Comstock Resources, Inc. Form 10-Q September 30, 2006
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
The Quarter Ended September 30, 2006
OR
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
File No. 0-16741
COMSTOCK
RESOURCES, INC.
(Exact
name of registrant as specified in its charter)
NEVADA
(State
or other jurisdiction of
|
|
94-1667468
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
Number)
|
5300
Town and Country Blvd., Suite 500, Frisco, Texas 75034
(Address
of principal executive offices)
Telephone
No.:
(972) 668-8800
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for
the
past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer þ
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The
number of shares outstanding of the registrant's common stock, par value $.50,
as of November 9, 2006 was 43,133,762.
COMSTOCK
RESOURCES, INC.
QUARTERLY
REPORT
For
The Quarter Ended September 30, 2006
|
Page
|
|
PART
I. Financial Information
|
|
|
|
|
|
|
|
Item
1. Financial Statements (Unaudited):
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets -
September
30, 2006 and December 31, 2005
|
|
4
|
|
Consolidated
Statements of Operations -
Three
months and nine months ended September 30, 2006 and 2005
|
|
5
|
|
Consolidated
Statement of Stockholders' Equity -
Nine
months ended September 30, 2006
|
|
6
|
|
Consolidated
Statements of Cash Flows -
Nine
months ended September 30, 2006 and 2005
|
|
7
|
|
Notes
to Consolidated Financial Statements
|
|
8
|
|
Independent
Accountants' Review Report
|
|
20
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
|
|
21
|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosure About Market
Risks
|
|
29
|
|
|
|
|
|
Item
4. Controls and Procedures
|
|
29
|
|
|
|
|
|
PART
II. Other Information
|
|
|
|
|
|
|
|
Item
6. Exhibits
|
|
30
|
|
|
|
|
|
Awareness
Letter of Ernst & Young LLP
|
|
|
|
Section
302 Certification of the CEO
|
|
|
|
Section
302 Certification of the CFO
|
|
|
|
Section
906 Certification of the CEO
|
|
|
|
Section
906 Certification of the CFO
|
|
|
|
PART
I — FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
INTRODUCTORY
NOTE
In
the third
quarter of 2006, Comstock Resources, Inc. ("Comstock" or the "Company") acquired
additional interests in Bois d'Arc Energy, Inc. ("Bois d'Arc Energy") and,
as a
result, began including Bois d'Arc Energy in its financial statements as a
consolidated subsidiary. In accordance with generally accepted accounting
principles, Comstock has applied consolidation accounting for its ownership
in
Bois d'Arc Energy retroactively as of January 1, 2006.
Comstock
accounted for its interest in Bois d'Arc Energy using proportionate
consolidation from July 16, 2004, the date that Bois d'Arc Energy was formed
as
a limited liability company, until May 10, 2005 when Bois d'Arc Energy converted
to a corporation in connection with its initial public offering. From May 10,
2005 through December 31, 2005, Comstock accounted for its ownership interest
in
Bois d'Arc Energy using the equity method. Revenues
and expenses have been adjusted beginning January 1, 2006 to include
Bois
d'Arc Energy
as a
consolidated subsidiary. There was no effect on net income as a result of using
the consolidation method. The Company's financial statements for dates and
periods prior to January 1, 2006 have not been adjusted. A summary of the impact
of consolidating Bois d'Arc Energy is included in Note 1 to the consolidated
financial statements.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
27,084
|
|
|
$
|
89
|
|
Accounts
Receivable:
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
|
48,051
|
|
|
|
37,646
|
|
Joint
interest operations
|
|
|
13,888
|
|
|
|
5,553
|
|
Other
Current Assets
|
|
|
16,150
|
|
|
|
9,482
|
|
Total
current assets
|
|
|
105,173
|
|
|
|
52,770
|
|
Property
and Equipment:
|
|
|
|
|
|
|
|
|
Unevaluated
oil and gas properties
|
|
|
17,279
|
|
|
|
10,723
|
|
Oil
and gas properties, successful efforts method
|
|
|
2,353,375
|
|
|
|
1,018,341
|
|
Other
|
|
|
8,154
|
|
|
|
3,342
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(702,574
|
)
|
|
|
(325,478
|
)
|
Net
property and equipment
|
|
|
1,676,234
|
|
|
|
706,928
|
|
Assets
Held for Sale
|
|
|
6,518
|
|
|
|
—
|
|
Investment
in Bois d'Arc Energy
|
|
|
—
|
|
|
|
252,134
|
|
Other
Assets
|
|
|
4,959
|
|
|
|
4,831
|
|
|
|
$
|
1,792,884
|
|
|
$
|
1,016,663
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
Short-term
Debt
|
|
$
|
6,500
|
|
|
$
|
—
|
|
Accounts
Payable
|
|
|
83,623
|
|
|
|
44,216
|
|
Accrued
Expenses
|
|
|
32,776
|
|
|
|
12,659
|
|
Unrealized
Loss on Derivatives
|
|
|
—
|
|
|
|
11,242
|
|
Total
current liabilities
|
|
|
122,899
|
|
|
|
68,117
|
|
Long-term
Debt
|
|
|
455,000
|
|
|
|
243,000
|
|
Deferred
Income Taxes Payable
|
|
|
305,062
|
|
|
|
119,481
|
|
Reserve
for Future Abandonment Costs
|
|
|
44,327
|
|
|
|
3,206
|
|
Minority
Interest in Bois d'Arc Energy
|
|
|
212,683
|
|
|
|
—
|
|
Total
liabilities
|
|
|
1,139,971
|
|
|
|
433,804
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
stock-$0.50 par, 50,000,000 shares authorized, 43,126,262 and
42,969,262
shares
outstanding at September 30, 2006 and December 31, 2005,
respectively
|
|
|
21,554
|
|
|
|
21,485
|
|
Additional
paid-in capital
|
|
|
346,728
|
|
|
|
338,996
|
|
Retained
earnings
|
|
|
284,631
|
|
|
|
222,378
|
|
Total
stockholders' equity
|
|
|
652,913
|
|
|
|
582,859
|
|
|
|
$
|
1,792,884
|
|
|
$
|
1,016,663
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
129,251
|
|
|
$
|
71,619
|
|
|
$
|
385,153
|
|
|
$
|
209,970
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating
|
|
|
26,904
|
|
|
|
10,803
|
|
|
|
78,220
|
|
|
|
36,869
|
|
Exploration
|
|
|
8,069
|
|
|
|
2,423
|
|
|
|
16,662
|
|
|
|
19,709
|
|
Depreciation,
depletion and amortization
|
|
|
40,709
|
|
|
|
14,036
|
|
|
|
104,457
|
|
|
|
47,368
|
|
Impairment
|
|
|
1,389
|
|
|
|
3,400
|
|
|
|
2,235
|
|
|
|
3,400
|
|
Loss
on disposal of oil and gas properties
|
|
|
—
|
|
|
|
—
|
|
|
|
7,934
|
|
|
|
—
|
|
General
and administrative, net
|
|
|
7,370
|
|
|
|
3,058
|
|
|
|
22,738
|
|
|
|
11,015
|
|
Total
operating expenses
|
|
|
84,441
|
|
|
|
33,720
|
|
|
|
232,246
|
|
|
|
118,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
44,810
|
|
|
|
37,899
|
|
|
|
152,907
|
|
|
|
91,609
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
258
|
|
|
|
242
|
|
|
|
724
|
|
|
|
1,449
|
|
Other
income
|
|
|
187
|
|
|
|
37
|
|
|
|
616
|
|
|
|
173
|
|
Interest
expense
|
|
|
(6,733
|
)
|
|
|
(4,982
|
)
|
|
|
(18,322
|
)
|
|
|
(15,499
|
)
|
Gain
on sale of stock by Bois d'Arc Energy
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,797
|
|
Gain
(loss) on derivatives
|
|
|
1,180
|
|
|
|
(17,814
|
)
|
|
|
10,608
|
|
|
|
(21,045
|
)
|
Total
other income (expenses)
|
|
|
(5,108
|
)
|
|
|
(22,517
|
)
|
|
|
(6,374
|
)
|
|
|
(6,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes, minority interest and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
in earnings of Bois d'Arc Energy
|
|
|
39,702
|
|
|
|
15,382
|
|
|
|
146,533
|
|
|
|
85,484
|
|
Provision
for income taxes
|
|
|
(16,662
|
)
|
|
|
(7,602
|
)
|
|
|
(61,847
|
)
|
|
|
(11,469
|
)
|
Minority
interest in earnings of Bois d'Arc Energy
|
|
|
(6,004
|
)
|
|
|
—
|
|
|
|
(22,433
|
)
|
|
|
—
|
|
Equity
in earnings (loss) of Bois d'Arc Energy
|
|
|
—
|
|
|
|
6,358
|
|
|
|
—
|
|
|
|
(54,867
|
)
|
Net
income
|
|
$
|
17,036
|
|
|
$
|
14,138
|
|
|
$
|
62,253
|
|
|
$
|
19,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
0.35
|
|
|
$
|
1.48
|
|
|
$
|
0.50
|
|
Diluted
|
|
$
|
0.39
|
|
|
$
|
0.33
|
|
|
$
|
1.42
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common and common stock equivalent shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
42,243
|
|
|
|
40,432
|
|
|
|
42,128
|
|
|
|
38,417
|
|
Diluted
|
|
|
43,553
|
|
|
|
42,380
|
|
|
|
43,505
|
|
|
|
40,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
For
the Nine Months Ended September 30, 2006
(Unaudited)
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Stock
-
|
|
|
Paid-in
|
|
|
Retained
|
|
|
|
|
|
|
Stock
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Balance
at December 31, 2005
|
|
|
42,969
|
|
|
$
|
21,485
|
|
|
$
|
338,996
|
|
|
$
|
222,378
|
|
|
$
|
582,859
|
|
Stock-based
compensation
|
|
|
19
|
|
|
|
—
|
|
|
|
5,123
|
|
|
|
—
|
|
|
|
5,123
|
|
Exercise
of stock options
|
|
|
138
|
|
|
|
69
|
|
|
|
1,687
|
|
|
|
—
|
|
|
|
1,756
|
|
Excess
tax benefit from stock-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
922
|
|
|
|
—
|
|
|
|
922
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,253
|
|
|
|
62,253
|
|
Balance
at September 30, 2006
|
|
|
43,126
|
|
|
$
|
21,554
|
|
|
$
|
346,728
|
|
|
$
|
284,631
|
|
|
$
|
652,913
|
|
The
accompanying notes are an integral part of these statements.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
62,253
|
|
|
$
|
19,148
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
55,078
|
|
|
|
8,435
|
|
Depreciation,
depletion and amortization
|
|
|
104,457
|
|
|
|
47,368
|
|
Dry
hole costs and leasehold impairments
|
|
|
13,246
|
|
|
|
16,883
|
|
Impairments
|
|
|
2,235
|
|
|
|
3,400
|
|
Loss
on disposal of oil and gas properties
|
|
|
7,934
|
|
|
|
—
|
|
Debt
issuance cost amortization
|
|
|
878
|
|
|
|
707
|
|
Stock-based
compensation
|
|
|
9,834
|
|
|
|
4,195
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(922
|
)
|
|
|
—
|
|
Minority
interest in earnings of Bois d'Arc Energy
|
|
|
22,433
|
|
|
|
—
|
|
Equity
in loss of Bois d'Arc Energy
|
|
|
—
|
|
|
|
54,867
|
|
Gain
on sale of stock by Bois d'Arc Energy
|
|
|
—
|
|
|
|
(28,797
|
)
|
Gain
(loss) from derivatives
|
|
|
(10,608
|
)
|
|
|
21,045
|
|
(Increase)
decrease in accounts receivable
|
|
|
10,774
|
|
|
|
(4,741
|
)
|
(Increase)
decrease in other current assets
|
|
|
(139
|
)
|
|
|
1,659
|
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
(3,153
|
)
|
|
|
7,947
|
|
Net
cash provided by operating activities
|
|
|
274,300
|
|
|
|
152,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
expenditures and acquisitions
|
|
|
(404,295
|
)
|
|
|
(326,091
|
)
|
Advances
to Bois d'Arc Energy
|
|
|
—
|
|
|
|
(6,421
|
)
|
Repayments
from Bois d'Arc Energy
|
|
|
—
|
|
|
|
158,066
|
|
Payments
to settle derivatives
|
|
|
(703
|
)
|
|
|
(140
|
)
|
Net
cash used for investing activities
|
|
|
(404,998
|
)
|
|
|
(174,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
182,000
|
|
|
|
176,000
|
|
Principal
payments on debt
|
|
|
(39,000
|
)
|
|
|
(297,000
|
)
|
Proceeds
from issuance of common stock
|
|
|
1,756
|
|
|
|
142,706
|
|
Excess
tax benefit from stock-based compensation
|
|
|
922
|
|
|
|
—
|
|
Other
|
|
|
(28
|
)
|
|
|
(92
|
)
|
Net
cash provided by financing activities
|
|
|
145,650
|
|
|
|
21,614
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
14,952
|
|
|
|
(856
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
89
|
|
|
|
2,703
|
|
Bois
d'Arc Energy cash and cash equivalents as of January 1,
2006
|
|
|
12,043
|
|
|
|
—
|
|
Cash
and cash equivalents, end of period
|
|
$
|
27,084
|
|
|
$
|
1,847
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2006
(Unaudited)
(1)
SIGNIFICANT ACCOUNTING POLICIES -
Basis
of Presentation
In
management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the financial position of Comstock
Resources, Inc. and subsidiaries ("Comstock" or the "Company") as of September
30, 2006 and the related results of operations and cash flows for the nine
months ended September 30, 2006 and 2005.
