COMSTOCK RESOURCES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 3 COMSTOCK RESOURCES, INC. CONSOLIDATED BALANCE SHEETS As of June 30, 2023 December 31, 2022 (Unaudited) (In thousands) ASSETS Cash and cash equivalents $ 9,919 $ 54,652 Accounts receivable: Natural gas and oil sales and gas services 124,493 415,079 Joint interest operations 40,911 76,521 From affiliates 28,513 18,527 Derivative financial instruments 17,553 23,884 Other current assets 60,777 56,324 Total current assets 282,166 644,987 Property and equipment: Natural gas and oil properties, successful efforts method: Proved 6,483,151 5,843,409 Unproved 319,791 298,230 Other 37,710 26,475 Accumulated depreciation, depletion and amortization ( 1,814,651 ) ( 1,545,459 ) Net property and equipment 5,026,001 4,622,655 Goodwill 335,897 335,897 Operating lease right-of-use assets 192,670 90,716 $ 5,836,734 $ 5,694,255 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 552,315 $ 530,195 Accrued costs 132,057 183,111 Operating leases 77,690 38,411 Derivative financial instruments — 4,420 Total current liabilities 762,062 756,137 Long-term debt 2,176,418 2,152,571 Deferred income taxes 451,004 425,734 Derivative financial instruments 2,052 — Long-term operating leases 115,048 52,385 Reserve for future abandonment costs 29,964 29,114 Total liabilities 3,536,548 3,415,941 Commitments and contingencies Stockholders' equity: Common stock—$ 0.50 par, 400,000,000 shares authorized, 278,492,648 and 277,517,087 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively 139,246 138,759 Additional paid-in capital 1,255,382 1,253,417 Accumulated earnings 905,558 886,138 Total stockholders' equity 2,300,186 2,278,314 $ 5,836,734 $ 5,694,255 The accompanying notes are an integral part of these statements. 4 COMSTOCK RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands, except per share amounts) Revenues: Natural gas sales $ 228,892 $ 858,838 $ 606,924 $ 1,381,795 Oil sales 860 2,504 2,802 4,388 Total natural gas and oil sales 229,752 861,342 609,726 1,386,183 Gas services 58,459 84,912 168,063 129,485 Total revenues 288,211 946,254 777,789 1,515,668 Operating expenses: Production and ad valorem taxes 19,599 21,729 34,505 35,549 Gathering and transportation 45,395 36,964 90,969 69,057 Lease operating 34,031 25,079 68,861 51,265 Exploration — 2,342 1,775 3,363 Depreciation, depletion and amortization 140,177 119,201 274,160 225,929 Gas services 55,390 82,778 156,685 123,453 General and administrative 10,038 9,063 22,406 17,286 Loss (gain) on sale of assets 648 ( 19 ) ( 125 ) ( 21 ) Total operating expenses 305,278 297,137 649,236 525,881 Operating income (loss) ( 17,067 ) 649,117 128,553 989,787 Other income (expenses): Gain (loss) from derivative financial instruments ( 4,495 ) ( 72,826 ) 61,914 ( 510,319 ) Other income 598 182 1,058 450 Interest expense ( 39,188 ) ( 44,320 ) ( 77,458 ) ( 90,811 ) Loss on early retirement of debt — ( 46,840 ) — ( 46,840 ) Total other expenses ( 43,085 ) ( 163,804 ) ( 14,486 ) ( 647,520 ) Income (loss) before income taxes ( 60,152 ) 485,313 114,067 342,267 (Provision for) benefit from income taxes 14,446 ( 108,422 ) ( 25,270 ) ( 76,800 ) Net income (loss) ( 45,706 ) 376,891 88,797 265,467 Preferred stock dividends — ( 4,363 ) — ( 8,678 ) Net income (loss) available to common stockholders $ ( 45,706 ) $ 372,528 $ 88,797 $ 256,789 Net income (loss) per share: Basic $ ( 0.17 ) $ 1.60 $ 0.32 $ 1.10 Diluted $ ( 0.17 ) $ 1.36 $ 0.32 $ 0.96 Weighted average shares outstanding: Basic 276,669 232,045 276,610 232,011 Diluted 276,669 277,614 276,610 277,485 Dividends per share $ 0.125 $ — $ 0.25 $ — The accompanying notes are an integral part of these statements. 5 COMSTOCK RESOURCES, INC. 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, 2022 232,925 $ 116,462 $ 1,100,359 $ ( 204,042 ) $ 1,012,779 Stock-based compensation ( 5 ) ( 2 ) 1,479 — 1,477 Net loss — — — ( 111,424 ) ( 111,424 ) Payment of preferred stock dividends — — — ( 4,315 ) ( 4,315 ) Balance at March 31, 2022 232,920 $ 116,460 $ 1,101,838 $ ( 319,781 ) $ 898,517 Stock-based compensation 239 119 115 — 234 Net income — — — 376,891 376,891 Payment of preferred stock dividends — — — ( 4,363 ) ( 4,363 ) Balance at June 30, 2022 233,159 $ 116,579 $ 1,101,953 $ 52,747 $ 1,271,279 Balance at January 1, 2023 277,517 $ 138,759 $ 1,253,417 $ 886,138 $ 2,278,314 Stock-based compensation ( 7 ) ( 4 ) 2,050 — 2,046 Net income — — — 134,503 134,503 Payment of common stock dividends — — — ( 34,688 ) ( 34,688 ) Balance at March 31, 2023 277,510 $ 138,755 $ 1,255,467 $ 985,953 $ 2,380,175 Stock-based compensation 983 491 ( 85 ) — 406 Net loss — — — ( 45,706 ) ( 45,706 ) Payment of common stock dividends — — — ( 34,689 ) ( 34,689 ) Balance at June 30, 2023 278,493 $ 139,246 $ 1,255,382 $ 905,558 $ 2,300,186 The accompanying notes are an integral part of these statements. 