UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended |
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OR |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
(Address of principal executive offices including zip code)
(Registrant's telephone number and area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes |
¨ |
þ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes |
¨ |
þ |
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.
þ |
No |
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þ |
No |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if registrant has elected to not use the extended transition period for complying with any new or revised final accounting standards provided pursuant to Section 13(a) of the Exchange Act. Emerging growth company ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes |
¨ |
No |
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of common stock on the New York Stock Exchange on June 30, 2023 (the last business day of the registrant's most recently completed second fiscal quarter), was $
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the 2024 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after
December 31, 2023 are incorporated by reference into Part III of this report.
COMSTOCK RESOURCES, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2023
CONTENTS
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1. |
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6 |
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1A. |
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23 |
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1B. |
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29 |
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1C. |
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29 |
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2. |
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30 |
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3. |
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30 |
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4. |
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30 |
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5. |
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31 |
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6. |
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31 |
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7. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
32 |
7A. |
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39 |
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8. |
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39 |
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9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
40 |
9A. |
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40 |
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9B. |
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42 |
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9C. |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
42 |
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10. |
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42 |
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11. |
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42 |
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12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
42 |
13. |
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Certain Relationships and Related Transactions, and Director Independence |
43 |
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43 |
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15. |
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16. |
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1
COMSTOCK RESOURCES, INC.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can in some instances be identified by their use of terms such as "expect," "estimate," "anticipate," "project," "plan," "intend," "believe" and similar terms. All statements, other than statements of historical facts, included in this report, are forward-looking statements, including all statements regarding:
All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to:
These forward-looking statements are made based upon detailed assumptions and reflect management's current expectations and beliefs. While we believe that these assumptions underlying the forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect actual results.
The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
WEBSITE REFERENCES
In this Annual Report on Form 10-K, we make references to our website at www.comstockresources.com. References to our website through this Form 10-K are provided for convenience only and the content on our website does not constitute a part of, and shall not be deemed incorporated by reference into, this Annual Report on Form 10-K.
2
COMSTOCK RESOURCES, INC.
DEFINITIONS
The following are abbreviations and definitions of terms commonly used in the oil and gas industry and this report. Natural gas equivalents and crude oil equivalents are determined using the ratio of six Mcf to one barrel. All references to "us", "our", "we" , the "Company" or "Comstock" mean the registrant, Comstock Resources, Inc. and where applicable, its consolidated subsidiaries.
"Bbl" means a barrel of U.S. 42 gallons of oil.
"Bcf" means one billion cubic feet of natural gas.
"Bcfe" means one billion cubic feet of natural gas equivalent.
"BOE" means one barrel of oil equivalent.
"Btu" means British thermal unit, which is the quantity of heat required to raise the temperature of one pound of water from 58.5 to 59.5 degrees Fahrenheit.
"Completion" means the installation of permanent equipment for the production of oil or gas.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates from natural gas when the gas is produced and is similar to crude oil.
"Development well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.
"Dry hole" means a well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
"Exploratory well" means a well drilled to find a new field or to find a new productive reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.
"Gross" when used with respect to acres or wells, production or reserves refers to the total acres or wells in which we or another specified person has a working interest.
"LNG" refers to liquefied natural gas, which is a composition of methane and some mixture of ethane that has been cooled to liquid form for ease and safety of non-pressurized storage or transport.
"MBbls" means one thousand barrels of oil.
"MBbls/d" means one thousand barrels of oil per day.
"Mcf" means one thousand cubic feet of natural gas.
"Mcfe" means one thousand cubic feet of natural gas equivalent.
"MMBbls" means one million barrels of oil.
"MMBOE" means one million barrels of oil equivalent.
"MMBtu" means one million British thermal units.
"MMcf" means one million cubic feet of natural gas.
"MMcf/d" means one million cubic feet of natural gas per day.
"MMcfe/d" means one million cubic feet of natural gas equivalent per day.
"MMcfe" means one million cubic feet of natural gas equivalent.
3
COMSTOCK RESOURCES, INC.
"Net" when used with respect to acres or wells, refers to gross acres of wells multiplied, in each case, by the percentage working interest owned by us.
"Net production" means production we own less royalties and production due others.
"NGL" refers to natural gas liquids, which is composed exclusively of carbon and hydrogen.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration, development, and production of an oil or gas well or lease.
"Proved developed reserves" means reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.
"Proved developed non-producing" means reserves (i) expected to be recovered from zones capable of producing but which are shut-in because no market outlet exists at the present time or whose date of connection to a pipeline is uncertain or (ii) currently behind the pipe in existing wells, which are considered proved by virtue of successful testing or production of offsetting wells.
"Proved developed producing" means reserves expected to be recovered from currently producing zones under continuation of present operating methods. This category includes recently completed shut-in gas wells scheduled for connection to a pipeline in the near future.
"Proved reserves" means the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided by contractual arrangements.
"Proved undeveloped reserves" means reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling locations offsetting productive wells that are reasonably certain of production when drilled or where it can be demonstrated with certainty that there is continuity of production from the existing productive formation.
"PV 10 Value" means the present value of estimated future revenues to be generated from the production of proved reserves calculated, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. This amount is the same as the standardized measure of discounted future net cash flows related to proved natural gas and oil reserves except that it is determined without deducting future income taxes. Although PV 10 Value is not a financial measure calculated in accordance with GAAP, management believes that the presentation of PV 10 Value is relevant and useful to our investors because it presents the discounted future net cash flows attributable to our proved reserves prior to taking into account corporate future income taxes and our current tax structure. We use this measure when assessing the potential return on investment related to our oil and gas properties. Because many factors that are unique to any given company affect the amount of estimated future income taxes, we believe the use of a pre-tax measure is helpful to investors when comparing companies in our industry.
"Recompletion" means the completion for production of an existing well bore in another formation from which the well has been previously completed.
"Reserve life" means the calculation derived by dividing year-end reserves by total production in that year.
"Royalty" means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
4
COMSTOCK RESOURCES, INC.
"3-D seismic" means an advanced technology method of detecting accumulations of hydrocarbons identified by the collection and measurement of the intensity and timing of sound waves transmitted into the earth as they reflect back to the surface.
"SEC" means the United States Securities and Exchange Commission.
"Tcf" means one trillion cubic feet of natural gas.
"Tcfe" means one trillion cubic feet of natural gas equivalent.
"Working interest" means an interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties. For example, the owner of a 100% working interest in a lease burdened only by a landowner's royalty of 12.5% would be required to pay 100% of the costs of a well but would be entitled to retain 87.5% of the production.
"Workover" means operations on a producing well to restore or increase production.
5
COMSTOCK RESOURCES, INC.
PART I
ITEM 1. BUSINESS
We are a leading independent natural gas producer operating primarily in the Haynesville shale, a premier natural gas basin located in North Louisiana and East Texas with superior economics given its geographical proximity to the Gulf Coast markets. As of December 31, 2023, 99% of our proved reserves were in the Haynesville and Bossier shale play. We are focused on creating value through the development of our substantial inventory of highly economic and low-risk drilling opportunities in the Haynesville and Bossier shales and through our exploration activities in our Western Haynesville play. Our common stock is listed and traded on the New York Stock Exchange under the symbol "CRK".
