COMSTOCK RESOURCES INC 10-K

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed for trading on the New York Stock Exchange under the symbol "CRK". As of February 16, 2024, we had 278,429,463 shares of common stock outstanding, which were held by 161 holders of record. During 2023, we paid quarterly cash dividends on our common stock of 12.5¢ per share. The declaration and payment of future dividends will be at the discretion of the board of directors and will depend upon the results of our operations, capital requirements, our financial condition and such other factors as our board of directors may deem relevant. Stockholder Return Performance The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock during the five years ended December 31, 2023 with the cumulative returns during the same period for the New York Stock Exchange Index and the SPDR Standard & Poor's ("S&P") Oil and Gas Exploration and Production ETF. The graph assumes that $100.00 was invested on the last trading day of 2018, and that dividends, if any, were reinvested. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1) Among Comstock, the NYSE Composite Index and the S&P Oil & Gas Exploration and Production ETF Index As of December 31, Total Return Analysis 2018 2019 2020 2021 2022 2023 Comstock $ 100.00 $ 181.68 $ 96.47 $ 178.59 $ 304.71 $ 206.02 NYSE Composite $ 100.00 $ 125.51 $ 134.28 $ 162.04 $ 146.89 $ 167.12 SPDR S&P Oil and Gas Exploration and Production ETF $ 100.00 $ 90.56 $ 57.59 $ 96.03 $ 139.60 $ 144.57 _______________ (1) The data contained in the above graph is deemed to be furnished and not filed pursuant to Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section. ITEM 6. [RESERVED] 31 COMSTOCK RESOURCES, INC. ITEM 7. MANAGEMENT'S DI SCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our selected historical consolidated financial data and our accompanying consolidated financial statements and the notes to those financial statements included elsewhere in this report. The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." Overview We are an independent energy company engaged in the acquisition, exploration, development and production of natural gas and oil in the United States. Our assets are concentrated in the Haynesville and Bossier shale located in North Louisiana and East Texas, a premier natural gas basin with superior economics due to the geographic proximity to Gulf Coast natural gas markets. We own interests in 2,478 producing natural gas and oil wells (1,516.7 net to us) and we operate 1,703 of these wells. We use the successful efforts method of accounting, which allows only for the capitalization of costs associated with developing proven natural gas and oil properties as well as exploration costs associated with successful exploration activities. Accordingly, our exploration costs consist of costs we incur to acquire seismic data used for exploration, impairments of our unevaluated leasehold where we were not successful in discovering reserves and the costs of unsuccessful exploratory wells that we drill. We generally sell our natural gas and oil at current market prices at the point our wells connect to third party purchaser pipelines or terminals. We have entered into certain transportation and treating agreements with midstream and pipeline companies to transport a substantial portion of our natural gas production to long-haul gas pipelines. We market our products several different ways depending upon a number of factors, including the availability of purchasers for the product, the availability and cost of pipelines near our wells, market prices, pipeline constraints and operational flexibility. Accordingly, our revenues are heavily dependent upon the prices of, and demand for, natural gas. Natural gas prices have historically been volatile and are likely to remain volatile in the future. Our operating costs are generally comprised of several components, including costs of our field personnel, insurance, repair and maintenance costs, production supplies, fuel used in operations, transportation costs, workover expenses and state production and ad valorem taxes. Like all natural gas and oil exploration and production companies, we face the challenge of replacing our reserves. Although in the past we have offset the effect of declining production rates from existing properties through successful acquisition and drilling efforts, there can be no assurance that we will be able to continue to offset production declines or maintain production at current rates through future acquisitions or drilling activity. Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration for, and the development, production and transportation of, natural gas and oil, and operating safety. Future laws or regulations, any adverse changes in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may have an adverse effect on our business, results of operations and financial condition. Applicable environmental regulations require us to remove our equipment after production has ceased, to plug and abandon our wells and to remediate any environmental damage our operations may have caused. The present value of the estimated future costs to plug and abandon our natural gas and oil wells and to dismantle and remove our production facilities is included in our reserve for future abandonment costs, which was $30.8 million as of December 31, 2023. Prices for natural gas and oil have been highly volatile in recent years but we expect our natural gas production to increase, assuming we maintain a sufficient development program to offset expected production declines from our producing wells. The level of our drilling activity is dependent on natural gas prices. If we are unable to offset production declines with the new wells we plan to drill in 2024 and future periods, our production volumes and cash flows from our operating activities may not be sufficient to fund our capital expenditures, and thus, we may need to either curtail drilling activity or seek additional borrowings, which would result in an increase in our interest expense in 2024 and future periods. We may need to recognize impairments of our natural gas and oil properties if natural gas and oil prices decline, and as a result, the expected future cash flows from these properties becomes insufficient to recover their carrying value. 32 COMSTOCK RESOURCES, INC. Results of Operations Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Our operating data for the year ended December 31, 2023 and 2022 are summarized below: Year Ended December 31, 2023 2022 (In thousands except per unit amounts) Net Production Data: Natural gas (MMcf) 524,467 500,616 Oil (MBbls) 70 82 Natural gas equivalent (MMcfe) 524,890 501,107 Revenues: Natural gas sales $ 1,259,450 $ 3,117,094 Oil sales 5,161 7,597 Total natural gas and oil sales $ 1,264,611 $ 3,124,691 Expenses: Production and ad valorem taxes $ 91,803 $ 77,917 Gathering and transportation $ 184,906 $ 155,679 Lease operating $ 132,203 $ 111,134 Exploration $ 1,775 $ 8,287 Average Sales Price: Natural gas (per Mcf) $ 2.40 $ 6.23 Oil (per Bbl) $ 73.73 $ 92.65 Average equivalent (Mcfe) $ 2.41 $ 6.24 Expenses ($ per Mcfe): Production and ad valorem taxes $ 0.18 $ 0.16 Gathering and transportation $ 0.35 $ 0.31 Lease operating $ 0.25 $ 0.22 Gas Services: Gas services revenue $ 300,498 $ 503,366 Gas services expense $ 282,050 $ 465,044 Natural gas and oil sales. Natural gas and oil sales of $1.3 billion in 2023 decreased by $1.9 billion, or 60%, as compared to $3.1 billion in 2022. The decrease was primarily due to lower prices received for our natural gas production. Our 2023 natural gas production increased 5% to 524.5 Bcf (1.4 Bcf per day), and was sold at an average price of $2.40 per Mcf as compared to 500.6 Bcf (1.4 Bcf per day) sold at an average price of $6.23 in 2022. We utilize natural gas derivative financial instruments to manage our exposure to changes in prices of natural gas to protect returns on investment from our drilling activities. The following table presents our natural gas prices before and after the effect of cash settlements of our derivative financial instruments: Year Ended December 31, 2023 2022 Average Realized Natural Gas Price: Natural gas, per Mcf $ 2.40 $ 6.23 Cash settlements on derivative financial instruments, per Mcf 0.15 (1.73 ) Price per Mcf, including cash settlements on derivative financial instruments $ 2.55 $ 4.50 Gas services revenues. Gas services revenues of $300.5 million in 2023 decreased $202.9 million (40%) from $503.4 million in 2022. Gas services activities include sales of natural gas purchased from unaffiliated third parties for resale and fees received from unaffiliated third parties for natural gas gathering and treating services. These activities commenced in 2022 with the acquisition of a pipeline and natural gas treating plant and the opportunity to utilize our excess transport capacity in North Louisiana. Gas services revenues decreased in 2023 due primarily to lower natural gas prices on sales of natural gas purchased to utilize our excess transport capacity. 33 COMSTOCK RESOURCES, INC. Production and ad valorem taxes. Our production and ad valorem taxes increased $13.9 million (18%) to $91.8 million in 2023 from $77.9 million in 2022. This increase was primarily related to increases in the Louisiana production tax rate and higher ad valorem taxes. Gathering and transportation. Gathering and transportation costs increased $29.2 million (19%) to $184.9 million in 2023 as compared to $155.7 million in 2022. This increase was due to production growth in areas with higher average gathering and transportation rates. Lease operating expenses. Our lease operating expense of $132.2 million ($0.25 per Mcfe) in 2023 was $21.1 million, or 19%, higher than lease operating expenses in 2022 of $111.1 million ($0.22 per Mcfe). The increase in lease operating expense was due to higher production and increased water disposal costs and other production costs. Gas services expenses. Gas services expenses of $282.1 million in 2023 were $183.0 million (39%) lower than gas services expenses in 2022 of $465.0 million. The decrease was due primarily to lower natural gas prices for purchases of third party natural gas for resale. Depreciation, depletion and amortization expense ("DD&A"). DD&A expense increased $118.5 million (24%) to $607.9 million in 2023 from $489.5 million in 2022 and our DD&A expense per equivalent Mcf produced was $1.16 per Mcfe in 2023 as compared to $0.98 per Mcfe in 2022. The increase in DD&A rate was primarily due to higher drilling and completion costs incurred for