form10qsept302008.htm
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 Quarterly Period Ended September 30, 2008
OR
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File No. 001-03262
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 such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
þ
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
|
|
(Do
not check if a smaller reporting
company)
|
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 6, 2008 was 46,016,345.
COMSTOCK
RESOURCES, INC.
QUARTERLY
REPORT
For
The Quarter Ended September 30, 2008
|
Page
|
|
PART
I. Financial Information
|
|
|
|
|
|
|
|
Item
1. Financial Statements (Unaudited):
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets -
September 30, 2008 and December
31, 2007
|
|
4
|
|
Consolidated
Statements of Operations -
Three months and nine months
ended September 30, 2008 and 2007
|
|
5
|
|
Consolidated
Statement of Stockholders' Equity and Comprehensive Income -
Nine months ended September 30,
2008
|
|
6
|
|
Consolidated
Statements of Cash Flows -
Nine months ended September 30,
2008 and 2007
|
|
7
|
|
Notes to Consolidated Financial
Statements
|
|
8
|
|
Independent Accountants' Review
Report
|
|
19
|
|
|
|
|
|
Item 2. Management's Discussion
and Analysis of Financial Condition and Results of
Operations
|
|
20
|
|
|
|
|
|
Item 3. Quantitative and
Qualitative Disclosure About Market Risk
|
|
25
|
|
|
|
|
|
Item 4. Controls and
Procedures
|
|
26
|
|
|
|
|
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|
|
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|
PART II.
Other Information |
|
|
|
|
|
|
|
Item 6.
Exhibits
|
|
27
|
|
|
|
|
|
Awareness
Letter of Ernst & Young LLP
|
|
|
|
Section
302 Certification of the Chief Executive Officer
|
|
|
|
Section
302 Certification of the Chief Financial Officer
|
|
|
|
Certification
for the Chief Executive Officer as required by Section 906
|
|
|
|
Certification
for the Chief Financial Officer as required by Section 906
|
|
|
|
PART
I — FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
ASSETS
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash
Equivalents
|
|
$
|
118,357
|
|
|
$
|
5,565
|
|
Accounts
Receivable:
|
|
|
|
|
|
|
|
|
Oil
and gas
sales
|
|
|
58,941
|
|
|
|
36,245
|
|
Joint
interest
operations
|
|
|
4,492
|
|
|
|
12,406
|
|
Marketable
Securities
|
|
|
181,858
|
|
|
|
—
|
|
Other
Current Assets
|
|
|
15,677
|
|
|
|
3,987
|
|
Total
current
assets
|
|
|
379,325
|
|
|
|
58,203
|
|
Property
and Equipment:
|
|
|
|
|
|
|
|
|
Unevaluated
oil and gas
properties
|
|
|
112,980
|
|
|
|
5,804
|
|
Oil
and gas properties, successful efforts method
|
|
|
1,850,171
|
|
|
|
1,812,637
|
|
Other
property and
equipment
|
|
|
5,498
|
|
|
|
5,013
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(587,360
|
)
|
|
|
(512,895
|
)
|
Net
property and
equipment
|
|
|
1,381,289
|
|
|
|
1,310,559
|
|
Other
Assets
|
|
|
3,349
|
|
|
|
3,943
|
|
Assets
of Discontinued Operations
|
|
|
—
|
|
|
|
981,682
|
|
|
|
$
|
1,763,963
|
|
|
$
|
2,354,387
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
Accounts
Payable
|
|
$
|
91,950
|
|
|
$
|
71,579
|
|
Accrued
Expenses
|
|
|
8,236
|
|
|
|
11,108
|
|
Current
Taxes
Payable
|
|
|
144,388
|
|
|
|
780
|
|
Current
Deferred Taxes
Payable
|
|
|
37,673
|
|
|
|
—
|
|
Total
current
liabilities
|
|
|
282,247
|
|
|
|
83,467
|
|
Long-term
Debt
|
|
|
175,000
|
|
|
|
680,000
|
|
Deferred
Income Taxes
Payable
|
|
|
170,553
|
|
|
|
92,088
|
|
Derivatives
|
|
|
176
|
|
|
|
—
|
|
Reserve
for Future Abandonment
Costs
|
|
|
7,369
|
|
|
|
7,512
|
|
Liabilities
of Discontinued
Operations
|
|
|
—
|
|
|
|
452,235
|
|
Minority
Interest in Discontinued Operations
|
|
|
—
|
|
|
|
267,441
|
|
Total
liabilities
|
|
|
635,345
|
|
|
|
1,582,743
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
stock – $0.50 par, 50,000,000 shares authorized, 46,016,345 and
45,428,095
shares
outstanding at September 30, 2008 and December 31, 2007,
respectively
|
|
|
23,008
|
|
|
|
22,714
|
|
Additional
paid-in
capital
|
|
|
412,743
|
|
|
|
386,986
|
|
Retained
earnings
|
|
|
710,283
|
|
|
|
361,944
|
|
Accumulated
other comprehensive
loss
|
|
|
(17,416
|
)
|
|
|
—
|
|
Total
stockholders'
equity
|
|
|
1,128,618
|
|
|
|
771,644
|
|
|
|
$
|
1,763,963
|
|
|
$
|
2,354,387
|
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
163,852
|
|
|
$
|
83,087
|
|
|
$
|
463,595
|
|
|
$
|
236,094
|
|
Gain
on sales of assets
|
|
|
5,356
|
|
|
|
—
|
|
|
|
26,560
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas operating
|
|
|
21,556
|
|
|
|
17,030
|
|
|
|
66,120
|
|
|
|
48,709
|
|
Exploration
|
|
|
2,794
|
|
|
|
1,375
|
|
|
|
5,032
|
|
|
|
3,651
|
|
Depreciation,
depletion and amortization
|
|
|
45,943
|
|
|
|
33,413
|
|
|
|
131,870
|
|
|
|
91,021
|
|
Impairment
|
|
|
—
|
|
|
|
482
|
|
|
|
—
|
|
|
|
482
|
|
General
and administrative, net
|
|
|
7,242
|
|
|
|
5,663
|
|
|
|
20,328
|
|
|
|
17,501
|
|
Total
operating expenses
|
|
|
77,535
|
|
|
|
57,963
|
|
|
|
223,350
|
|
|
|
161,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
91,673
|
|
|
|
25,124
|
|
|
|
266,805
|
|
|
|
74,730
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
587
|
|
|
|
256
|
|
|
|
953
|
|
|
|
644
|
|
Other
income
|
|
|
29
|
|
|
|
39
|
|
|
|
87
|
|
|
|
116
|
|
Interest
expense
|
|
|
(4,751
|
)
|
|
|
(8,772
|
)
|
|
|
(23,248
|
)
|
|
|
(22,832
|
)
|
Total
other income (expenses)
|
|
|
(4,135
|
)
|
|
|
(8,477
|
)
|
|
|
(22,208
|
)
|
|
|
(22,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
87,538
|
|
|
|
16,647
|
|
|
|
244,597
|
|
|
|
52,658
|
|
Provision
for income taxes
|
|
|
(32,774
|
)
|
|
|
(6,539
|
)
|
|
|
(90,003
|
)
|
|
|
(20,180
|
)
|
Income
from continuing operations
|
|
|
54,764
|
|
|
|
10,108
|
|
|
|
154,594
|
|
|
|
32,478
|
|
Income
from discontinued operations after income taxes and minority
interest
|
|
|
169,853
|
|
|
|
6,320
|
|
|
|
193,745
|
|
|
|
14,725
|
|
Net
income
|
|
$
|
224,617
|
|
|
$
|
16,428
|
|
|
$
|
348,339
|
|
|
$
|
47,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.22
|
|
|
$
|
0.23
|
|
|
$
|
3.48
|
|
|
$
|
0.75
|
|
Discontinued
operations
|
|
|
3.80
|
|
|
|
0.15
|
|
|
|
4.36
|
|
|
|
0.34
|
|
|
|
$
|
5.02
|
|
|
$
|
0.38
|
|
|
$
|
7.84
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.20
|
|
|
$
|
0.23
|
|
|
$
|
3.40
|
|
|
$
|
0.73
|
|
Discontinued
operations
|
|
|
3.71
|
|
|
|
0.14
|
|
|
|
4.25
|
|
|
|
0.32
|
|
|
|
$
|
4.91
|
|
|
$
|
0.37
|
|
|
$
|
7.65
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
44,748
|
|
|
|
43,379
|
|
|
|
44,448
|
|
|
|
43,372
|
|
Diluted
|
|
|
45,759
|
|
|
|
44,434
|
|
|
|
45,419
|
|
|
|
44,345
|
|
The
accompanying notes are an integral part of these statements.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
For
the Nine Months Ended September 30, 2008
(Unaudited)
|
|
Common
Stock
(Shares)
|
|
|
Common
Stock
–