Our operations are primarily concentrated in Louisiana and Texas. Our natural gas and oil properties are estimated to have proved reserves of 4.9 Tcfe with a PV 10 Value of $2.5 billion as of December 31, 2023 based on SEC prices and 6.6 Tcfe with a PV 10 Value of $5.2 billion based on our alternative price case. Our proved reserves are principally natural gas, which are 56% developed as of December 31, 2023 with an average reserve life of approximately 9 years.
Strengths
High Quality Properties. As of December 31, 2023, we had 717,875 acres (552,712 net) in the Haynesville and Bossier shale plays, located in North Louisiana and East Texas, including our Western Haynesville area. Our Haynesville/Bossier shale properties have extensive development and exploration potential. Advances in drilling and completion technology have allowed us to increase the reserves recovered through longer horizontal lateral length and substantially larger well stimulations. As a result of the improved economic returns, we have focused our development activities primarily on drilling Haynesville and Bossier horizontal wells since 2015.
Our Haynesville and Bossier shale positions are located in one of the premier North American natural gas basins and have access to the growing Gulf Coast market demand related to LNG exports and the petrochemical industry due to its geographic proximity. We believe we are well positioned for future growth due to the following:
Value-Added Leasehold Acquisitions. Over the last four years we have acquired a total of approximately 252,564 net undeveloped acres prospective for the Haynesville and Bossier shales through acquisitions and an active leasing program.
6
COMSTOCK RESOURCES, INC.
Successful Drilling Program. We spent $1.3 billion on exploration and development activities in 2023, almost exclusively in the Haynesville and Bossier shale. We spent $1.2 billion on drilling and completion activities and an additional $53.0 million on other development costs. We drilled 71 (55.5 net) wells in 2023, which had an average lateral length of approximately 10,700 feet. Our drilling program in 2023 replaced 109% of our 2023 production. The results included five successful wells in our Western Haynesville play.
Efficient Operator. We operated 98% of our proved reserve base as of December 31, 2023. As the operator, we are better able to control operating costs, the timing and plans for future development, the level of drilling and lifting costs, and the marketing of production. As an operator, we receive reimbursements for overhead from other working interest owners, which reduces our general and administrative expenses.
Business Strategy
Our strategy consists of the following principal elements:
Property Acquisitions
In 2023, we added 79,741 net acres in the Western Haynesville through an active leasing program at a cost of $98.6 million. In 2022, we added 104,314 net Haynesville and Bossier shale acres in Western Haynesville through acquisitions and direct leasing for $54.4 million. In 2021, we acquired approximately 17,500 net acres of predominantly undeveloped Haynesville shale acreage in East Texas, which also included interests in 37 producing wells for $34.7 million. We also leased 32,556 net acres in the Western Haynesville for $22.9 million.
7
COMSTOCK RESOURCES, INC.
Western Haynesville Midstream Venture
To support the development of the Western Haynesville acreage, we entered into a partnership on October 31, 2023 with Quantum Capital Solutions ("Quantum") to finance the buildout of natural gas gathering and treating facilities required to handle the expected growth in our natural gas production from wells we drill on our acreage. Pinnacle Gas Services LLC ("Pinnacle") was formed by the contribution of a 145-mile high pressure pipeline and natural gas treating plant which we acquired in 2022. We had invested $30.0 million in these midstream assets including the initial acquisition costs. Quantum agreed to fund up to $300 million for the future build out of the gathering and gas treating system. We manage the operations of Pinnacle under a management contract and appoint the majority of Pinnacle's board of directors. Quantum is entitled to a 12% dividend on its invested capital and 80% of any distributions from Pinnacle until certain return hurdles are met. After the return hurdles are met, Quantum's ownership reduces to 30%.
Property Dispositions
In 2023, we sold our working interests in 55 (6.7 net) non-operated wells for $41.3 million. In 2022, we sold our interests in certain nonstrategic, non-operated properties for $4.1 million, which included working interests in 575 (56.3 net) wells producing approximately 2.7 MMcfe of natural gas per day. In 2021, we sold our non-operated properties in the Bakken shale for $138.1 million after selling expenses. The Bakken shale properties sold included non-operated working interests in 442 producing wells (68.3 net) producing approximately 4,500 barrels of oil equivalent per day.
Natural Gas and Oil Reserves
The following table sets forth our estimated proved natural gas and oil reserves as of December 31, 2023:
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Oil |
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Natural Gas |
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Total |
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PV 10 Value |
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Proved Developed: |
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|
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|
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|
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Producing |
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504 |
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|
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2,699,444 |
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2,702,467 |
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$ |
2,170,426 |
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Non-producing |
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44 |
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34,731 |
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34,999 |
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15,370 |
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Total Proved Developed |
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548 |
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|
|
2,734,175 |
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|
|
2,737,466 |
|
|
|
2,185,796 |
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Proved Undeveloped |
|
|
— |
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|
|
2,206,051 |
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|
|
2,206,051 |
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|
|
315,900 |
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Total Proved |
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548 |
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4,940,226 |
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4,943,517 |
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2,501,696 |
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Discounted Future Income Taxes |
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(127,066 |
) |
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Standardized Measure of Discounted Cash Flows |
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|
|
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$ |
2,374,630 |
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______________
The following table sets forth our year end reserves as of December 31 for each of the last three fiscal years:
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2023 |
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2022 |
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2021 |
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Oil |
|
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Natural Gas |
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|
Oil |
|
|
Natural Gas |
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|
Oil |
|
|
Natural Gas |
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Proved Developed |
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548 |
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|
|
2,734,175 |
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|
480 |
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|
|
2,531,462 |
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|
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627 |
|
|
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2,245,660 |
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Proved Undeveloped |
|
|
— |
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|
|
2,206,051 |
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|
|
69 |
|
|
|
4,166,108 |
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|
|
— |
|
|
|
3,872,423 |
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Total Proved Reserves |
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548 |
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|
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4,940,226 |
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|
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549 |
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6,697,570 |
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627 |
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6,118,083 |
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______________
99% of our proved reserves are in the Haynesville and Bossier shales in North Louisiana and East Texas. These wells produce from depths of 10,500 to 18,000 feet. All of our proved undeveloped reserves represent wells to be drilled in the next five years on our Haynesville and Bossier shale acreage.
8
COMSTOCK RESOURCES, INC.
Proved reserves that are attributable to existing producing wells are primarily determined using decline curve analysis and rate transient analysis, which incorporates the principles of hydrocarbon flow. Proved reserves attributable to producing wells with limited production history and for undeveloped locations are estimated using performance from analogous wells in the surrounding area and geologic data to assess the reservoir continuity. Technologies relied on to establish reasonable certainty of economic producibility include electrical logs, radioactivity logs, core analyses, geologic maps and available production data, seismic data and well test data.
