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, 2025 (the "Annual Report"). All statements other than statements of historic facts contained, or incorporated by reference, in this report, may be forward-looking statements. Actual results may differ materially from those anticipated in our forward-looking statements due to many factors. Such forward-looking statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described herein. Although we believe the expectations in such statements to be reasonable, there can be no assurance that such expectations will prove to be correct. You are cautioned not to place undue reliance on the forward-looking statements included in this report, which speak only as of the date made. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in our expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based, except as required by law. 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 as well as with the Risk Factors contained in our Annual Report. Results of Operations Three Months Ended June 30, Six Months Ended June 30, 2026 2025 2026 2025 (In thousands, except per unit amounts) Net Production Data: Natural gas (MMcf) 113,069 112,164 210,924 227,193 Oil (MBbls) 5 13 16 23 Natural gas equivalent (MMcfe) 113,102 112,238 211,021 227,329 Revenues: Natural gas sales $ 287,745 $ 339,225 $ 706,020 $ 751,511 Oil sales 476 741 1,234 1,443 Total natural gas and oil sales $ 288,221 $ 339,966 $ 707,254 $ 752,954 Expenses: Production and ad valorem taxes $ 7,196 $ 10,555 $ 17,621 $ 21,734 Gathering and transportation $ 43,331 $ 41,759 $ 85,135 $ 84,376 Lease operating $ 28,150 $ 31,109 $ 56,431 $ 66,109 Exploration $ 4,427 $ — $ 13,770 $ 2,150 Average Sales Price: Natural gas (per Mcf) $ 2.54 $ 3.02 $ 3.35 $ 3.31 Oil (per Bbl) $ 95.20 $ 57.00 $ 77.13 $ 62.74 Average equivalent (Mcfe) $ 2.55 $ 3.03 $ 3.35 $ 3.31 Expenses ($ per Mcfe): Production and ad valorem taxes $ 0.06 $ 0.09 $ 0.09 $ 0.10 Gathering and transportation $ 0.38 $ 0.37 $ 0.40 $ 0.37 Lease operating $ 0.25 $ 0.28 $ 0.27 $ 0.29 Gas Services: Gas services revenue $ 63,481 $ 130,296 $ 229,982 $ 230,162 Gas services expense $ 63,014 $ 126,714 $ 225,870 $ 243,483 Revenues – Natural gas and oil sales of $288.2 million for the three months ended June 30, 2026 decreased by $51.7 million (15%) as compared to $340.0 million for the second quarter of 2025. The decrease was due to lower natural gas prices realized in the second quarter of 2026 as compared to the same period in 2025. The average realized price for our natural gas was $2.54 per thousand cubic feet ("Mcf"), which decreased 16% from the average realized natural gas price in the second quarter of 2025. Our natural gas production for the second quarter of 2026 increased 1% to 113.1 billion cubic feet ("Bcf") (1.2 Bcf per day). Natural gas production for the second quarter of 2025 was 112.2 Bcf (1.2 Bcf per day) and was sold at an average price of $3.02 per Mcf. 20 COMSTOCK RESOURCES, INC. Natural gas and oil sales of $707.3 million for the six months ended June 30, 2026 decreased by $45.7 million (6%) as compared to $753.0 million for the six months ended June 30, 2025, which was primarily attributable to lower natural gas production, which decreased 7% to 210.9 Bcf (1.2 Bcf per day) during the first six months of 2026. Natural gas prices increased by 1% during the first six months of 2026 as compared to 2025 natural gas prices. Our natural gas production for the first six months of 2025 was 227.2 Bcf (1.3 Bcf per day) and was sold at an average price of $3.31 per Mcf. 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, 2026 2025 2026 2025 Average Realized Natural Gas Price: Natural gas, per Mcf $ 2.54 $ 3.02 $ 3.35 $ 3.31 Cash settlements on derivative financial instruments, per Mcf 0.39 0.04 (0.18 ) (0.02 ) Price per Mcf, including cash settlements on derivative financial instruments $ 2.93 $ 3.06 $ 3.17 $ 3.29 Gas service revenues of $63.5 million decreased $66.8 million (51%) for the second quarter of 2026 from $130.3 million in the second quarter of 2025. Gas service revenues of $230.0 million decreased $0.2 million for the first six months of 2025 from $230.2 million for the first six months of 2025. 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 $3.4 million (32%) to $7.2 million for the second quarter of 2026 from $10.6 million in the second quarter of 2025. Production and ad valorem taxes decreased $4.1 million (19%) to $17.6 million during the first six months of 2026 from $21.7 million during the first six months of 2025. The decreases were due primarily to the sale of producing properties in the prior periods and changes in natural gas prices. Gathering and transportation costs for the second quarter of 2026 increased $1.6 million (4%) to $43.3 million as compared to $41.8 million in the second quarter of 2025. Gathering and transportation costs during the first six months of 2026 increased $0.8 million (1%) to $85.1 million as compared to the first six months of 2025. The increases in both periods were due primarily to production growth in areas with higher average gathering and transportation rates. Our lease operating expense of $28.2 million ($0.25 per Mcfe) for the second quarter of 2026 decreased $3.0 million (10%) as compared to our lease operating expense of $31.1 million ($0.28 per Mcfe) for the second quarter of 2025. Lease operating expense of $56.4 million ($0.27 per Mcfe) during the first six months of 2026 decreased $9.7 million (15%) from lease operating expense of $66.1 million ($0.29 per Mcfe) during