COMSTOCK RESOURCES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 3 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, 2021 December 31, 2020 (In thousands) ASSETS Cash and cash equivalents $ 27,841 $ 30,272 Accounts receivable: Oil and gas sales 213,661 125,016 Joint interest operations 20,241 14,615 From affiliates 9,263 6,155 Derivative financial instruments 26,392 8,913 Other current assets 12,194 14,839 Total current assets 309,592 199,810 Property and equipment: Oil and natural gas properties, successful efforts method: Proved 5,180,782 4,647,188 Unproved 307,593 332,765 Other 6,630 6,858 Accumulated depreciation, depletion and amortization ( 1,260,528 ) ( 902,261 ) Net property and equipment 4,234,477 4,084,550 Goodwill 335,897 335,897 Derivative financial instruments 342 661 Operating lease right-of-use assets 6,792 3,025 Other assets 37 40 $ 4,887,137 $ 4,623,983 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 324,811 $ 259,284 Accrued costs 109,122 133,019 Operating leases 2,356 2,284 Derivative financial instruments 627,166 47,005 Total current liabilities 1,063,455 441,592 Long-term debt 2,801,312 2,517,149 Deferred income taxes 115,585 200,583 Derivative financial instruments 50,127 2,364 Long-term operating leases 4,486 740 Reserve for future abandonment costs 21,867 19,290 Other non-current liabilities 24 492 Total liabilities 4,056,856 3,182,210 Commitments and contingencies Mezzanine equity: Series B 10 % Convertible Preferred stock — 5,000,000 shares authorized, 175,000 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 175,000 175,000 Stockholders' equity: Common stock—$ 0.50 par, 400,000,000 shares authorized, 232,924,646 and 232,414,718 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively 116,462 116,206 Additional paid-in capital 1,098,851 1,095,384 Accumulated earnings (deficit) ( 560,032 ) 55,183 Total stockholders' equity 655,281 1,266,773 $ 4,887,137 $ 4,623,983 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, 2021 2020 2021 2020 (In thousands, except per share amounts) Revenues: Natural gas sales $ 488,303 $ 168,374 $ 1,133,783 $ 547,975 Oil sales 22,873 9,637 61,571 35,449 Total oil and gas sales 511,176 178,011 1,195,354 583,424 Operating expenses: Production and ad valorem taxes 16,675 9,798 36,468 27,768 Gathering and transportation 35,402 22,422 96,596 77,423 Lease operating 26,576 25,412 77,150 79,110 Depreciation, depletion and amortization 128,739 99,056 359,313 312,828 General and administrative 8,052 8,974 23,952 25,991 Exploration — — — 27 Gain on sale of assets ( 14 ) ( 16 ) ( 93 ) ( 16 ) Total operating expenses 215,430 165,646 593,386 523,131 Operating income 295,746 12,365 601,968 60,293 Other income (expenses): Loss from derivative financial instruments ( 510,319 ) ( 121,579 ) ( 756,026 ) ( 71,978 ) Other expense 197 489 1,008 793 Interest expense ( 49,954 ) ( 63,890 ) ( 170,645 ) ( 168,764 ) Loss on early retirement of debt — — ( 352,599 ) ( 861 ) Total other expenses ( 560,076 ) ( 184,980 ) ( 1,278,262 ) ( 240,810 ) Loss before income taxes ( 264,330 ) ( 172,615 ) ( 676,294 ) ( 180,517 ) Benefit from (provision for) income taxes ( 23,976 ) 46,123 74,168 46,177 Net loss ( 288,306 ) ( 126,492 ) ( 602,126 ) ( 134,340 ) Preferred stock dividends and accretion ( 4,411 ) ( 4,398 ) ( 13,089 ) ( 26,596 ) Net loss available to common stockholders $ ( 292,717 ) $ ( 130,890 ) $ ( 615,215 ) $ ( 160,936 ) Net loss per share: Basic $ ( 1.26 ) $ ( 0.57 ) $ ( 2.66 ) $ ( 0.77 ) Diluted $ ( 1.26 ) $ ( 0.57 ) $ ( 2.66 ) $ ( 0.77 ) Weighted average shares outstanding: Basic 231,747 231,223 231,519 209,760 Diluted 231,747 231,223 231,519 209,760 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, 2020 190,007 $ 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 stock 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 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 stock accretion — — — ( 2,917 ) ( 2,917 ) Payment of preferred dividends — — — ( 7,210 ) ( 7,210 ) Balance at June 30, 2020 232,580 $ 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, 2020 232,421 $ 116,210 $ 1,093,811 $ ( 