There are numerous uncertainties inherent in estimating quantities of proved natural gas and oil reserves. Natural gas and oil reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be precisely measured. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of natural gas and oil that are ultimately recovered.
Prices used in determining quantities of natural gas and oil reserves and future cash inflows from natural gas and oil reserves represent the average first of the month prices received at the point of sale for the last twelve months. These prices have been adjusted from index prices for both location and quality differences.
The natural gas and oil prices used for reserves estimation were as follows:
Year |
|
Natural Gas Price |
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|
Oil Price |
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||
2023 |
|
$ |
2.39 |
|
|
$ |
72.63 |
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2022 |
|
$ |
6.03 |
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|
$ |
91.21 |
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2021 |
|
$ |
3.33 |
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|
$ |
62.38 |
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Reserves may be classified as proved undeveloped if there is a high degree of confidence that the quantities will be recovered, and they are scheduled to be drilled within five years of their initial inclusion as proved reserves, unless specific circumstances justify a longer time. In connection with estimating proved undeveloped reserves for our reserve report, reserves on undrilled acreage were limited to those that are reasonably certain of production when drilled where we can verify the continuity of the reservoir. We only include wells in our proved undeveloped reserves that we currently plan to drill and in which we have adequate capital resources to enable us to drill them. Using empirical evidence, we utilize control points and sample sizes to show continuity in the reservoir. We reflect changes to undeveloped reserves that occur in the same field as revisions to the extent that proved undeveloped locations are revised due to changes in future development plans, including changes to proposed lateral lengths, development spacing and timing of development. As of December 31, 2023, our proved undeveloped reserves did not include any undrilled wells with a rate of return less than 10%.
As of December 31, 2023, our proved undeveloped reserves were comprised of 2.2 Tcf of natural gas consisting of 160 undeveloped locations. All of our natural gas undeveloped reserves are associated with our Haynesville and Bossier shale (including Western Haynesville and Bossier) properties where our 2024 drilling program is focused. Our natural gas and oil proved undeveloped reserves decreased by 2.0 Tcf during 2023 due to low natural gas prices used to determine the proved reserves as 164 proved undeveloped reserve locations previously included in our proved reserves no longer generate an economic return using the prescribed SEC natural gas and oil prices. During 2023, 67 proved undeveloped locations included in our 2022 reserves were converted to proved developed reserves.
As of December 31, 2022, our proved undeveloped reserves were comprised of 4.2 Tcf of natural gas, all of which were associated with our Haynesville and Bossier shale (including Western Haynesville and Bossier) properties. Our natural gas proved undeveloped reserves increased by 294 Bcf during 2022. During 2022, 66 proved undeveloped locations were converted to proved developed reserves.
9
COMSTOCK RESOURCES, INC.
The following table presents the changes in our estimated proved undeveloped natural gas and oil reserves for the years ended December 31, 2023, 2022 and 2021:
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Proved Undeveloped Reserves |
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2023 |
|
|
2022 |
|
|
2021 |
|
|||||||||||||||
|
|
Oil |
|
|
Natural Gas |
|
|
Oil |
|
|
Natural Gas |
|
|
Oil |
|
|
Natural Gas |
|
||||||
Beginning Balance |
|
|
69 |
|
|
|
4,166,108 |
|
|
|
— |
|
|
|
3,872,423 |
|
|
|
— |
|
|
|
3,595,588 |
|
Revisions |
|
|
— |
|
|
|
(1,634,178 |
) |
|
|
(68 |
) |
|
|
(1,545 |
) |
|
|
— |
|
|
|
34,111 |
|
Divestitures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,592 |
) |
Acquisitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
196,623 |
|
Extension and Discoveries |
|
|
— |
|
|
|
407,629 |
|
|
|
137 |
|
|
|
920,825 |
|
|
|
— |
|
|
|
725,120 |
|
Conversion from Undeveloped to Developed |
|
|
(69 |
) |
|
|
(733,508 |
) |
|
|
— |
|
|
|
(625,595 |
) |
|
|
— |
|
|
|
(668,427 |
) |
Total Change |
|
|
(69 |
) |
|
|
(1,960,057 |
) |
|
|
69 |
|
|
|
293,685 |
|
|
|
— |
|
|
|
276,835 |
|
Ending Balance |
|
|
— |
|
|
|
2,206,051 |
|
|
|
69 |
|
|
|
4,166,108 |
|
|
|
— |
|
|
|
3,872,423 |
|
The timing, by year, when our proved undeveloped reserve quantities are estimated to be converted to proved developed reserves is as follows:
|
|
Proved Undeveloped Reserves |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||||||||||||||
Year ended December 31, |
|
Oil |
|
|
Natural Gas |
|
|
Oil |
|
|
Natural Gas |
|
|
Oil |
|
|
Natural Gas |
|
||||||
2022 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
636,183 |
|
2023 |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
|
|
974,476 |
|
|
|
— |
|
|
|
782,785 |
|
2024 |
|
|
— |
|
|
|
273,487 |
|
|
|
— |
|
|
|
868,692 |
|
|
|
— |
|
|
|
852,342 |
|
2025 |
|
|
— |
|
|
|
425,458 |
|
|
|
— |
|
|
|
961,824 |
|
|
|
— |
|
|
|
812,056 |
|
2026 |
|
|
— |
|
|
|
656,609 |
|
|
|
— |
|
|
|
881,972 |
|
|
|
— |
|
|
|
789,057 |
|
2027 |
|
|
— |
|
|
|
509,227 |
|
|
|
— |
|
|
|
479,144 |
|
|
|
— |
|
|
|
— |
|
2028 |
|
|
— |
|
|
|
341,270 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
— |
|
|
|
2,206,051 |
|
|
|
69 |
|
|
|
4,166,108 |
|
|
|
— |
|
|
|
3,872,423 |
|
The following table presents the timing of our estimated future development capital costs to be incurred for the years ended December 31, 2023, 2022 and 2021:
|
|
Future Development Costs |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
Year ended December 31, |
|
(in millions) |
|
|||||||||
2022 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
381.4 |
|
2023 |
|
|
— |
|
|
|
810.0 |
|
|
|
540.9 |
|
2024 |
|
|
184.5 |
|
|
|
890.0 |
|
|
|
600.5 |
|
2025 |
|
|
427.2 |
|
|
|
957.0 |
|
|
|
594.3 |
|
2026 |
|
|
728.7 |
|
|
|
942.4 |
|
|
|
576.2 |
|
2027 |
|
|
522.4 |
|
|
|
497.8 |
|
|
|
— |
|
2028 |
|
|
351.3 |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
2,214.1 |
|
|
$ |
4,097.2 |
|
|
$ |
2,693.3 |
|
10
COMSTOCK RESOURCES, INC.