6 COMSTOCK RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2023 2022 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 88,797 $ 265,467 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 25,270 70,329 Gain on sale of assets ( 125 ) ( 21 ) Depreciation, depletion and amortization 274,160 225,929 (Gain) loss on derivative financial instruments ( 61,914 ) 510,319 Cash settlements of derivative financial instruments 65,877 ( 374,549 ) Amortization of debt discount and issuance costs 3,991 7,098 Stock-based compensation 4,351 3,076 Loss on early retirement of debt — 46,840 (Increase) decrease in accounts receivable 316,210 ( 203,918 ) Decrease in other current assets 1,201 881 Increase in accounts payable and accrued expenses 56 145,083 Net cash provided by operating activities 717,874 696,534 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures and acquisitions ( 743,858 ) ( 515,454 ) Prepaid drilling costs ( 8,624 ) ( 10,601 ) Proceeds from sales of assets 41,295 93 Net cash used for investing activities ( 711,187 ) ( 525,962 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on bank credit facility 160,000 595,000 Repayments of bank credit facility ( 140,000 ) ( 480,000 ) Retirement of Senior Notes — ( 273,920 ) Preferred stock dividends paid — ( 8,678 ) Common stock dividends paid ( 69,377 ) — Debt and stock issuance costs ( 144 ) — Income tax withholdings on equity awards ( 1,899 ) ( 1,365 ) Net cash used for financing activities ( 51,420 ) ( 168,963 ) Net increase (decrease) in cash and cash equivalents ( 44,733 ) 1,609 Cash and cash equivalents, beginning of period 54,652 30,663 Cash and cash equivalents, end of period $ 9,919 $ 32,272 The accompanying notes are an integral part of these statements. 7 COMSTOCK RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2023 (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 June 30, 2023, 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, 2022. The results of operations for the period through June 30, 2023 are not necessarily an indication of the results expected for the full year. Other Current Assets Other current assets at June 30, 2023 and December 31, 2022 consisted of the following: As of June 30, 2023 December 31, 2022 (In thousands) Pipe and well equipment inventory $ 44,738 $ 34,819 Production tax refunds receivable 13,852 11,156 Prepaid expenses 2,187 2,455 Prepaid drilling costs — 4,265 Accrued proceeds from sale of natural gas and oil properties — 3,118 Other — 511 $ 60,777 $ 56,324 Property and Equipment The Company follows the successful efforts method of accounting for its natural gas and oil properties. Costs incurred to acquire natural gas and oil leases and to drill and complete developmental wells are capitalized. 8 COMSTOCK RESOURCES, INC. Exploratory well costs are initially capitalized as proved property in the consolidated balance sheets but charged to exploration expense if and when the well is determined not to have found commercial proved natural gas and oil reserves. The changes in capitalized exploratory well costs are as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Beginning capitalized exploratory well costs $ 30,557 $ 18,523 $ 867 $ 6,966 Additions to exploratory well costs pending the determination of proved reserves 74,622 18,840 104,312 30,397 Determined to have found proved reserves ( 70,983 ) ( 27,592 ) ( 70,983 ) ( 27,592 ) Ending capitalized exploratory well costs $ 34,196 $ 9,771 $ 34,196 $ 9,771 As of June 30, 2023 and December 31, 2022, the Company had no exploratory wells for which costs have been capitalized for a period greater than one year. The Company assesses the need for an impairment of the capitalized costs for its proved natural gas and oil properties on a property basis. No impairments were recognized to adjust the carrying value of the Company's proved natural gas and oil properties during any of the periods presented. Unproved natural gas and oil properties are also periodically assessed and any impairment in value is charged to expense. The costs related to unproved properties are transferred to proved natural gas and oil properties and amortized on an equivalent unit-of-production basis when they are reflected in proved natural gas and oil reserves. The Company determines the fair values of its natural gas and oil properties using a discounted cash flow model and proved and risk-adjusted probable natural gas and oil 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 natural gas and oil