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Loss
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
$
|
45,428
|
|
|
$
|
22,714
|
|
|
$
|
386,986
|
|
|
$
|
361,944
|
|
|
$
|
—
|
|
$
|
771,644
|
|
Exercise
of stock options and warrants
|
|
|
591
|
|
|
|
296
|
|
|
|
7,982
|
|
|
|
—
|
|
|
|
—
|
|
|
8,278
|
|
Stock-based
compensation
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
8,970
|
|
|
|
—
|
|
|
|
—
|
|
|
8,968
|
|
Tax
benefit from stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
8,805
|
|
|
|
—
|
|
|
|
—
|
|
|
8,805
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
348,339
|
|
|
|
—
|
|
|
348,339
|
|
Unrealized
hedging gain, net of income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,791
|
|
|
1,791
|
|
Unrealized
loss on marketable securities, net of income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,207
|
)
|
|
(19,207
|
)
|
Total
comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
330,923
|
|
Balance
at September 30, 2008
|
|
$
|
46,016
|
|
|
$
|
23,008
|
|
|
$
|
412,743
|
|
|
$
|
710,283
|
|
|
$
|
(17,416
|
)
|
$
|
1,128,618
|
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
348,339
|
|
|
$
|
47,203
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
(193,745
|
)
|
|
|
(14,725
|
)
|
Deferred
income taxes
|
|
|
85,171
|
|
|
|
16,640
|
|
Dry
hole costs and lease impairments
|
|
|
4,113
|
|
|
|
3,458
|
|
Depreciation,
depletion and amortization
|
|
|
131,870
|
|
|
|
91,021
|
|
Impairment
|
|
|
—
|
|
|
|
482
|
|
Gain
on sales of assets
|
|
|
(26,560
|
)
|
|
|
—
|
|
Debt
issuance cost amortization
|
|
|
608
|
|
|
|
608
|
|
Stock-based
compensation
|
|
|
8,968
|
|
|
|
7,905
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(8,805
|
)
|
|
|
(602
|
)
|
Increase
in accounts receivable
|
|
|
(14,738
|
)
|
|
|
(5,749
|
)
|
Increase in
other current assets
|
|
|
(8,758
|
)
|
|
|
(2,757
|
)
|
Increase
in accounts payable and accrued expenses
|
|
|
4,573
|
|
|
|
5,375
|
|
Net
cash provided by operating activities from continuing
operations
|
|
|
331,036
|
|
|
|
148,859
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(298,812
|
)
|
|
|
(290,582
|
)
|
Proceeds
from asset sales
|
|
|
129,541
|
|
|
|
—
|
|
Net
cash used for investing activities from continuing
operations
|
|
|
(169,271
|
)
|
|
|
(290,582
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
50,000
|
|
|
|
142,000
|
|
Principal
payments on debt
|
|
|
(555,000
|
)
|
|
|
—
|
|
Proceeds
from issuance of common stock
|
|
|
8,278
|
|
|
|
279
|
|
Excess
tax benefit from stock-based compensation
|
|
|
8,805
|
|
|
|
602
|
|
Debt
issuance costs
|
|
|
(16
|
)
|
|
|
(34
|
)
|
Net
cash provided by (used for) financing activities from continuing
operations
|
|
|
(487,933
|
)
|
|
|
142,847
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
Net
cash flows provided by operating activities
|
|
|
240,332
|
|
|
|
170,767
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of Bois d'Arc Energy
|
|
|
438,960
|
|
|
|
—
|
|
Capital
expenditures
|
|
|
(159,368
|
)
|
|
|
(171,242
|
)
|
Net
cash provided by (used for) investing activities
|
|
|
279,592
|
|
|
|
(171,242
|
)
|
Net
cash flows provided by (used for) financing activities
|
|
|
(80,964
|
)
|
|
|
409
|
|
Net
cash provided by (used for) discontinued operations
|
|
|
438,960
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
112,792
|
|
|
|
1,058
|
|
Cash
and cash equivalents, beginning of period
|
|
|
5,565
|
|
|
|
1,228
|
|
Cash
and cash equivalents, end of period
|
|
$
|
118,357
|
|
|
$
|
2,286
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of these statements.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
(1) SUMMARY
OF 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, 2008 and the related results of operations for the three months and nine
months ended September 30, 2008 and 2007 and cash flows for the nine months
ended September 30, 2008 and 2007.
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 included in Comstock's
Annual Report on Form 10-K for the year ended December 31, 2007.
In
connection with an acquisition of certain oil and gas properties, Comstock
entered into a transaction structured as a reverse like-kind exchange in
accordance with Section 1031 of the Internal Revenue Code pursuant to which
Comstock assigned the right to acquire ownership in the acquired oil and gas
properties to an exchange accommodation titleholder. Comstock
operated these properties pursuant to lease and management
agreements. Because the Company was the primary beneficiary of these
arrangements, the acquired properties were included in the consolidated balance
sheet as of December 31, 2007, and all revenues earned and expenses incurred
related to the properties were included in the Company's consolidated results of
operations during the term of the agreements. The Company completed
the like-kind exchange transaction for federal tax purposes when certain
designated oil and gas properties were sold in June
2008. Accordingly, the ownership of the oil and gas properties
acquired in December 2007 was transferred to the Company and the agreements with
the exchange accommodation titleholder terminated.
The
results of operations for the three months and nine months ended September 30,
2008 are not necessarily an indication of the results expected for the full
year.
These
unaudited consolidated financial statements include the accounts of Comstock and
subsidiaries in which it has a controlling interest. Intercompany
balances and transactions have been eliminated in consolidation.
Discontinued
Operations
The
Company's offshore operations have historically been conducted through its
subsidiary Bois d'Arc Energy, Inc. ("Bois d'Arc Energy"). On August
28, 2008, Bois d'Arc Energy completed a merger with Stone Energy Corporation
("Stone") pursuant to which each outstanding share of Bois d'Arc Energy was
exchanged for cash in the amount of $13.65 per share and 0.165 shares of Stone
common stock. As a result of this transaction, Comstock received net
proceeds of $439.0 million in cash and 5,317,069 shares of Stone in exchange for
its interest in Bois d'Arc Energy. In connection with the merger,
Comstock agreed not to sell its shares of Stone common stock prior to August 28,
2009 and to certain other restrictions relating to its ownership of the Stone
common stock.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As a
result of the merger, the consolidated financial statements and the related
notes thereto present the Company's offshore operations as discontinued
operations. No general and administrative or interest costs incurred
by Comstock have been allocated to the discontinued operations during the
periods presented. Unless indicated otherwise, the amounts presented
in the accompanying notes to the consolidated financial statements relate to the
Company's continuing operations.