22,341 ) $ 1,187,680 Balance at January 1, 2021 232,415 $ 116,206 $ 1,095,384 $ 55,183 $ 1,266,773 Stock-based compensation ( 4 ) — 1,690 — 1,690 Stock issuance costs — — ( 30 ) — ( 30 ) Net loss — — — ( 134,125 ) ( 134,125 ) Payment of preferred dividends — — — ( 4,315 ) ( 4,315 ) Balance at March 31, 2021 232,411 $ 116,206 $ 1,097,044 $ ( 83,257 ) $ 1,129,993 Stock-based compensation 472 235 1,564 — 1,799 Income tax withholdings on equity awards ( 33 ) ( 16 ) ( 182 ) — ( 198 ) Stock issuance costs — — ( 126 ) — ( 126 ) Net loss — — — ( 179,695 ) ( 179,695 ) Payment of preferred dividends — — — ( 4,363 ) ( 4,363 ) Balance at June 30, 2021 232,850 $ 116,425 $ 1,098,300 $ ( 267,315 ) $ 947,410 Stock-based compensation 298 149 1,653 — 1,802 Income tax withholdings on equity awards ( 223 ) ( 112 ) ( 1,102 ) — ( 1,214 ) Net loss — — — ( 288,306 ) ( 288,306 ) Payment of preferred dividends — — — ( 4,411 ) ( 4,411 ) Balance at September 30, 2021 232,925 $ 116,462 $ 1,098,851 $ ( 560,032 ) $ 655,281 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, 2021 2020 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 602,126 ) $ ( 134,340 ) Adjustments to reconcile net loss to net cash provided by operating activities: Deferred income taxes ( 84,942 ) ( 46,443 ) Exploration — 27 Gain on sale of assets ( 93 ) ( 16 ) Depreciation, depletion and amortization 359,313 312,828 Loss on derivative financial instruments 756,026 71,978 Cash settlements of derivative financial instruments ( 145,262 ) 132,725 Amortization of debt discount and issuance costs 17,587 24,231 Stock-based compensation 5,291 4,734 Loss on early retirement of debt 352,599 861 (Increase) decrease in accounts receivable ( 97,379 ) 79,382 Decrease in other current assets 850 8,291 Increase (decrease) in accounts payable and accrued expenses 56,689 ( 64,303 ) Net cash provided by operating activities 618,553 389,955 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 508,051 ) ( 332,628 ) Proceeds from sales of assets 261 283 Net cash used for investing activities ( 507,790 ) ( 332,345 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on bank credit facility 275,000 157,000 Repayments on bank credit facility ( 350,000 ) ( 907,000 ) Issuance of Senior Notes 2,222,500 751,500 Retirement of Senior Notes ( 2,210,626 ) — Issuance of common stock — 206,626 Redemption of Series A Preferred Stock — ( 210,000 ) Preferred stock dividends paid ( 13,089 ) ( 21,180 ) Debt and stock issuance costs ( 35,567 ) ( 24,128 ) Income tax withholdings on equity awards ( 1,412 ) ( 692 ) Net cash used for financing activities ( 113,194 ) ( 47,874 ) Net increase (decrease) in cash and cash equivalents ( 2,431 ) 9,736 Cash and cash equivalents, beginning of period 30,272 18,532 Cash and cash equivalents, end of period $ 27,841 $ 28,268 The accompanying notes are an integral part of these statements. 7 COMSTOCK RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2021 (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, 2021, 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, 2020. The results of operations for the period through September 30, 2021 are not necessarily an indication of the results expected for the full year. 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 proved 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, 2021 that was recorded in 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 8 goodwill for impairment. The Company performs an annual assessment of goodwill on October 1 of each year 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 $ 6.8 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. 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, 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, 2021 and 2020 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) Operating lease cost included in general and administrative expense $ 435 $ 422 $ 1,299 $ 1,249 Operating lease cost included in lease operating expense 218 229 640 578 Short-term lease cost (drilling rig costs included in proved oil and gas properties) 8,239 7,324 27,482 26,605 $ 8,892 $ 7,975 $ 29,421 $ 28,432 Cash payments for operating leases associated with right-of-use assets included in cash provided by operating activities were $ 0.7 million in each of the three months ended September 30, 2021 and 2020, and $ 1.9 million and $ 1.8 million for the nine months ended September 30, 2021 and 2020, respectively. 