The
accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been omitted pursuant to those rules and regulations,
although Comstock believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited consolidated financial
statements should be read in conjunction with the financial statements and
notes
thereto of the Company and of Bois d'Arc Energy, Inc. included in Comstock's
Annual Report on Form 10-K for the year ended December 31, 2005.
These
unaudited consolidated financial statements include the accounts of Comstock
and
subsidiaries in which it has a controlling interest. Investments in 50% or
less
owned entities are accounted for using the equity method of accounting.
Intercompany balances and transactions have been eliminated in
consolidation.
The
results of operations for the nine months ended September 30, 2006 are not
necessarily an indication of the results expected for the full
year.
On
July
16, 2004, Comstock contributed its offshore oil and gas properties to a new
entity, Bois d'Arc Energy, LLC, a limited liability company that conducted
exploration, development and production operations in state and federal waters
in the Gulf of Mexico. Comstock accounted for its 60% interest in Bois d'Arc
Energy, LLC based on its proportionate ownership in such entity until May 10,
2005 when Bois d'Arc Energy, LLC was converted to a corporation and changed
its
name to Bois d'Arc Energy, Inc. ("Bois d'Arc Energy"). On May 11, 2005 Bois
d'Arc Energy completed an initial public offering of 13.5 million shares of
common stock at $13.00 per share to the public. Bois d'Arc Energy sold 12.0
million shares of common stock and received net proceeds of $145.1 million
and a
selling stockholder sold 1.5 million shares. On May 11, 2005, Bois d'Arc Energy
used the proceeds from its initial public offering together with borrowings
under a new bank credit facility to repay $158.1 million in outstanding advances
from Comstock. As a result of Bois d'Arc Energy's conversion to a corporation
and the initial public offering, Comstock's ownership in Bois d'Arc Energy
decreased to 48% and Comstock discontinued accounting for its interest in Bois
d'Arc Energy using the proportionate consolidation method and began using the
equity method to account for its investment in Bois d'Arc Energy.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During
the three months ended September 30, 2006, Comstock acquired 2,285,000
additional shares of Bois d'Arc Energy for $36.4 million increasing its
ownership of Bois d'Arc Energy's common stock to 32,220,761 shares. As a result,
as of September 30, 2006, the Company has voting control of Bois d'Arc Energy
through the combined share ownership of the Company and the members of its
Board
of Directors. Upon obtaining voting control of Bois d'Arc Energy, Comstock
began
including Bois d'Arc Energy in its financial statements as a consolidated
subsidiary. As permitted by generally accepted accounting principles,
consolidated revenues, expenses and cash flows for 2006 have been retroactively
adjusted to reflect Bois d'Arc Energy as a consolidated subsidiary as of January
1, 2006. The Company's financial statements for dates and periods prior to
January 1, 2006, have not been adjusted. The inclusion of Bois d'Arc Energy
as a
consolidated subsidiary in the Company's financial statements had no impact
on
the Company's net income.
The
following summarizes the impact of retroactively consolidating the results
of
Bois
d'Arc Energy
as of
January 1, 2006:
|
|
Six
Months Ended June 30, 2006
|
|
|
|
As
Previously
|
|
|
Consolidating
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
134,462
|
|
|
$
|
121,440
|
|
|
$
|
255,902
|
|
Income
from operations
|
|
$
|
56,783
|
|
|
$
|
51,314
|
|
|
$
|
108,097
|
|
Income
before income taxes, minority interest in
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
and equity in earnings of
Bois d'Arc
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
$
|
57,710
|
|
|
$
|
49,121
|
|
|
$
|
106,831
|
|
Provision
for income taxes
|
|
|
(27,628
|
)
|
|
|
(17,557
|
)
|
|
|
(45,185
|
)
|
Minority
interest in earnings of Bois d'Arc Energy
|
|
|
—
|
|
|
|
(16,429
|
)
|
|
|
(16,429
|
)
|
Equity
earnings in earnings of Bois d'Arc Energy
|
|
|
15,135
|
|
|
|
(15,135
|
)
|
|
|
—
|
|
Net
income
|
|
$
|
45,217
|
|
|
$
|
—
|
|
|
$
|
45,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
40,723
|
|
|
$
|
51,450
|
|
|
$
|
92,173
|
|
Property
and equipment, net
|
|
|
752,181
|
|
|
|
741,164
|
|
|
|
1,493,345
|
|
Investment
in Bois d'Arc Energy
|
|
|
267,269
|
|
|
|
(267,269
|
)
|
|
|
—
|
|
Other
assets
|
|
|
10,858
|
|
|
|
703
|
|
|
|
11,561
|
|
Total
assets
|
|
$
|
1,071,031
|
|
|
$
|
526,048
|
|
|
$
|
1,597,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
51,086
|
|
|
$
|
73,196
|
|
|
$
|
124,282
|
|
Long-term
debt
|
|
|
243,000
|
|
|
|
90,000
|
|
|
|
333,000
|
|
Deferred
income taxes payable
|
|
|
139,383
|
|
|
|
138,344
|
|
|
|
277,727
|
|
Reserve
for future abandonment costs
|
|
|
3,349
|
|
|
|
37,988
|
|
|
|
41,337
|
|
Minority
interest in Bois d'Arc Energy
|
|
|
—
|
|
|
|
186,520
|
|
|
|
186,520
|
|
Stockholders'
equity
|
|
|
634,213
|
|
|
|
—
|
|
|
|
634,213
|
|
Total
liabilities and stockholders' equity
|
|
$
|
1,071,031
|
|
|
$
|
526,048
|
|
|
$
|
1,597,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the $36.4 million acquisition of additional common shares of
Bois d'Arc Energy, Comstock has allocated the purchase price paid for the shares
in excess of its underlying net book value in Bois d'Arc Energy of $18.9 million
together with the related deferred income tax liability of $10.1 million to
oil
and gas properties in the accompanying consolidated balance sheet. This
additional amount is being amortized over the productive lives of Bois d'Arc
Energy's oil and gas properties using the unit-of-production method. The pro
forma impact of the acquisition of these shares was not material to the
Company's historical results of operations.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Reclassifications
Certain
reclassifications have been made to prior periods' financial statements to
conform to the current presentation.
Income
Taxes
Deferred
income taxes are provided to reflect the future tax consequences or benefits
of
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements using enacted tax rates. The difference
between the Company's customary rate of 35% and the effective tax rate on income
before income taxes, minority interest and equity in earnings (loss) of Bois
d'Arc Energy, is due to the following:
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Tax
at statutory rate
|
|
|
|
35.0%
|
|
|
|
35.0%
|
|
Tax
effect of:
|
|
|
|
|
|
|
|
|
|
Undistributed
earnings of Bois d'Arc Energy, not consolidated for federal income
tax
purposes
|
|
|
|
5.0%
|
|
|
|
—
|
|
Nondeductible
stock-based compensation
|
|
|
|
1.7%
|
|
|
|
0.5%
|
|
State
income taxes, net of federal benefit
|
|
|
|
—
|
|
|
|
1.0%
|
|
Deferred
taxes provided due to change in state tax laws
|
|
|
|
0.7%
|
|
|
|
—
|
|
Other
|
|
|
|
(0.2%
|
)
|
|
|
1.0%
|
|
Effective
tax rate
|
|
|
|
42.2%
|
|
|
|
37.5%
|
|
The
following is an analysis of consolidated income tax expense:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
September
30,
|
|
|
(In
thousands)
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
|
|
|
$
|
1,599
|
|
|
$
|
930
|
|
|
$
|
6,769
|
|
|
$
|
3,034
|
|
Deferred
provision
|
|
|
|
15,063
|
|
|
|
6,672
|
|
|
|
55,078
|
|
|
|
8,435
|
|
Provision
for Income
Taxes
|
|
|
$
|
16,662
|
|
|
$
|
7,602
|
|
|
$
|
61,847
|
|
|
$
|
11,469
|
|
Stock-Based
Compensation
Effective
January 1, 2006 Comstock adopted Statement of Financial Accounting Standards
No.
123 (Revised 2004), "Share-Based Payment" ("SFAS 123R") in accounting for
employee stock-based compensation, including the supplemental guidance provided
in Staff Accounting Bulletin No. 107. The Company adopted SFAS 123R utilizing
the modified prospective transition method and accordingly the financial results
for periods prior to January 1, 2006 have not been adjusted. Prior to adopting
SFAS 123R the Company followed the fair value based method prescribed in
Statement of Financial Accountings Standards No. 123, "Accounting for Stock
Based Compensation" for all periods beginning January 1, 2004. Under the fair
value based method, compensation cost is measured at the grant date based on
the
fair value of the award and is recognized over the award vesting period. Because
the Company previously recorded stock-based compensation using the fair value
method, adoption of SFAS 123R did not have a significant impact on the Company's
net income or earnings per share for the three months and nine months ended
September 30, 2006. The Company recognized $3.3 million and $1.0 million, for
the three months ended September 30, 2006 and 2005, respectively, and $9.8
million and $4.2 million for the nine months ended September 30, 2006 and 2005,
respectively, in stock-based compensation expense within general and
administrative expenses.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
excess income tax benefit realized from tax deductions associated with
stock-based compensation totaled $0.9 million and $12.6 million for the nine
months ended September 30, 2006 and 2005, respectively. Prior to adopting
SFAS
123R, the Company presented all tax benefits of the deductions that resulted
from stock-based compensation as cash flows from operating activities. SFAS
123R
requires that excess tax benefits on stock-based compensation be recognized
as a
part of cash flows from financing activities. Upon adoption of SFAS 123R
effective January 1, 2006, $0.9 million of tax benefits have been included
in
cash flows from financing activities for the nine months ended September
30,
2006.