prices, production costs, capital expenditures, and future production as well as estimated proved natural gas and oil reserves and risk-adjusted probable natural gas and oil reserves. Management's natural gas and oil 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 natural gas and oil 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 natural gas and oil reserves, results of future drilling activities, future prices for natural gas and oil, 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 June 30, 2023 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 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 $ 192.7 million related to its corporate office, certain office equipment, vehicles and hydraulic fracturing fleets used to complete natural gas wells 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 natural 9 COMSTOCK RESOURCES, INC. gas and oil reserves and the related rights to use the land associated with those leases are reflected as natural gas and oil properties. Comstock contracts for a variety of equipment used in its natural gas and oil 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 and completion operations routinely change due to changes in commodity prices, demand for natural gas and oil, and the overall operating and economic environment. Accordingly, Comstock manages the terms of its contracts for drilling rigs and completion equipment so as to allow for maximum flexibility in responding to these changing conditions. The Company has two hydraulic fracturing fleet lease contracts with a three year term. The Company's other hydraulic fracturing fleet contracts are on terms less than one year and include rights of substitution. The Company's drilling 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. The Company has elected not to recognize right-of-use lease assets for contracts less than one year. The costs associated with drilling and completion operations are accounted for under the successful efforts method, which generally require that these costs be capitalized as part of our proved natural gas and oil 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 six months months ended June 30, 2023 and 2022 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Operating lease cost included in general and administrative expense $ 444 $ 436 $ 889 $ 871 Operating lease cost included in lease operating expense 502 329 1,010 599 Operating lease cost included in natural gas and oil properties 13,230 6,300 22,680 6,300 Variable lease cost (completion costs included in natural gas and oil properties) 3,301 11,127 5,062 11,127 Short-term lease cost (drilling rig costs included in natural gas and oil properties) 24,496 17,105 53,888 28,140 $ 41,973 $ 35,297 $ 83,529 $ 47,037 Cash payments for operating leases associated with right-of-use assets included in cash provided by operating activities were $ 0.9 million and $ 0.8 million for the three months ended June 30, 2023 and 2022, respectively, and $ 1.9 million and $ 1.5 million for the six months ended June 30, 2023 and 2022, respectively. Cash payments for operating leases associated with right-of-use assets included in cash used for investing activities were $ 41.0 million and $ 34.5 million for the three months ended June 30, 2023 and 2022, respectively and $ 81.6 million and $ 45.6 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023 and December 31, 2022, the operating leases had a weighted-average term of 2.5 years and 2.2 years, respectively, and the weighted-average discount rate used to determine the present value of future operating lease payments was 5.8 % and 3.5 %, respectively. As of June 30, 2023, the Company also had expected future payments for contracted drilling services of $ 117.8 million. As of June 30, 2023, expected future payments related to contracts that contain operating leases were as follows: (In thousands) July 1 to December 31, 2023 $ 43,143 2024 86,791 2025 59,208 2026 19,151 2027 17 Total lease payments 208,310 Imputed interest ( 15,572 ) Total lease liability $ 192,738 10 COMSTOCK RESOURCES, INC. Accrued Costs Accrued costs at June 30, 2023 and December 31, 2022 consisted of the following: As of June 30, 2023 December 31, 2022 (In thousands) Accrued interest payable $ 54,377 $ 54,867 Accrued transportation costs 29,449 28,357 Accrued drilling costs 25,392 54,438 Accrued income and other taxes 10,174 31,256 Accrued employee compensation 8,484 11,308 Accrued lease operating expenses 3,861 2,412 Other 320 473 $ 132,057 $ 183,111 Reserve for Future Abandonment Costs Comstock's asset retirement obligations relate to future plugging and abandonment expenses on its natural gas and oil properties