The
merger of Bois d'Arc Energy with Stone resulted in Comstock recognizing a gain
on the disposal of the discontinued operations in the three months ended
September 30, 2008 of approximately $158.1 million, after income taxes of $85.3
million and the Company's share of transaction-related costs incurred by Bois
d'Arc Energy of $11.7 million. Transaction-related costs incurred by
Bois d'Arc Energy included accounting, legal and investment banking fees,
change-in-control and other compensation costs that became obligations as a
result of the merger.
Income
from discontinued operations for the three and nine months ended September 30,
2008 is comprised of the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
99,463
|
|
|
$
|
87,987
|
|
|
$
|
360,719
|
|
|
$
|
255,215
|
|
Total
operating expenses
|
|
|
(57,768
|
)
|
|
|
(53,674
|
)
|
|
|
(198,894
|
)
|
|
|
(172,866
|
)
|
Operating
income from discontinued operations
|
|
|
41,695
|
|
|
|
34,313
|
|
|
|
161,825
|
|
|
|
82,349
|
|
Other
income (expense)
|
|
|
(740
|
)
|
|
|
(2,184
|
)
|
|
|
(2,630
|
)
|
|
|
(6,262
|
)
|
Provision
for income taxes
|
|
|
(22,040
|
)
|
|
|
(15,031
|
)
|
|
|
(76,626
|
)
|
|
|
(35,775
|
)
|
Minority
interest in earnings
|
|
|
(7,121
|
)
|
|
|
(10,778
|
)
|
|
|
(46,883
|
)
|
|
|
(25,587
|
)
|
Income
from discontinued operations excluding gain
on
sale
|
|
|
11,794
|
|
|
|
6,320
|
|
|
|
35,686
|
|
|
|
14,725
|
|
Gain
on sale of discontinued operations, net of income taxes of
$85,327
|
|
|
158,059
|
|
|
|
—
|
|
|
|
158,059
|
|
|
|
—
|
|
Income
from discontinued operations
|
|
$
|
169,853
|
|
|
$
|
6,320
|
|
|
$
|
193,745
|
|
|
$
|
14,725
|
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Assets
and liabilities of discontinued operations as of December 31, 2007 were as
follows:
|
|
December
31,
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Current
Assets
|
|
$
|
66,302
|
|
Property
and Equipment, Net
|
|
|
912,316
|
|
Other
Assets
|
|
|
3,064
|
|
Total
Assets of Discontinued Operations
|
|
$
|
981,682
|
|
|
|
|
|
|
Current
Liabilities
|
|
$
|
47,333
|
|
Long-term
Debt
|
|
|
80,000
|
|
Deferred
Income Taxes Payable
|
|
|
279,808
|
|
Reserve
for Future Abandonment Costs
|
|
|
45,094
|
|
Liabilities
of Discontinued Operations
|
|
$
|
452,235
|
|
|
|
|
|
|
Minority
Interest in Bois d'Arc Energy
|
|
$
|
267,441
|
|
Reclassifications
Certain
reclassifications have been made to prior periods' financial statements to
conform to the current presentation.
Marketable
Securities
The
Company received shares of Stone common stock as part of the proceeds from sale
of its interest in Bois d'Arc Energy. The Company does not exert
influence over the operating and financial polices of Stone, and has classified
its investment in these shares as an available-for-sale security in the
consolidated balance sheet as of September 30,
2008. Available-for-sale securities are accounted for at fair value,
with any unrealized gains and losses reported in the consolidated balance sheet
within accumulated other comprehensive income (loss) as a separate component of
stockholders' equity. The fair value of the Stone common stock
includes a discount to the public market price to reflect certain trading
restrictions. The Company utilizes the specific identification method
to determine the cost of the securities sold.
The
Company reviews its available-for-sale securities to determine whether a decline
in fair value below the respective cost basis is other than
temporary. If the decline in fair value is judged to be other than
temporary, the cost basis of the security is written down to fair value and the
amount of the write-down is included in the consolidated statement of
operations. As of September 30, 2008, the decline in the fair value
of the Stone common stock since the date it was received was not determined to
be other than temporary. The Stone shares were acquired in August
2008 and valued at $211.4 million. As of September 30, 2008 the
estimated fair value of the Stone shares was $181.9 million after recognizing an
unrealized loss before income taxes of $29.5 million.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Asset
Retirement Obligations
Comstock's
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, 2008 and 2007:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Beginning
asset retirement obligations
|
|
$
|
7,512
|
|
|
$
|
9,052
|
|
Accretion
expense
|
|
|
333
|
|
|
|
409
|
|
New
wells placed on production and changes in estimates
|
|
|
484
|
|
|
|
526
|
|
Liabilities
settled and properties sold
|
|
|
(960
|
)
|
|
|
(680
|
)
|
Future
abandonment liability — end of period
|
|
$
|
7,369
|
|
|
$
|
9,307
|
|
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.
In
January 2008, Comstock entered into natural gas swaps which fix the price at
$8.00 per Mmbtu (at the Houston Ship Channel) for 520,000 Mmbtu's per month of
production from certain properties in South Texas for the period February 2008
through December 2009. The Company designated these swaps at their
inception as cash flow hedges. Realized gains and losses are included
in oil and natural gas sales in the month of production. Changes in
the fair value of derivative instruments designated as cash flow hedges to the
extent they are effective in offsetting cash flows attributable to the hedged
risk are recorded in other comprehensive income until the hedged item is
recognized in earnings. Any change in fair value resulting from
ineffectiveness is recognized currently in oil and natural gas sales as
unrealized gains (losses). The Company realized losses of $2.7
million and $7.4 million on the natural gas price swaps during the three and
nine months ended September 30, 2008, respectively, which are included in oil
and gas sales in the accompanying Consolidated Statements of
Operations. As of September 30, 2008, the estimated fair value of the
Company's derivative financial instruments, which equals their carrying value,
was a net asset of $2.7 million, of which $2.9 million was classified as a
current asset and $0.2 million was classified as long-term
liability. The Company had no derivative financial instruments
outstanding during the nine months ended September 30, 2007.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-Based
Compensation
Comstock
accounts for employee stock-based compensation under the fair value
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. During the three months ended September 30, 2008 and 2007,
the Company recognized $3.3 million and $2.6 million, respectively, in
stock-based compensation expense within general and administrative expenses
related to stock option and restricted stock grants. Stock-based
compensation expense for the nine months ended September 30, 2008 and 2007 was
$9.0 million and $7.9 million, respectively. The excess income tax
benefit realized from the deductions associated with stock-based compensation
for the nine months ended September 30, 2008 and 2007 was $8.8 million and $0.6
million, respectively.
