available
to common stockholders of $256.8 million or $0.96 per diluted share, which
included a $510.3 million net loss from derivative financial instruments and a
$46.8 million loss on early retirement of debt. Income from operations for the
first six months of 2022 was $989.8 million and we had interest expense of $90.8
million and $8.7 million in preferred stock dividends. We reported net loss
available to common stockholders of $322.5 million or $1.39 per share for the
six months ended June 30, 2021.

Cash Flows, Liquidity and Capital Resources

Cash Flows


The following table summarizes sources and uses of cash and cash equivalents:

                                                                     Six Months Ended
                                                                         June 30,
                                                                  2022            2021
                                                                      (In thousands)
   Sources of cash and cash equivalents:
   Operating activities                                        $ 685,933      $   385,583
   Issuance of new senior notes, net of costs                          -        2,187,098
   Borrowings on bank credit facility, net of repayments         115,000                -
   Proceeds from asset sales                                          93              211

   Total                                                       $ 801,026      $ 2,572,892

   Uses of cash and cash equivalents:
   Capital expenditures                                        $ 515,454      $   338,779
   Retirement of senior notes                                    273,920        2,210,626
   Repayments of bank credit facility, net of borrowings               -           25,000
   Preferred stock dividends                                       8,678            8,678
   Other                                                           1,365              354
   Total                                                       $ 799,417      $ 2,583,437



                                       21
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Cash flows from operating activities. Net cash provided by our operating
activities increased $300.4 million (78%) to $685.9 million in the first six
months of 2022 from $385.6 million in the same period in 2021. The increase is
primarily due to higher realized natural gas prices in 2022.

Issuance of new senior notes and retirement of senior notes. In May 2022, we
retired all of our outstanding 7.5% senior notes due in 2025 for $248.9 million,
which included premiums paid over face value of $4.5 million. During June 2022,
we retired $26.1 million principal amount of our 6.75% senior notes for
$24.9 million.

In 2021, we issued $1.25 billion principal amount of 6.75% senior notes due in
2029 and $965.0 million principal amount of 5.875% senior notes due in 2030. The
proceeds from the note offerings were used to redeem $2,025.0 million principal
amount of outstanding senior notes for $2,198.1 million, including premiums paid
over face value and costs related to a tender offer.

Capital expenditures. The increase in capital expenditures of $176.7 million is
primarily due to our higher drilling and completion activity in 2022 and the
acquisition of undeveloped Haynesville shale acreage and a high pressure natural
gas pipeline and treating plant from an unaffiliated third party.

The following table summarizes our capital expenditure activity:

                                                               Six Months Ended
                                                                   June 30,
                                                             2022           2021
                                                                (In thousands)
      Acquisitions:
      Proved property                                     $     205      $       -
      Unproved property                                      25,182         13,401

Exploration and development:

      Development leasehold costs                             5,287        

6,061

      Drilling and completion costs                         444,816       

312,887

      Other development costs                                36,937        

8,076

      Change to asset retirement obligations                    816        

855

      Total exploration and development                     513,243       

341,280

      Other property and equipment                           18,079        

46

      Total capital expenditures                          $ 531,322      $

341,326

Change in accrued capital expenditures and other (13,842) (1,692)

      Change in asset retirement obligations                 (2,026)       

(855)

      Total cash capital expenditures                     $ 515,454      $

338,779



We drilled 61 (30.5 net) wells and completed 61 (30.3 net) Haynesville and
Bossier shale wells during the first six months of 2022. We currently expect to
spend an additional $440 million to $490 million in the remaining six months of
2022 to drill 42 (28.9 net) additional wells, to complete 33 (27.0 net) wells
and for other development activity.

Liquidity and Capital Resources


As of June 30, 2022, we had $1.1 billion of liquidity, comprised of unused
borrowing capacity under our bank credit facility and $32.3 million of cash and
cash equivalents on hand. Our short and long-term capital requirements consist
primarily of funding our development and exploration activities, acquisitions,
payments of contractual obligations and debt service.