Comstock
and Bois d'Arc Energy
maintain
separate incentive compensation plans under which they grant common stock and
stock options to key employees and directors. Additional information regarding
the outstanding awards under these incentive compensation plans is presented
below.
Comstock
stock options.
Comstock
amortizes the fair value of stock options granted over the vesting period using
the straight-line method. The fair value of each award is estimated as of the
date of grant using the Black-Scholes options pricing model. Options to purchase
40,000 shares at an exercise price of $32.44 per share were granted during
the
nine months ended September 30, 2006. The fair value of the options awarded
was
$15.03 per option share. Total compensation expense recognized by Comstock
for
all outstanding Comstock stock options was $0.2 million and $0.1 million for
the
three months ended September 30, 2006 and 2005, respectively, and $0.6 million
and $0.4 million for the nine months ended September 30, 2006 and 2005,
respectively. During the nine months ended September 30, 2006, options to
purchase 138,000 Comstock shares were exercised with an intrinsic value of
$2.4
million. Total unrecognized compensation cost related to non-vested Comstock
stock options of $1.7 million is expected to be recognized over a period of
3.2
years. A summary of outstanding and exercisable options for Comstock as of
September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
1,625,970
|
|
|
$10.00
|
|
|
2.62
|
|
|
$28,581
|
|
Options
exercisable
|
|
|
1,494,470
|
|
|
$8.03
|
|
|
2.14
|
|
|
$28,581
|
|
Comstock
restricted stock. The
fair
value of restricted stock grants is amortized over the vesting period using
the
straight-line method. The fair value of each restricted share on the date of
grant is equal to its fair market price. Restricted stock grants for 40,000
shares were made during the nine months ended September 30, 2006. The value
of
the grants awarded was $29.60 per share. Total compensation expense recognized
by Comstock for restricted stock grants was $1.4 million and $0.8 million for
the three months ended September 30, 2006 and 2005, respectively, and $4.5
million and $2.6 million for the nine months ended September 30, 2006 and 2005,
respectively. Total unrecognized compensation cost related to non-vested
Comstock restricted stock of $15.1 million as of September 30, 2006 is expected
to be recognized over a period of 3.3 years. As of September 30, 2006 the
Company had 882,250 shares of Comstock unvested restricted stock outstanding
at
a weighted average grant date fair value of $24.63 per share.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Bois
d'Arc Energy stock options. Bois
d'Arc Energy
amortizes the fair value of stock options granted over the vesting period using
the straight-line method. The fair value of each award is estimated as of the
date of grant using the Black-Scholes options pricing model. Options to purchase
324,000 shares at exercise prices ranging from $14.23 to $16.75 per share were
granted during the nine months ended September 30, 2006. The fair value of
the
options awarded was $9.66 per option share. The consolidated statements of
operations include compensation expense recognized for all outstanding
Bois
d'Arc Energy
stock
options of $0.9 million for the three months ended September 30, 2006 and $2.5
million for the nine months ended September 30, 2006. Total unrecognized
compensation cost related to non-vested Bois
d'Arc Energy
stock
options of $11.5 million is expected to be recognized over a period of 4.9
years. A summary of outstanding and exercisable options for Bois
d'Arc Energy
as of
September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Options
outstanding
|
|
|
3,352,000
|
|
|
$7.64
|
|
|
8.0
|
|
|
$26,027
|
|
Options
exercisable
|
|
|
1,130,000
|
|
|
$6.17
|
|
|
7.7
|
|
|
$10,321
|
|
Bois
d'Arc Energy restricted stock. Bois
d'Arc Energy
amortizes the fair value of restricted stock grants over the vesting period
using the straight-line method. The fair value of each restricted share on
the
date of grant is equal to its fair market price. Bois
d'Arc Energy
issued
restricted stock grants for 25,000 shares during the nine months ended September
30, 2006. The value of the grants awarded was $15.48 per share. The consolidated
statements of operations include compensation expense recognized by Bois
d'Arc
Energy
for
restricted stock grants of $0.8 million for the three months ended September
30,
2006 and $2.2 million for the nine months ended September 30, 2006. Total
unrecognized compensation cost related to non-vested Bois
d'Arc Energy
restricted stock of $8.5 million as of September 30, 2006, is expected to be
recognized over a period of 4.5 years. As of September 30, 2006 Bois
d'Arc Energy
had
1,312,000 shares of unvested restricted stock outstanding at a weighted average
grant date fair value of $6.97 per share.
Asset
Retirement Obligations
Comstock's
primary asset retirement obligations relate to future plugging and abandonment
expenses on its oil and gas properties and related facilities disposal. The
following table summarizes the changes in Comstock's total estimated liability
during the nine months ended September 30, 2006 and 2005:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Future
abandonment liability — beginning of period
|
|
$
|
3,206
|
|
|
$
|
19,248
|
|
Bois
d'Arc Energy abandonment liability(1)
|
|
|
35,034
|
|
|
|
(16,915
|
)
|
Accretion
expense
|
|
|
1,849
|
|
|
|
109
|
|
Acquisition
liabilities assumed
|
|
|
3,345
|
|
|
|
266
|
|
New
wells placed on production
|
|
|
923
|
|
|
|
61
|
|
Liabilities
settled
|
|
|
(30
|
)
|
|
|
—
|
|
Future
abandonment liability — end of period
|
|
$
|
44,327
|
|
|
$
|
2,769
|
|
|
|
|
|
|
(1) Comstock's
share of the asset retirement obligations of Bois d'Arc Energy
was
reclassified to the investment in Bois d'Arc Energy upon the
change to the equity accounting method in 2005. Concurrent
with including Bois d'Arc Energy as a consolidated subsidiary as of
January 1, 2006, the asset retirement obligations of Bois d'Arc
Energy are
included in the Company's consolidated financial
statements.
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Earnings
Per Share
Basic
earnings per share is determined without the effect of any outstanding
potentially dilutive stock options, unvested restricted stock or other
convertible securities and diluted earnings per share is determined with the
effect of outstanding stock options, unvested restricted stock and other
convertible securities that are potentially dilutive. Basic and diluted earnings
per share for the three months and nine months ended September 30, 2006 and
2005, respectively, were determined as follows:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
|
(In
thousands, except per share amounts)
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
17,036
|
|
|
|
42,243
|
|
|
$
|
0.40
|
|
|
$
|
14,138
|
|
|
|
40,432
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
17,036
|
|
|
|
42,243
|
|
|
|
|
|
|
$
|
14,138
|
|
|
|
40,432
|
|
|
|
|
|
Effect
of Dilutive
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Grants and Options
|
|
|
(88
|
)
|
|
|
1,310
|
|
|
|
|
|
|
|
—
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Available to Common
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
Assumed
Conversions
|
|
$
|
16,948
|
|
|
|
43,553
|
|
|
$
|
0.39
|
|
|
$
|
14,138
|
|
|
|
42,380
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
62,253
|
|
|
|
42,128
|
|
|
$
|
1.48
|
|
|
$
|
19,148
|
|
|
|
38,417
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
62,253
|
|
|
|
42,128
|
|
|
|
|
|
|
$
|
19,148
|
|
|
|
38,417
|
|
|
|
|
|
Effect
of Dilutive
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Grants and Options
|
|
|
(394
|
)
|
|
|
1,377
|
|
|
|
|
|
|
|
—
|
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Available to Common
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
Assumed
Conversions
|
|
$
|
61,859
|
|
|
|
43,505
|
|
|
$
|
1.42
|
|
|
$
|
19,148
|
|
|
|
40,516
|
|
|
$
|
0.47
|
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Derivative
Instruments and Hedging Activities
Comstock
periodically uses swaps, floors and collars to hedge oil and natural gas prices
and interest rates. Swaps are settled monthly based on differences between
the
prices specified in the instruments and the settlement prices of futures
contracts. Generally, when the applicable settlement price is less than the
price specified in the contract, Comstock receives a settlement from the counter
party based on the difference multiplied by the volume or amounts hedged.
Similarly, when the applicable settlement price exceeds the price specified
in
the contract, Comstock pays the counter party based on the difference. Comstock
generally receives a settlement from the counter party for floors when the
applicable settlement price is less than the price specified in the contract,
which is based on the difference multiplied by the volume amounts hedged. For
collars, generally Comstock receives a settlement from the counter party when
the settlement price is below the floor and pays a settlement to the counter
party when the settlement price exceeds the cap. No settlement occurs when
the
settlement price falls between the floor and cap.
The
following table sets forth the derivative financial instruments outstanding
at
September 30, 2006 which relate to Comstock's natural gas
production:
Period
Beginning
|
|
Period
Ending
|
|
Volume
MMBtu
|
|
Delivery
Location
|
|
Type
of Instrument
|
|
Floor
Price
|
|
Ceiling
Price
|
October
1, 2006
|
|
December
31, 2006
|
|
768,000
|
|
Henry
Hub
|
|
Collar
|
|
$4.50
|
|
$9.02
|
October
1, 2006
|
|
December
31, 2006
|
|
600,000
|
|
Houston
Ship Channel
|
|
Collar
|
|
$4.50
|
|
$8.25
|
The
fair
value of the Company's derivative contracts held for price risk management
at
September 30, 2006 was an asset of $68,000. Comstock
did not designate these instruments as cash flow hedges and accordingly,
unrealized gains on derivatives of $1.2 million and $11.3 million was recorded
for the three months and nine months ended September 30, 2006, respectively,
and
unrealized losses of $17.7 million and $20.9 million was recorded for the three
and nine months ended September 30, 2005, respectively, to reflect the change
in
this liability. The Company realized losses of $0.7 million and $0.2 million
for
the nine months ended September 30, 2006 and 2005, respectively, to settle
derivative positions.
Supplementary
Information With Respect to the Consolidated Statements of Cash Flows
-
|
|
For
the Nine Months
|
|
|
Ended
September 30,
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
Cash
Payments -
|
|
|
|
|
|
|
|
|
Interest
payments
|
|
$
|
21,017
|
|
|
$
|
18,193
|
|
Income
tax payments
|
|
$
|
7,105
|
|
|
$
|
2,546
|
|
(2)
ACQUISITION
-
In
September 2006 the Company acquired oil and gas properties in South Texas from
Denali Oil & Gas Partners LP and other working interest owners for $67.2
million in cash. The transaction was funded with borrowings under Comstock's
bank credit facility. The pro forma impact of this acquisition was not material
to the Company's historical results of operations.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3)
LONG-TERM DEBT -
At
September 30, 2006, long-term debt was comprised of the following:
|
|
(In
thousands)
|
|
Comstock
Revolving Bank Credit Facility
|
|
$
|
175,000
|
|
Bois
d'Arc Energy Revolving Bank Credit Facility
|
|
|
105,000
|
|
Comstock
6⅞% Senior Notes due 2012
|
|
|
175,000
|
|
|
|
$
|
455,000
|
|
Comstock
has $175.0 million of 6⅞% senior notes which are due March 1, 2012, with
interest payable semiannually on each March 1 and September 1. These notes
are
unsecured obligations of the Company and are guaranteed by the Company's wholly
owned subsidiaries. Comstock also has a $400.0 million bank credit facility
with
Bank of Montreal, as the administrative agent. The credit facility is a
four-year revolving credit commitment that matures on February 25, 2008.