The fair
value of stock option grants is estimated on the date of the grant using a
Black-Scholes option pricing model. Some of the inputs to the option
valuation model are subjective, including assumptions regarding expected stock
price volatility. During the nine months ended September 30, 2008,
Comstock granted options to purchase 40,000 shares at an exercise price of
$54.36 per share. The fair value of the options awarded was
determined to be $19.76 per share. Assumptions used to value these
stock options included expected volatility of 38.9%, expected lives of 4.3
years, a risk-free interest rate of 3.3% and an expected dividend yield of
zero. As of September 30, 2008, total unrecognized compensation cost
related to nonvested stock options of $1.6 million is expected to be recognized
over a period of 2.2 years. Options outstanding at September 30, 2008
totaled 456,870, of which 305,120 were exercisable.
As of
September 30, 2008, Comstock had 1.3 million shares of unvested restricted stock
outstanding at a weighted average grant date fair value of $31.60 per
share. Total unrecognized compensation cost related to the unvested
restricted stock grants of $22.3 million as of September 30, 2008 is expected to
be recognized over a period of 3.3 years.
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 from continuing operations is due to the following:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Tax
at statutory rate
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Tax
effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible
stock-based compensation
|
|
1.1
|
|
|
|
2.6
|
|
|
|
0.9
|
|
|
|
3.0
|
|
Changes
due to tax law changes
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.5
|
)
|
State
income taxes, net of federal benefit
|
|
1.2
|
|
|
|
2.2
|
|
|
|
0.9
|
|
|
|
1.9
|
|
Other
|
|
0.1
|
|
|
|
(0.5
|
)
|
|
|
—
|
|
|
|
(0.1
|
)
|
Effective
tax rate
|
|
37.4
|
%
|
|
|
39.3
|
%
|
|
|
36.8
|
%
|
|
|
38.3
|
%
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following is an analysis of consolidated income tax expense from continuing
operations:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Current
provision
|
|
$
|
107
|
|
|
$
|
1,745
|
|
|
$
|
4,832
|
|
|
$
|
3,540
|
|
Deferred
provision
|
|
|
32,667
|
|
|
|
4,794
|
|
|
|
85,171
|
|
|
|
16,640
|
|
Provision
for income taxes
|
|
$
|
32,774
|
|
|
$
|
6,539
|
|
|
$
|
90,003
|
|
|
$
|
20,180
|
|
Earnings
Per Share
Basic
earnings per share is determined without the effect of any outstanding
potentially dilutive stock options or unvested restricted stock and diluted
earnings per share is determined with the effect of outstanding stock options
and unvested restricted stock that are potentially dilutive. Basic
and diluted earnings per share for the three months and nine months ended
September 30, 2008 and 2007, respectively, were determined as
follows:
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
|
(In
thousands, except per share amounts)
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
From Continuing Operations
|
|
$
|
54,764
|
|
|
|
44,748
|
|
|
$
|
1.22
|
|
|
$
|
10,108
|
|
|
|
43,379
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Discontinued Operations
|
|
|
169,853
|
|
|
|
44,748
|
|
|
|
3.80
|
|
|
|
6,320
|
|
|
|
43,379
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
224,617
|
|
|
|
44,748
|
|
|
$
|
5.02
|
|
|
$
|
16,428
|
|
|
|
43,379
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$
|
54,764
|
|
|
|
44,748
|
|
|
|
|
|
|
$
|
10,108
|
|
|
|
43,379
|
|
|
|
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Grants and
Options
|
|
|
—
|
|
|
|
1,011
|
|
|
|
|
|
|
|
—
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations With Assumed Conversions
|
|
$
|
54,764
|
|
|
|
45,759
|
|
|
$
|
1.20
|
|
|
$
|
10,108
|
|
|
|
44,434
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Discontinued Operations
|
|
$
|
169,853
|
|
|
|
45,759
|
|
|
$
|
3.71
|
|
|
$
|
6,320
|
|
|
|
44,434
|
|
|
$
|
0.14
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Grants and Options
|
|
|
(164
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(186
|
)
|
|
|
—
|
|
|
|
|
|
Income
from Discontinued Operations, After Income Taxes and Minority Interest
with Assumed Conversions
|
|
|
169,689
|
|
|
|
45,759
|
|
|
$
|
3.71
|
|
|
|
6,134
|
|
|
|
44,434
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
224,453
|
|
|
|
45,759
|
|
|
$
|
4.91
|
|
|
$
|
16,242
|
|
|
|
44,434
|
|
|
$
|
0.37
|
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
|
(In
thousands, except per share amounts)
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
From Continuing Operations
|
|
$
|
154,594
|
|
|
|
44,448
|
|
|
$
|
3.48
|
|
|
$
|
32,478
|
|
|
|
43,372
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Discontinued Operations
|
|
|
193,745
|
|
|
|
44,448
|
|
|
|
4.36
|
|
|
|
14,725
|
|
|
|
43,372
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
348,339
|
|
|
|
44,448
|
|
|
$
|
7.84
|
|
|
$
|
47,203
|
|
|
|
43,372
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$
|
154,594
|
|
|
|
44,448
|
|
|
|
|
|
|
$
|
32,478
|
|
|
|
43,372
|
|
|
|
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Grants and
Options
|
|
|
—
|
|
|
|
971
|
|
|
|
|
|
|
|
—
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations With Assumed Conversions
|
|
$
|
154,594
|
|
|
|
45,419
|
|
|
$
|
3.40
|
|
|
$
|
32,478
|
|
|
|
44,345
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Discontinued Operations
|
|
$
|
193,745
|
|
|
|
45,419
|
|
|
$
|
4.27
|
|
|
$
|
14,725
|
|
|
|
44,345
|
|
|
$
|
0.33
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Grants and Options
|
|
|
(839
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(441
|
)
|
|
|
—
|
|
|
|
|
|
Income
from Discontinued Operations After Income Taxes and Minority Interest with
Assumed Conversions
|
|
|
192,906
|
|
|
|
45,419
|
|
|
$
|
4.25
|
|
|
|
14,284
|
|
|
|
44,345
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
347,500
|
|
|
|
45,419
|
|
|
$
|
7.65
|
|
|
$
|
46,762
|
|
|
|
44,345
|
|
|
$
|
1.05
|
|
Stock
options to purchase common stock at exercise prices in excess of the average
actual stock price for the period that were anti-dilutive and that were excluded
from the determination of diluted earnings per share are as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average anti-dilutive stock options
|
|
|
—
|
|
|
|
267
|
|
|
|
21
|
|
|
|
249
|
|
Weighted
average exercise price
|
|
$
|
—
|
|
|
$
|
32.32
|
|
|
$
|
54.36
|
|
|
$
|
32.52
|
|
Fair
Value Measurements
In
September 2006, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 157, "Fair Value Measurements" ("SFAS 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. The Company adopted SFAS 157 and its related amendments for
financial assets and liabilities effective as of January 1,
2008. SFAS 157 will be effective for non-financial assets and
liabilities in financial statements issued for fiscal years beginning after
November 15, 2008.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
SFAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. SFAS 157 establishes a
three-level hierarchy for disclosure to show the extent and level of judgment
used to estimate fair value measurements:
Level 1 –
Inputs used to measure fair value are unadjusted quoted prices that are
available in active markets for the identical assets or liabilities as of the
reporting date.
Level 2 –
Inputs used to measure fair value, other than quoted prices included in Level 1,
are either directly or indirectly observable as of the reporting date through
correlation with market data, including quoted prices for similar assets and
liabilities in active markets and quoted prices in markets that are not
active. Level 2 also includes assets and liabilities that are valued
using models or other pricing methodologies that do not require significant
judgment since the input assumptions used in the models, such as interest rates
and volatility factors, are corroborated by readily observable data from
actively quoted markets for substantially the full term of the financial
instrument.