The following table presents the changes in our estimated future development costs for the years ended December 31, 2023 and December 31, 2022:
|
|
(in millions) |
|
|
Total as of December 31, 2021 |
|
$ |
2,693.3 |
|
Development Costs Incurred |
|
|
(635.9 |
) |
Additions |
|
|
1,119.3 |
|
Revisions |
|
|
920.5 |
|
Total Changes |
|
|
1,403.9 |
|
Total as of December 31, 2022 |
|
|
4,097.2 |
|
Development Costs Incurred |
|
|
(844.3 |
) |
Additions |
|
|
461.4 |
|
Revisions |
|
|
(1,500.2 |
) |
Total Changes |
|
|
(1,883.1 |
) |
Total as of December 31, 2023 |
|
$ |
2,214.1 |
|
Our estimated future capital costs to develop proved undeveloped reserves as of December 31, 2023 of $2.2 billion decreased by $1.9 billion from our estimated future capital costs of $4.1 billion as of December 31, 2022. This decrease was attributable to the lower number of future proved undeveloped locations expected to generate an economic return as a result of lower natural gas prices. Our estimated future capital costs to develop proved undeveloped reserves as of December 31, 2022 of $4.1 billion increased by $1.4 billion from our estimated future capital costs of $2.7 billion as of December 31, 2021.
We performed an analysis to compare our proved reserve estimates as of December 31, 2023 to natural gas and oil reserves using a $3.24 per Mcf natural gas price and a $69.39 per Bbl oil price, which represents our expected realized prices based on a $3.50 per Mcf NYMEX index natural gas price and a $75.00 per Bbl NYMEX index oil price ("Alternative Prices") to show the sensitivity of our natural gas and oil reserves to price fluctuations. All factors other than the natural gas and oil price assumptions have been held constant with the average first of the month pricing for the last twelve months ("SEC Prices"), including the number of proved undeveloped locations, drill schedules and operating cost assumptions. This sensitivity analysis is only meant to demonstrate the impact that changing natural gas and oil prices may have on our proved natural gas and oil reserves and the related PV 10 Value and there is no assurance this outcome will be realized. Our proved natural gas and oil reserves utilizing SEC Prices and Alternative Prices are as follows:
|
|
SEC Price Case |
|
|
Alternative Price Case |
|
||
Oil (MBbls) |
|
|
|
|
|
|
||
Proved Developed |
|
|
548 |
|
|
|
571 |
|
Proved Undeveloped |
|
|
— |
|
|
|
— |
|
Total |
|
|
548 |
|
|
|
571 |
|
|
|
|
|
|
|
|
||
Natural Gas (MMcf) (1) |
|
|
|
|
|
|
||
Proved Developed |
|
|
2,734,175 |
|
|
|
2,782,085 |
|
Proved Undeveloped |
|
|
2,206,051 |
|
|
|
3,857,745 |
|
Total |
|
|
4,940,226 |
|
|
|
6,639,830 |
|
|
|
|
|
|
|
|
||
Total Proved Reserves (MMcfe) (1) |
|
|
4,943,517 |
|
|
|
6,643,255 |
|
|
|
|
|
|
|
|
||
PV 10 Value (in thousands) (2) |
|
$ |
2,501,696 |
|
|
$ |
5,165,729 |
|
______________
11
COMSTOCK RESOURCES, INC.
Proved reserve information in this report is based on estimates prepared by our petroleum engineering staff and is the responsibility of management. We retained an independent petroleum consultant to conduct an audit of our December 31, 2023 reserve estimates. Netherland, Sewell & Associates, Inc. ("NSAI") audited 100% of our total PV 10 Value as of December 31, 2023. The purpose of this audit was to provide additional assurance on the reasonableness of internally prepared reserve estimates. NSAI was selected for its geographic expertise and historical experience.
The audit letter prepared by NSAI is included as an exhibit to this report. The technical persons at the independent petroleum consulting firm responsible for reviewing the reserve estimates presented herein meet the requirements regarding qualifications, independence, objectivity and confidentiality as set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers.
The independent consultant's estimates of proved reserves and the pretax present value of such reserves discounted at 10% did not differ from our estimates by more than 2% in the aggregate. However, when compared on a lease-by-lease, field-by-field or area-by-area basis, some of our estimates may be greater than those of our independent consultant and some may be less than the estimates of the independent consultant. When such differences do not exceed 10% in the aggregate, our reserve auditor is satisfied that the proved reserves and pretax present value of such reserves discounted at 10% are reasonable and will issue an unqualified opinion. Remaining differences are not resolved due to the limited cost benefit of continuing such analysis. During the year, our reserves group also performs separate, detailed technical reviews of reserve estimates for significant acquisitions or for properties with problematic indicators such as excessively long lives, sudden changes in performance or changes in economic or operating conditions.
We have established and maintain internal controls designed to provide reasonable assurance that the estimates of proved reserves are computed and reported in accordance with rules and regulations promulgated by the SEC. These internal controls include documented process workflows, employing qualified engineering and geological personnel, and on-going education for personnel involved in our reserves estimation process. Our internal audit function routinely tests our processes and controls. Throughout the year, our technical team meets periodically with representatives of our independent petroleum consultants to review properties and discuss methods and assumptions. We provide historical information to our consultants for our largest producing properties such as ownership interest, production, well test data, commodity prices and operating and development costs. In some cases, additional meetings are held to review identified reserve differences.
All of our reserve estimates are reviewed with our executive management, our independent consultants perform an independent analysis, and ultimately our reserve estimates are approved by our Director of Reservoir Engineering, Kristine Bartlett. Ms. Bartlett holds a Bachelor of Science degree in Petroleum Engineering and Geoscience from the University of Texas at Austin and has eleven years of engineering experience in the oil and gas industry.
We did not provide estimates of total proved natural gas and oil reserves during the three year period ended December 31, 2023 to any federal authority or agency, other than the SEC.
Production, Price and Cost Summary
Annual production, average prices that we realized from sales of natural gas and oil and the associated lifting costs for each of the last three fiscal years were as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
Net Production Volumes: |
|
|
|
|
|
|
|
|
|
|||
Natural gas - Mcf |
|
|
524,467 |
|
|
|
500,616 |
|
|
|
489,274 |
|
Oil - Bbl |
|
|
70 |
|
|
|
82 |
|
|
|
1,210 |
|
Average Prices: |
|
|
|
|
|
|
|
|
|
|||
Natural Gas - $/Mcf |
|
$ |
2.40 |
|
|
$ |
6.23 |
|
|
$ |
3.63 |
|
Oil - $/Bbl |
|
$ |
73.73 |
|
|
$ |
92.65 |
|
|
$ |
61.95 |
|
Lifting Costs - $/Mcfe: |
|
|
|
|
|
|
|
|
|
|||
Lease operating |
|
$ |
0.25 |
|
|
$ |
0.22 |
|
|
$ |
0.21 |
|
Gathering and transportation |
|
$ |
0.35 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
Production and ad valorem taxes |
|
$ |
0.18 |
|
|
$ |
0.16 |
|
|
$ |
0.10 |
|
12
COMSTOCK RESOURCES, INC.