the first six months of 2025. The decreases were due primarily to the sale of producing properties in the prior periods. Gas service expenses of $63.0 million decreased $63.7 million (50%) for the second quarter of 2026 from $126.7 million in the second quarter of 2025. Gas service expenses of $225.9 million decreased $17.6 million (7%) for the first six months of 2026 from $243.5 million for the first six months of 2025. The decreases were primarily due to lower natural gas prices and volumes related to purchases of third party natural gas for resale. Depreciation, depletion and amortization ("DD&A") increased $9.1 million to $167.4 million in the second quarter of 2026 from $158.4 million in the second quarter of 2025. Our DD&A per equivalent Mcf produced was $1.48 per Mcfe for the quarter ended June 30, 2026 as compared to $1.41 per Mcfe for the quarter ended June 30, 2025. The increase was due primarily to higher finding and development costs in 2026. DD&A decreased $17.3 million to $309.0 million for the first six months of 2026 from $326.3 million during the first six months of 2025. Our DD&A per equivalent Mcf produced was $1.46 per Mcfe for the six months ended June 30, 2026, which was comparable to $1.44 per Mcfe for the six months ended June 30, 2025. 21 COMSTOCK RESOURCES, INC. General and administrative expenses, which are reported net of overhead reimbursements, increased to $17.2 million for the second quarter of 2026 as compared to $12.3 million in the second quarter of 2025. General and administrative expenses increased to $35.4 million for the six months ended June 30, 2026 as compared to $23.4 million for the six months ended June 30, 2025. The increases in both periods were primarily due to higher stock-based compensation, which increased to $8.4 million in the second quarter of 2026 as compared to $5.5 million in the second quarter of 2025, and a reduction in overhead reimbursements resulting from the property divestitures completed in 2025. For the six months ended June 30, 2026, stock-based compensation increased to $15.8 million as compared to $10.0 million for the same period in 2025. We use derivative financial instruments as part of our price risk management program to protect our capital investments. During the quarter ended June 30, 2026, we had net gains related to our derivative financial instruments of $44.4 million, as compared to net gains on derivative financial instruments of $235.8 million during the quarter ended June 30, 2025, resulting from the decrease in future natural gas prices since June 30, 2025. Realized net gains from our price risk management program were $43.3 million for the quarter ended June 30, 2026 as compared to realized net gains of $4.3 million for the quarter ended June 30, 2025. Net gains on derivative financial instruments were $46.8 million for the first six months of 2026 as compared to net losses of $94.5 million for the first six months of 2025, resulting from a decrease in future natural gas prices since December 31, 2025. Realized net losses from our price risk management program were $37.1 million for the first six months of 2026 as compared to realized net losses of $3.7 million for the first six months of 2025. Interest expense was $55.0 million and $55.2 million for the quarters ended June 30, 2026 and 2025, respectively, and $108.1 million and $110.0 million for six months ended June 30, 2026 and 2025, respectively. The decrease in interest expense was due primarily to decreased borrowings on our bank credit facility. Exploration expense was $4.4 million for the second quarter of 2026, and exploration expense was $13.8 million and $2.2 million for the six months ended June 30, 2026 and 2025, respectively, which were related to the acquisition of seismic data in our Western Haynesville area. Income taxes for the quarters ended June 30, 2026 and 2025 were a benefit of $2.8 million and a provision of $141.5 million, respectively. Income taxes for the six months ended June 30, 2026 and 2025 were a provision of $9.2 million and a benefit of $1.8 million, respectively. Income taxes for the quarters ended June 30, 2026 and 2025 reflect an effective tax rate of (23.3)% and 52.0%, respectively, and income taxes for the six months ended June 30, 2026 and 2025 reflect an effective tax rate of 6.7% and (13.2)%, respectively. The difference between the federal statutory tax rate of 21% and our effective rate is primarily attributable to research and development and other tax credits, release of valuation allowance on deferred tax assets, state income taxes, changes in certain nondeductible items and the income attributable to noncontrolling interest. We reported net income available to the Company of $8.8 million for the quarter ended June 30, 2026 as compared to net income available to the Company of $124.8 million for the quarter ended June 30, 2025. Income from operations for the second quarter of 2026 was $22.6 million as compared to income from operations of $89.4 million for the second quarter of 2025. In the first six months of 2026, we reported net income available to the Company of $116.2 million as compared to net income available to the Company of $3.6 million for the first six months of 2025. Income from operations for the first six months of 2026 was $197.5 million as compared to income from operations of $215.6 million for the first six months of 2025. 22 COMSTOCK RESOURCES, INC. 