and disposal of other facilities. The following table summarizes the changes in Comstock's total estimated liability for such obligations during the periods presented: Six Months Ended June 30, 2023 2022 (In thousands) Reserve for future abandonment costs at beginning of period $ 29,114 $ 25,673 New wells placed on production 67 844 Acquisitions — 1,211 Liabilities settled and assets disposed of ( 42 ) ( 29 ) Accretion expense 825 734 Reserve for future abandonment costs at end of period $ 29,964 $ 28,433 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. None of the Company's derivative contracts were designated as cash flow hedges. All of Comstock's natural gas derivative financial instruments are tied to the Henry Hub-NYMEX price index. 11 COMSTOCK RESOURCES, INC. The Company had the following natural gas price derivative financial instruments at June 30, 2023: Future Production Period Six Months Ending December 31, 2023 Year Ending December 31, 2024 Total Natural Gas Price Swap Contracts: Volume (MMBtu) — 47,580,000 47,580,000 Average Price per MMBtu $ 3.50 $ 3.50 Natural Gas Price Collar Contracts: Volume (MMBtu) 46,000,000 46,000,000 Average Price per MMBtu: Average Ceiling $ 10.28 $ 10.28 Average Floor $ 3.00 $ 3.00 The classification of derivative financial instruments of assets or liabilities, consists of the following: As of Type Consolidated Balance Sheet Location June 30, 2023 December 31, 2022 (In thousands) Asset Derivative Financial Instruments: Natural gas price derivatives Derivative Financial Instruments – current $ 17,553 $ 23,884 $ 17,553 $ 23,884 Liability Derivative Financial Instruments: Natural gas price derivatives Derivative Financial Instruments – current $ — $ 4,420 $ — $ 4,420 Natural gas price derivatives Derivative Financial Instruments – long-term $ 2,052 $ — $ 2,052 $ — 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Natural gas price derivatives $ ( 4,495 ) $ ( 72,826 ) $ 61,914 $ ( 510,319 ) $ ( 4,495 ) $ ( 72,826 ) $ 61,914 $ ( 510,319 ) 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 $ 2.3 million and $ 1.6 million of stock-based compensation expense within general and administrative expenses related to awards of restricted stock and PSUs to its employees and directors during the three months ended June 30, 2023 and 2022, respectively, and $ 4.4 million and $ 3.1 million for the six months ended June 30, 2023 and 2022, respectively. 12 COMSTOCK RESOURCES, INC. In June 2023, the Company granted an aggregate of 954,031 shares of restricted stock to its directors and employees. The grants were valued at $ 9.80 per share. As of June 30, 2023, Comstock had 1,494,134 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $ 11.52 per share. Total unrecognized compensation cost related to unvested restricted stock grants of $ 16.6 million as of June 30, 2023 is expected to be recognized over a period of 2.4 years. In June 2023, the Company granted an aggregate of 359,689 PSUs to its executive officers at a value of $ 13.64 per unit. As of June 30, 2023, Comstock had 742,425 PSUs outstanding with a weighted average grant date fair value of $ 15.92 per unit. The number of shares of common stock to be issued related to the PSUs is based on the Company's stock price performance as compared to its peers which could result in the issuance of anywhere from zero to 1,484,850 shares of common stock. Total unrecognized compensation cost related to these grants of $ 8.8 million as of June 30, 2023 is expected to be recognized over a period of 2.5 years. Revenue Recognition Comstock produces natural gas and oil 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. Gas services revenues represent sales of natural gas purchased for resale and fees received for gathering and treating services provided to unaffiliated third parties and certain natural gas wells operated by the Company. Revenues are recognized upon completion of the gathering and treating of contracted natural gas volumes and delivery of purchased natural gas volumes to the Company's customers. Profits and losses earned in the gathering and treating of natural gas produced by the Company's natural gas wells are eliminated in consolidation. Revenues and expenses associated with natural gas purchased for resale are presented on a gross basis in the Company's consolidated statements of operations as the Company acts as the principal in the transaction by assuming the risks and rewards from ownership of the natural gas volumes purchased and the responsibility to deliver the natural gas volumes to their sales point. All natural gas and oil and gas services revenues 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 natural gas and oil 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 natural gas and oil routinely fluctuate based on changes in these factors. Prices for gathering and treating services are generally fixed in nature but can vary due to the quality of the gas being treated. 