Indebtedness under the credit facility is secured by Comstock's wholly-owned
subsidiaries' oil and gas properties and is guaranteed by all of its
wholly-owned subsidiaries. The credit facility is subject to borrowing base
availability, which is redetermined semiannually based on the banks' estimates
of the future net cash flows of Comstock's oil and natural gas properties.
The
borrowing base may be affected by the performance of Comstock's properties
and
changes in oil and natural gas prices. The determination of the borrowing base
is at the sole discretion of the administrative agent and the bank group. The
borrowing base was $350.0 million at September 30, 2006. Borrowings under the
credit facility bear interest, based on
the
utilization of the borrowing base, at Comstock's option at either LIBOR plus
1.25% to 1.75% or the base rate (which is the higher of the prime rate or the
federal funds rate) plus 0% to 0.5%. A commitment fee of 0.375% is payable
on
the unused borrowing base. The credit facility contains covenants that, among
other things, restrict the payment of cash dividends in excess of $10.0 million,
limit the amount of consolidated debt that Comstock may incur and limit its
ability to make certain loans and investments. The only financial covenants
are
the maintenance of a current ratio and maintenance of a minimum tangible net
worth. Comstock was in compliance with these covenants as of September 30,
2006.
Bois
d'Arc Energy has a bank credit facility with The Bank of Nova Scotia and several
other banks. Borrowings under the credit facility are limited to a borrowing
base that was $150.0 million at September 30, 2006 and was increased to $200.0
million as of October 31, 2006. The borrowing base is re-determined
semi-annually based on the banks' estimates of the future net cash flows of
Bois
d'Arc Energy's oil and natural gas properties. The determination of the
borrowing base is at the sole discretion of the administrative agent and the
bank group. The credit facility matures on May 11, 2009. Borrowings under the
credit facility bear interest at the Bois d'Arc Energy's option of either (1)
LIBOR plus a margin that varies from 1.25% to 2.0% depending upon the ratio
of
the amounts outstanding to the borrowing base or (2) the base rate (which is
the
higher of the prime rate or the federal funds rate) plus a margin that varies
from 0% to 0.75% depending upon the ratio of the amounts outstanding to the
borrowing base. A commitment fee ranging from 0.375% to 0.50% (depending upon
the ratio of the amounts outstanding to the borrowing base) is payable on the
unused borrowing base. Indebtedness under the credit facility is secured by
substantially all of Bois d'Arc Energy and its subsidiaries' assets, and all
of
the Bois d'Arc Energy's subsidiaries are guarantors of the indebtedness. The
credit facility contains covenants that restrict the payment of cash dividends
in excess of $5.0 million, borrowings, sales of assets, loans to others, capital
expenditures, investments, merger activity, hedging contracts, liens and certain
other transactions without the prior consent of the lenders and requires Bois
d'Arc Energy to maintain a ratio of current assets, including the availability
under the bank credit facility, to current liabilities of at least one-to-one
and a ratio of indebtedness to earnings before interest, taxes, depreciation,
depletion, and amortization, exploration and impairment expense of no more
than
2.5-to-one. Bois d'Arc Energy was in compliance with these covenants as of
September 30, 2006.
(4)
COMMITMENTS
AND CONTINGENCIES -
From
time
to time, Comstock is involved in certain litigation that arises in the
normal
course of its operations. The Company records a loss contingency for these
matters when it is probable that a liability has been incurred and the
amount of
the loss can be reasonably estimated. The Company does not believe the
resolution of these matters will have a material effect on the Company's
financial position or results of operations. In connection with its exploration
and development activities, the Company contracts for drilling rigs and
for the
acquisition of seismic data under terms of up to three
years.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5)
ASSETS HELD FOR SALE -
The
Company has entered into an agreement to sell its oil and gas properties in
Kentucky to a third party for $7.0 million. The Company has recorded a $7.9
million loss on this pending sale. The Company's investment in these properties
of $6.5 million is presented as Assets Held for Sale in the accompanying
consolidated balance sheet as of September 30, 2006 at its expected realizable
value.
(6)
CONSOLIDATING FINANCIAL STATEMENTS -
Comstock
Resources, Inc. (the parent company) has $175.0 million of 6⅞% senior notes
outstanding which are guaranteed by all of the parent company's 100% owned
consolidated subsidiaries. There are no restrictions on the parent company's
ability to obtain funds from any of the guarantor subsidiaries or on a guarantor
subsidiary's ability to obtain funds from the parent company or their direct
or
indirect subsidiaries. The 6⅞% senior notes are not guaranteed by Bois d'Arc
Energy, Inc. and its subsidiaries (the Non-Guarantor Subsidiaries). The
following condensed consolidating balance sheet, statements of operations
and
statement of cash flows are provided for the parent company, all guarantor
subsidiaries and all non-guarantor subsidiaries. The information has been
presented as if the parent company accounted for its ownership of the guarantor
and non-guarantor subsidiaries using the equity method of accounting.
Balance
Sheet:
|
|
|
|
|
|
As
of September 30, 2006
|
|
|
|
Comstock
Resources,
Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminating
Entries
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
—
|
|
|
$
|
1,253
|
|
|
$
|
25,831
|
|
|
$
|
—
|
|
|
$
|
27,084
|
|
Accounts
receivable
|
|
|
—
|
|
|
|
34,031
|
|
|
|
27,908
|
|
|
|
—
|
|
|
|
61,939
|
|
Other
current assets
|
|
|
378
|
|
|
|
1,852
|
|
|
|
13,920
|
|
|
|
—
|
|
|
|
16,150
|
|
Total
current assets
|
|
|
378
|
|
|
|
37,136
|
|
|
|
67,659
|
|
|
|
—
|
|
|
|
105,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
|
30,863
|
|
|
|
851,535
|
|
|
|
793,836
|
|
|
|
—
|
|
|
|
1,676,234
|
|
Assets
held for resale
|
|
|
—
|
|
|
|
6,518
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,518
|
|
Investment
in subsidiaries
|
|
|
621,632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(621,632
|
)
|
|
|
—
|
|
Intercompany
receivables
|
|
|
375,474
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(375,474
|
)
|
|
|
—
|
|
Other
assets
|
|
|
4,099
|
|
|
|
1
|
|
|
|
859
|
|
|
|
—
|
|
|
|
4,959
|
|
Total
assets
|
|
$
|
1,032,446
|
|
|
$
|
895,190
|
|
|
$
|
862,354
|
|
|
$
|
(997,106
|
)
|
|
$
|
1,792,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
6,500
|
|
|
$ |
—
|
|
|
$ |
6,500
|
|
Accounts
payable
|
|
|
—
|
|
|
|
37,593
|
|
|
|
46,030
|
|
|
|
—
|
|
|
|
83,623
|
|
Accrued
expenses
|
|
|
3,877
|
|
|
|
14,668
|
|
|
|
14,231
|
|
|
|
—
|
|
|
|
32,776
|
|
Total
current liabilities
|
|
|
3,877
|
|
|
|
52,261
|
|
|
|
66,761
|
|
|
|
—
|
|
|
|
122,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
350,000
|
|
|
|
—
|
|
|
|
105,000
|
|
|
|
—
|
|
|
|
455,000
|
|
Intercompany
payables
|
|
|
—
|
|
|
|
375,474
|
|
|
|
—
|
|
|
|
(375,474
|
)
|
|
|
—
|
|
Deferred
income taxes payable
|
|
|
25,656
|
|
|
|
132,744
|
|
|
|
146,662
|
|
|
|
—
|
|
|
|
305,062
|
|
Reserve
for future abandonment costs
|
|
|
—
|
|
|
|
3,465
|
|
|
|
40,862
|
|
|
|
—
|
|
|
|
44,327
|
|
Minority
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
212,683
|
|
|
|
212,683
|
|
Total
liabilities
|
|
|
379,533
|
|
|
|
563,944
|
|
|
|
359,285
|
|
|
|
(162,791
|
)
|
|
|
1,139,971
|
|
Stockholders'
equity
|
|
|
652,913
|
|
|
|
331,246
|
|
|
|
503,069
|
|
|
|
(834,315
|
)
|
|
|
652,913
|
|
Total
liabilities and stockholders'
equity
|
|
$
|
1,032,446
|
|
|
$
|
895,190
|
|
|
$
|
862,354
|
|
|
$
|
(997,106
|
)
|
|
$
|
1,792,884
|
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statement
of Operations:
|
|
|
|
|
|
Three
Months Ended September 30, 2006
|
|
|
|
Comstock
Resources,
Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminating
Entries
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Oil
and gas sales
|
|
$
|
—
|
|
|
$
|
62,255
|
|
|
$
|
66,996
|
|
|
$
|
—
|
|
|
$
|
129,251
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating
|
|
|
—
|
|
|
|
13,366
|
|
|
|
13,538
|
|
|
|
—
|
|
|
|
26,904
|
|
Exploration
|
|
|
—
|
|
|
|
—
|
|
|
|
8,069
|
|
|
|
—
|
|
|
|
8,069
|
|
Depreciation,
depletion and amortization
|
|
|
329
|
|
|
|
18,648
|
|
|
|
21,732
|
|
|
|
—
|
|
|
|
40,709
|
|
Impairment
|
|
|
—
|
|
|
|
803
|
|
|
|
586
|
|
|
|
—
|
|
|
|
1,389
|
|
Loss
on disposal of oil and gas properties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
General
and administrative, net
|
|
|
6,138
|
|
|
|
(1,798
|
)
|
|
|
3,030
|
|
|
|
—
|
|
|
|
7,370
|
|
Total
operating expenses
|
|
|
6,467
|
|
|
|
31,019
|
|
|
|
46,955
|
|
|
|
—
|
|
|
|
84,441
|
|
Income
from operations
|
|
|
(6,467
|
)
|
|
|
31,236
|
|
|
|
20,041
|
|
|
|
—
|
|
|
|
44,810
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,299
|
|
|
|
143
|
|
|
|
115
|
|
|
|
(5,299
|
)
|
|
|
258
|
|
Other
income
|
|
|
—
|
|
|
|
45
|
|
|
|
142
|
|
|
|
—
|
|
|
|
187
|
|
Interest
expense
|
|
|
(4,851
|
)
|
|
|
(5,299
|
)
|
|
|
(1,882
|
)
|
|
|
5,299
|
|
|
|
(6,733
|
)
|
Gain
on derivatives
|
|
|
—
|
|
|
|
1,180
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,180
|
|
Total
other income (expenses)
|
|
|
448
|
|
|
|
(3,931
|
)
|
|
|
(1,625
|
)
|
|
|
—
|
|
|
|
(5,108
|
)
|
Income
(loss) before income taxes and minority interest in earnings
of
Bois
d'Arc Energy
|
|
|
(6,019
|
)
|
|
|
27,305
|
|
|
|
18,416
|
|
|
|
—
|
|
|
|
39,702
|
|
Provision
for income taxes
|
|
|
(508
|
)
|
|
|
(9,322
|
)
|
|
|
(6,832
|
)
|
|
|
—
|
|
|
|
(16,662
|
)
|
Minority
interest in earnings of Bois
d'Arc Energy
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,004
|
)
|
|
|
(6,004
|
)
|
Equity
in earnings of subsidiaries
|
|
|
23,563
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,563
|
)
|
|
|
—
|
|
Net
income
|
|
$
|
17,036
|
|
|
$
|
17,983
|
|
|
$
|
11,584
|
|
|
$
|
(29,567
|
)
|
|
$
|
17,036
|
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
Comstock
Resources,
Inc.
