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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands, except per unit amounts) Net Production Data: Natural gas (MMcf) 130,861 126,307 270,304 253,374 Oil (MBbls) 15 13 27 40 Natural gas equivalent (MMcfe) 130,949 126,386 270,464 253,612 Revenues: Natural gas sales $ 216,527 $ 228,892 $ 503,610 $ 606,924 Oil sales 1,074 860 1,950 2,802 Total natural gas and oil sales $ 217,601 $ 229,752 $ 505,560 $ 609,726 Expenses: Production and ad valorem taxes $ 19,244 $ 19,599 $ 37,152 $ 34,505 Gathering and transportation $ 49,361 $ 45,395 $ 96,460 $ 90,969 Lease operating $ 34,805 $ 34,031 $ 69,877 $ 68,861 Exploration $ — $ — $ — $ 1,775 Average Sales Price: Natural gas (per Mcf) $ 1.65 $ 1.81 $ 1.86 $ 2.40 Oil (per Bbl) $ 71.60 $ 66.15 $ 72.22 $ 70.05 Average equivalent (Mcfe) $ 1.66 $ 1.82 $ 1.87 $ 2.40 Expenses ($ per Mcfe): Production and ad valorem taxes $ 0.14 $ 0.15 $ 0.13 $ 0.14 Gathering and transportation $ 0.38 $ 0.36 $ 0.36 $ 0.36 Lease operating $ 0.27 $ 0.27 $ 0.26 $ 0.27 Gas Services: Gas services revenue $ 29,229 $ 58,459 $ 77,042 $ 168,063 Gas services expense $ 31,494 $ 55,390 $ 80,174 $ 156,685 Revenues – Natural gas and oil sales of $217.6 million for the second quarter of 2024 decreased by $12.2 million (5%) as compared to $229.8 million for the second quarter of 2023. The decrease was primarily due to a decrease in the average natural gas price realized in the second quarter of 2024 of 9% as compared with the same period in 2023. Our natural gas production for the second quarter of 2024 increased 4% to 130.9 billion cubic feet ("Bcf") (1.4 Bcf per day) and was sold at an average price of $1.65 per thousand cubic feet ("Mcf"). Natural gas production for the second quarter of 2023 was 126.3 Bcf (1.4 Bcf per day) and was sold at an average price of $1.81 per Mcf. Natural gas and oil sales of $505.6 million for the six months ended June 30, 2024 decreased by $104.2 million (17%) as compared to $609.7 million for the six months ended June 30, 2023, which was also primarily due to lower natural gas prices (23%) during the first six months of 2024 as compared with 2023 prices. Our natural gas production for the first six months of 2024 increased 7% to 270.3 Bcf (1.5 Bcf per day), and was sold at an average price of $1.86 per Mcf as compared to 253.4 Bcf (1.4 Bcf per day) sold at an average price of $2.40 in the first six months of 2023. 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 June 30, Six Months Ended June 30, 2024 2023 2024 2023 Average Realized Natural Gas Price: Natural gas, per Mcf $ 1.65 $ 1.81 $ 1.86 $ 2.40 Cash settlements on derivative financial instruments, per Mcf 0.47 0.44 0.40 0.26 Price per Mcf, including cash settlements on derivative financial instruments $ 2.12 $ 2.25 $ 2.26 $ 2.66 Gas service revenues of $29.2 million decreased $29.2 million (50%) for the second quarter of 2024 from $58.5 million in the second quarter of 2023. Gas service revenues of $77.0 million decreased $91.0 million (54%) for the first six months of 2024 from $168.1 million for the first six months of 2023. The decreases were primarily due to lower natural gas prices related to sales of natural gas purchased to utilize our excess transport capacity. Costs and Expenses – Our production and ad valorem taxes decreased $0.4 million (2%) to $19.2 million for the second quarter of 2024 from $19.6 million in the second quarter of 2023. The decrease was primarily due to lower production taxes in Texas from lower natural gas and oil sales. Production and ad valorem taxes increased $2.6 million (8%) to $37.2 million for the first six months of 2024 from $34.5 million in the first six months of 2023. The increase was attributable to the increase in production in 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 second quarter of 2024 increased $4.0 million (9%) to $49.4 million as compared to $45.4 million in the second quarter of 2023. Gathering and transportation costs for the first six months of 2024 increased $5.5 million (6%) to $96.5 million as compared to $91.0 million for the first six months of 2023. The increases were due to production growth in areas with higher average gathering and transportation rates. Our lease operating expense of $34.8 million ($0.27 per Mcfe) for the second quarter of 2024 increased $0.8 million (2%) from lease operating expense of $34.0 million ($0.27 per Mcfe) for the second