Drilling Activity Summary
During the three-year period ended December 31, 2023, we drilled development and exploratory wells as set forth in the table below:
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||||||||||||||
|
|
Gross |
|
|
Net |
|
|
Gross |
|
|
Net |
|
|
Gross |
|
|
Net |
|
||||||
Development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Oil |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gas |
|
|
63 |
|
|
|
47.6 |
|
|
|
116 |
|
|
|
58.6 |
|
|
|
100 |
|
|
|
54.1 |
|
Dry |
|
|
1 |
|
|
|
1.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
64 |
|
|
|
48.6 |
|
|
|
116 |
|
|
|
58.6 |
|
|
|
100 |
|
|
|
54.1 |
|
Exploratory: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Oil |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gas |
|
|
7 |
|
|
|
6.9 |
|
|
|
2 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
— |
|
Dry |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
7 |
|
|
|
6.9 |
|
|
|
2 |
|
|
|
2.0 |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
71 |
|
|
|
55.5 |
|
|
|
118 |
|
|
|
60.6 |
|
|
|
100 |
|
|
|
54.1 |
|
As of December 31, 2023, 2022 and 2021, we had 30 (26.9 net), 42 (29.0 net), and 28 (21.9 net), respectively, operated wells in the process of being drilled and completed.
Producing Well Summary
The following table sets forth the gross and net producing natural gas and oil wells in which we owned an interest at December 31, 2023:
|
|
Oil |
|
|
Natural Gas |
|
||||||||||
|
|
Gross |
|
|
Net |
|
|
Gross |
|
|
Net |
|
||||
Louisiana |
|
|
4 |
|
|
|
2.6 |
|
|
|
1,286 |
|
|
|
716.3 |
|
New Mexico |
|
|
1 |
|
|
|
— |
|
|
|
86 |
|
|
|
13.2 |
|
Oklahoma |
|
|
6 |
|
|
|
0.6 |
|
|
|
98 |
|
|
|
8.8 |
|
Texas |
|
|
11 |
|
|
|
6.2 |
|
|
|
960 |
|
|
|
767.1 |
|
Wyoming |
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
1.9 |
|
Total |
|
|
22 |
|
|
|
9.4 |
|
|
|
2,456 |
|
|
|
1,507.3 |
|
We operate 1,703 of the 2,478 producing wells presented in the above table. As of December 31, 2023, we did not own an interest in any wells containing multiple completions, which means that a well is producing from more than one completed zone.
Acreage
The following table summarizes our developed and undeveloped leasehold acreage at December 31, 2023, all of which is onshore in the continental United States. We have excluded acreage in which our interest is limited to a royalty or overriding royalty interest.
|
|
Developed |
|
|
Undeveloped |
|
||||||||||
|
|
Gross |
|
|
Net |
|
|
Gross |
|
|
Net |
|
||||
Louisiana |
|
|
197,119 |
|
|
|
152,354 |
|
|
|
27,543 |
|
|
|
21,215 |
|
New Mexico |
|
|
12,757 |
|
|
|
2,739 |
|
|
|
— |
|
|
|
— |
|
Oklahoma |
|
|
26,080 |
|
|
|
3,382 |
|
|
|
— |
|
|
|
— |
|
Texas |
|
|
209,875 |
|
|
|
159,872 |
|
|
|
366,564 |
|
|
|
271,617 |
|
Wyoming |
|
|
13,440 |
|
|
|
927 |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
459,271 |
|
|
|
319,274 |
|
|
|
394,107 |
|
|
|
292,832 |
|
13
COMSTOCK RESOURCES, INC.
As of December 31, 2023, our undeveloped acreage expires as follows:
|
|
Gross |
|
|
Net |
|
||||||||||
2024 |
|
|
11,040 |
|
|
|
3 |
% |
|
|
5,900 |
|
|
|
2 |
% |
2025 |
|
|
40,658 |
|
|
|
10 |
% |
|
|
30,270 |
|
|
|
10 |
% |
2026 |
|
|
85,905 |
|
|
|
22 |
% |
|
|
53,333 |
|
|
|
18 |
% |
2027 |
|
|
42,615 |
|
|
|
11 |
% |
|
|
21,443 |
|
|
|
7 |
% |
2028 |
|
|
22,251 |
|
|
|
6 |
% |
|
|
20,251 |
|
|
|
7 |
% |
Thereafter |
|
|
191,638 |
|
|
|
48 |
% |
|
|
161,635 |
|
|
|
56 |
% |
|
|
|
394,107 |
|
|
|
100 |
% |
|
|
292,832 |
|
|
|
100 |
% |
Title to our natural gas and oil properties is subject to royalty, overriding royalty, carried and other similar interests and contractual arrangements customary in the natural gas and oil industry, liens incident to operating agreements and for current taxes not yet due and other minor encumbrances. All of our natural gas and oil properties are pledged as collateral under our bank credit facility. As is customary in the natural gas and oil industry, we are generally able to retain our ownership interest in undeveloped acreage by production from wells producing from a different reservoir, by drilling activity which establishes commercial reserves sufficient to maintain the lease, by payment of delay rentals or by the exercise of contractual extension rights.
Markets and Customers
The market for our production of natural gas and oil depends on factors beyond our control, including the extent of domestic production and imports of natural gas and oil, the proximity and capacity of natural gas pipelines and other transportation facilities, demand for natural gas and oil, the marketing of competitive fuels and the effects of state and federal regulation. The natural gas and oil industry also competes with other industries in supplying the energy and fuel requirements of industrial, residential and commercial consumers along with electric generator customers.
Our natural gas production is primarily sold under contracts with various terms and priced on first of the month index prices or on daily spot market prices or fixed prices. We target selling approximately 80% of our natural gas on first of month index price, with the remaining 20% on daily spot market pricing. The percentage of natural gas sold on spot market pricing can be impacted when new wells commence production as such production is typically sold on daily spot market pricing during the month the well is first brought on line. Enterprise Products Operating and its subsidiaries, Southwest Energy L.P. and Venture Global LNG, Inc. accounted for 20%. 17% and 10%, respectively, of our total 2023 sales. The loss of any of these customers would not have a material adverse effect on us as there is an available market for our natural gas and oil production from other purchasers.
We have entered into longer term transportation arrangements to ensure that we have adequate transportation to deliver our natural gas production in North Louisiana and East Texas to various markets. As an alternative to constructing our own gathering and treating facilities, we have entered into a variety of gathering and treating agreements with midstream companies to transport our natural gas to a central point or other long-haul natural gas pipelines. We currently have agreements with certain natural gas midstream companies to provide us with firm transportation for an average of approximately 1.8 Bcf per day in 2024 on the long-haul pipelines. To the extent we are not able to deliver the contracted natural gas volumes, we may be responsible for the transportation costs. Our production available to deliver under these agreements is expected to exceed the firm transportation arrangements we have in place. In addition, any marketing company managing the firm transportation is required to use reasonable efforts to supplement our deliveries should we have a shortfall during the term of the agreements.