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 natural gas and oil, 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. Gas services revenue is recorded in the month the services are performed or purchased gas is sold based on an estimate of natural gas volumes and contract prices. 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 natural gas or oil 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 June 30, 2023 or December 31, 2022. The Company recognized accounts receivable of $ 124.5 million and $ 415.1 million as of June 30, 2023 and December 31, 2022, respectively, from purchasers 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 natural gas and oil or participants in natural gas and oil wells for which the Company serves as the operator. Generally, operators of natural gas and oil wells have the right to offset future revenues against unpaid charges related to operated wells. Natural gas and oil sales are generally unsecured. Comstock assesses the collectability 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 six months ended June 30, 2023 and 2022. 13 COMSTOCK RESOURCES, INC. 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. The following is an analysis of the consolidated income tax provision (benefit): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Current - Federal $ — $ 5,360 $ — $ 1,399 Current - State ( 536 ) 7,969 — 5,509 Deferred - Federal ( 12,414 ) 71,292 24,351 57,868 Deferred - State ( 1,496 ) 23,801 919 12,024 $ ( 14,446 ) $ 108,422 $ 25,270 $ 76,800 The difference between the federal statutory rate of 21% and the effective tax rate is due to the following: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Tax at statutory rate 21.0 % 21.0 % 21.0 % 21.0 % Tax effect of: Valuation allowance on deferred tax assets ( 0.7 ) ( 3.8 ) 1.1 ( 4.0 ) State income taxes, net of federal benefit 3.8 5.0 ( 0.5 ) 5.3 Nondeductible stock-based compensation ( 0.1 ) 0.1 0.6 0.1 Effective tax rate 24.0 % 22.3 % 22.2 % 22.4 % The Company's federal income tax returns for the years subsequent to December 31, 2018 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, 2019. The Company is currently under examination with the state of Louisiana and believes that its significant filing positions are highly certain and that all of its other significant income tax filing 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. 14 COMSTOCK RESOURCES, INC. 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. 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. Fair Values – Reported The following presents the carrying amounts and the fair values of the Company's financial instruments as of June 30, 2023 and December 31, 2022: As of June 30, 2023 December 31, 2022 Carrying Value Fair Value Carrying Value Fair Value Assets: (In thousands) Commodity-based derivatives (1) $ 17,553 $ 17,553 $ 23,884 $ 23,884 Liabilities: Commodity-based derivatives (1) $ 2,052 $ 2,052 $ 4,420 $ 4,420 Bank credit facility (2) $ 20,000 $ 20,000 $ — $ — 6.75 % senior notes due 2029 (3) $ 1,229,437 $ 1,122,910 $ 1,229,836 $ 1,129,029 5.875 % senior notes due 2030 (3) $ 965,000 $ 832,313 $ 965,000 $ 846,788 _____________________________ (1) The Company's commodity-based derivatives are classified as Level 2 and measured at fair value using third party pricing services and other active markets or broker quotes that are readily available in the public markets. (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 June 30, 2023 and December 31, 2022, respectively, a Level 1 measurement. 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 June 30, 2023 and December 31, 2022, 1,494,134 and 966,058 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Unvested restricted stock 1,124 905 1,042 926 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. 