quarter of 2023. Lease operating expense of $69.9 million ($0.26 per Mcfe) for the first six months of 2024 increased $1.0 million (1%) from lease operating expense of $68.9 million ($0.27 per Mcfe) for the first six months of 2023. The increases for both periods were primarily due to increased production in 2024. Gas service expenses of $31.5 million decreased $23.9 million (43%) for the second quarter of 2024 from $55.4 million in the second quarter of 2023. Gas service expenses of $80.2 million decreased $76.5 million (49%) for the first six months of 2024 from $156.7 million for the first six months of 2023. The decreases in both periods were primarily due to lower natural gas prices related to purchases of third party natural gas for resale. Depreciation, depletion and amortization ("DD&A") increased $54.1 million to $194.2 million in the second quarter of 2024 from $140.2 million in the second quarter of 2023. Our DD&A per equivalent Mcf produced was $1.48 per Mcfe for the quarter ended June 30, 2024 as compared to $1.11 for the quarter ended June 30, 2023. DD&A increased $110.8 million to $384.9 million for the first six months of 2024 from $274.2 million during the first six months of 2023. Our DD&A per equivalent Mcf produced was $1.42 per Mcfe for the six months ended June 30, 2024 as compared to $1.08 for the six months ended June 30, 2023. The increase in the DD&A rate for both periods was primarily due to lower estimated proved undeveloped reserves resulting from the lower natural gas price used in the determination of proved reserves at June 30, 2024. General and administrative expenses, which are reported net of overhead reimbursements, increased to $10.2 million for the second quarter of 2024 as compared to $10.0 million in the second quarter of 2023. General and administrative expenses decreased to $19.3 million for the first six months of 2024 as compared to $22.4 million during the first six months of 2023, which was primarily due to lower employee compensation. We use derivative financial instruments as part of our price risk management program to protect our capital investments. During the quarter ended June 30, 2024, we had net losses related to our derivative financial instruments of $25.3 million, as compared to net losses on derivative financial instruments of $4.5 million during the quarter ended June 30, 2023. Realized net gains from our price risk management program were $60.6 million for the quarter ended June 30, 2024 as compared to realized net gains of $55.5 million for the quarter ended June 30, 2023. Net gains on derivative financial instruments were $14.1 million for the first six months of 2024 as 19 COMSTOCK RESOURCES, INC. compared to net gains of $61.9 million for the first six months of 2023. Realized net gains from our price risk management program were $108.5 million for the first six months of 2024 as compared to realized net gains of $65.9 million for the first six months of 2023. Interest expense was $51.9 million and $39.2 million for the quarters ended June 30, 2024 and 2023, respectively, and $101.5 million and $77.5 million for the six months ended June 30, 2024 and 2023, respectively. The increase in interest expense for both periods was due primarily to increased borrowings under our bank credit facility, the issuance of an additional $400.0 million principal amount of 6.75% senior notes due 2029 and higher interest rates. Income taxes for the quarters ended June 30, 2024 and 2023 were a benefit of $46.1 million and $14.4 million, respectively. Income taxes for the six months ended June 30, 2024 and 2023 were a benefit of $54.4 million and a provision of $25.3 million, respectively. Income tax expense for the quarters ended June 30, 2024 and 2023 reflect an effective tax rate of 27.2% and 24.0%, respectively. Income tax expense for the six months ended June 30, 2024 and 2023 reflect an effective tax rate of 28.3% and 22.2%, 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. As a result of continued lower natural gas prices, we reported a net loss of $123.2 million, or $0.43 per share for the quarter ended June 30, 2024. Loss from operations for the second quarter of 2024 was $92.5 million. We reported a net loss of $45.7 million or $0.17 per share for the quarter ended June 30, 2023. In the first six months of 2024, we reported a net loss of $137.7 million or $0.49 per share. Loss from operations for the first six months