Competition
The natural gas and oil industry is highly competitive. Competitors include major oil companies, other independent energy companies and individual producers and operators, many of which have financial resources, personnel and facilities substantially greater than we do. We face intense competition for the acquisition of natural gas and oil properties and leases for natural gas and oil exploration.
Regulation
General. Various aspects of our natural gas and oil operations are subject to extensive and continually changing regulation, as legislation affecting the natural gas and oil industry is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, are authorized by statute to issue, and have issued, rules and
14
COMSTOCK RESOURCES, INC.
regulations binding upon the natural gas and oil industry and its individual members. The Federal Energy Regulatory Commission, or "FERC", regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938, or "NGA", and the Natural Gas Policy Act of 1978, or "NGPA". In 1989, however, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all remaining price and nonprice controls affecting all "first sales" of natural gas, effective January 1, 1993, subject to the terms of any private contracts that may be in effect. While sales by producers of natural gas and all sales of crude oil, condensate and natural gas liquids can currently be made at uncontrolled market prices, in the future Congress could reenact price controls or enact other legislation with detrimental impact on many aspects of our business. Under the provisions of the Energy Policy Act of 2005 (the "2005 Act"), the NGA has been amended to prohibit any form of market manipulation with the purchase or sale of natural gas, and the FERC has issued new regulations that are intended to increase natural gas pricing transparency. The 2005 Act has also significantly increased the penalties for violations of the NGA. The FERC has issued Order No. 704 et al. which requires a market participant to make an annual filing if it has sales or purchases equal to or greater than 2.2 million MMBtu in the reporting year to facilitate price transparency.
Regulation and transportation of natural gas. Our sales of natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation are subject to extensive regulation. The FERC requires interstate pipelines to provide open-access transportation on a not unduly discriminatory basis for similarly situated shippers. The FERC frequently reviews and modifies its regulations regarding the transportation of natural gas, with the stated goal of fostering competition within the natural gas industry.
Intrastate natural gas transportation is subject to regulation by state regulatory agencies. The Texas Railroad Commission has been changing its regulations governing transportation and gathering services provided by intrastate pipelines and gatherers. While the changes by these state regulators affect us only indirectly, they are intended to further enhance competition in natural gas markets. We cannot predict what further action the FERC or state regulators will take on these matters; however, we do not believe that we will be affected differently in any material respect than other natural gas producers with which we compete by any action taken.
Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC, state commissions and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach pursued by the FERC, Congress and state regulatory authorities will continue.
Federal leases. Some of our operations are located on federal natural gas and oil leases that are administered by the Bureau of Land Management ("BLM") of the United States Department of the Interior. These leases are issued through competitive bidding and contain relatively standardized terms. These leases require compliance with detailed Department of Interior and BLM regulations and orders that are subject to interpretation and change. These leases are also subject to certain regulations and orders promulgated by the Department of Interior's Bureau of Ocean Energy Management, Regulation & Enforcement ("BOEMRE"), through its Minerals Revenue Management Program, which is responsible for the management of revenues from both onshore and offshore leases. The Company's operations located on federal natural gas and oil leases are insignificant to its total operations and any Executive Orders related to federal natural gas and oil leases issued by the Biden administration are not expected to adversely affect our business, financial position and results of operations.
Oil and natural gas liquids transportation rates. Our sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at market prices. In a number of instances, however, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to FERC jurisdiction under the Interstate Commerce Act. In other instances, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to regulation by state regulatory bodies under state statutes. The price received from the sale of these products may be affected by the cost of transporting the products to market.
The FERC's regulation of pipelines that transport crude oil, condensate and natural gas liquids under the Interstate Commerce Act is generally more light-handed than the FERC's regulation of natural gas pipelines under the NGA. FERC-regulated pipelines that transport crude oil, condensate and natural gas liquids are subject to common carrier obligations that generally ensure non-discriminatory access. With respect to interstate pipeline transportation subject to regulation of the FERC under the Interstate Commerce Act, rates generally must be cost-based, although settlement rates agreed to by all shippers are permitted and market-based rates are permitted in certain circumstances. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system (based on inflation) for transportation rates governed by the Interstate Commerce Act that allowed for an increase or decrease in the transportation rates. The FERC's regulations include a methodology for such pipelines to change their rates through the use of an index system that establishes ceiling levels for such rates. The mandatory five year review in 2005 revised the methodology for this index to be based on Producer Price Index for Finished Goods
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(PPI-FG) plus 1.3 percent for the period July 1, 2006 through June 30, 2011. The mandatory five year review in 2012 revised the methodology for this index to be based on PPI-FG plus 2.65 percent for the period July 1, 2011 through June 30, 2016. The regulations provide that each year the Commission will publish the oil pipeline index after the PPI-FG becomes available.
With respect to intrastate crude oil, condensate and natural gas liquids pipelines subject to the jurisdiction of state agencies, such state regulation is generally less rigorous than the regulation of interstate pipelines. State agencies have generally not investigated or challenged existing or proposed rates in the absence of shipper complaints or protests. Complaints or protests have been infrequent and are usually resolved informally.
We do not believe that the regulatory decisions or activities relating to interstate or intrastate crude oil, condensate or natural gas liquids pipelines will affect us in a way that materially differs from the way it affects other crude oil, condensate and natural gas liquids producers or marketers.
Environmental regulations. We are subject to stringent federal, state and local laws. These laws, among other things, govern the issuance of permits to conduct exploration, drilling and production operations, the amounts and types of materials that may be released into the environment, the discharge and disposition of waste materials, the remediation of contaminated sites and the reclamation and abandonment of wells, sites and facilities. Numerous governmental departments issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial civil and even criminal penalties for failure to comply. Some laws, rules and regulations relating to protection of the environment may, in certain circumstances, impose strict liability for environmental contamination, rendering a person liable for environmental damages and cleanup cost without regard to negligence or fault on the part of such person. Other laws, rules and regulations may restrict the rate of natural gas and oil production below the rate that would otherwise exist or even prohibit exploration and production activities in sensitive areas. In addition, state laws often require various forms of remedial action to prevent pollution, such as closure of inactive pits and plugging of abandoned wells. The regulatory burden on the natural gas and oil industry increases our cost of doing business and consequently affects our profitability. These costs are considered a normal, recurring cost of our on-going operations. Our domestic competitors are generally subject to the same laws and regulations.
We believe that we are in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on our operations. Environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements or new regulatory schemes such as carbon "cap and trade" or pricing programs could have a material adverse effect upon our capital expenditures, earnings or competitive position, including the suspension or cessation of operations in affected areas. The Biden administration has made, and is expected to make additional changes to applicable regulations, and in each case we expect changes to be more stringent than those of the prior administration. There are also costs associated with responding to changing regulations and policies, whether such regulations are more or less stringent. As such, there can be no assurance that material cost and liabilities will not be incurred in the future.