Level 3 –
Inputs used to measure fair value are unobservable inputs that are supported by
little or no market activity and reflect the use of significant management
judgment. These values are generally determined using pricing models
for which the assumptions utilize management's estimates of market participant
assumptions.
At
January 1, 2008, the Company had no financial assets and liabilities that were
accounted for at fair value. Accordingly, adoption of SFAS 157 had no
impact on the carrying amounts of the Company's assets and
liabilities. As of September 30, 2008, the Company held certain items
that are required to be measured at fair value on a recurring
basis. These included cash equivalents held in money market funds,
short-term marketable securities comprised of shares of Stone common stock, and
derivative instruments in the form of natural gas price swap
agreements. The fair value of the Stone common stock recorded by the
Company includes a discount from the quoted public market price to reflect the
impact of certain trading restrictions. The Company determines the
impact of the trading restriction on the fair value of the Stone common stock
utilizing a standard option pricing model based on inputs that are either
readily available in public markets or can be derived from information available
in publicly quoted markets. Therefore, the Company has categorized
the Stone common stock as Level 2. The Company's natural gas price
swap agreements are not traded on a public exchange. The value of
natural gas price swap agreements is determined utilizing a discounted cash flow
model based on inputs that are not readily available in public markets and,
accordingly, these swap agreements have been categorized as Level 3 within the
valuation hierarchy.
The
following table summarizes financial assets and liabilities accounted for at
fair value as of September 30, 2008:
|
|
Portion
of Carrying Value Measured at Fair Value as of September 30,
2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
(In
thousands)
|
|
Items
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents – money market funds
|
|
$
|
102,262
|
|
|
$
|
102,262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketable
securities
|
|
|
181,858
|
|
|
|
—
|
|
|
|
181,858
|
|
|
|
—
|
|
Short-term
receivable – natural gas price derivatives
|
|
|
2,932
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,932
|
|
Total
assets
|
|
$
|
287,052
|
|
|
$
|
102,262
|
|
|
$
|
181,858
|
|
|
$
|
2,932
|
|
Long
term liability – natural gas price derivatives
|
|
$
|
176
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
176
|
|
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table summarizes the changes in the fair values of the natural gas
swaps, which are Level 3 liabilities, for the nine months ended September 30,
2008:
|
|
(In
thousands)
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
$
|
—
|
|
Purchases
and settlements (net)
|
|
|
7,358
|
|
Hedge
ineffectiveness
|
|
|
—
|
|
Total
realized or unrealized gains (losses):
|
|
|
|
|
Included
in earnings
|
|
|
(7,358
|
)
|
Included
in other comprehensive income
|
|
|
2,756
|
|
Balance
at September 30, 2008
|
|
$
|
2,756
|
|
Supplementary
Information With Respect to the Consolidated Statements of Cash Flows
–
For the
purpose of the consolidated statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. At September 30, 2008 the Company's cash
investments consisted of cash held in an institutional money market fund which
has daily liquidity and cash in interest bearing accounts at a large commercial
bank. At December 31, 2007 the Company's cash investments consisted
of overnight Eurodollar deposits with a bank.
The
following is a summary of cash payments made for interest and income
taxes:
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Cash
Payments - |
|
|
|
Interest
payments
|
|
$
|
26,560
|
|
|
$
|
25,726
|
|
Income
tax payments
|
|
$
|
5,199
|
|
|
$
|
381
|
|
The
Company capitalizes interest on its unevaluated oil and gas property costs
during periods when it is conducting exploration activity on this
acreage. For the three and nine months ended September 30, 2008 the
Company capitalized $0.6 million of interest which reduced interest expense and
increased the carrying value of its unevaluated oil and gas
properties.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Comprehensive
Income
Comprehensive
income (loss) consists of the following:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
54,764
|
|
|
$
|
10,108
|
|
|
$
|
154,594
|
|
|
$
|
32,478
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on marketable securities, net of income taxes of $10.3
million
|
|
|
(19,207
|
)
|
|
|
—
|
|
|
|
(19,207
|
)
|
|
|
—
|
|
Hedge
contracts settled, net of income taxes of $1.1 million and $2.6
million, respectively
|
|
|
(2,008
|
)
|
|
|
—
|
|
|
|
(4,783
|
)
|
|
|
—
|
|
Unrealized
hedging gains, net of income taxes of $16.1 million and $3.5 million,
respectively
|
|
|
29,851
|
|
|
|
—
|
|
|
|
6,574
|
|
|
|
—
|
|
Hedge
ineffectiveness recorded in net income, net of income taxes of
$126,000
|
|
|
(233
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
from continuing operations
|
|
|
63,167
|
|
|
|
10,108
|
|
|
|
137,178
|
|
|
|
32,478
|
|
Income
from discontinued operations, net of income taxes and minority
interest
|
|
$
|
169,853
|
|
|
$
|
6,320
|
|
|
$
|
193,745
|
|
|
$
|
14,725
|
|
Total
comprehensive income
|
|
$
|
223,020
|
|
|
$
|
16,428
|
|
|
$
|
330,923
|
|
|
$
|
47,203
|
|
The
following table provides a rollforward of the amounts included in Accumulated
other comprehensive income (loss), net of income taxes, for the three and nine
months ended September 30, 2008:
|
|
Natural
Gas Price Swap Agreements
|
|
|
Marketable
Securities
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Balance
as of June 30, 2008
|
|
$
|
(25,819
|
)
|
|
$
|
—
|
|
|
$
|
(25,819
|
)
|
Third
quarter changes in value
|
|
|
29,851
|
|
|
|
(19,207
|
)
|
|
|
10,644
|
|
Reclassification
to earnings
|
|
|
(2,241
|
)
|
|
|
—
|
|
|
|
(2,241
|
)
|
Balance
as of September 30, 2008
|
|
$
|
1,791
|
|
|
$
|
(19,207
|
)
|
|
$
|
(17,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2008
changes in value
|
|
|
6,574
|
|
|
|
(19,207
|
)
|
|
|
(12,633
|
)
|
Reclassification
to earnings
|
|
|
(4,783 |
) |
|
|
— |
|
|
|
(4,783 |
) |
Balance
as of September 30, 2008
|
|
$
|
1,791
|
|
|
$
|
(19,207
|
)
|
|
$
|
(17,416
|
)
|
(2) LONG-TERM
DEBT –
At
September 30, 2008, long-term debt was comprised of $175.0 million of 6⅞% Senior
Notes due in 2012. The notes are unsecured obligations of Comstock
and are guaranteed by all of Comstock's subsidiaries. The subsidiary
guarantors are 100% owned and all of the guarantees are full and unconditional
and joint and several. As of September 30, 2008, Comstock also has no
assets or operations which are independent of its subsidiaries. There
are no restrictions on the ability of Comstock to obtain funds from its
subsidiaries through dividends or loans.
COMSTOCK
RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Comstock
has a $850.0 million bank credit facility with Bank of Montreal, as the
administrative agent. The credit facility is a five-year revolving
credit commitment that matures on December 15, 2011. Indebtedness
under the credit facility is secured by Comstock's and its 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. As of
September 30, 2008, the borrowing base was $590.0 million, all of which was
available. On October 29, 2008 this borrowing base was reaffirmed by
the Company's bank group. Borrowings under the credit facility bear
interest, based on the utilization of the borrowing base, at Comstock's option
at either (1) LIBOR plus 1.0% to 1.75% or (2) the base rate (which is the higher
of the prime rate or the federal funds rate) plus 0% to 0.25%. A
commitment fee of 0.25% to 0.375%, based on the utilization of the borrowing
base, 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 $40.0 million, limit the amount of consolidated debt that
Comstock may incur and limit the Company's ability to make certain loans and
investments. The only financial covenants are the maintenance of a
ratio of current assets, including availability under the bank credit facility,
to current liabilities of at least one-to-one and maintenance of a minimum
tangible net worth. The Company was in compliance with these
covenants as of September 30, 2008.
