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, 2024 (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, 2025 2024 (In thousands, except per unit amounts) Net Production Data: Natural gas (MMcf) 115,029 139,443 Oil (MBbls) 10 12 Natural gas equivalent (MMcfe) 115,091 139,515 Revenues: Natural gas sales $ 412,286 $ 287,083 Oil sales 702 876 Total natural gas and oil sales $ 412,988 $ 287,959 Expenses: Production and ad valorem taxes $ 11,179 $ 17,908 Gathering and transportation $ 42,617 $ 47,099 Lease operating $ 35,000 $ 35,072 Exploration $ 2,150 $ — Average Sales Price: Natural gas (per Mcf) $ 3.58 $ 2.06 Oil (per Bbl) $ 70.20 $ 73.00 Average equivalent (Mcfe) $ 3.59 $ 2.06 Expenses ($ per Mcfe): Production and ad valorem taxes $ 0.10 $ 0.13 Gathering and transportation $ 0.37 $ 0.34 Lease operating $ 0.30 $ 0.25 Gas Services: Gas services revenue $ 99,866 $ 47,813 Gas services expense $ 116,769 $ 48,680 Revenues – Natural gas and oil sales of $413.0 million for the three months ended March 31, 2025 increased by $125.0 million (43%) as compared to $288.0 million for the first quarter of 2024. The increase was due to higher natural gas prices realized in the first quarter of 2025 as compared to the same period in 2024. The average realized price for our natural gas was $3.58 per thousand cubic feet ("Mcf"), which increased 74% from the average realized natural gas price in the first quarter of 2024. Our natural gas production for the first quarter of 2025 decreased 18% to 115.0 billion cubic feet ("Bcf") (1.3 Bcf per day). Natural gas production for the first quarter of 2024 was 139.4 Bcf (1.5 Bcf per day) and was sold at an average price of $2.06 per Mcf. 19 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, 2025 2024 Average Realized Natural Gas Price: Natural gas, per Mcf $ 3.58 $ 2.06 Cash settlements on derivative financial instruments, per Mcf (0.06 ) 0.34 Price per Mcf, including cash settlements on derivative financial instruments $ 3.52 $ 2.40 Gas service revenues of $99.9 million increased $52.1 million (109%) for the first quarter of 2025 from $47.8 million in the first quarter of 2024. The increases were primarily due to higher 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 $6.7 million (38%) to $11.2 million for the first quarter of 2025 from $17.9 million in the first quarter of 2024. The decrease was primarily due to a lower statutory production tax rate in Louisiana and lower production in the first quarter of 2025. Gathering and transportation costs for the first quarter of 2025 decreased $4.5 million (10%) to $42.6 million as compared to $47.1 million in the first quarter of 2024. The decrease was due primarily to lower production in the quarter. Our lease operating expense of $35.0 million ($0.30 per Mcfe) for the first quarter of 2025 remained consistent with our lease operating expense of $35.1 million ($0.25 per Mcfe) for the first quarter of 2024. The lease operating expense rate increased due to the fixed nature of much of our lease operating costs and lower production in the first quarter of 2025. Gas service expenses of $116.8 million increased $68.1 million (140%) for the first quarter of 2025 from $48.7 million in the first quarter of 2024. The increase in was primarily due to higher natural gas prices related to purchases of third party natural gas for resale. Depreciation, depletion and amortization ("DD&A") decreased $22.8 million to $167.9 million in the first quarter of 2025 from $190.7 million in the first quarter of 2024 due to lower production in the first quarter of 2025. Our DD&A per equivalent Mcf produced was $1.46 per Mcfe for the quarter ended March 31, 2025 as compared to $1.37 for the quarter ended March 31, 2024. The increase in the rate was primarily due to higher finding and development costs. General and administrative expenses, which are reported net of overhead reimbursements, increased to $11.1 million for the first quarter of 2025 as compared to $9.2 million in the first quarter of 2024, which was primarily due to higher employee compensation. We use derivative financial instruments as part of our price risk management program to protect our capital investments. During the quarter ended March 31, 2025, we had net losses related to our derivative financial instruments of $330.3 million, as compared to net gains on derivative financial instruments of $39.3 million during the quarter ended March 31, 2024, which was due to the significant increase in future NYMEX natural gas prices. Realized net losses from our price risk management program were $8.0 million for the quarter ended March 31, 2025 as compared to realized net gains of $48.0 million for the quarter ended March 31, 2024. Interest expense was $54.8 million