The Comprehensive Environmental Response, Compensation and Liability Act; or "CERCLA", imposes liability, without regard to fault, on certain classes of persons that are considered to be responsible for the release of a "hazardous substance" into the environment. These persons include the current or former owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances at such sites. Under CERCLA, such persons may be subject to joint and several liability for the cost of investigating and cleaning up hazardous substances that have been released into the environment, for damages to natural resources and for the cost of certain health studies. In addition, companies that incur liability frequently also confront third party claims because it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment from a polluted site. Many states have adopted similar statutes that impose liability for the release of hazardous substances and petroleum. In addition, from time to time the U.S. Environmental Protection Agency ("EPA"), states, and other agencies make new findings that certain chemicals are potential environmental concerns, sometimes referred to as emerging contaminants. These agencies may also adjust risk based assessment or cleanup levels, in some instances, to be more stringent. The EPA and other agencies may impose new restrictions or cleanup requirements on such chemicals. We may incur costs to comply with such requirements.
The Federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, or "RCRA", regulates the generation, transportation, storage, treatment and disposal of hazardous wastes and can require cleanup of hazardous waste disposal sites. RCRA currently excludes drilling fluids, produced waters and other wastes associated with the exploration, development or production of natural gas and oil gas from regulation as "hazardous waste". Disposal of such non-hazardous natural gas and oil exploration, development and production wastes usually are regulated by state law. Other
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wastes handled at exploration and production sites or used in the course of providing well services may not fall within this exclusion. Moreover, stricter standards for waste handling and disposal may be imposed on the natural gas and oil industry in the future. From time to time, legislation is proposed in Congress that would revoke or alter the current exclusion of exploration, development and production wastes from RCRA's definition of "hazardous wastes", thereby potentially subjecting such wastes to more stringent handling, disposal and cleanup requirements. If such legislation were enacted, it could have a significant impact on our operating costs, as well as the natural gas and oil industry in general. The impact of future revisions to environmental laws and regulations cannot be predicted.
Certain natural gas and oil wastes may also contain naturally occurring radioactive material ("NORM"), which is regulated by the federal Occupational Safety and Health Administration and state agencies. These regulations require certain worker protections and waste handling and disposal procedures. We believe our operations comply in all material respects with these worker protection and waste handling and disposal requirements.
Our operations are also subject to the Clean Air Act, or "CAA", and comparable state and local requirements. Amendments to the CAA were adopted in 1990 and contain provisions that may result in the gradual imposition of certain pollution control requirements with respect to air emissions from our operations. Between 2012 and 2014, the EPA promulgated new emission standards for the natural gas and oil industry, and made revisions that imposed further requirements with respect to volatile organic compounds ("VOCs") and methane. In September 2020, the EPA published a rule that revised the VOC requirements and rescinded the methane requirements, as well as revised its interpretation of the CAA, such that, in order to impose the methane emission requirements, it would need to first make a Significant Contribution Finding for each particular pollutant for the specific source. Since that time, the US has passed a law that repeals the 2020 rules, and the EPA issued a new proposed rule as of November 2021 and supplemented the proposed rule in December 2022. EPA issued its final new rule on December 2, 2023. The rule has a number of provisions intended to reduce methane emissions from natural gas and oil operations. We believe our operations will not be materially adversely affected by the new requirements, and the requirements will not be any more burdensome to us than to other similarly situated companies involved in natural gas and oil exploration and production activities.
The Federal Water Pollution Control Act of 1972, as amended, or the "Clean Water Act", imposes restrictions and controls on the discharge of produced waters and other wastes into navigable waters. Permits must be obtained to discharge pollutants into state and federal waters and to conduct construction activities in waters and wetlands. Recent judicial interpretations have caused certain water features to be considered jurisdictional when they were not previously. Additionally, in January 2023,the EPA and the US Army Corps of Engineers issued a new rule that revises the definition of "waters of the United States" ("WOTUS"). The new rule has been challenged by several states and industry groups. If upheld, such regulations may impact certain exploration and production activities. Certain state regulations and the general permits issued under the Federal National Pollutant Discharge Elimination System program prohibit the discharge of produced waters and sand, drilling fluids, drill cuttings and certain other substances related to the natural gas and oil industry into certain coastal and offshore waters, unless otherwise authorized. Further, the EPA has adopted regulations requiring certain natural gas and oil exploration and production facilities to obtain permits for storm water discharges. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans. The Clean Water Act and comparable state statutes provide for civil, criminal and administrative penalties for unauthorized discharges for oil and other pollutants and impose liability on parties responsible for those discharges for the cost of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release. We believe that our operations comply in all material respects with the requirements of the Clean Water Act and state statutes enacted to control water pollution and that the requirements, including those under the 2023 WOTUS rule, are not any more burdensome to us than to other similarly situated companies involved in natural gas and oil exploration and production activities.
The Federal Safe Drinking Water Act of 1974, as amended, requires the EPA to develop minimum federal requirements for Underground Injection Control ("UIC") programs and other safeguards to protect public health by preventing injection wells from contaminating underground sources of drinking water. The UIC program does not regulate wells that are solely used for production. However, the EPA has authority to regulate hydraulic fracturing when diesel fuels are used in fluids or propping agents. In February 2014, the EPA issued guidance on when UIC permitting requirements apply to fracking fluids containing diesel. We believe that our operations comply in all material respects with the requirements of the Federal Safe Drinking Water Act and similar state statutes. We believe the requirements are not any more burdensome to us than to other similarly situated companies involved in natural gas and oil exploration and production activities.
State and federal regulatory agencies have studied possible connections between hydraulic fracturing related activities and the increased occurrence of seismic activity. When caused by human activity, such events are called induced seismicity. In a few instances, operators of injection wells in the vicinity of seismic events have been ordered to reduce injection volumes
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or suspend operations. Some state regulatory agencies, including those in Arkansas, California, Colorado, Illinois, Kansas, Ohio, Oklahoma, and Texas, have modified their regulations to account for induced seismicity. There continues to be research into the possible linkage between natural gas and oil activity and induced seismicity. A 2012 report published by the National Academy of Sciences, as well as a more recent paper published in the journal Reviews of Geophysics and cited on the US Geological Survey website, concluded that only a very small fraction of the tens of thousands of injection wells have been suspected to be, or have been, the likely cause of induced seismicity. In 2015, the United States Geological Survey identified eight states, including Texas, with areas of increased rates of induced seismicity that could be attributed to fluid injection or natural gas and oil extraction. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Texas, Colorado, Oklahoma, Kansas, New Mexico, and Arkansas. In addition, a number of lawsuits have been filed, including in Oklahoma, alleging that disposal well operations have caused damage to or injury at nearby properties or otherwise violated state and federal rules regulating waste disposal. It is possible that the EPA or other agencies may develop rules to specifically address the disposal of wastewater from natural gas and oil development and the potential for induced seismicity from wastewater injection. Future regulatory developments could adversely affect our operations by placing restrictions on the use of injection wells and hydraulic fracturing and/or causing us to incur increased operating expenses.