(3) 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 under terms of up to four years. As
of September 30, 2008, the Company had commitments for contracted drilling
services of $146.4 million. The Company also has entered into a
natural gas transportation agreement for 30,000 Mbtu's of natural gas per day
which expires on August 31, 2013. Minimum commitments under this
transportation agreement as of September 30, 2008 totaled $13.7
million.
(4) SALE
OF PROPERTIES –
During
the three months ended September 30, 2008, the Company sold its interests in
certain producing properties in South Texas and received net proceeds of $15.8
million. Comstock recognized a gain of $5.4 million ($3.5 million
after income taxes) on these sales which is included in the accompanying
consolidated statement of operations. During the first six months of
2008, the Company sold its interests in certain producing properties in East and
South Texas and received net proceeds of $113.8 million. Comstock
recognized a gain of $21.2 million ($13.9 million after income taxes) on these
sales which is also included in the accompanying consolidated statement of
operations.
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, 2008, and the
related consolidated statements of operations for the three- and nine-month
periods ended September 30, 2008 and 2007, the consolidated statement of
stockholders' equity and comprehensive income for the nine months ended
September 30, 2008, and the consolidated statements of cash flows for the nine
months ended September 30, 2008 and 2007. 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, 2007, 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
February 28, 2008, we expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph regarding the
Company's adoption of Statement of Financial Accounting Standards No. 123
(revised 2004), Share Based
Payment, effective January 1, 2006. On August 28, 2008, Bois
d'Arc Energy, Inc., a subsidiary of the Company completed a merger with Stone
Energy Corporation, which resulted in Bois d'Arc Energy, Inc. being classified
as discontinued operations, resulting in the revision of the December 31, 2007
consolidated balance sheet. We have not audited the revised consolidated balance
sheet reflecting the reclassifications for discontinued operations.
/s/ Ernst
& Young LLP
Dallas,
Texas
November
5, 2008
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,
2007.
Discontinued
Operations
Our
offshore operations have historically been conducted through our subsidiary,
Bois d'Arc Energy, Inc. ("Bois d'Arc Energy"). Bois d'Arc Energy was
acquired by Stone Energy Corporation ("Stone") in exchange for a combination of
cash and shares of Stone common stock on August 28,
2008. Accordingly, the offshore operations are presented as
discontinued operations in our financial statements for all periods
presented. Unless indicated otherwise, the amounts in the
accompanying tables and discussion relate to our continuing
operations.
Results
of Operations
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands, except per unit amounts)
|
|
Net
Production Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas (Mmcf)
|
|
|
13,395
|
|
|
|
10,612
|
|
|
|
40,207
|
|
|
|
28,462
|
|
Oil
(Mbbls)
|
|
|
264
|
|
|
|
260
|
|
|
|
775
|
|
|
|
766
|
|
Natural
Gas equivalent (Mmcfe)
|
|
|
14,977
|
|
|
|
12,170
|
|
|
|
44,855
|
|
|
|
33,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas sales
|
|
$
|
138,861
|
|
|
$
|
66,459
|
|
|
$
|
395,234
|
|
|
$
|
193,101
|
|
Hedging
losses
|
|
|
(2,730
|
)
|
|
|
—
|
|
|
|
(7,358
|
)
|
|
|
—
|
|
Total
natural gas sales including hedging
|
|
|
136,131
|
|
|
|
66,459
|
|
|
|
387,876
|
|
|
|
193,101
|
|
Oil
sales
|
|
|
27,721
|
|
|
|
16,628
|
|
|
|
75,719
|
|
|
|
42,993
|
|
Total
oil and gas sales
|
|
$
|
163,852
|
|
|
$
|
83,087
|
|
|
$
|
463,595
|
|
|
$
|
236,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas operating
expenses(1)
|
|
$
|
21,556
|
|
|
$
|
17,030
|
|
|
$
|
66,120
|
|
|
$
|
48,709
|
|
Exploration
expense
|
|
$
|
2,794
|
|
|
$
|
1,375
|
|
|
$
|
5,032
|
|
|
$
|
3,651
|
|
Depreciation,
depletion and amortization
|
|
$
|
45,943
|
|
|
$
|
33,413
|
|
|
$
|
131,870
|
|
|
$
|
91,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Sales Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
(per Bbl)
|
|
$
|
105.15
|
|
|
$
|
64.06
|
|
|
$
|
97.74
|
|
|
$
|
56.15
|
|
Natural
gas (per Mcf)
|
|
$
|
10.37
|
|
|
$
|
6.26
|
|
|
$
|
9.83
|
|
|
$
|
6.78
|
|
Natural
gas including hedging (per Mcf)
|
|
$
|
10.16
|
|
|
$
|
6.26
|
|
|
$
|
9.65
|
|
|
$
|
6.78
|
|
Average
equivalent (Mcfe)
|
|
$
|
11.12
|
|
|
$
|
6.83
|
|
|
$
|
10.50
|
|
|
$
|
7.14
|
|
Average
equivalent including hedging (Mcfe)
|
|
$
|
10.94
|
|
|
$
|
6.83
|
|
|
$
|
10.34
|
|
|
$
|
7.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
($ per Mcfe):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
operating(1)
|
|
$
|
1.44
|
|
|
$
|
1.40
|
|
|
$
|
1.47
|
|
|
$
|
1.47
|
|
Depreciation,
depletion and amortization(2)
|
|
$
|
3.06
|
|
|
$
|
2.73
|
|
|
$
|
2.93
|
|
|
$
|
2.74
|
|
(1)
Includes lease operating costs and production and ad valorem taxes.
(2)
Represents depreciation,
depletion and amortization of oil and gas properties only.
Revenues
–
Oil and
gas sales increased $80.8 million to $163.9 million for the three months ended
September 30, 2008 from $83.1 million for the third quarter of
2007. This increase resulted from both higher production and higher
crude oil and natural gas prices. Our production in the third quarter
of 2008 increased to 15.0 Bcfe, a 23% increase over production of 12.2 Bcfe in
the third quarter of 2007. The production increase was attributable
to our development drilling activity and a producing property acquisition in
South Texas which was completed in December 2007. Our average
realized crude oil price increased by 64% and our average realized natural gas
price increased by 62% in the third quarter of 2008 as compared to the third
quarter of 2007. Our natural gas sales for the three months ended
September 30, 2008 have been reduced by a loss of $2.7 million from our hedging
activities.
Oil and
gas sales increased $227.5 million to $463.6 million for the nine months ended
September 30, 2008 from $236.1 million for the first nine months of
2007. Our production in the first nine months of 2008 increased to
44.9 Bcfe or 36% higher than production of 33.1 Bcfe in the first nine months of
2007. The production increase was attributable to our development
drilling and the recent acquisition. Our average realized crude oil
price increased by 74% and our average realized natural gas price increased by
42% in the first nine months of 2008 as compared to the first nine months of
2007. Our natural gas sales for the nine months ended September 30, 2008
have been reduced by a loss of $7.4 million from our hedging
activities.