9 As of September 30, 2021, expected future payments related to contracts that contain operating leases were as follows: (In thousands) October 1 to December 31, 2021 $ 552 2022 2,522 2023 2,188 2024 1,862 2025 3 Total lease payments 7,127 Imputed interest ( 285 ) Total lease liability $ 6,842 The weighted average term of these operating leases was 3.0 years and the weighted average interest rate used in lease computations was 2.7 %. As of September 30, 2021, the Company also had expected future payments for contracted drilling services of $ 4.3 million. Accrued Costs Accrued costs at September 30, 2021 and December 31, 2020 consisted of the following: As of September 30, 2021 As of December 31, 2020 (In thousands) Accrued interest payable $ 28,956 $ 67,265 Accrued transportation costs 24,703 25,353 Accrued capital expenditures 21,938 24,959 Accrued income and other taxes 12,595 2,168 Accrued ad valorem taxes 9,000 — Accrued employee compensation 6,518 7,519 Accrued lease operating expenses 2,685 3,466 Other 2,727 2,289 $ 109,122 $ 133,019 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, 2021 2020 (In thousands) Reserve for future abandonment costs at beginning of period $ 19,290 $ 18,151 New wells placed on production 1,666 451 Liabilities settled and assets disposed of ( 6 ) ( 80 ) Accretion expense 917 880 Reserve for future abandonment costs at end of period $ 21,867 $ 19,402 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, 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. The Company had the following oil and natural gas price derivative financial instruments at September 30, 2021: Future Production Period Three Months Ending December 31, 2021 Year Ending December 31, 2022 Year Ending December 31, 2023 Total Natural Gas Swap Contracts: Volume (MMBtu) 51,520,000 (1) 77,500,000 — 129,020,000 Average Price per MMBtu $ 2.53 (1) $ 2.76 — $ 2.66 Natural Gas Collar Contracts: Volume (MMBtu) 37,410,000 140,925,000 6,750,000 185,085,000 Price per MMBtu: Average Ceiling $ 3.05 $ 3.91 $ 4.03 $ 3.74 Average Floor $ 2.48 $ 2.62 $ 2.67 $ 2.60 Natural Gas Swaptions Contracts: Volume (MMBtu) — 43,800,000 (2) — 43,800,000 (2) Average Price per MMBtu — 2.51 (2) — $ 2.51 (2) Natural Gas Basis Swap Contracts: Volume (MMBtu) 3,680,000 (3) 10,950,000 (3) — 14,630,000 (3) Average Price per MMBtu ($ 0.12 ) ($ 0.16 ) — ($ 0.15 ) Crude Oil Collar Contracts: Volume (Bbls) 138,000 — — 138,000 Price per Bbl: Average Ceiling $ 51.67 — — $ 51.67 Average Floor $ 41.67 — — $ 41.67 _____________________________ (1) For the three months ending December 31, 2021, natural gas price swap contracts include 11,040,000 MMBtu at an average price of $ 2.51 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 (2) below. (2) The counterparties have the right to exercise a call option to enter into a price swap with the Company on 43,800,000 MMBtu in 2022 at an average price $ 2.51 . The call option was exercised for 36,500,000 MMBtu at an average price of $ 2.52 on October 29, 2021 and the call option on 7,300,000 MMBtu at an average price of $ 2.50 expires on November 26, 2021. (3) Contracts fix the differential between NYMEX Henry Hub and the Houston Ship Channel indices. 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 $ 0.9 million at September 30, 2021. 