of 2024 was $105.3 million. We reported net income of $88.8 million or $0.32 per diluted share for the six months ended June 30, 2023. Cash Flows, Liquidity and Capital Resources Cash Flows The following table summarizes sources and uses of cash and cash equivalents: Six Months Ended June 30, 2024 2023 (In thousands) Sources of cash and cash equivalents: Operating activities $ 255,114 $ 717,874 Issuance of 6.75% Senior Notes 372,000 — Issuance of common stock 100,450 — Borrowings on bank credit facility, net of repayments — 20,000 Proceeds from asset sales — 41,295 Contributions from noncontrolling interest 17,000 — Total $ 744,564 $ 779,169 Uses of cash and cash equivalents: Capital expenditures $ 575,724 $ 752,482 Repayments on bank credit facility, net of borrowings 155,000 — Common stock dividends — 69,377 Debt and stock issuance costs 6,768 144 Distributions to noncontrolling interest 1,098 — Other 3,373 1,899 Total $ 741,963 $ 823,902 Cash flows from operating activities. Net cash provided by our operating activities decreased $462.8 million (64%) to $255.1 million in the first six months of 2024 from $717.9 million in the same period in 2023. The decrease was due primarily to lower natural gas prices. Issuance of 6.75% Senior Notes. In April 2024, we issued $400.0 million principal amount of 6.75% senior notes due 2029 in a private placement and received net proceeds after deducting the initial purchasers' discounts of $365.2 million, which were used to pay down the outstanding borrowings on the Company's bank credit facility. Proceeds from asset sales. In the first six months of 2023, we sold our interest in certain non-operated properties for net proceeds of $41.3 million. 20 COMSTOCK RESOURCES, INC. Capital expenditures. The decrease in capital expenditures of $176.8 million was primarily due to lower drilling and completion activity in the first six months of 2024, partially offset by $79.1 million of unproved property acquisitions, which included the acquisition of 189,000 net acres in our Western Haynesville area from an unaffiliated third party for $50.0 million. Our capital expenditures are summarized in the following table: Six Months Ended June 30, 2024 2023 (In thousands) Acquisitions: Unproved property $ 79,138 $ 56,648 Exploration and development: Development leasehold costs 6,530 13,718 Exploratory drilling and completion costs 158,848 104,312 Development drilling and completion costs 297,143 511,214 Other development costs 14,722 17,450 Asset retirement obligations 56 24 Total exploration and development 556,437 703,366 Other property and equipment 17,459 11,513 Total capital expenditures $ 573,896 $ 714,879 Change in accrued capital expenditures and other 14,368 29,046 Prepaid drilling costs (12,484 ) 8,624 Change in asset retirement obligations (56 ) (67 ) Total cash capital expenditures $ 575,724 $ 752,482 We drilled 27 (23.5 net) wells and completed 30 (27.9 net) Haynesville and Bossier shale operated wells during the first six months of 2024. We currently expect to spend an additional $280 million to $380 million in the remaining six months of 2024 on drilling, completion, infrastructure and other activity. Issuance of common stock. In the first six months 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 six months of 2023, we paid quarterly cash dividends of $0.125 per common share to stockholders of record as of March 1, 2023 and June 1, 2023, respectively. Liquidity and Capital Resources As of June 30, 2024, we had $1.2 billion of liquidity, comprised of $1,175.0 million of unused borrowing capacity under our bank credit facility and $19.3 million of cash and cash equivalents on hand. Our short and long-term capital requirements consist primarily of funding our development and exploration activities, acquisitions, payments of contractual obligations and debt service. We expect to fund our future development and exploration activities with future operating cash flow 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. 21 COMSTOCK RESOURCES, INC. At June 30, 2024, we had $325.0 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 our 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 our 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. Our 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 June 30, 2024. F ederal and State Taxation At June 30, 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. 22 COMSTOCK RESOURCES, INC.