COMSTOCK RESOURCES INC 10-Q

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 March 31, 2022 2021 Net Production Data: (In thousands except per unit amounts) Natural gas (MMcf) 114,906 113,293 Oil (MBbls) 21 326 Natural gas equivalent (MMcfe) 115,035 115,246 Revenues: Natural gas sales $ 522,957 $ 323,960 Oil sales 1,884 16,525 Total oil and gas sales $ 524,841 $ 340,485 Expenses: Production and ad valorem taxes $ 13,820 $ 9,652 Gathering and transportation $ 32,093 $ 29,458 Lease operating $ 26,186 $ 24,563 Depreciation, depletion and amortization $ 106,728 $ 109,128 Exploration $ 1,021 $ — Average Sales Price: Natural gas (per Mcf) $ 4.55 $ 2.86 Oil (per Bbl) $ 89.71 $ 50.69 Average equivalent (Mcfe) $ 4.56 $ 2.95 Expenses ($ per Mcfe): Production and ad valorem taxes $ 0.12 $ 0.08 Gathering and transportation $ 0.28 $ 0.26 Lease operating $ 0.23 $ 0.21 Depreciation, depletion and amortization $ 0.93 $ 0.95 Revenues – Oil and natural gas sales of $524.8 million for the first quarter of 2022 increased by $184.4 million (54%) as compared to $340.5 million for the first quarter of 2021. The increase was primarily due to higher prices received for our natural gas production as well as higher natural gas production. Our natural gas production for the first quarter of 2022 increased 1% to 114.9 billion cubic feet ("Bcf") (1.3 Bcf per day), and was sold at an average price of $4.55 per Mcf as compared to 113.3 Bcf (1.3 Bcf per day) sold at an average price of $2.86 per Mcf in the first quarter of 2021. In October 2021, the Company sold its Bakken shale properties, which accounted for most of its oil production. 18 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 March 31, 2022 2021 Average Realized Natural Gas Price: Natural gas, per Mcf $ 4.55 $ 2.86 Cash settlements on derivative financial instruments, per Mcf (1.02) (0.07) Price per Mcf, including cash settlements on derivative financial instruments $ 3.53 $ 2.79 Average Realized Oil Price: Oil, per Bbl $ 89.71 $ 50.69 Cash settlements on derivative financial instruments, per Bbl — (2.82) Price per Bbl, including cash settlements on derivative financial instruments $ 89.71 $ 47.87 Costs and Expenses – Our production and ad valorem taxes increased $4.2 million (43%) to $13.8 million for the first quarter of 2022 from $9.7 million in the first quarter of 2021. The increase was primarily related to higher natural gas sales in 2022. Gathering and transportation costs for the first quarter of 2022 increased $2.6 million (9%) to $32.1 million as compared to $29.5 million in the first quarter of 2021 due to additional transportation costs related to the Company's operated natural gas production. Our lease operating expense of $26.2 million ($0.23 per Mcfe) for the first quarter of 2022 increased $1.6 million (7%) from lease operating expense of $24.6 million ($0.21 per Mcfe) for the first quarter of 2021 due to higher field-level costs incurred during the first quarter. Depreciation, depletion and amortization ("DD&A") decreased $2.4 million (2%) to $106.7 million in the first quarter of 2022 from $109.1 million in the first quarter of 2021 primarily due to a decrease in the average amortization rate. Our DD&A per equivalent Mcf produced decreased $0.02 (2%) to $0.93 per Mcfe for the three months ended March 31, 2022 from $0.95 per Mcfe for the three months ended March 31, 2021. General and administrative expenses, which are reported net of overhead reimbursements, were $8.2 million for the first quarter of 2022 and were comparable to the $8.0 million in the first quarter of 2021. We use derivative financial instruments as part of our price risk management program to protect our capital investments. During the quarter ended March 31, 2022, we had substantial losses related to our derivative financial instruments of $437.5 million, as compared to net losses on derivative financial instruments of $21.7 million during the quarter ended March 31, 2021. Realized net losses from our oil and natural gas price risk management program were $117.2 million for the quarter ended March 31, 2022 as compared to realized net losses of $8.4 million for the quarter ended March 31, 2021. Interest expense was $46.5 million and $63.8 million for the quarter ended March 31, 2022 and 2021, respectively. The 27% decrease in interest expense is due primarily to the refinancing of our senior notes in 2021. We expect interest expense to decrease further with the planned redemption of our 7.50% senior notes due 2025 on May 15, 2022. Income taxes for the quarter ended March 31, 2022 and 2021 were a benefit of $31.6 million and $30.0 million, respectively. The benefit for income taxes for the three months ended March 31, 2022 reflect an effective tax rate of 22.1%. The income tax benefit for the three months ended March 31, 2022 is attributable to revisions to the estimated future utilization of federal and state net operating loss carryforwards ("NOL") and the impact of state income taxes. The benefit for income taxes for the three months ended March 31, 2021 reflect an effective tax rate of 18.3%. The difference between the federal statutory rate of 21% and our effective rate is primarily due to the impact of state income taxes. 