11 None of the Company's derivative contracts were designated as cash flow hedges. The aggregate fair value of the Company's derivative instruments are presented on a gross basis in the accompanying consolidated balance sheets. The classification of derivative financial instruments between assets and liabilities, consists of the following: Type Consolidated Balance Sheet Location September 30, 2021 December 31, 2020 (in thousands) Asset Derivative Financial Instruments: Natural gas price derivatives Derivative Financial Instruments – current $ 23,815 $ 8,913 Oil price derivatives Derivative Financial Instruments – current 2,577 — $ 26,392 $ 8,913 Natural gas price derivatives Derivative Financial Instruments – long-term $ 236 $ 661 Interest rate derivatives Derivative Financial Instruments – long-term 106 — $ 342 $ 661 Liability Derivative Financial Instruments: Natural gas price derivatives Derivative Financial Instruments – current $ 620,408 $ 45,158 Oil price derivatives Derivative Financial Instruments – current 5,739 831 Interest rate derivatives Derivative Financial Instruments – current 1,019 1,016 $ 627,166 $ 47,005 Natural gas price derivatives Derivative Financial Instruments – long-term $ 50,127 $ 1,308 Interest rate derivatives Derivative Financial Instruments – long-term — 1,056 $ 50,127 $ 2,364 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, 2021 2020 2021 2020 (In thousands) Natural gas price derivatives $ ( 509,777 ) $ ( 120,706 ) $ ( 748,499 ) $ ( 82,872 ) Oil price derivatives ( 287 ) ( 989 ) ( 7,820 ) 13,529 Interest rate derivatives ( 255 ) 116 293 ( 2,635 ) $ ( 510,319 ) $ ( 121,579 ) $ ( 756,026 ) $ ( 71,978 ) 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 of stock-based compensation expense within general and administrative expenses related to awards of restricted stock and PSUs to its employees and directors during each of the three months ended September 30, 2021 and 2020, and $ 5.3 million and $ 4.7 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, Comstock had 952,971 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $ 5.74 per share. Total unrecognized compensation cost related to unvested restricted stock grants of $ 4.7 million as of September 30, 2021 is expected to be recognized over a period of 1.9 years. As of September 30, 2021, Comstock had 1,049,910 PSUs outstanding at a weighted average grant date fair value of $ 8.11 per unit. The number of shares of common stock to be issued related to the PSUs is based on the Company's stock price 12 performance as compared to its peers which could result in the issuance of anywhere from zero to 2,099,820 shares of common stock. Total unrecognized compensation cost related to these grants of $ 4.2 million as of September 30, 2021 is expected to be recognized over a period of 1.8 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, 2021. 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 $ 213.7 million as of September 30, 2021 from customers for contracts where performance obligations have been satisfied and an unconditional right to consideration exists. Credit Losses Substantially all of the Company's accounts receivable are due from either purchasers of oil and gas or participants in oil and gas wells for which the Company serves as the operator. Generally, operators of oil and gas wells have the right to offset future revenues against unpaid charges related to operated wells. Oil and gas sales are generally unsecured. Comstock assesses the collectibility of its receivables based upon their age, the credit quality of the purchaser or participant and the potential for revenue offset. The Company has not had any significant credit losses in the past and believes its accounts receivable are fully collectible. Accordingly, no allowance for doubtful accounts has been recorded for the nine months ended September 30, 2021 and 2020. 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. 13 The following is an analysis of the consolidated income tax benefit (provision): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) Current - State $ ( 7,637 ) $ ( 67 ) $ ( 10,774 ) $ ( 216 ) Deferred - Federal 12,971 35,645 105,934 37,662 Deferred - State ( 29,310 ) 10,545 ( 20,992 ) 8,731 $ ( 23,976 ) $ 46,123 $ 74,168 $ 46,177 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, 2021 2020 2021 2020 Tax at statutory rate 21.0 % 21.0 % 21.0 % 21.0 % Tax effect of: Change in Louisiana tax law 43.1 — 8.3 — Valuation allowance on deferred tax assets ( 58.3 ) 1.5 ( 13.3 ) 1.0 State income taxes, net of federal benefit ( 14.0 ) 5.2 ( 4.7 ) 4.3 Nondeductible stock-based compensation ( 0.9 ) ( 1.0 ) ( 0.3 ) ( 0.8 ) Other — — — 0.1 Effective tax rate ( 9.1 ) % 26.7 % 11.0 % 25.6 % The income tax provision for the three months ended September 30, 2021 is attributable to revisions to the estimated future utilization of federal and state net operating loss carryforwards resulting from the loss from derivative financial instruments that was recognized in the period. The Company's federal income tax returns for the years subsequent to December 31, 2016 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, 2013. 