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, uncertainties and assumptions that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 including those described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023 (the "Annual Report"). 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. Results of Operations Three Months Ended March 31, 2024 2023 (In thousands except per unit amounts) Net Production Data: Natural gas (MMcf) 139,443 127,067 Oil (MBbls) 12 27 Natural gas equivalent (MMcfe) 139,515 127,226 Revenues: Natural gas sales $ 287,083 $ 378,032 Oil sales 876 1,942 Total natural gas and oil sales $ 287,959 $ 379,974 Expenses: Production and ad valorem taxes $ 17,908 $ 14,906 Gathering and transportation $ 47,099 $ 45,574 Lease operating $ 35,072 $ 34,830 Exploration $ — $ 1,775 Average Sales Price: Natural gas (per Mcf) $ 2.06 $ 2.98 Oil (per Bbl) $ 73.00 $ 71.93 Average equivalent (Mcfe) $ 2.06 $ 2.99 Expenses ($ per Mcfe): Production and ad valorem taxes $ 0.13 $ 0.12 Gathering and transportation $ 0.34 $ 0.36 Lease operating $ 0.25 $ 0.27 Gas Services: Gas services revenue $ 47,813 $ 109,604 Gas services expense $ 48,680 $ 101,295 Revenues – Natural gas and oil sales of $288.0 million for the first quarter of 2024 decreased by $92.0 million (24%) as compared to $380.0 million for the first quarter of 2023. The decrease was due to a decrease in the average natural gas price realized in the first quarter of 2024 of 31% as compared with 2023. Our natural gas production for the first quarter of 2024 increased 10% to 139.4 billion cubic feet ("Bcf") (1.5 Bcf per day) and was sold at an average price of $2.06 per thousand cubic feet ("Mcf"). Natural gas production for the first quarter of 2023 was 127.1 Bcf (1.4 Bcf per day) and was sold at an average price of $2.98 per Mcf. 18 COMSTOCK RESOURCES, INC. We utilize natural gas price derivative financial instruments to manage our exposure to changes in prices of natural gas and 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: Three Months Ended March 31, 2024 2023 Average Realized Natural Gas Price: Natural gas, per Mcf $ 2.06 $ 2.98 Cash settlements on derivative financial instruments, per Mcf 0.34 0.08 Price per Mcf, including cash settlements on derivative financial instruments $ 2.40 $ 3.06 Gas service revenues of $47.8 million decreased $61.8 million (56%) for the first quarter of 2024 from $109.6 million in the first quarter of 2023. The decrease was due to lower natural gas prices on sales of natural gas purchased to utilize our excess transport capacity. Costs and Expenses – Our production and ad valorem taxes increased $3.0 million (20%) to $17.9 million for the first quarter of 2024 from $14.9 million in the first quarter of 2023. The increase was attributable to the increase in production in the first quarter of 2024 and an increase in Louisiana production tax and ad valorem tax rates, partially offset by lower production taxes in Texas attributable to the decrease in natural gas and oil sales. Gathering and transportation costs for the first quarter of 2024 increased $1.5 million (3%) to $47.1 million as compared to $45.6 million in the first quarter of 2023. The increase was due to production growth in areas with higher average gathering and transportation rates. Our lease operating expense of $35.1 million ($0.25 per Mcfe) for the first quarter of 2024 increased $0.2 million (1%) from lease operating expense of $34.8 million ($0.27 per Mcfe) for the first quarter of 2023. The increase was due primarily to increased production in the first quarter of 2024. Gas service expenses of $48.7 million decreased $52.6 million (52%) for the first quarter of 2024 from $101.3 million in the first quarter of 2023. The decrease was due primarily to lower natural gas prices realized on purchases of third party natural gas for resale. Depreciation, depletion and amortization ("DD&A") increased $56.7 million to $190.7 million in the first quarter of 2024 from $134.0 million in the first quarter of 2023. Our DD&A per equivalent Mcf produced was $1.37 per Mcfe for the quarter ended March 31, 2024 as compared to $1.05 for the quarter ended March 31, 2023. The increase in the DD&A rate was primarily due to lower estimated proved reserves resulting from the lower natural gas price used in the determination of proved reserves at March 31, 2024. General and administrative expenses, which are reported net of overhead reimbursements, decreased to $9.2 million for the first quarter of 2024 as compared to $12.4 million in the first quarter of 2023. The decrease was primarily related to higher employee bonuses paid in 2023. We use derivative financial instruments as part of our price risk management program to protect our capital investments. During the quarter ended March 31, 2024, we had net gains related to our derivative financial instruments of $39.3 million, as compared to net gains on derivative financial instruments of $66.4 million during the quarter ended March 31, 2023. Realized net gains from our price risk management program were $48.0 million for the quarter ended March 31, 2024 as compared to realized net gains of $10.4 million for the quarter ended March 31, 2023. Interest expense was $49.6 million and $38.3 million for the quarters ended March 31, 2024 and 2023, respectively. The increase in interest expense was due primarily to increased borrowings under the bank credit facility and higher interest rates. Income taxes for the quarter ended March 31, 2024 and 2023 were a benefit of $8.3 million and a provision of $39.7 million, respectively. Income tax expense for the quarters ended March 31, 2024 and 2023 reflect an effective tax rate of 36.4% and 22.9%, respectively. The difference between the federal statutory tax rate of 21% and our effective rate is primarily attributable to the impact of state income taxes and revisions to the estimated future utilization of federal and state net operating loss carryforwards. 