|
|
|
Guarantor
Subsidiaries
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminating
Entries
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Oil
and gas sales
|
|
$
|
—
|
|
|
$
|
196,717
|
|
|
$
|
188,436
|
|
|
$
|
—
|
|
|
$
|
385,153
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating
|
|
|
—
|
|
|
|
40,421
|
|
|
|
37,799
|
|
|
|
—
|
|
|
|
78,220
|
|
Exploration
|
|
|
—
|
|
|
|
344
|
|
|
|
16,318
|
|
|
|
—
|
|
|
|
16,662
|
|
Depreciation,
depletion and amortization
|
|
|
444
|
|
|
|
51,393
|
|
|
|
52,620
|
|
|
|
—
|
|
|
|
104,457
|
|
Impairment
|
|
|
—
|
|
|
|
803
|
|
|
|
1,432
|
|
|
|
—
|
|
|
|
2,235
|
|
Loss
on disposal of oil and gas properties
|
|
|
—
|
|
|
|
7,934
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,934
|
|
General
and administrative, net
|
|
|
18,704
|
|
|
|
(4,878
|
)
|
|
|
8,912
|
|
|
|
—
|
|
|
|
22,738
|
|
Total
operating expenses
|
|
|
19,148
|
|
|
|
96,017
|
|
|
|
117,081
|
|
|
|
—
|
|
|
|
232,246
|
|
Income
from operations
|
|
|
(19,148
|
)
|
|
|
100,700
|
|
|
|
71,355
|
|
|
|
—
|
|
|
|
152,907
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
16,260
|
|
|
|
483
|
|
|
|
241
|
|
|
|
(16,260
|
)
|
|
|
724
|
|
Other
income
|
|
|
—
|
|
|
|
147
|
|
|
|
469
|
|
|
|
—
|
|
|
|
616
|
|
Interest
expense
|
|
|
(14,041
|
)
|
|
|
(16,013
|
)
|
|
|
(4,528
|
)
|
|
|
16,260
|
|
|
|
(18,322
|
)
|
Gain
on derivatives
|
|
|
—
|
|
|
|
10,608
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,608
|
|
Total
other income (expenses)
|
|
|
2,219
|
|
|
|
(4,775
|
)
|
|
|
(3,818
|
)
|
|
|
—
|
|
|
|
(6,374
|
)
|
Income
(loss) before income taxes and minority interest in earnings of
Bois
d'Arc Energy
|
|
|
(16,929
|
)
|
|
|
95,925
|
|
|
|
67,537
|
|
|
|
—
|
|
|
|
146,533
|
|
Provision
for income taxes
|
|
|
(2,791
|
)
|
|
|
(34,667
|
)
|
|
|
(24,389
|
)
|
|
|
—
|
|
|
|
(61,847
|
)
|
Minority
interest in earnings of Bois
d'Arc Energy
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(22,433
|
)
|
|
|
(22,433
|
)
|
Equity
in earnings of subsidiaries
|
|
|
81,973
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(81,973
|
)
|
|
|
—
|
|
Net
income
|
|
$
|
62,253
|
|
|
$
|
61,258
|
|
|
$
|
43,148
|
|
|
$
|
(104,406
|
)
|
|
$
|
62,253
|
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Statement
of Cash Flows:
|
|
|
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
Comstock
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Eliminating
|
|
|
|
|
|
|
Resources,
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Entries
|
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Net
Cash Provided by (Used for) Operating Activities
|
|
$
|
(9,694
|
)
|
|
$
|
146,023
|
|
|
$
|
137,971
|
|
|
$
|
—
|
|
|
$
|
274,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures and acquisitions
|
|
|
(929
|
)
|
|
|
(207,318
|
)
|
|
|
(196,048
|
)
|
|
|
—
|
|
|
|
(404,295
|
)
|
Acquisition
of Bois d'Arc Energy, Inc. common stock
|
|
|
(35,865
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
35,865
|
|
|
|
—
|
|
Payments
to settle derivatives
|
|
|
—
|
|
|
|
(703
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(703
|
)
|
Advances
to subsidiaries
|
|
|
(63,190
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
63,190
|
|
|
|
—
|
|
Net
Cash Used for Investing Activities
|
|
|
(99,984
|
)
|
|
|
(208,021
|
)
|
|
|
(196,048
|
)
|
|
|
99,055
|
|
|
|
(404,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
111,000
|
|
|
|
—
|
|
|
|
71,000
|
|
|
|
—
|
|
|
|
182,000
|
|
Borrowing
from parent
|
|
|
—
|
|
|
|
63,190
|
|
|
|
—
|
|
|
|
(63,190
|
)
|
|
|
—
|
|
Principal
payments on debt
|
|
|
(4,000
|
)
|
|
|
—
|
|
|
|
(35,000
|
)
|
|
|
—
|
|
|
|
(39,000
|
)
|
Proceeds
from issuance of common stock
|
|
|
1,756
|
|
|
|
—
|
|
|
|
35,990
|
|
|
|
(35,990
|
)
|
|
|
1,756
|
|
Excess
tax benefit from stock-based compensation
|
|
|
922
|
|
|
|
—
|
|
|
|
29
|
|
|
|
(29
|
)
|
|
|
922
|
|
Other
|
|
|
—
|
|
|
|
(28
|
)
|
|
|
(154
|
)
|
|
|
154
|
|
|
|
(28
|
)
|
Net
Cash Provided by Financing Activities
|
|
|
109,678
|
|
|
|
63,162
|
|
|
|
71,865
|
|
|
|
(99,055
|
)
|
|
|
145,650
|
|
Net
increase in cash and cash equivalents
|
|
|
—
|
|
|
|
1,164
|
|
|
|
13,788
|
|
|
|
—
|
|
|
|
14,952
|
|
Cash
and cash equivalents, beginning of period
|
|
|
—
|
|
|
|
89
|
|
|
|
—
|
|
|
|
—
|
|
|
|
89
|
|
Bois
d'Arc Energy cash and cash equivalents as of January 1,
2006
|
|
|
—
|
|
|
|
—
|
|
|
|
12,043
|
|
|
|
—
|
|
|
|
12,043
|
|
Cash
and cash equivalents, end
of period
|
|
$
|
—
|
|
|
$
|
1,253
|
|
|
$
|
25,831
|
|
|
$
|
—
|
|
|
$
|
27,084
|
|
INDEPENDENT
ACCOUNTANTS' REVIEW REPORT
We
have
reviewed the consolidated balance sheet of Comstock Resources, Inc. (a Nevada
corporation) and subsidiaries (the Company) as of September 30, 2006, and
the
related consolidated statements of operations for the three-month and nine-month
periods ended September 30, 2006 and 2005, the consolidated statement of
stockholders' equity for the nine months ended September 30, 2006, and the
consolidated statements of cash flows for the nine-month periods ended September
30, 2006 and 2005. These financial statements are the responsibility of the
Company's management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It
is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective
of
which is the expression of an opinion regarding the financial statements
taken
as a whole. Accordingly, we do not express such an opinion.
Based
on
our review, we are not aware of any material modifications that should be
made
to the condensed consolidated interim financial statements referred to above
for
them to be in conformity with U.S. generally accepted accounting
principles.
We
have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
Comstock Resources, Inc. and subsidiaries as of December 31, 2005, and the
related consolidated statements of operations, stockholders' equity, and
cash
flows for the year then ended not presented herein, and in our report dated
March 13, 2006 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2005, is fairly
stated, in all material respects, in relation to the consolidated balance
sheet
from which it has been derived.
/s/
Ernst
& Young LLP
Dallas,
Texas
November
6, 2006
ITEM
2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
|
This
report
contains forward-looking statements that involve risks and uncertainties that
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. 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
filed on Form 10-K for the year ended December 31, 2005.
Investment
in Bois d'Arc Energy
Bois
d'Arc Energy was organized in July 2004 as a limited liability company through
the contribution of substantially all of our offshore properties together with
the properties of Bois d'Arc Resources, Ltd. and its partners. We initially
owned 60% of Bois d'Arc Energy, and we accounted for our share of the Bois
d'Arc
Energy financial and operating results using proportionate consolidation
accounting until Bois d'Arc Energy converted to a corporation and completed
its
initial public offering in May 2005. As
a
result of Bois d'Arc Energy's conversion to a corporation and the initial public
offering, our ownership in Bois d'Arc Energy decreased to 48% and we
discontinued accounting for our interest in Bois d'Arc Energy using the
proportionate consolidation method and began using the equity method to account
for our investment in Bois d'Arc Energy.
During
the three months ended September 30, 2006, we acquired 2,285,000 additional
shares of Bois d'Arc Energy for $36.4 million increasing our ownership of Bois
d'Arc Energy's common stock to 32,220,761 shares. As a result, as of September
30, 2006, we have voting control of Bois d'Arc Energy through our share
ownership combined with the share ownership of the members of our Board of
Directors. Since we obtained voting control of Bois d'Arc Energy, we began
including Bois d'Arc Energy in our financial statements as a consolidated
subsidiary. As permitted by generally accepted accounting principles,
consolidated revenues, expenses and cash flows for 2006 have been retroactively
adjusted to reflect Bois d'Arc Energy as a consolidated subsidiary as of January
1, 2006. Our financial statements for dates and periods prior to January 1,
2006, have not been adjusted. The inclusion of Bois d'Arc Energy as a
consolidated subsidiary in the our financial statements had no impact on the
our
net income. Although the adjustment to reflect Bois d'Arc Energy as a
consolidated subsidiary had no impact on our net income, comparisons of the
separate components of our results of operations are significantly impacted
by
this change. In order to provide meaningful information regarding comparisons
of
our results for the three and nine months ended September 30, 2006, our
discussion of our operating results and capital expenditures is presented based
upon a comparison of actual 2006 results to pro forma results for 2005 which
include Bois d'Arc Energy as a consolidated subsidiary.