wells turned to sales in 2023 combined with lower estimated proved reserves resulting from the low natural gas price used in the determination of proved reserves at December 31, 2023. General and administrative expenses. General and administrative expenses, which are reported net of overhead reimbursements, decreased to $38.0 million in 2023 from $39.4 million in 2022 due primarily to lower personnel costs. Stock-based compensation included in general and administrative expenses was $9.9 million and $6.6 million in 2023 and 2022, respectively. Derivative financial instruments. We use derivative financial instruments as part of our price risk management program to protect the cash flow we generate from our operating activities. We had net gains on derivative financial instruments of $187.6 million for 2023 as compared to net losses on derivative financial instruments of $662.5 million for 2022. Realized net gains from our natural gas price risk management program were $80.3 million in 2023 as compared to $862.7 million of realized net losses in 2022. We recognized unrealized gains on derivative financial instruments of $107.3 million and $200.2 million in 2023 and 2022, respectively. Interest expense. Interest expense was $169.0 million for 2023 as compared to $171.1 million for 2022. Included in interest expense was amortization of the premiums or discounts on our senior notes and the debt issuance cost amortization associated with our outstanding debt. The non-cash interest expense for 2023 totaled $8.0 million compared with $10.3 million for 2022. The decrease in interest expense in 2023 was due primarily to the retirement of our 7.5% senior notes in 2022. Loss on early retirement of debt. During 2022, we retired $244.4 million principal amount of our 7.5% senior notes and $26.1 million principal amount of our 6.75% senior notes. As a result of premiums paid over face value and costs associated with the retirements, we recognized a loss on early retirement of debt of $46.8 million during 2022. Income taxes. Our income tax provision was $35.1 million and $261.1 million in 2023 and 2022, respectively. Our effective tax rate of 14% in 2023 and 19% in 2022 differed from the federal income tax rate of 21% primarily due to changes in our valuation allowance on our federal and state net operating loss carryforwards and state income taxes. Net income. We reported net income available to common stockholders of $211.9 million or $0.76 per diluted share in 2023 and a net income available to common stockholders of $1.1 billion or $4.11 per diluted share in 2022. The decrease in net income in 2023 is primarily due to the impact of lower natural gas prices in 2023. Income from operations in 2023 decreased to $226.6 million as compared to $2.3 billion in 2022. Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Discussions of 2022 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 17, 2023. 34 COMSTOCK RESOURCES, INC. Cash Flows, Liquidity and Capital Resources Cash Flows The following table summarizes sources and uses of cash and cash equivalents: Year Ended December 31, 2023 2022 (in thousands) Sources of cash and cash equivalents: Operating activities $ 1,016,846 $ 1,698,388 Borrowings on bank credit facility, net of repayments 480,000 — Proceeds from asset sales 41,295 4,186 Contributions from noncontrolling interest 24,000 — Total $ 1,562,141 $ 1,702,574 Uses of cash and cash equivalents: Capital expenditures $ 1,459,096 $ 1,101,869 Retirement of senior notes — 273,920 Repayments on bank credit facility, net of borrowings — 235,000 Common stock dividends 138,985 34,688 Preferred stock dividends — 16,014 Debt issuance costs 144 10,839 Other 1,899 6,255 Total $ 1,600,124 $ 1,678,585 Cash flows from operating activities. Net cash provided by our operating activities decreased $681.5 million (40%) to $1.0 billion in 2023 from $1.7 billion in 2022. The decrease was primarily due to the lower realized natural gas prices we had in 2023. Proceeds from asset sales. In 2023, we sold certain non-operated properties for net proceeds of $41.3 million. In 2022, we sold certain non-operated properties for net proceeds of $4.2 million. Contributions from noncontrolling interest. During the fourth quarter of 2023, we formed a midstream partnership to fund the future build-out of our Western Haynesville midstream system over the next several years. During 2023, the noncontrolling interest contributed $24.0 million to the midstream partnership. Capital expenditures. The increase in capital expenditures of $357.2 million is primarily due to higher drilling, completion and acquisition activities in 2023. 