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. 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. 14 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 natural gas price swap agreements, basis swap agreements, interest rate swap agreements and its crude oil and 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 derivative financial instruments, is categorized as a Level 2 measurement. The Company's natural gas swaption agreements are measured at fair value using a third-party pricing service, categorized as a Level 3 measurement. The following is a reconciliation of the beginning and ending balances for derivative instruments classified as Level 3 in the fair value hierarchy: Nine Months Ended September 30, 2021 2020 (In thousands) Balance at beginning of year $ ( 22,588 ) $ 4,351 Total unrealized loss included in earnings (1) ( 113,018 ) ( 27,450 ) Settlements, net (1) 21,881 ( 33,143 ) Transfers out of Level 3 ( 6,418 ) — Balance at end of period $ ( 120,143 ) $ ( 56,242 ) _____________________________ (1) Unrealized gains and losses and net settlements are reported as part of loss from derivative financial instruments on the accompanying consolidated statements of operations. Fair Values – Reported The following presents the carrying amounts and the fair values of the Company's financial instruments as of September 30, 2021 and December 31, 2020: September 30, 2021 December 31, 2020 Carrying Value Fair Value Carrying Value Fair Value Assets: (In thousands) Derivative financial instruments (1) $ 26,734 $ 26,734 $ 9,574 $ 9,574 Liabilities: Derivative financial instruments (1) $ 677,293 $ 677,293 $ 49,369 $ 49,369 Bank credit facility (2) $ 425,000 $ 425,000 $ 500,000 $ 500,000 7.50 % senior notes due 2025 (3) $ 194,339 $ 253,871 $ 473,728 $ 628,691 9.75 % senior notes due 2026 (3) $ — $ — $ 1,577,824 $ 1,769,625 6.75 % senior notes due 2029 (3) $ 1,257,067 $ 1,348,438 $ — $ — 5.875 % senior notes due 2030 (3) $ 965,000 $ 1,007,219 $ — $ — _____________________________ (1) The Company's natural gas price swaps and basis swap agreements, its interest rate swap agreements and its crude oil and 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. The Company's natural gas swaption contracts provide the counterparty 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 the contracts, these contracts are classified as Level 3 in the fair value hierarchy. (2) The carrying value of our floating rate debt outstanding approximates fair value. (3) The fair value of the Company's fixed rate debt was based on quoted prices as of September 30, 2021 and December 31, 2020, respectively, a Level 1 measurement. 15 Earnings Per Share Unvested restricted stock containing non-forfeitable rights to dividends are included in common stock outstanding and are considered to be participating securities and included in the computation of basic and diluted earnings per share pursuant to the two-class method. At September 30, 2021 and December 31, 2020, 952,971 and 1,038,006 shares of restricted stock, respectively, are included in common stock outstanding as such shares have a non-forfeitable right to participate in any dividends that might be declared and have the right to vote on matters submitted to the Company's stockholders. Weighted average shares of unvested restricted stock outstanding were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in thousands) Unvested restricted stock 1,148 1,285 1,092 1,185 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 performance period. The treasury stock method is used to measure the dilutive effect of PSUs. Weighted