Pro
Forma Financial Results
The
following table includes our financial results for the three and nine months
ended September 30, 2006 and 2005 and pro forma financial results for the three
and nine months ended September 30, 2005 assuming Bois d'Arc Energy was included
as a consolidated subsidiary as of January 1, 2005:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
2005
|
|
|
|
2006
|
|
|
As
Reported
|
|
|
Pro
Forma(1)
|
|
|
2006
|
|
|
As
Reported
|
|
|
Pro
Forma(1)
|
|
Oil
and gas sales
|
|
$
|
129,251
|
|
|
$
|
71,619
|
|
|
$
|
115,053
|
|
|
$
|
385,153
|
|
|
$
|
209,970
|
|
|
$
|
307,035
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating
|
|
|
26,904
|
|
|
|
10,803
|
|
|
|
19,146
|
|
|
|
78,220
|
|
|
|
36,869
|
|
|
|
54,494
|
|
Exploration
|
|
|
8,069
|
|
|
|
2,423
|
|
|
|
5,249
|
|
|
|
16,662
|
|
|
|
19,709
|
|
|
|
27,399
|
|
Depreciation,
depletion and amortization
|
|
|
40,709
|
|
|
|
14,036
|
|
|
|
23,331
|
|
|
|
104,457
|
|
|
|
47,368
|
|
|
|
71,054
|
|
Impairment
|
|
|
1,389
|
|
|
|
3,400
|
|
|
|
3,400
|
|
|
|
2,235
|
|
|
|
3,400
|
|
|
|
3,400
|
|
Loss
on disposal of assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,934
|
|
|
$
|
—
|
|
|
|
89
|
|
General
and administrative, net
|
|
|
7,370
|
|
|
|
3,058
|
|
|
|
4,942
|
|
|
|
22,738
|
|
|
|
11,015
|
|
|
|
15,437
|
|
Total
operating expenses
|
|
|
84,441
|
|
|
|
33,720
|
|
|
|
56,068
|
|
|
|
232,246
|
|
|
|
118,361
|
|
|
|
171,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
44,810
|
|
|
|
37,899
|
|
|
|
58,985
|
|
|
|
152,907
|
|
|
|
91,609
|
|
|
|
135,162
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
187
|
|
|
|
37
|
|
|
|
(13
|
)
|
|
|
616
|
|
|
|
173
|
|
|
|
123
|
|
Interest
income
|
|
|
258
|
|
|
|
242
|
|
|
|
221
|
|
|
|
724
|
|
|
|
1,449
|
|
|
|
407
|
|
Interest
expense
|
|
|
(6,733
|
)
|
|
|
(4,982
|
)
|
|
|
(5,220
|
)
|
|
|
(18,322
|
)
|
|
|
(15,499
|
)
|
|
|
(15,904
|
)
|
Gain
on sale of stock by Bois d'Arc
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,797
|
|
|
|
28,797
|
|
Gain
(loss) on derivatives
|
|
|
1,180
|
|
|
|
(17,814
|
)
|
|
|
(17,814
|
)
|
|
|
10,608
|
|
|
|
(21,045
|
)
|
|
|
(21,045
|
)
|
Total
other income (expenses)
|
|
|
(5,108
|
)
|
|
|
(22,517
|
)
|
|
|
(22,826
|
)
|
|
|
(6,374
|
)
|
|
|
(6,125
|
)
|
|
|
(7,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes, minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in earnings of Bois d'Arc Energy
|
|
|
39,702
|
|
|
|
15,382
|
|
|
|
36,159
|
|
|
|
146,533
|
|
|
|
85,484
|
|
|
|
127,540
|
|
Provision
for income taxes
|
|
|
(16,662
|
)
|
|
|
(7,602
|
)
|
|
|
(15,120
|
)
|
|
|
(61,847
|
)
|
|
|
(11,469
|
)
|
|
|
(131,112
|
)
|
Equity
in earnings (loss) of Bois d'Arc Energy
|
|
|
—
|
|
|
|
6,358
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(54,867
|
)
|
|
|
—
|
|
Minority
interest in earnings of
Bois
d'Arc Energy
|
|
|
(6,004
|
)
|
|
|
—
|
|
|
|
(6,901
|
)
|
|
|
(22,433
|
)
|
|
|
—
|
|
|
|
22,720
|
|
Net
Income
|
|
$
|
17,036
|
|
|
$
|
14,138
|
|
|
$
|
14,138
|
|
|
$
|
62,253
|
|
|
$
|
19,148
|
|
|
$
|
19,148
|
|
(1) |
Pro
forma results include Bois d'Arc Energy as a consolidated subsidiary.
|
Results
of Operations
The
following table reflects certain summary operating data for the periods
presented:
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
|
|
Onshore(3)
|
|
|
Boid
d'Arc Energy
|
|
|
Total
|
|
|
Onshore(3)
|
|
|
Bois
d'Arc Energy
|
|
|
Pro
Forma Total(4)
|
|
Net
Production Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(Mbbls)
|
|
|
231
|
|
|
|
370
|
|
|
|
601
|
|
|
|
208
|
|
|
|
245
|
|
|
|
453
|
|
Natural
Gas (Mmcf)
|
|
|
7,409
|
|
|
|
6,106
|
|
|
|
13,515
|
|
|
|
7,328
|
|
|
|
3,306
|
|
|
|
10,634
|
|
Natural
Gas equivalent (Mmcfe)
|
|
|
8,792
|
|
|
|
8,328
|
|
|
|
17,120
|
|
|
|
8,575
|
|
|
|
4,775
|
|
|
|
13,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
sales
|
|
$
|
13,696
|
|
|
$
|
25,935
|
|
|
$
|
39,631
|
|
|
$
|
10,960
|
|
|
$
|
14,683
|
|
|
$
|
25,643
|
|
Gas
sales
|
|
|
48,559
|
|
|
|
41,061
|
|
|
|
89,620
|
|
|
|
60,659
|
|
|
|
28,751
|
|
|
|
89,410
|
|
Total
oil and gas sales
|
|
$
|
62,255
|
|
|
$
|
66,996
|
|
|
$
|
129,251
|
|
|
$
|
71,619
|
|
|
$
|
43,434
|
|
|
$
|
115,053
|
|
Oil
and gas operating expenses(1)
|
|
$
|
13,365
|
|
|
$
|
13,538
|
|
|
$
|
26,903
|
|
|
$
|
10,803
|
|
|
$
|
8,343
|
|
|
$
|
19,146
|
|
Exploration
expense
|
|
|
—
|
|
|
|
8,069
|
|
|
|
8,069
|
|
|
|
2,423
|
|
|
|
2,826
|
|
|
|
5,249
|
|
Depreciation,
depletion and amortization
|
|
$
|
18,977
|
|
|
$
|
21,732
|
|
|
$
|
40,709
|
|
|
$
|
14,036
|
|
|
$
|
9,295
|
|
|
$
|
23,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Sales Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(per Bbl)
|
|
$
|
59.42
|
|
|
$
|
70.01
|
|
|
$
|
65.95
|
|
|
$
|
52.71
|
|
|
$
|
59.96
|
|
|
$
|
56.63
|
|
Natural
gas (per Mcf)
|
|
$
|
6.55
|
|
|
$
|
6.72
|
|
|
$
|
6.63
|
|
|
$
|
8.28
|
|
|
$
|
8.70
|
|
|
$
|
8.41
|
|
Average
equivalent (Mcfe)
|
|
$
|
7.08
|
|
|
$
|
8.04
|
|
|
$
|
7.55
|
|
|
$
|
8.35
|
|
|
$
|
9.10
|
|
|
$
|
8.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
($ per Mcfe):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating(1)
|
|
$
|
1.52
|
|
|
$
|
1.63
|
|
|
$
|
1.57
|
|
|
$
|
1.26
|
|
|
$
|
1.75
|
|
|
$
|
1.43
|
|
Depreciation,
depletion and amortization(2)
|
|
$
|
2.12
|
|
|
$
|
2.60
|
|
|
$
|
2.35
|
|
|
$
|
1.62
|
|
|
$
|
1.93
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes
lease operating costs and production and ad valorem
taxes.
|
(2) |
Represents
depreciation, deletion and amortization of oil and gas properties
only.
|
(3) |
Includes
the onshore operations of Comstock.
|
(4) |
Pro
Forma amounts include Bois d'Arc Energy as a consolidated
subsidiary.
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2006
|
|
|
September
30, 2005
|
|
|
|
Onshore(3)
|
|
|
Bois
d'Arc Energy
|
|
|
Total
|
|
|
Onshore(3)
|
|
|
Bois
d'Arc Energy
|
|
|
Pro
Forma Total(4)
|
|
Net
Production Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(Mbbls)
|
|
|
696
|
|
|
|
1,033
|
|
|
|
1,729
|
|
|
|
501
|
|
|
|
956
|
|
|
|
1,457
|
|
Natural
Gas (Mmcf)
|
|
|
22,327
|
|
|
|
16,388
|
|
|
|
38,715
|
|
|
|
20,874
|
|
|
|
11,718
|
|
|
|
32,592
|
|
Natural
Gas equivalent (Mmcfe)
|
|
|
26,501
|
|
|
|
22,587
|
|
|
|
49,088
|
|
|
|
23,881
|
|
|
|
17,457
|
|
|
|
41,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
sales
|
|
$
|
39,808
|
|
|
$
|
69,215
|
|
|
$
|
109,023
|
|
|
$
|
24,534
|
|
|
$
|
49,294
|
|
|
$
|
73,828
|
|
Gas
sales
|
|
|
156,909
|
|
|
|
119,221
|
|
|
|
276,130
|
|
|
|
146,906
|
|
|
|
86,301
|
|
|
|
233,207
|
|
Total
oil and gas sales
|
|
$
|
196,717
|
|
|
$
|
188,436
|
|
|
$
|
385,153
|
|
|
$
|
171,440
|
|
|
$
|
135,595
|
|
|
$
|
307,035
|
|
Oil
and gas operating expenses(1)
|
|
$
|
40,420
|
|
|
$
|
37,799
|
|
|
$
|
78,219
|
|
|
$
|
30,170
|
|
|
$
|
24,324
|
|
|
$
|
54,494
|
|
Exploration
expense
|
|
|
344
|
|
|
|
16,318
|
|
|
|
16,662
|
|
|
|
16,883
|
|
|
|
10,516
|
|
|
|
27,399
|
|
Depreciation,
depletion and amortization
|
|
$
|
51,837
|
|
|
$
|
52,620
|
|
|
$
|
104,457
|
|
|
$
|
37,153
|
|
|
$
|
33,901
|
|
|
$
|
71,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Sales Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(per Bbl)
|
|
$
|
57.22
|
|
|
$
|
67.00
|
|
|
$
|
63.06
|
|
|
$
|
48.96
|
|
|
$
|
51.54
|
|
|
$
|
50.65
|
|
Natural
gas (per Mcf)
|
|
$
|
7.03
|
|
|
$
|
7.27
|
|
|
$
|
7.13
|
|
|
$
|
7.04
|
|
|
$
|
7.36
|
|
|
$
|
7.16
|
|
Average
equivalent (Mcfe)
|
|
$
|
7.42
|
|
|
$
|
8.34
|
|
|
$
|
7.85
|
|
|
$
|
7.18
|
|
|
$
|
7.77
|
|
|
$
|
7.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
($ per Mcfe):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating(1)
|
|
$
|
1.53
|
|
|
$
|
1.67
|
|
|
$
|
1.59
|
|
|
$
|
1.26
|
|
|
$
|
1.39
|
|
|
$
|
1.32
|
|
Depreciation,
depletion and amortization(2)
|
|
$
|
1.94
|
|
|
$
|
2.32
|
|
|
$
|
2.11
|
|
|
$
|
1.54
|
|
|
$
|
1.93
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes
lease operating costs and production and ad valorem
taxes.
|
(2) |
Represents
depreciation, deletion and amortization of oil and gas properties
only.
|
(3) |
Includes
the onshore operations of Comstock.
|
(4) |
Pro
Forma amounts include Bois d'Arc Energy as a consolidated
subsidiary.
|
Revenues
-
Our
total
oil and gas sales in the third quarter of 2006 of $129.3 million were $14.2
million (12%) higher than our pro forma consolidated sales of $115.1 million
in
the third quarter of 2005. Oil and gas sales from our onshore properties
decreased $9.3 million or 13% to $62.3 million for the three months ended
September 30, 2006 from $71.6 million for the third quarter of 2005. This
decrease is primarily attributable to lower natural gas prices. Our onshore
production in the third quarter of 2006, on an equivalent unit of production
basis, increased by 3% from production in the third quarter of 2005, reflecting
additional production from our drilling activity. Our average onshore realized
crude oil price increased by 13% and our average onshore realized natural gas
price decreased by 21% in the third quarter of 2006 as compared to the third
quarter of 2005. Oil and gas sales from Bois d'Arc Energy operations for the
third quarter of 2006 of $67.0 million increased $23.6 million compared with
the
third quarter of 2005 primarily due to higher production. Bois d'Arc Energy
production of 8.3 Bcfe in the third quarter of 2006 increased by 74% from the
same quarter last year, primarily due to production from new wells and the
return to production of certain properties which were curtailed following last
year's hurricanes. The average Bois d'Arc Energy oil price increased by 17%
and
the average Bois d'Arc Energy natural gas price decreased by 23% in the third
quarter of 2006 as compared to the third quarter of 2005.