35 COMSTOCK RESOURCES, INC. Our capital expenditures are summarized in the following table: Year Ended December 31, 2023 2022 (in thousands) Acquisitions: Proved property $ — $ 500 Unproved property 98,553 54,120 Exploration and development: Developmental leasehold costs 27,905 13,727 Exploratory drilling and completion costs 244,129 63,520 Development drilling and completion costs 974,664 901,026 Other development costs 25,130 53,693 Asset retirement obligations (19 ) 686 Total exploration and development 1,370,362 1,087,272 Midstream property 35,694 17,972 Other property 491 803 Total capital expenditures $ 1,406,547 $ 1,106,047 Change in accrued capital expenditures and other 18,562 (37,561 ) Prepaid drilling costs 34,010 34,069 Asset retirement obligations (23 ) (686 ) Total cash capital expenditures $ 1,459,096 $ 1,101,869 We currently expect to spend approximately $750 million to $850 million in 2024 on our development and exploration projects primarily focused on the continued development of our Haynesville/Bossier shale properties including the exploration and development of our Western Haynesville acreage. We also expect to spend $125.0 million to $150.0 million in our Western Haynesville midstream partnership. Under our 2024 operating plan, we currently expect to run five operated drilling rigs and to drill 46 operated horizontal wells (35.9 net) and to turn 44 operated wells (38.2 net) to sales in 2024. Retirement of senior notes. In 2022, we retired all of our outstanding 7.5% senior notes due in 2025 for $248.9 million, which included premiums paid over face value of $4.5 million, and we retired $26.1 million principal amount of our 6.75% senior notes for $24.9 million. Common stock and preferred stock dividends. In 2023, we paid a quarterly cash dividend of 12.5¢ per share of common stock. On December 15, 2022, we paid a cash dividend of 12.5¢ per share of common stock. On November 30, 2022, all of the outstanding shares of our Series B Redeemable Convertible Preferred Stock were converted into 43,750,000 shares of common stock. Debt issuance costs. In 2022, we entered into a new five-year bank credit facility and we incurred $10.8 million of issuance costs associated with the new bank credit facility Liquidity and Capital Resources As of December 31, 2023, we had $480.0 million outstanding under a bank credit facility. Aggregate commitments under the 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 our assets and those of our restricted subsidiaries and bear interest at our option, at either adjusted 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. We also pay a commitment fee of 0.375% to 0.5% on the unused portion of the committed borrowing base. The bank credit facility places certain restrictions upon our and our restricted subsidiaries' ability to, among other things, incur additional indebtedness, pay cash dividends, repurchase common stock, make certain loans, investments and divestitures and redeem our 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. We were in compliance with the covenants as of December 31, 2023. As of December 31, 2023, we had $1.0 billion of liquidity, comprised of $1.0 billion of unused borrowing capacity under our bank credit facility and $16.7 million of cash and cash equivalents on hand. Our short and long-term capital 36 COMSTOCK RESOURCES, INC. 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 capital expenditures is mostly discretionary. 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 prove to be inaccurate, we may be required to seek additional capital, including debt or equity financing. We expect to fund future acquisitions, depending on the size and timing, with future operating cash flow, borrowings under our bank credit facility, or other debt or equity financings, to the extent available. The availability and attractiveness of debt or equity 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, natural gas and oil prices and other market conditions. 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. Our contractual obligations consist primarily of natural gas transportation and gathering contracts, principal and interest payments on our senior notes and bank credit facility and other operating lease obligations. Our natural gas transportation and gathering contracts extend to 2031 and commitments under these contracts are $97.8 million for 2024, $89.6 million for 2025, $63.9 million for 2026, $62.7 million for 2027, $56.3 million for 2028 and $96.4 million for commitments thereafter. Interest payments under our senior notes and bank credit facility are $175.1 million for 2024 through 2026, $170.6 million for 2027, $139.3 million for 2028 and $72.8 million for all periods thereafter. Federal and State Taxation At December 31, 2023, we had $754.1 million in U.S. federal net operating loss carryforwards and $1.7 billion in certain state net operating loss carryforwards. As a result of a change of control in August 2018, our ability to use U.S. federal net operating losses ("NOLs") to reduce taxable income is limited. If we do not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carry-forward periods, then we will lose the ability to apply those NOLs as offsets to future taxable income. We estimate that $740.6 million of the U.S. federal NOL carryforwards and $1.2 billion of the estimated state NOL carryforwards will expire unused. Our federal income tax returns for the years subsequent to December 31, 2019 remain subject to examination. Our income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2020. Currently, we are under examination with the state of Louisiana and we believe that our significant filing positions are highly certain and that all of our other significant income tax filing positions and deductions would be sustained upon audit or the final resolution would not have a material effect on our consolidated financial statements. Therefore, we have not established any significant reserves for uncertain tax positions. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and use assumptions that can affect the reported amounts of assets, liabilities, revenues or expenses. Successful efforts accounting. We are required to select among alternative acceptable accounting policies. There are two generally acceptable methods for accounting for natural gas and oil producing activities. The full cost method allows the capitalization of all costs associated with finding natural gas and oil reserves, including certain general and administrative expenses. The successful efforts method allows only for the capitalization of costs associated with developing proven natural gas and oil properties as well as exploration costs associated with successful exploration projects. Costs related to exploration that are not successful are expensed when it is determined that commercially productive oil and gas reserves were not found. We have elected to use the successful efforts method to account for our oil and gas activities and we do not capitalize any of our general and administrative expenses. Natural gas and oil reserve quantities. The determination of depreciation, depletion and amortization expense is highly dependent on the estimates of the proved natural gas and oil reserves attributable to our properties. The determination of whether impairments should be recognized on our oil and gas properties is also dependent on these estimates, as well as estimates of probable reserves. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be precisely measured. The accuracy of any reserve estimate depends on the quality of available data, production history and engineering and geological interpretation and judgment. Because all reserve estimates are to some degree imprecise, the quantities and timing of natural gas and oil that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future natural gas and oil prices may all differ materially from 37 COMSTOCK RESOURCES, INC. those assumed in these estimates. Proved reserve estimates included in this report were prepared by the Company's engineers and audited by independent petroleum engineers. The information regarding present value of the future net cash flows attributable to our proved natural gas and oil reserves are estimates only and should not be construed as the current market value of the estimated natural gas and oil reserves attributable to our properties. Thus, such information includes revisions of certain reserve estimates attributable to proved properties included in the preceding year's estimates. Such revisions reflect additional information from subsequent activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices. Any future downward revisions could adversely affect our financial condition, our future prospects and the value of our common stock. Impairment of natural gas and oil properties. We evaluate our proved properties for potential impairment when circumstances indicate that the carrying value of an asset may not be recoverable. If impairment is indicated based on a comparison of the asset's carrying value to its undiscounted expected future net cash flows, then it is recognized to the extent that the carrying value exceeds fair value. A significant amount of judgment is involved in performing these evaluations since the results are based on estimated future events. Expected future cash flows are determined using estimated future prices based on market based forward prices applied to projected future production volumes. The projected production volumes are based on the property's proved and risk adjusted probable natural gas and oil reserves estimates at the end of the period. The estimated future cash flows that we use in our assessment of the need for an impairment are based on a corporate forecast which considers forecasts from multiple independent price forecasts. Prices are not escalated to levels that exceed observed historical market prices. Costs are also assumed to escalate at a rate that is based on our historical experience, currently estimated at 2% per annum. The natural gas and oil prices used for determining asset impairments will generally differ from those used in the standardized measure of discounted future net cash flows because the standardized measure requires the use of the average first day of the month historical price for the year. Unproved properties are evaluated for impairment based upon the results of drilling, planned future drilling and the terms of our natural gas and oil leases. It is reasonably possible that our estimates of undiscounted future net cash flows attributable to our 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 impairments in the carrying values of our proved and unproved natural gas and oil properties in the future. Goodwill. We have goodwill of $335.9 million as of December 31, 2023 that was recorded in 2018. Goodwill represents the excess of purchase price over fair value of net tangible and identifiable intangible assets. We are not required to amortize goodwill as a charge to earnings; however, we are required to conduct an annual review of goodwill for impairment. We determine the potential for impairment of our goodwill by initially preparing a qualitative fair value assessment of our business value. In performing this qualitative assessment, we examine