average unearned PSUs outstanding were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands, except per unit amounts) Weighted average PSUs 1,204 1,136 1,178 1,014 Weighted average grant date fair value per unit $ 8.11 $ 9.33 $ 8.11 $ 9.33 The Company redeemed all of the shares of Series A Convertible Preferred Stock on May 19, 2020. The Series B Convertible Preferred Stock became convertible into an aggregate of 43,750,000 shares of common stock 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. Weighted average shares of convertible preferred stock outstanding were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (In thousands) Weighted average convertible preferred stock 43,750 43,750 43,750 70,575 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. Basic and diluted per share amounts are the same for the three months and nine months ended September 30, 2021 and 2020 due to the net losses in the periods. 16 Supplementary Information with Respect to the Consolidated Statements of Cash Flows Cash payments made for interest and income taxes and other non-cash investing activities for the nine months ended September 30, 2021 and 2020, respectively, were as follows: Nine Months Ended September 30, 2021 2020 (In thousands) Cash payments for: Interest payments $ 206,170 $ 145,125 Non-cash investing activities include: Increase (decrease) in accrued capital expenditures $ ( 3,021 ) $ 16,771 Liabilities assumed in exchange for right-of-use lease assets $ 5,562 $ 1,675 Non-cash financing activities include: Retirement of debt in exchange for common stock $ — $ ( 4,151 ) Issuance of common stock in exchange for debt $ — $ 5,012 (2) LONG-TERM DEBT At September 30, 2021, long-term debt was comprised of the following: (In thousands) 7.50 % Senior Notes due 2025: Principal $ 244,400 Discount, net of amortization ( 50,061 ) 6.75 % Senior Notes due 2029: Principal 1,250,000 Premium, net of amortization 7,067 5.875 % Senior Notes due 2030: Principal 965,000 Bank Credit Facility: Principal 425,000 Debt issuance costs, net of amortization ( 40,094 ) $ 2,801,312 As of September 30, 2021, the Company had $ 425.0 million outstanding under a 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. Borrowings under the bank credit facility are secured by substantially all of the assets of the Company and its subsidiaries and bear interest at the Company's 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. The Company also pays a commitment fee of 0.375 % to 0.5 % on the unused portion of the borrowing base. The bank credit facility places certain restrictions upon the Company's and its 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. The Company was in compliance with the covenants as of September 30, 2021. On March 4, 2021, the Company issued $ 1.25 billion principal amount of its 6.75 % senior notes due 2029 (the "2029 Notes") in a private placement and received net proceeds after offering costs of $ 1.24 billion, which were used to repurchase a portion of the Company's 7.5 % senior notes due 2025 (the "2025 Notes") and 9.75 % senior notes due 2026 (the "2026 Notes") pursuant to a tender offer. The 2029 Notes mature on March 1, 2029 and accrue interest at a rate of 6.75 % per annum, payable semi-annually on March 1 and September 1 of each year. 17 Pursuant to the tender offer, Comstock repurchased $ 375.0 million principal amount of the 2025 Notes and $ 777.1 million principal amount of the 2026 Notes for an aggregate amount of $ 1.26 billion, which included premiums paid over face value of $ 97.9 million, accrued interest of $ 12.5 million and $ 1.1 million of costs related to the tender offer. On June 28, 2021, the Company issued $ 965.0 million principal amount of its 5.875 % senior notes due 2030 (the "2030 Notes") in a private placement and received net proceeds after offering costs of $ 949.5 million, which were used along with cash on hand to redeem all outstanding 2026 Notes. The 2030 Notes mature on January 15, 2030 and accrue interest at a rate of 5.875 % per annum, payable semi-annually on January 15 and July 15 of each year. On June 29, 