For
the
nine months ended September 30, 2006, our oil and gas sales increased $78.2
million (25%) to $385.2 million from our pro forma consolidated sales of $307.0
million for the nine months ended September 30, 2005. Our oil and gas sales
from
onshore operations increased $25.3 million to $196.7 million for the first
nine
months of 2006 from the same period last year due to a 11% increase in
production and a 17% increase in oil prices. Oil and gas sales from Bois d'Arc
Energy operations of $188.4 million during the first nine months of 2006
increased 39% from the first nine months of 2005. This increase is attributable
to a 29% increase in production and a 30% increase in oil prices. The higher
production level relates to new wells drilled and the return to production
of
certain offshore properties which were curtailed following the 2005
hurricanes.
Costs
and Expenses
-
Our
oil
and gas operating expenses, including production taxes, increased $7.8 million
(41%) to $26.9 million in the third quarter of 2006 from pro forma consolidated
operating expenses of $19.1 million in the third quarter of 2005. Oil and gas
operating expenses from our onshore operations increased $2.6 million (24%)
to
$13.4 million from $10.8 million in the third quarter of 2005. This increase
mainly reflects our higher production from onshore properties and higher ad
valorem taxes. Oil and gas operating expenses per equivalent Mcf produced for
our onshore operations increased $0.26 (21%) to $1.52 in the third quarter
of
2006 from $1.26 in the third quarter of 2005. Bois d'Arc Energy's oil and gas
operating costs for the third quarter of 2006 of $13.5 million increased $5.2
million (62%) from $8.3 million in the third quarter of 2005 due primarily
due
to the higher production level together with higher oil field service and
insurance costs in the Gulf of Mexico. Oil and gas operating expenses per
equivalent Mcf produced for Bois d'Arc Energy operations decreased $0.12 (7%)
to
$1.63 in the third quarter of 2006 from $1.75 in the third quarter of
2005.
Oil
and
gas operating expenses increased $23.7 million (43%) to $78.2 million in the
first nine months of 2006 from our pro forma consolidated operating expenses
of
$54.5 million in the first nine months of 2005. Onshore oil and gas operating
expenses increased $10.3 million (34%) as the result of property acquisitions,
the higher production level and increased ad valorem and severance taxes.
Onshore oil and gas operating expenses per Mcfe produced increased $0.27 to
$1.53 for the nine months ended September 30, 2006 from $1.26 for the same
period in 2005. Bois d'Arc Energy's oil and gas operating expenses increased
$13.5 million (55%) to $37.8 million for the first nine months of 2006 due
to
hurricane repair costs incurred and lifting costs associated with new wells.
Bois d'Arc Energy's oil and gas operating expenses per Mcfe produced increased
$0.28 to $1.67 for the nine months ended September 30, 2006 from $1.39 for
the
same period in 2005.
In
the
third quarter of 2006, we had $8.1 million of exploration expense as compared
to
pro forma consolidated exploration expense of $5.2 million in the third quarter
of 2005. The provision in the third quarter of 2006 primarily related to an
offshore exploratory dry hole and seismic costs incurred by Bois d'Arc Energy.
For the nine months ended September 30, 2006 exploration expense was $16.7
million as compared to $27.4 million in the same period in 2005. The provision
for the first nine months of 2006 primarily reflects three exploratory offshore
dry holes drilled in 2006 and seismic costs incurred for both onshore and
offshore operations.
Depreciation,
depletion and amortization ("DD&A") increased $17.4 million (75%) to $40.7
million in the third quarter of 2006 from pro forma consolidated DDA expense
of
$23.3 million in the third quarter of 2005. DD&A for our onshore properties
increased $5.0 million to $19.0 million for the three months ended September
30,
2006 from $14.0 million in the third quarter of 2005 due to higher production
and an increase in our onshore average DD&A rate. Our onshore DD&A per
equivalent Mcf produced increased by $0.50 to $2.12 for the three months ended
September 30, 2006 from $1.62 for the three months ended September 30, 2005.
This increased rate is primarily attributable to the higher capitalized costs
associated with our drilling program and our acquisition made in May 2005.
DD&A related to Bois d'Arc Energy for the third quarter of 2006 increased
$12.4 million due primarily to the higher production level and a higher
amortization rate. The DD&A rate per Mcfe produced for Bois d'Arc Energy
operations in the third quarter of 2006 increased $0.67 per Mcfe to $2.60 per
Mcfe from $1.93 in the third quarter of 2005 due to higher capitalized costs
related to Bois d'Arc Energy's exploration program which reflect the increased
costs for drilling and construction services in the Gulf of Mexico after the
2005 hurricanes. For the nine months ended September 30, 2006, DD&A
increased $33.4 million (47%) to $104.5 million from pro forma consolidated
DD&A expense of $71.1 million for the nine months ended September 30, 2005.
DD&A for our onshore properties increased $14.6 million (39%) to $51.8
million from $37.2 million in the first nine months of 2005. The increase is
due
to the 11% increase in onshore production and the increased amortization rate
of
$1.94 per Mcfe in the first nine months of 2006 as compared to $1.54 for the
first nine months of 2005. The higher rate is attributable to higher costs
of
the acquisition we made in May 2005 and higher drilling costs per Mcfe of proved
reserves added associated with our onshore drilling program. The DD&A
associated with Bois d'Arc Energy of $52.6 million for the first nine months
of
2006 increased $18.7 million (55%) from $33.9 million for the nine months ended
September 30, 2005 due to the 29% higher production level and the increased
amortization rate of $2.32 per Mcfe in the first nine months of 2006 as compared
to $1.93 for the first nine months of 2005. The higher amortization rate is
attributable to higher capitalized costs per Mcfe of proved reserves added
from
the 2005 and 2006 offshore drilling activity and also to the higher costs
associated with offshore drilling and construction activity.
General
and administrative expenses, which are
reported net of overhead reimbursements, increased by $2.5 million to $7.4
million for the third quarter of 2006 as compared to pro forma consolidated
general and administrative expenses of $4.9 million for the third quarter of
2005. For the first nine months of 2006, general and administrative expenses
increased to $22.7 million from pro forma consolidated general and
administrative expenses of $15.4 million for the nine months ended September
30,
2005. The increases are primarily related to higher staffing levels in
2006.
Interest
expense increased $1.5 million (29%) to $6.7 million for the third quarter
of
2006 from pro forma consolidated interest expense of $5.2 million in the third
quarter of 2005. The increase is primarily due increased borrowings under our
bank credit facilities during the third quarter of 2006 and higher interest
rates. The average borrowings outstanding increased to $180.5 million during
the
third quarter of 2006 as compared to $137.8 million in the third quarter of
2005. The average interest rate we were charged on the outstanding borrowings
under our credit facilities increased to 6.75% in the third quarter of 2006
as
compared to 4.75% in the third quarter of 2005. Interest expense for the nine
months ended September 30, 2006 increased $2.4 million (15%) to $18.3 million
from pro forma consolidated interest expense of $15.9 million for the nine
months ended September 30, 2005. The increase is attributable higher interest
rates partially offset by lower borrowings under our bank credit facilities
during the third quarter of 2006. The average interest rate under the bank
credit facilities increased to 6.4% in the first nine months of 2006 as compared
to 4.4% in the first nine months of 2005. Average borrowings outstanding
decreased to $157.0 million during the first nine months of 2006 as compared
to
$170.3 million for the nine months ended September 30, 2005.
Minority
interest in earnings of Bois d'Arc Energy of $6.0 million for the three months
ended September 30, 2006 decreased $0.9 million (13%) from the pro forma
minority interest in earnings of $6.9 million for the comparable period last
year primarily due to Bois d'Arc Energy's lower net income during the third
quarter of 2006. Minority interest in earnings for the nine months ended of
$22.4 million increased from the nine months ended September 30, 2005 mainly
due
to the absence of Bois d'Arc Energy's one time provision associated with
recognizing cumulative deferred tax liabilities when it converted from a limited
liability company to a corporation. We also recognized a gain of $28.8 million
in the nine months ended September 30, 2005 on our investment in Bois d'Arc
Energy based on our share of the amount that Bois d'Arc Energy's equity
increased as a result of the sale of shares in Bois d'Arc Energy's initial
public offering.
We
did
not designate our derivatives we utilize as part of our price risk management
program as cash flow hedges and accordingly, we recognize gains or losses for
the changes in the fair value of these liabilities during each period. The
fair
value of our liability for these derivatives decreased during the three months
ended September 30, 2006 resulting in a gain of $1.2 million. During the three
months ended September 30, 2005, the fair value of these liabilities increased
substantially due to the increase in natural gas prices following Hurricane
Rita
and we accordingly recognized an unrealized loss of $17.7 million during this
period. The unrealized gain on these derivatives for the nine months ended
September 30, 2006 was $11.3 million and the unrealized loss on these
derivatives for the nine months ended September 30, 2005 was 2005 was $20.9
million. We realized losses to settle derivative positions of $0.7 million
during the nine months ended September 30, 2006 and $0.2 million for the three
and nine months ended September 30, 2005.
We
reported net income of $17.0 million for the three months ended September 30,
2006, as compared to $14.1 million for the three months ended September 30,
2005. The net income per share for the third quarter of 2006 was $0.39 on
weighted average diluted shares outstanding of 43.6 million as compared to
$0.33
for the third quarter of 2005 on weighted average diluted shares outstanding
of
42.4 million. Net income for the nine months ended September 30, 2006 was $62.3
million, as compared to net income of $19.1 million for the nine months ended
September 30, 2005. Net income per share on weighted average diluted shares
outstanding for the nine months ended September 30, 2006 was $1.42 as compared
to net income of $0.47 for the nine months ended September 30,
2005.
Liquidity
and Capital Resources
Funding
for our activities has historically been provided by our operating cash flow,
debt or equity financings or asset dispositions. For the nine months ended
September 30, 2006, our primary sources of funds were net cash flow from
operations of $274.3 million and net borrowings under our credit facilities
of
$143.0 million.
Our
primary needs for capital, in addition to funding our ongoing operations, relate
to the acquisition, development and exploration of our oil and gas properties
and the repayment of our debt. In the first nine months of 2006, we incurred
capital expenditures of $406.7 million primarily for our acquisition,
development and exploration activities.