relevant events and circumstances that could have a negative effect on our business, including macroeconomic conditions, industry and market conditions (including current commodity price), earnings and cash flows, overall financial performance and other relevant entity specific events. If the qualitative assessment indicates that it is more likely than not that our business is impaired, a quantitative analysis would be performed to assess our fair value and to determine the amount of impairment, if any, that requires recognition. When performing a quantitative impairment assessment of goodwill, fair value is determined based on a market approach or an income approach. If the carrying value of goodwill exceeds the fair value calculated using the quantitative approach, an impairment charge would be recorded for the difference between fair value and carrying value. If oil or natural gas prices decrease, drilling efforts are unsuccessful or our market capitalization declines, it is reasonably possible that impairments would need to be recognized. We performed a quantitative assessment of goodwill as of October 1, 2023 and determined there was no goodwill impairment. Income Taxes. We account for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as the future tax consequences attributable to the future utilization of existing tax net operating loss and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change in rate is enacted. In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of our deferred income tax assets will be realized in the future. The ultimate realization of deferred income tax assets is dependent 38 COMSTOCK RESOURCES, INC. upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. We believe that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, we are not able to determine that it is more likely than not that all of our deferred tax assets will be realized. As a result, we established valuation allowances for our 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. We will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future reporting periods. ITEM 7A. QUANTITATIVE AND QUA LITATIVE DISCLOSURES ABOUT MARKET RISK Our financial condition, results of operations and capital resources are highly dependent upon the prevailing market prices of natural gas and oil. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors, some of which are beyond our control. Factors influencing natural gas and oil prices include the level of global demand for oil, the foreign supply of natural gas and oil, the establishment of and compliance with production quotas by oil exporting countries, weather conditions that determine the demand for natural gas, the price and availability of alternative fuels and overall economic conditions. It is impossible to predict future natural gas and oil prices with any degree of certainty. Sustained weakness in natural gas and oil prices may adversely affect our financial condition and results of operations, and may also reduce the amount of natural gas and oil reserves that we can produce economically. Any reduction in our natural gas and oil reserves, including reductions due to price fluctuations, can have an adverse effect on our ability to obtain capital for our exploration and development activities. Similarly, any improvements in natural gas and oil prices can have a favorable impact on our financial condition, results of operations and capital resources. As of December 31, 2023, we had natural gas price swap agreements to hedge approximately 146.4 Bcf of our 2024 production at an average price of $3.55 per MMBtu. None of our derivative contracts have margin requirements or collateral provisions that could require funding prior to the scheduled cash settlement date. A change of 10% in the market price of natural gas on December 31, 2023 would change the fair value of our natural gas swaps by approximately $38.2 million. The impact of hypothetical changes in market prices of natural gas on our natural gas derivative financial instruments does not include the offsetting impact that the same hypothetical changes in market prices of natural gas may have on our physical sales of natural gas. Since our outstanding natural gas derivative financial instruments hedge only a portion of our forecasted physical gas production, a positive or negative impact to the fair value of our natural gas derivative financial instruments would be partially offset by our physical sales of natural gas. Interest Rates At December 31, 2023, we had approximately $2.7 billion principal amount of long-term debt outstanding. $965.0 million of our long-term debt bear interest at a fixed rate of 5.875% and $1.2 billion of our long-term debt bear interest at a fixed rate of 6.75%. The fair market value of the senior notes due 2030 and senior notes due 2029 as of December 31, 2023 were $849.2 million and $1.1 billion, respectively, based on the market price of approximately 88% and 93% of the face amount of such debt. At December 31, 2023, we had $480.0 million of outstanding borrowings under our bank credit facility, which is subject to variable rates of interest that are tied to adjusted SOFR or an alternate base rate, at our option. Any increase in these interest rates would have an adverse impact to our results of operations and cash flow.