2021, Comstock completed the redemption of all outstanding 2026 Notes for an aggregate amount of $ 978.6 million, which included premiums paid over face value of $ 74.0 million and accrued interest of $ 31.7 million. As a result of the early retirement of the senior notes repurchased in the tender offer and the redemption of the 2026 Notes, the Company recognized a loss of $ 352.6 million on early retirement of debt for the nine months ended September 30, 2021. (3) PREFERRED STOCK In connection with the acquisition of Covey Park Energy LLC in 2019, the Company issued 210,000 shares of Series A Convertible Preferred Stock with a face value of $ 210.0 million and a fair value of $ 200.0 million as part of the consideration for the acquisition and sold 175,000 shares of Series B Convertible Preferred Stock for $ 175.0 million to its majority stockholder. On May 19, 2020, the Company redeemed the 210,000 outstanding shares of the Series A Convertible Preferred Stock for an aggregate redemption price of $ 210.0 million plus accrued and unpaid dividends of approximately $ 2.9 million. The holder of the Series B Convertible Preferred Stock is entitled to receive quarterly dividends at a rate of 10 % per annum, which are paid in arrears. The holder of the Series B Convertible Preferred Stock may convert any or all shares of such preferred stock into shares of the Company's common stock at $ 4.00 per share, subject to adjustment pursuant to customary anti-dilution provisions. The Company has the right to redeem the Series B Convertible Preferred Stock at any time at face value plus accrued dividends. The Series B Convertible Preferred Stock is classified as mezzanine equity based on the majority stockholder's ability to control the terms of conversion to common stock. (4) COMMITMENTS AND CONTINGENCIES In April 2021, the Company entered into a well stimulation agreement that extends to 2024 for exclusive use of a natural gas powered pressure pumping fleet. The minimum commitment under this contract is $ 19.2 million per year from 2022 through 2024. From time to time, the Company is involved in certain litigation that arises in the normal course of its operations. The Company records a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company does not believe the resolution of these matters will have a material effect on the Company's financial position, results of operations or cash flows and no material amounts are accrued relative to these matters at September 30, 2021 or 2020. (5) RELATED PARTY TRANSACTIONS Comstock operates oil and gas properties held by a partnership owned by its majority stockholder. The Company charges the partnership for the costs incurred to drill, complete and produce the wells, as well as drilling and operating overhead fees that are charged other interest owners. Comstock also provides natural gas marketing services to the partnership, including evaluating potential markets and providing hedging services, in return for a fee equal to $ 0.02 per Mcf for natural gas marketed. The Company received $ 353 thousand and $ 1.2 million for the three and nine months ended September 30, 2021, and $ 54 thousand and $ 433 thousand for the three and nine months ended September 30, 2020, respectively, for drilling, operating and marketing services provided to the partnership. In connection with the operation of the wells, the Company had a $ 9.3 million receivable from the partnership at September 30, 2021, which is expected to be collected in full in November 2021. The Company also had a $ 25.5 million receivable for the fair market value of oil and natural gas price hedging contracts that were entered into with the partnership. 18 (6) SUBSEQUENT EVENTS On October 6, 2021, the Company entered into an agreement to sell certain wells producing from the Bakken shale for $ 154 million in cash, subject to adjustment and customary closing conditions. The sale is expected to close in the fourth quarter of 2021 and has an effective date of October 1, 2021. The Company expects to recognize a pre-tax loss between $ 150 million and $ 160 million on the divestiture. 19