The 2008
third quarter and nine months financial results include a $5.4 million gain on
the sales of certain properties in South Texas for which we received net
proceeds of $15.8 million. The sales closed in August and September
2008. The financial results for the nine months ended September 30,
2008 include a gain of $21.2 million on sales of certain properties that closed
during the first six months of 2008 for which we received net proceeds of $113.8
million.
Costs and Expenses
-
Our oil
and gas operating expenses, including production taxes, increased $4.6 million
(27%) to $21.6 million in the third quarter of 2008 from $17.0 million in the
third quarter of 2007. Oil and gas operating expenses per equivalent
Mcf produced increased $0.04 (3%) to $1.44 in the third quarter of 2008 from
$1.40 in the third quarter of 2007. Oil and gas operating expenses
also increased $17.4 million (36%) to $66.1 million in the first nine months of
2008 from $48.7 million in the first nine months of 2007. Oil and gas
operating expenses per Mcfe produced of $1.47 for the nine months ended
September 30, 2008 were unchanged from the nine months ended September 30,
2007. These increases in operating costs reflect our higher
production level and the impact of higher oil and natural gas prices on
production and severance taxes.
Exploration
expense of $2.8 million for the three months ended September 30, 2008 includes
$2.0 million for impairment of unevaluated leases in Mississippi for which no
drilling is planned and costs related to an exploratory dry hole drilled in
South Texas. Exploration expense of $1.4 million in the three months
ended September 30, 2007 includes the costs of two exploratory dry hole wells
drilled in Mississippi and impairment of unevaluated leases in
Mississippi. Exploration expense of $5.0 million for the nine months
ended September 30, 2008 relates primarily to an exploratory dryhole drilled in
South Texas and the impairment of unevaluated leases in
Mississippi. Exploration expense in the first nine months of 2007 of
$3.7 million was mainly associated with exploratory dry holes drilled in
Mississippi and impairment of unevaluated leases in
Mississippi.
Depreciation,
depletion and amortization ("DD&A") increased $12.5 million (38%) to $45.9
million in the third quarter of 2008 from DD&A expense of $33.4 million in
the third quarter of 2007. Our DD&A per equivalent Mcf produced
increased $0.33 to $3.06 for the three months ended September 30, 2008 from
$2.73 for the three months ended September 30, 2007. DD&A for the
first nine months of 2008 increased $40.9 million (45%) to $131.9 million from
$91.0 million for the nine months ended September 30, 2007. Our
DD&A rate per Mcfe for the first nine months of 2008 of $2.93 increased
$0.19 (7%) above the DD&A rate of $2.74 for the first nine months of
2007. These increases primarily reflect our higher production during
2008 and the higher capitalized costs associated with our drilling program and
our acquisition completed in 2007.
General
and administrative expense, which is reported net of overhead reimbursements,
increased by $1.5 million to $7.2 million for the third quarter of 2008 as
compared to general and administrative expense of $5.7 million for the third
quarter of 2007. Included in general and administrative expense is
stock-based compensation of $3.3 million and $2.6 million for the three months
ended September 30, 2008 and 2007, respectively. For the first nine
months of 2008, general and administrative expense increased to $20.3 million
from $17.5 million for the nine months ended September 30,
2007. Included in general and administrative expense is stock-based
compensation of $9.0 million and $7.9 million for the nine months ended
September 30, 2008 and 2007, respectively. Increases in general and
administrative expenses in 2008 primarily reflect the additional personnel we
have added.
Interest
expense decreased $4.0 million (46%) to $4.8 million for the third quarter of
2008 from interest expense of $8.8 million in the third quarter of
2007. The decrease was primarily due to lower interest
rates. Although our average borrowings outstanding increased to
$300.7 million during the third quarter of 2008 as compared to $256.5 million in
the third quarter of 2007, we had no borrowings outstanding under our bank
credit facility during the month of September 2008 as we repaid the entire
outstanding balance in late August 2008. The average
interest rate we were charged on the outstanding borrowings under our credit
facility decreased to 3.7% in the third quarter of 2008 as compared to 6.9% in
the third quarter of 2007. Interest expense for the nine months ended
September 30, 2008 increased $0.4 million (2%) to $23.2 million from $22.8
million for the nine months ended September 30, 2007. The increase is
attributable to higher average borrowings under the bank credit facility which
was partially offset by lower interest rates. Average borrowings
outstanding increased to $461.6 million during the first nine months of 2008 as
compared to $254.7 million for the nine months ended September 30,
2007. The average interest rate under our bank credit facility
decreased to 4.5% in the first nine months of 2008 as compared to 6.6% in the
first nine months of 2007. We capitalized interest of $0.6 million
which reduced interest expense for the three and nine months ended September 30,
2008. No interest was capitalized in 2007.
Income
tax expense related to continuing operations increased by $26.3 million to $32.8
million for the three months ended September 30, 2008 as compared to $6.5
million for the three months ended September 30, 2007. Income tax
expense related to continuing operations increased $69.8 million to $90.0
million for the nine months ended September 30, 2008 from $20.2 million for the
first nine months of 2007. Higher income tax expenses in 2008 are
primarily due to our higher income. Our effective tax rates for
continuing operations in 2008 are lower than the comparable rates in 2007 due
mainly to increased pre-tax income in 2008 which reduced the impact of
nondeductible stock based compensation and state income taxes on our effective
rate.
We
reported income from continuing operations of $54.8 million for the three months
ended September 30, 2008, as compared to $10.1 million for the three months
ended September 30, 2007. The income per diluted share from
continuing operations for the third quarter of 2008 was $1.20 on weighted
average diluted shares outstanding of 45.8 million as compared to $0.23 for the
third quarter of 2007 on weighted average diluted shares outstanding of 44.4
million. Net income from continuing operations for the nine months
ended September 30, 2008 was $154.6 million, as compared to net income from
continuing operations of $32.5 million for the nine months ended September 30,
2007. Income per share from continuing operations for the nine months
ended September 30, 2008 was $3.40 on weighted average diluted shares
outstanding of 45.4 million as compared to net income per share from continuing
operations of $0.73 on weighted average diluted shares outstanding of 44.3
million for the nine months ended September 30, 2007. The higher net
income in 2008 results from higher oil and gas sales reflecting increased
production and significantly higher oil and natural gas prices
received. Higher revenues were only partially offset by higher
operating costs, DD&A expense and general and administrative
expense.
Income
from discontinued operations of $169.9 million in the three months ended
September 30, 2008 was $163.6 million (87%) higher than income from discontinued
operations of $6.3 million during the three months ended September 30,
2007. Income from discontinued operations increased $179.0 million to
$193.7 million during the first nine months of 2008 as compared to $14.7 million
for the first nine months of 2007. The increases in income from
discontinued operations in 2008 reflect the higher oil and gas prices in 2008
offset in part by higher operating and exploration expenses of the offshore
operations. Also included in income from discontinued operations is a
net gain, after income taxes, of $159.1 million during the three and nine months
ended September 30, 2008 as a result of the sale of our interest in Bois d'Arc
Energy.
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, 2008, our primary sources of funds were net cash flow from
continuing operations of $331.0 million, net proceeds from asset sales of $129.5
million and net proceeds from the sale of our interest in Bois d'Arc Energy of
$439.0 million. Our net cash flow from continuing operating
activities increased $182.1 million (122%) to $331.0 million in the first nine
months of 2008 from $148.9 million for the nine months ended September 30,
2007. This increase is primarily due to the higher revenues we had in
the first nine months of 2008 driven by the 36% increase in our oil and gas
production and higher oil and natural gas prices.