15 COMSTOCK RESOURCES, INC. Weighted average unearned PSUs outstanding were as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands, except per unit amounts) Weighted average PSUs 597 1,080 586 1,065 Weighted average grant date fair value per unit $ 15.92 $ 10.41 $ 15.92 $ 10.41 Basic and diluted income (loss) per share for the three months and six months months ended June 30, 2023 and 2022 were determined as follows: Three Months Ended June 30, 2023 2022 Income Shares Per Share Loss Shares Per Share (In thousands, except per share amounts) Net income (loss) attributable to common stock $ ( 45,706 ) $ 372,528 Income allocable to unvested restricted shares — ( 1,447 ) Basic income (loss) attributable to common stock ( 45,706 ) 276,669 $ ( 0.17 ) 371,081 232,045 $ 1.60 Effect of Dilutive Securities: Restricted stock — — 1,447 680 Performance stock units — — — 1,139 Convertible preferred stock — — 4,363 43,750 Diluted income (loss) attributable to common stock $ ( 45,706 ) 276,669 $ ( 0.17 ) $ 376,891 277,614 $ 1.36 Six Months Ended June 30, 2023 2022 Income Shares Per Share Loss Shares Per Share (In thousands, except per share amounts) Net income attributable to common stock $ 88,797 $ 256,789 Income allocable to unvested restricted shares ( 73 ) ( 1,021 ) Basic income attributable to common stock 88,724 276,610 $ 0.32 255,768 232,011 $ 1.10 Effect of Dilutive Securities: Restricted stock — — 1,021 640 Performance stock units — — — 1,084 Convertible preferred stock — — 8,678 43,750 Diluted income attributable to common stock $ 88,724 276,610 $ 0.32 $ 265,467 277,485 $ 0.96 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. 16 COMSTOCK RESOURCES, INC. 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 six months ended June 30, 2023 and 2022, respectively, were as follows: Six Months Ended June 30, 2023 2022 (In thousands) Cash payments for: Interest payments $ 73,957 $ 89,641 Income tax payments $ 29,182 $ 169 Non-cash investing activities include: Increase (decrease) in accrued capital expenditures $ ( 29,046 ) $ 13,813 Liabilities assumed in exchange for right-of-use lease assets $ 124,383 $ 108,881 (2) LONG-TERM DEBT At June 30, 2023, long-term debt was comprised of the following: (In thousands) 6.75 % Senior Notes due 2029: Principal $ 1,223,880 Premium, net of amortization 5,557 5.875 % Senior Notes due 2030: Principal 965,000 Bank Credit Facility: Principal 20,000 Debt issuance costs, net of amortization ( 38,019 ) $ 2,176,418 As of June 30, 2023, the Company had $ 20.0 million outstanding under a bank credit facility. Aggregate commitments under the bank credit facility are $ 1.5 billion, which matures on November 15, 2027. Borrowings under the bank credit facility are subject to a borrowing base, which is currently set at $ 2.0 billion. The borrowing base is re-determined on a semi-annual basis and upon the occurrence of certain other events. 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 SOFR plus 1.75 % to 2.75 % or an alternate base rate plus 0.75 % to 1.75 %, 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 3.5 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 June 30, 2023. During the six months ended June 30, 2022, the Company completed the early redemption of all of its outstanding 7.5 % senior notes due in 2025 for an aggregate amount of $ 258.1 million and repurchased $ 26.1 million principal amount of its 6.75 % senior notes due in 2029 for $ 24.9 million. As a result of the redemption and repurchase, the Company recognized a loss of $ 46.8 million on early retirement of debt. (4) COMMITMENTS AND CONTINGENCIES In December 2022, the Company entered into agreements for three new drilling rigs with a three year term and a minimum annual commitment of $ 12.2 million per drilling rig. Comstock expects to take delivery of two of the rigs in the second half of 2023 and the third rig in early 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 17 COMSTOCK RESOURCES, INC. 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 June 30, 2023 or 2022. (5) RELATED PARTY TRANSACTIONS Comstock operates natural gas and oil properties held by partnerships owned by its majority stockholder. The Company charges the partnerships for the costs incurred to drill, complete and produce wells, as well as drilling and operating overhead fees. Comstock also provides natural gas marketing services to the partnerships, 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 $ 0.4 million for the three months ended June 30, 2023 and 2022, respectively, and $ 0.7 million and $ 0.6 million for the six months ended June 30, 2023, respectively, for drilling, operating and marketing services provided to the partnerships. The fees received for the services are reflected as a reduction of general and administrative expenses in the accompanying consolidated statements of operations. In connection with the operation of the wells, the Company had a $ 28.5 million and $ 18.5 million receivable from the partnerships at June 30, 2023 and December 31, 2022, respectively. (6) SUBSEQUENT EVENT On July 31, 2023, the board of directors of the Company authorized a dividend of $ 0.125 per share to be paid on September 15, 2023 to common stockholders of record on September 1, 2023. 18 COMSTOCK RESOURCES, INC.