19 COMSTOCK RESOURCES, INC. As a result of the lower natural gas prices, we reported a net loss of $14.5 million or $0.05 per share, for the quarter ended March 31, 2024. Loss from operations for the first quarter of 2024 was $12.8 million. We reported net income of $134.5 million or $0.49 per diluted share for the quarter ended March 31, 2023. 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, 2024 2023 (In thousands) Sources of cash and cash equivalents: Operating activities $ 171,539 $ 386,364 Issuance of common stock 100,450 — Borrowings on bank credit facility, net of repayments 60,000 — Proceeds from asset sales — 130 Contributions from noncontrolling interest 6,000 — Total $ 337,989 $ 386,494 Uses of cash and cash equivalents: Capital expenditures $ 348,238 $ 372,637 Common stock dividends — 34,688 Debt issuance costs — 144 Total $ 348,238 $ 407,469 Cash flows from operating activities. Net cash provided by our operating activities decreased $214.8 million (56%) to $171.5 million in the first three months of 2024 from $386.4 million in the same period in 2023. The decrease was due primarily to lower natural gas and oil sales. Issuance of common stock. In the first quarter of 2024, we issued 12,500,000 shares of common stock to two entities controlled by our majority stockholder in a private placement, receiving proceeds of $100.5 million. Common stock dividends. During the first quarter of 2023, we paid quarterly cash dividends of $0.125 per common share to stockholders of record as of March 1, 2023. Capital expenditures. The decrease in capital expenditures of $24.4 million was primarily due to lower drilling and completion activity in the first three months of 2024, partially offset by $69.4 million of unproved property acquisitions, which included the acquisition of 189,000 net acres in the Company's Western Haynesville area from an unaffiliated third party for $50.0 million. Our capital expenditures are summarized in the following table: Three Months Ended March 31, 2024 2023 (In thousands) Acquisitions: Unproved property $ 69,444 $ 40,695 Exploration and development: Development leasehold costs 3,938 8,743 Exploratory drilling and completion costs 106,456 29,690 Development drilling and completion costs 145,793 280,176 Other development costs 37 6,097 Asset retirement obligations 40 30 Total exploration and development 325,708 365,431 Other property and equipment 5,327 4,543 Total capital expenditures $ 331,035 $ 369,974 Change in accrued capital expenditures and other 20,475 1,009 Prepaid drilling costs (3,232 ) 1,684 Change in asset retirement obligations (40 ) (30 ) Total cash capital expenditures $ 348,238 $ 372,637 20 COMSTOCK RESOURCES, INC. We drilled 16 (14.3 net) wells and completed 18 (16.3 net) Haynesville and Bossier shale operated wells during the first three months of 2024. We currently expect to spend an additional $525 million to $625 million in the remaining nine months of 2024 on drilling, completion, infrastructure and other activity. Liquidity and Capital Resources As of March 31, 2024, we had $966.4 million of liquidity, comprised of unused borrowing capacity under our bank credit facility and $6.4 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. The issuance of $400.0 million additional senior notes in April 2024 increased our liquidity by $365.2 million. We expect to fund our future development and exploration activities with future operating cash flow and borrowings under our bank credit facility. The timing of most of our future capital expenditures is discretionary because of our limited number of 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. We believe that our cash provided by operations and borrowings available under our bank credit facility will be sufficient to satisfy our foreseeable liquidity needs and capital expenditure requirements for at least the next twelve months. 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 the remainder of 2024 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 financing 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, natural gas and oil prices and other market conditions. Lack of access to the debt or equity markets due to general economic conditions could impede our ability to complete acquisitions. At March 31, 2024, we had $540.0 million of borrowings outstanding under our bank credit facility. Aggregate commitments under our 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 was redetermined on April 30, 2024 and 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 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 0.50% 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 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 March 31, 2024. F ederal and State Taxation At March 31, 2024, we had $754.1 million in U.S. federal net operating loss ("NOL") carryforwards and $1.7 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 limited. 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 $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 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 under audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, we have not established any significant reserves for uncertain tax positions. 21 COMSTOCK RESOURCES, INC.