The
following table summarizes our capital expenditure activity, on an accrual
basis, for the nine months ended September 30, 2008 and 2007:
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of producing oil and gas properties
|
|
$
|
—
|
|
|
$
|
31,189
|
|
Leasehold
costs
|
|
|
110,940
|
|
|
|
7,546
|
|
Development
drilling
|
|
|
182,382
|
|
|
|
231,870
|
|
Exploratory
drilling
|
|
|
3,178
|
|
|
|
10,424
|
|
Other
development
|
|
|
12,828
|
|
|
|
5,775
|
|
|
|
|
309,328
|
|
|
|
286,804
|
|
Other
|
|
|
507
|
|
|
|
806
|
|
|
|
$
|
309,835
|
|
|
$
|
287,610
|
|
We spent
$309.3 million and $255.6 million on our development and exploration
activities during the nine months ended September 30, 2008 and 2007,
respectively. The expenditures in 2008 include $109.2 million for
acquisitions of leases in the emerging Haynesville Shale play in East Texas and
North Louisiana. We expect to spend approximately $425.0 million
in total for development and exploration projects during
2008. Development and exploration activities are funded primarily
with operating cash flow and with borrowings under our bank credit
facility.
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. Consequently, we have a significant
degree of flexibility to adjust the level of our capital expenditures as
circumstances warrant. As of September 30, 2008 we have contracted
for the services of drilling rigs through October 2012 at an aggregate cost of
$146.4 million and we have minimum commitments of $13.7 million to transport
natural gas through August 2013. We have obligations to incur future
payments for dismantlement, abandonment and restoration costs of oil and gas
properties. These payments are currently estimated to be incurred
primarily after 2013. We record a separate liability for the fair
value of these asset retirement obligations which totaled $7.4 million as of
September 30, 2008.
The gain
on the sale of our interest in Bois d'Arc Energy generated a current tax
liability of $146.4 million which we intend to pay in December
2008.
We have a
$850.0 million bank credit facility with the Bank of Montreal, as the
administrative agent. The credit facility is a five-year revolving
credit commitment that matures on December 15, 2011. 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. As of September 30, 2008 the borrowing base was $590.0
million, all of which was available. On October 29, 2008 this
borrowing base was reaffirmed by our bank group. Indebtedness under
the bank credit facility is secured by substantially all of our and our
subsidiaries' oil and gas properties and is guaranteed by all of our
subsidiaries. Borrowings under the credit facility bear interest,
based on the utilization of the borrowing base, at our option of either LIBOR
plus 1.0% 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 0.25% to
0.375% based on the utilization of the borrowing base 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 $40.0 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,
2008. 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 subsidiaries.
We
believe that our cash flow from operations and available borrowings under our
bank credit facilities 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, 2007 is
incorporated herein by reference.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
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. We adopted SFAS
157 and its related amendments for financial assets and liabilities effective as
of January 1, 2008. See Note 1 to the consolidated financial
statements. Adoption of SFAS 157 had no impact on the carrying values
of our assets and liabilities. SFAS 157 will be effective for
non-financial assets and liabilities in financial statements issued for fiscal
years beginning after November 15, 2008.
In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations" ("SFAS
141R") which requires measurements based on fair value as determined under the
provisions of SFAS 157 and is effective for financial statements issued for
fiscal years beginning after December 15, 2008. SFAS 141R establishes
accounting and reporting standards for how the acquirer of a business recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree. This statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statement to evaluate
the nature and financial effects of the business combination. SFAS
141R will impact the accounting and disclosures for any business combinations we
engage in after January 1, 2009. However, the nature and magnitude of
the specific effects will depend upon the nature, terms and size of the
acquisitions we consummate after that date.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities – An Amendment of FASB Statement No. 133" ("SFAS
161"). This standard applies to derivative instruments, nonderivative
instruments that are designated and qualify as hedging instruments and related
hedged items accounted for under SFAS 133. SFAS 161 does not change
the accounting for derivatives and hedging activities, but requires enhanced
disclosures concerning the effect on the financial statements from their
use. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15,
2008. Currently, we do not have any instruments that would be
impacted by SFAS 161.
In
September 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1,
"Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities." Under the provisions of this standard,
unvested awards of share-based payments with rights to receive dividends or
dividend equivalents are considered "participating securities" for purposes of
calculating earnings per share. As a result, these participating
securities will be included in the weighted average number of shares outstanding
used to determine basic earnings per share. This FSP is effective for
fiscal years beginning after December 15, 2008, and interim periods within those
years. All prior period earnings per share data presented in
financial reports after the effective date shall be adjusted retrospectively to
conform with the provisions of this FSP. Early application is not
permitted. Currently, we do not anticipate that adoption of the FSP
will have a significant impact on our previously reported basic earnings per
share amounts.
On
October 10, 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active," which clarifies
how companies should apply the fair value measurement methodologies of SFAS 157
to financial assets when markets they trade in are illiquid or
inactive. Under the provisions of this FSP, companies may use their
own assumptions about future cash flows and appropriately risk-adjusted discount
rates when relevant observable inputs are either not available or are based
solely on transaction prices that reflect forced liquidations or distressed
sales. This FSP is effective as of September 30,
2008. There was no impact to our financial position or results of
operations from the adoption of this FSP.
ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
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, 2008, 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 $0.9 million and a $1.00 change in the price per Mcf of natural
gas would have changed our cash flow by approximately $34.6
million.
We hedge
a portion of our price risks associated with our natural gas
sales. As of September 30, 2008, our outstanding natural gas price
swap agreements had a fair value of $2.7 million. A change in the
fair value of our natural gas swaps that would result from a 10% change in
commodities prices at September 30, 2008 would be $1.8 million. Such
a change in fair value could be a gain or a loss depending on whether prices
increase or decrease.
Because
our swap agreements have been designated as hedge derivatives, changes in their
fair value generally are reported as a component of accumulated other
comprehensive loss until the related sale of production occurs. At
that time, the realized hedge derivative gain or loss is transferred to oil and
gas sales in the consolidated income statement. None of our
derivative contracts have margin requirements or collateral provisions that
could require funding prior to the scheduled cash settlement date.
Interest
Rates
At
September 30, 2008, we had total long-term debt of $175.0 million which bears
interest at a fixed rate of 6⅞%. Borrowings under our bank credit
facility bear interest at a fluctuating rate that is limited to LIBOR, or the
corporate base rate, at our option. We had no borrowings outstanding
under our bank credit facilities at September 30, 2008.
ITEM
4: CONTROLS AND PROCEDURES
As of
September 30, 2008, 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, 2008 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, 2008, that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial
reporting.
PART
II — OTHER INFORMATION
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Exhibit
No.
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Description
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15.1*
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Awareness
Letter of Ernst & Young LLP.
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31.1*
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Section
302 Certification of the Chief Executive Officer.
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31.2*
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Section
302 Certification of the Chief Financial Officer.
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32.1*
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Certification
for the Chief Executive Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2*
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Certification
for the Chief Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
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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.
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COMSTOCK
RESOURCES, INC.
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Date: November
6, 2008
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/s/
M. JAY ALLISON
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M. Jay Allison, Chairman,
President and Chief
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Executive
Officer (Principal Executive Officer)
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Date: November
6, 2008
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/s/
ROLAND O. BURNS
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Roland O. Burns, Senior
Vice President,
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Chief
Financial Officer, Secretary, and Treasurer
(Principal
Financial and Accounting Officer)
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