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, 2026 2025 (In thousands) Sources of cash and cash equivalents: Operating activities $ 442,170 $ 522,310 Contributions from noncontrolling interest, net of transaction costs 581,654 92,500 Borrowings on bank credit facilities, net of repayments 285,000 60,000 Proceeds from asset sales 18,400 — Total $ 1,327,224 $ 674,810 Uses of cash and cash equivalents: Capital expenditures $ 829,547 $ 639,267 Redemption of noncontrolling interest 445,000 — Distributions to noncontrolling interest 24,589 5,500 Other 7,010 10,983 Total $ 1,306,146 $ 655,750 Cash flows from operating activities. Net cash provided by our operating activities decreased $80.1 million (15%) to $442.2 million in the first six months of 2026 from $522.3 million in the same period in 2025. The decrease was due primarily to lower natural gas production and lower realized natural gas prices. Contributions and redemption of noncontrolling interest. On June 15, 2026, PGS redeemed Cactus' interest in PGS for $445 million. The redemption was funded by the issuance of 600,000 Class A-2 Units representing a 27% ownership interest in PGS for $600 million to Starville, net of $18.5 million in related transaction costs. Capital expenditures. Our capital expenditures are summarized in the following table: Six Months Ended June 30, 2026 2025 (In thousands) Acquisitions: Unproved property $ 39,449 $ 19,616 Exploration and development: Development leasehold costs 7,374 8,851 Exploratory drilling and completion costs 349,134 231,104 Development drilling and completion costs 357,915 269,569 Other development costs 19,277 8,434 Asset retirement obligations 83 17 Total exploration and development 773,232 537,591 Midstream property and equipment 90,627 102,940 Other property and equipment 112 (762 ) Total capital expenditures $ 863,971 $ 639,769 Change in accrued capital expenditures and other (16,179 ) 2,575 Prepaid drilling costs (18,191 ) (3,060 ) Change in asset retirement obligations (54 ) (17 ) Total cash capital expenditures $ 829,547 $ 639,267 We drilled 34 (30.9 net) wells and completed 29 (24.4 net) Haynesville and Bossier shale operated wells during the first six months of 2026. We currently expect to spend an additional $720 million to $820 million in the remaining six months of 2026 on drilling, completion, infrastructure and other activity. 23 COMSTOCK RESOURCES, INC. Liquidity and Capital Resources As of June 30, 2026, we had $1.2 billion of liquidity, comprised of $1.1 billion of unused borrowing capacity under our bank credit facilities and $45.0 million of cash and cash equivalents on hand. $150 million of unused borrowing capacity under our PGS bank credit facility is restricted to PGS midstream activities. Our short and long-term capital requirements consist primarily of funding our development, exploration and midstream 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 facilities. 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 facilities 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 2026 because the timing and size of acquisitions are unpredictable. We intend to use our cash flows from operations, borrowings under our bank credit facilities, 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. As of June 30, 2026, we had $545.0 million outstanding under the Comstock bank credit facility. Aggregate commitments under this 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 that 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 Comstock bank credit facility are secured by substantially all of our assets and those of our subsidiaries, except for PGS, 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 0.5%, which is dependent on the utilization of the borrowing base. Comstock's 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 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, 2026. As of June 30, 2026, PGS had no borrowings outstanding under its bank credit facility. Aggregate commitments under the PGS bank credit facility are $150 million, which matures on March 26, 2030. Borrowings under the PGS bank credit facility bear interest at our option, at either SOFR plus 2.5% to 3.5% or an alternate base rate plus 1.5% to 2.5%, in each case depending on a consolidated net leverage ratio. PGS also pays a commitment fee of 0.375% to 0.5%, which is dependent on the PGS consolidated net leverage ratio. The PGS bank credit facility contains financial covenants that require the maintenance of an interest coverage ratio of at least 2.5 to 1.0 and a consolidated net leverage ratio of less than 4.0 to 1.0. PGS was in compliance with the covenants as of June 30, 2026. F ederal and State Taxation At June 30, 2026, we had $1.5 billion in U.S. federal net operating loss ("NOL") carryforwards and $2.0 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 $720.7 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, 2021 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, 2022. Currently, we are under examination with the United States Internal Revenue Service 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. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United 24 COMSTOCK RESOURCES, INC. States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities as of the date of the financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. In Part II, Item 7 of the Annual Report, we disclosed our critical accounting policies and estimates, which are made in accordance with GAAP, involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operation. There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2026, as compared to those disclosed in the Annual Report.