19 We reported net loss available to common stockholders of $115.7 million or $0.50 per share, for the quarter ended March 31, 2022 which was caused by the $437.5 million net loss from derivative financial instruments. Income from operations for the first quarter of 2022 was $336.8 million and we had interest expense of $46.5 million and $4.3 million in preferred stock dividends. We reported net loss available to common stockholders of $138.4 million or $0.60 per share for the three months ended March 31, 2021. Cash Flows, Liquidity and Capital Resources Cash Flows The following table summarizes sources and uses of cash and cash equivalents: Three Months Ended March 31, 2022 2021 (In thousands) Sources of cash and cash equivalents: Operating activities $ 284,039 $ 193,272 Issuance of new senior notes — 1,237,438 Borrowings on bank credit facility, net of repayments — 50,000 Proceeds from asset sales 45 200 Total $ 284,084 $ 1,480,910 Uses of cash and cash equivalents: Retirement of senior notes $ — $ (1,263,651) Capital expenditures (213,277) (165,751) Repayments on bank credit facility, net of borrowings (85,000) — Preferred stock dividends (4,315) (4,315) Other (18) (30) Total $ (302,610) $ (1,433,747) Cash flows from operating activities. Net cash provided by our operating activities increased $90.8 million (47%) to $284.0 million in 2022 from $193.3 million in 2021. The increase is primarily due to higher natural gas prices in 2022. Issuance of new senior notes and retirement of senior notes. In March 2021, we issued $1.25 billion principal amount of 6.75% senior notes due 2029 in a private placement offering and received net proceeds after offering costs of $1.24 billion. The new 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. The proceeds from the offering were used to repurchase $375.0 million principal amount of our 7.50% senior notes due 2025 and $777.1 million principal amount of our 9.75% senior notes due 2026 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. Capital expenditures. The increase in capital expenditures of $47.5 million is primarily due to higher drilling and completion activity in 2022. 20 The following table summarizes our capital expenditure activity: Three Months Ended March 31, 2022 2021 (In thousands) Acquisitions: Proved property $ 274 $ — Unproved property 3,631 5,776 Exploration and development: Development leasehold costs 4,632 4,056 Exploratory drilling and completion costs 11,557 — Development drilling and completion costs 189,048 155,239 Other development costs 18,612 3,452 Change to asset retirement obligations 381 328 Total exploration and development 228,135 168,851 Other 22 6 Total capital expenditures $ 228,157 $ 168,857 Change in accrued capital expenditures (14,499) (2,778) Change in asset retirement obligations (381) (328) Total cash capital expenditures $ 213,277 $ 165,751 We drilled 29 (13.7 net) wells and completed 33 (15.2 net) Haynesville and Bossier shale wells during the first three months of 2022. We expect to spend an additional $650 million to $700 million in the remaining nine months of 2022 to drill 57 (44.4 net) additional wells, to complete 54 (45.1 net) wells and for other development activity. The Company also could spend an additional $100 million on bolt-on acquisitions and leasing activities in 2022. Liquidity and Capital Resources As of March 31, 2022, we had $1.26 billion of liquidity, comprised of $1.25 billion of unused borrowing capacity under our bank credit facility and $12.1 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 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. On April 14, 2022, we announced the early redemption of the remaining outstanding amount of our 7.50% senior notes due 2025 in aggregate principal amount of $244.4 million on May 15, 2022. In accordance with the terms and conditions set forth in the indenture, we will pay the redemption price of 101.875% of the principal amount plus any accrued and unpaid interest. We expect to fund this redemption by using cash on hand and borrowings under its bank credit facility. 21 At March 31, 2022, we had $150.0 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 March 31, 2022. Income Taxes At March 31, 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 $786.7 million of the U.S. federal NOL carryforwards and $1.2 billion of the estimated state NOL carryforwards will expire unused.