We expect to fund our future development and exploration activities with future
operating cash flow. The timing of most of our future capital expenditures is
discretionary because we have no material long-term capital expenditure
commitments. Consequently, we have a significant degree of flexibility to adjust
the level of our capital expenditures as circumstances warrant. If our plans or
assumptions change or our assumptions prove to be inaccurate, we may be required
to seek additional capital, including debt or equity financing. We cannot
provide any assurance that we will be able to obtain such capital, or if such
capital is available, that we will be able to obtain it on acceptable terms.

We do not have a specific acquisition budget for 2022 because the timing and
size of acquisitions are unpredictable. We intend to use our cash flows from
operations, borrowings under our bank credit facility, or other debt or equity
financings to the extent available, to finance such acquisitions. The
availability and attractiveness of these sources of financing will depend

                                       22
--------------------------------------------------------------------------------


upon a number of factors, some of which will relate to our financial condition
and performance and some of which will be beyond our control, such as prevailing
interest rates, oil and natural gas prices and other market conditions. Lack of
access to the debt or equity markets due to general economic conditions could
impede our ability to complete acquisitions.

At June 30, 2022, we had $350.0 million outstanding under our bank credit
facility with a $1.4 billion committed borrowing base, which is re-determined on
a semi-annual basis and upon the occurrence of certain other events, and matures
on July 16, 2024. The borrowing base was redetermined on April 15, 2022.
Borrowings under the bank credit facility are secured by substantially all of
our assets and those of our subsidiaries and bear interest at our option, at
either LIBOR plus 2.25% to 3.25% or a base rate plus 1.25% to 2.25%, in each
case depending on the utilization of the borrowing base. We also pay a
commitment fee of 0.375% to 0.50% on the unused portion of the borrowing base.
The bank credit facility places certain restrictions upon our and our
subsidiaries' ability to, among other things, incur additional indebtedness, pay
cash dividends, repurchase common stock, make certain loans, investments and
divestitures and redeem the senior notes. The only financial covenants are the
maintenance of a leverage ratio of less than 4.0 to 1.0 and an adjusted current
ratio of at least 1.0 to 1.0. We were in compliance with the covenants as of
June 30, 2022.

Income Taxes

At June 30, 2022, we had $897.4 million in U.S. federal NOL carryforwards and
$1.5 billion in certain state NOL carryforwards. As a result of the change of
control in August 2018, our ability to use NOLs to reduce taxable income is
generally limited to an annual amount based on the fair market value of our
stock immediately prior to the ownership change multiplied by the long-term
tax-exempt interest rate. Our NOLs are estimated to be limited to $3.3 million a
year as a result of this limitation. In addition to this limitation, IRC Section
382 provides that a corporation with a net unrealized built-in gain immediately
before an ownership change may increase its limitation by the amount of
recognized built-in gain recognized during a recognition period, which is
generally the five-year period immediately following an ownership change. Based
on the fair market value of our common stock immediately prior to the ownership
change, we believe that we have a net unrealized built-in gain which will
increase the Section 382 limitation during the five-year recognition period from
2018 to 2023 by $117.0 million.

NOLs that exceed the Section 382 limitation in any year continue to be allowed
as carryforwards until they expire and can be used to offset taxable income for
years within the carryover period subject to the limitation in each year. NOLs
incurred prior to 2018 generally have a 20-year life until they expire. NOLs
generated in 2018 and after would be carried forward indefinitely. Our use of
new NOLs arising after the date of an ownership change would not be affected by
the 382 limitation. If we do not generate a sufficient level of taxable income
prior to the expiration of the pre-2018 NOL carryforward periods, then we will
lose the ability to apply those NOLs as offsets to future taxable income. We
estimate that $790.9 million of the U.S. federal NOL carryforwards and $1.2
billion of the estimated state NOL carryforwards will expire unused.

© Edgar Online, source Glimpses

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