The
following
table summarizes our capital expenditure activity for the nine months ended
September 30, 2006 and 2005:
|
|
|
Nine
Months Ended September 30, 2006
|
|
|
Nine
Months Ended September 30, 2005
|
|
|
|
|
Onshore(1)
|
|
|
Bois
d'Arc Energy
|
|
|
Total
|
|
|
Onshore(1)
|
|
|
Bois
d'Arc Energy
|
|
|
Pro
Forma Total(2)
|
|
|
|
|
(In
thousands)
|
|
Acquisitions
|
|
|
$
|
68,175
|
|
|
$
|
18,178
|
|
|
$
|
86,353
|
|
|
$
|
201,731
|
|
|
$
|
—
|
|
|
$
|
201,731
|
|
Leasehold
costs
|
|
|
|
3,383
|
|
|
|
2,108
|
|
|
|
5,491
|
|
|
|
2,688
|
|
|
|
3,913
|
|
|
|
6,601
|
|
Development
drilling
|
|
|
|
123,916
|
|
|
|
39,027
|
|
|
|
162,943
|
|
|
|
66,104
|
|
|
|
52,936
|
|
|
|
119,040
|
|
Exploratory
drilling
|
|
|
|
75
|
|
|
|
87,771
|
|
|
|
87,846
|
|
|
|
15,189
|
|
|
|
39,069
|
|
|
|
54,258
|
|
Other
development
|
|
|
|
17,389
|
|
|
|
44,714
|
|
|
|
62,103
|
|
|
|
10,686
|
|
|
|
27,805
|
|
|
|
38,491
|
|
|
|
|
|
212,938
|
|
|
|
191,798
|
|
|
|
404,736
|
|
|
|
296,398
|
|
|
|
123,723
|
|
|
|
420,121
|
|
Other
|
|
|
|
388
|
|
|
|
1,595
|
|
|
|
1,983
|
|
|
|
118
|
|
|
|
1,354
|
|
|
|
1,472
|
|
|
|
|
$
|
213,326
|
|
|
$
|
193,393
|
|
|
$
|
406,719
|
(3)
|
|
$
|
296,516
|
|
|
$
|
125,077
|
|
|
$
|
421,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes
the onshore operations of Comstock.
|
(2) |
Pro
Forma amounts include Bois d'Arc Energy as a consolidated
subsidiary.
|
(3) |
Excludes
the $36.4 million acquisition of 2,285,000 shares of Bois d'Arc Energy
common stock by Comstock.
|
The
timing of most of our capital expenditures is discretionary because we have
no
material long-term capital expenditure commitments except for commitments for
contract drilling services and for seismic data acquisition. Consequently,
we
have a significant degree of flexibility to adjust the level of our capital
expenditures as circumstances warrant.
As
of
September 30, 2006 we have contracted for the services of onshore drilling
rigs
through September 2008 at an aggregate cost of $65.9 million. As of September
30, 2006 Bois d'Arc Energy has
made
commitments for the services of contracted offshore drilling rigs at an
aggregate cost of $56.6 million through March 2008 and to acquire seismic data
totaling $13.5 million through December 2008.
We
spent
$144.8 million and $94.7 million on our onshore development and exploration
activities in the nine months ended September 30, 2006 and 2005, respectively.
We expect to spend approximately $70.0 million for onshore development and
exploration projects in the fourth quarter of 2006. Bois d'Arc Energy spent
$173.6 million and $123.7 million on offshore development and exploration
activities in the nine months ended September 30, 2006 and 2005, respectively,
and expects to spend an additional $40.0 million for offshore development and
exploration projects in the fourth quarter of 2006. Development and exploration
activities are funded primarily with operating cash flow and with borrowings
under our bank credit facilities.
We
spent
$68.2 million and $201.7 million on onshore acquisitions in the nine months
ended September 30, 2006 and 2005, respectively. Bois d'Arc Energy spent $18.2
million on acquisitions during the nine months ended September 30, 2006. We
do
not have a specific acquisition budget for 2006 since the timing and size of
acquisitions are not predictable. We intend to use borrowings under our bank
credit facilities, or other debt or equity financings to the extent available,
to finance significant 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, oil and natural gas
prices and other market conditions.
We
have a
$400.0 million bank credit facility with the Bank of Montreal, as the
administrative agent. The credit facility is a four-year revolving credit
commitment that matures on February 25, 2008. Borrowings under the credit
facility are limited to a borrowing base that was $350.0 million at September
30, 2006. We also have $175.0 million of 6⅞% senior notes due March 1, 2012,
with interest payable semiannually on each March 1 and September 1. The notes
are unsecured obligations and are guaranteed by all of our wholly owned
subsidiaries.
Indebtedness
under the bank credit facility with the Bank of Montreal is secured by
substantially all of our wholly-owned subsidiaries' oil and gas properties
and
is guaranteed by all of our wholly-owned subsidiaries. The credit facility
is
subject to borrowing base availability, which is redetermined semiannually
based
on the banks' estimates of the future net cash flows of our oil and natural
gas
properties. The borrowing base may be affected by the performance of our
properties and changes in oil and natural gas prices. The determination of
the
borrowing base is at the sole discretion of the administrative agent and the
bank group. Borrowings under the credit facility bear interest, based on the
utilization of the borrowing base, at our option of either LIBOR plus 1.25%
to
1.75% or the base rate (which is the higher of the prime rate or the federal
funds rate) plus 0% to 0.5%. A commitment fee of 0.375% is payable on the unused
borrowing base. The credit facility contains covenants that, among other things,
restrict the payment of cash dividends in excess of $10.0 million, limit the
amount of consolidated debt that we may incur and limit our ability to make
certain loans and investments. The only financial covenants are the maintenance
of a current ratio and maintenance of a minimum tangible net worth. We were
in
compliance with these covenants as of September 30, 2006.
Bois
d'Arc Energy
also has
a bank credit facility with the Bank of Nova Scotia and several other banks.
The
credit facility matures on May 11, 2009. Borrowings under the credit facility
are limited to a borrowing base that is redetermined semi-annually based on
the
banks' estimates of the future net cash flows of Bois
d'Arc Energy's
oil and
natural gas properties. The determination of the borrowing base is at the sole
discretion of the administrative agent and the bank group. The borrowing base
was increased to $200.0 million as of October 31, 2006. Indebtedness under
the
credit facility is secured by substantially all of Bois
d'Arc Energy
and its
subsidiaries' assets, and all of Bois
d'Arc Energy's
subsidiaries are guarantors of the indebtedness. The credit facility contains
covenants that restrict the payment of cash dividends in excess of $5.0 million,
borrowings, sales of assets, loans to others, capital expenditures, investments,
merger activity, hedging contracts, liens and certain other transactions without
the prior consent of the lenders and requires Bois
d'Arc Energy
to
maintain a ratio of current assets, including the availability under the bank
credit facility, to current liabilities of at least one-to-one and a ratio
of
indebtedness to earnings before interest, taxes, depreciation, depletion, and
amortization, exploration and impairment expense of no more than 2.5-to-one.
We
believe that our cash flow from operations and available borrowings under our
bank credit facility will be sufficient to fund our operations and future growth
as contemplated under our current business plan. However, if our plans or
assumptions change or if our assumptions prove to be inaccurate, we may be
required to seek additional capital. 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 terms acceptable to us.
Critical
Accounting Policies
The
information included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations — Critical Accounting Policies" in our
annual report filed on Form 10-K for the year ended December 31, 2005 is
incorporated herein by reference.
During
the nine months ended September 30, 2006 we also adopted Statement of Financial
Accounting Standards No. 123R (Revised 2004), "Share-Based Payment." Because
we
previously recorded stock-based compensation using the fair value method,
adoption of this new accounting standard did not have a significant impact
on
our net income or earnings per share for the nine months ended September 30,
2006.
In
June 2006, the FASB issued FASB Interpretation
("FIN")
48,
"Accounting
for Uncertainty in Income Taxes." FIN
48 is
an interpretation of SFAS 109. Among
other things, FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. We
are
currently evaluating the impact of this interpretation, but do not expect it
to
have a material impact on the consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements"
(SFAS
No. 157). This
statement
establishes a framework for fair value measurements in the financial statements
by providing a single definition of fair value, provides guidance on the methods
used to estimate fair value and increases disclosures about estimates of fair
value. SFAS
No.
157 is effective for fiscal years beginning after November 15, 2007 and is
generally applied prospectively. We
are
currently evaluating the impact of this statement
on our
consolidated
financial statements.
In
September 2006, the FASB issued FSP AUG AIR-1, "Accounting
for Planned Major Maintenance Activities"
(FSP AUG
AIR-1). This
FSP
addresses the planned major maintenance of assets and prohibits the use of
the
"accrue-in-advance"
method
of accounting for these activities. This
FSP
is effective for the first fiscal year beginning after December 15, 2006.
We
are
currently evaluating the impact of this FSP, but do not expect it to have a
material impact on our
consolidated financial statements.
ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS
Oil
and Natural Gas Prices
Our
financial condition, results of operations and capital resources are highly
dependent upon the prevailing market prices of oil and natural gas. 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 oil and natural gas prices include the level of global demand for
crude oil, the foreign supply of oil and natural gas, 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 oil and natural gas prices with any degree of certainty. Sustained
weakness in oil and natural gas prices may adversely affect our financial
condition and results of operations, and may also reduce the amount of oil
and
natural gas reserves that we can produce economically. Any reduction in our
oil
and natural gas 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 oil and natural gas
prices can have a favorable impact on our financial condition, results of
operations and capital resources. Based on our oil and natural gas production
for the nine months ended September 30, 2006, a $1.00 change in the price per
barrel of oil would have resulted in a change in our cash flow for such period
by approximately $1.7 million
and a $1.00 change in the price per Mcf of natural gas would have changed our
cash flow by approximately $37.7 million.
Interest
Rates
At
September 30, 2006, we had total long-term debt of $455.0
million.
Of this amount, $175.0 million bears interest at a fixed rate of 6⅞%. We had
$280.0 million
outstanding under our bank credit facilities, which bear interest at a
fluctuating rate that is linked to LIBOR or the corporate base rate, at our
option. Any increases in these interest rates can have an adverse impact on
our
results of operations and cash flow. Based
on
borrowings outstanding at September 30, 2006, a 100 basis point change in
interest rates would change our interest expense for the nine month period
ended
September 30, 2006 by approximately $2.1 million.
ITEM
4: CONTROLS AND PROCEDURES
As
of
September 30, 2006, we carried out an evaluation, under the supervision and
with
the participation of our chief executive officer and chief financial officer,
of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act
of
1934). Based on this evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were effective
as
of September 30, 2006 to provide reasonable assurance that information required
to be disclosed by us in the reports filed or submitted by us under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and to provide
reasonable assurance that information required to be disclosed by us is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
There
were no changes in our internal controls over financial reporting (as such
term
is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that
occurred during the quarter ended September 30, 2006, that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
ITEM
6: EXHIBITS
a.
Exhibits
|
|
|
Exhibit
No
|
|
Description
|
15.1*
|
|
Awareness
Letter of Ernst & Young LLP.
|
31.1*
|
|
Section
302 Certification of the Chief Executive Officer.
|
31.2*
|
|
Section
302 Certification of the Chief Financial Officer.
|
32.1*
|
|
Certification
for the Chief Executive Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2*
|
|
Certification
for the Chief Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
COMSTOCK
RESOURCES, INC.
|
|
|
|
|
|
|
|
Date: November
9, 2006
|
/s/
M. JAY ALLISON
|
|
|
M.
Jay Allison,
Chairman, President and Chief
|
|
|
Executive
Officer (Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
Date: November
9, 2006
|
/s/
ROLAND O. BURNS
|
|
|
Roland
O. Burns,
Senior Vice President,
|
|
|
Chief
Financial Officer, Secretary, and Treasurer
(Principal
Financial and Accounting Officer)
|
|