and $49.6 million for the quarters ended March 31, 2025 and 2024, respectively. The increase in interest expense was due primarily to the issuance of an additional $400.0 million principal amount of senior notes in the second quarter of 2024. Income taxes for the quarters ended March 31, 2025 and 2024 were a benefit of $143.3 million and $8.3 million, respectively. Income tax benefit for the quarters ended March 31, 2025 and 2024 reflect an effective tax rate of 55.4% and 36.4%, 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 state net operating loss carryforwards and other items. As a result of losses related to our derivative financial instruments, we reported a net loss of $115.4 million, or $0.40 per share for the quarter ended March 31, 2025. Income from operations for the first quarter of 2025 was $126.2 million as compared to a loss from operations of $12.8 million for the first quarter of 2024. We reported a net loss of $14.5 million or $0.05 per share for the quarter ended March 31, 2024. 20 COMSTOCK RESOURCES, INC. 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, 2025 2024 (In thousands) Sources of cash and cash equivalents: Operating activities $ 174,746 $ 171,539 Issuance of common stock — 100,450 Borrowings on bank credit facility, net of repayments 95,000 60,000 Contributions from noncontrolling interest 59,500 6,000 Total $ 329,246 $ 337,989 Uses of cash and cash equivalents: Capital expenditures $ 298,261 $ 348,238 Distributions to noncontrolling interest 2,219 — Other 2,690 — Total $ 303,170 $ 348,238 Cash flows from operating activities. Net cash provided by our operating activities increased $3.2 million (2%) to $174.7 million in the first three months of 2025 from $171.5 million in the same period in 2024. The increase was due primarily to higher natural gas prices. 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. Contributions from noncontrolling interest. During the first three months of 2025 and 2024, our noncontrolling interest partner contributed $59.5 million and $6.0 million, respectively, to our midstream partnership to fund the build-out of our Western Haynesville midstream system. Capital expenditures. Our 2024 capital expenditures 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: Three Months Ended March 31, 2025 2024 (In thousands) Acquisitions: Unproved property $ 9,684 $ 69,444 Exploration and development: Development leasehold costs 3,556 3,938 Exploratory drilling and completion costs 100,107 106,456 Development drilling and completion costs 145,578 145,793 Other development costs 515 37 Asset retirement obligations 18 40 Total exploration and development 259,458 325,708 Other property and equipment 48,754 5,327 Total capital expenditures $ 308,212 $ 331,035 Change in accrued capital expenditures and other (10,202 ) 20,475 Prepaid drilling costs 269 (3,232 ) Change in asset retirement obligations (18 ) (40 ) Total cash capital expenditures $ 298,261 $ 348,238 21 COMSTOCK RESOURCES, INC. We drilled seven (6.9 net) wells and completed eleven (8.3 net) Haynesville and Bossier shale operated wells during the first three months of 2025. We currently expect to spend an additional $780 million to $880 million in the remaining nine months of 2025 on drilling, completion, infrastructure and other activity. Liquidity and Capital Resources As of March 31, 2025, we had $1.0 billion of liquidity, comprised of $990 million of unused borrowing capacity under our bank credit facility and $32.9 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 2025 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, 2025, we had $510.0 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 29, 2025 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 2.25% to 3.25% or an alternate base rate plus 1.25% to 2.25%, in each case depending on the utilization of the borrowing base. We also pay a commitment fee of 0.375% to 0.50% on the unused portion of the committed 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 4.0 to 1.0, which reduces to 3.75 to 1.0 at June 30, 2025 and to 3.5 to 1.0 at September 30, 2025, and an adjusted current ratio of at least 1.0 to 1.0. We were in compliance with the covenants as of March 31, 2025. F ederal and State Taxation At March 31, 2025, we had $743.0 million in U.S. federal net operating loss ("NOL") carryforwards and $1.8 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, 2020 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, 2021. Currently, we are under examination with the United States Internal Revenue Service and the state of Louisiana and believe that our significant filing positions and deductions will be sustained under audit or the final resolution will 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.