In December 2016, the EPA finalized its report on the potential impacts of hydraulic fracturing on drinking water resources, which concluded that hydraulic fracturing activities could impact drinking water resources under some circumstances. Other governmental agencies, including the U.S. Department of Energy, have evaluated or are evaluating various other aspects of hydraulic fracturing. These ongoing or proposed studies have the potential to impact the likelihood or scope of future legislation or regulation.
Federal regulators require certain owners or operators of facilities that store or otherwise handle oil to prepare and implement spill prevention, control, countermeasure and response plans relating to the possible discharge of oil into surface waters. The Oil Pollution Act of 1990 ("OPA") contains numerous requirements relating to the prevention and response to oil spills in the WOTUS. The OPA subjects owners of facilities to strict joint and several liability for all containment and cleanup costs and certain other damages relating to a spill. Noncompliance with OPA may result in varying civil and criminal penalties and liabilities.
Executive Order 13158, issued on May 26, 2000, directs federal agencies to safeguard existing Marine Protected Areas, or MPAs, in the United States and establish new MPAs. The order requires federal agencies to avoid harm to MPAs to the extent permitted by law and to the maximum extent practicable. It also directs the EPA to propose new regulations under the Clean Water Act to ensure appropriate levels of protection for the marine environment. This order has the potential to adversely affect our operations by restricting areas in which we may carry out future exploration and development projects and/or causing us to incur increased operating expenses.
Certain flora and fauna that have officially been classified as "threatened" or "endangered" are protected by the Endangered Species Act. This law prohibits any activities that could "take" a protected plant or animal or reduce or degrade its habitat area. If endangered species are located in an area we wish to develop, the work could be prohibited or delayed and/or expensive mitigation might be required.
Other statutes that provide protection to animal and plant species and which may apply to our operations include, but are not necessarily limited to, the Oil Pollution Act, the Emergency Planning and Community Right to Know Act, the Marine Mammal Protection Act, the Marine Protection, Research and Sanctuaries Act, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act and the National Historic Preservation Act. These laws and regulations may require the acquisition of a permit or other authorization before construction or drilling commences and may limit or prohibit construction, drilling and other activities on certain lands lying within wilderness or wetlands and other protected areas and impose substantial liabilities for pollution resulting from our operations. The permits required for our various operations are subject to revocation, modification and renewal by issuing authorities. In addition, laws such as the National Environmental Policy Act and the Coastal Zone Management Act may make the process of obtaining certain permits more difficult or time consuming, resulting in increased costs and potential delays that could affect the viability or profitability of certain activities. Administrative policies with respect to such laws are also changing, and we incur costs to follow such changes and comply as changes become effective.
Certain statutes such as the Emergency Planning and Community Right to Know Act require the reporting of hazardous chemicals manufactured, processed, or otherwise used, which may lead to heightened scrutiny of the company's operations by regulatory agencies or the public. In 2012, the EPA adopted the Petroleum and Natural Gas Systems Greenhouse Gas Reporting Rule (40 C.F.R. Part 98, Subpart W), which requires certain onshore petroleum and natural gas facilities to collect data on their
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emissions of greenhouse gases ("GHG"). GHGs include gases such as methane, a primary component of natural gas, and carbon dioxide, a byproduct of burning natural gas. Different GHGs have different global warming potentials with CO2 having the lowest global warming potential, so emissions of GHGs are typically expressed in terms of CO2 equivalents, or CO2e. The rule applies to facilities that emit 25,000 metric tons of CO2e or more per year, and requires onshore petroleum and natural gas operators to group all equipment under common ownership or control within a single hydrocarbon basin together when determining if the threshold is met. These greenhouse gas reporting rules were amended on October 22, 2015 to expand the number of sources and operations that are subject to these rules, and again on November 18, 2016 to provide less burdensome reporting requirements. We have determined that these reporting requirements apply to us and we believe we have met all of the EPA required reporting deadlines and strive to ensure accurate and consistent emissions data reporting. Other EPA actions with respect to the reduction of greenhouse gases (such as the EPA's Greenhouse Gas Endangerment Finding, and the EPA's Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule) and various state actions have or could impose mandatory reductions in greenhouse gas emissions. We are unable to predict at this time how much the cost of compliance with any legislation or regulation of greenhouse gas emissions will be in future periods.
The U.S. has not passed legislation to expressly regulate GHG emissions; however, in recent years the EPA moved ahead with its efforts to regulate GHG emissions from certain sources by rule. Beyond requiring measurement and reporting of GHGs as discussed above, the EPA issued an "Endangerment Finding" under section 202(a) of the Clean Air Act, concluding greenhouse gas pollution threatens the public health and welfare of current and future generations. The EPA has adopted regulations that would require permits for and reductions in greenhouse gas emissions for certain facilities. States in which we operate may also require permits and reductions in GHG emissions. Additionally, as discussed above, the EPA has promulgated rules that require reductions in VOC and methane generation from natural gas and oil operations. Additional regulations may still be forthcoming. Similarly, the Bureau of Land Management ("BLM") has proposed to suspend and revise a 2016 rule relating to methane venting, flaring, and leaks from natural gas and oil production on public lands that was being challenged by multiple western states and energy companies. In September 2018, the BLM published a final rule revising or rescinding certain provisions of the 2016 rule. The 2018 rule was challenged in federal court, and was vacated in 2020, but the court stayed its vacatur of the 2018 rule to allow for challenges to the 2016 rule to proceed. BLM did not defend the 2016 rule, and it was vacated. This decision may be further appealed, leaving the final outcome uncertain. In November 2022, the BLM proposed a new rule that would establish new requirements designed to reduce waste of natural gas from venting, flaring and leaks. Since all of our natural gas and oil production is in the United States, laws or regulations that have been or may be adopted to restrict or reduce emissions of greenhouse gases could require us to incur substantial increased operating costs, and could have an adverse effect on demand for the natural gas and oil we produce. In addition, efforts have been made and continue to be made in the international community toward the adoption of international treaties or protocols that would address global climate change issues. In 2015, the United States participated in the United Nations Conference on Climate Change, which led to the creation of the Paris Agreement. The Paris Agreement requires ratifying countries to review and "represent a progression" in the ambitions of their nationally determined contributions, which set GHG emission reduction goals, every five years. The United States signed the Paris Agreement on April 22, 2016; although the Trump administration provided notice of its intent to withdraw from the Paris Agreement, the Biden administration has reinstated the United States' participation. Further, the US has made additional commitments with respect to GHG emissions through the United Nations Climate Change Conference, including with respect to reducing methane emissions. It is difficult to predict the timing and certainty of any future government action and the effect on our operations. Future legislation or regulations adopted to address climate change could also make our products more or less desirable than competing sources of energy. However, we expect that the impacts to our operations will not be materially different from other similarly situated companies involved in natural gas and oil exploration and production activities.
The Inflation Reduction Act (the "IRA"), which was signed into law on August 16, 2023, established a new program, the Methane Emission Reduction Program, that imposes a first-time federal fee on methane emissions for the oil and gas sector. In general, covered facilities that emit 25,000 metric tons of carbon dioxide equivalent or more per year are required to pay for "excess" methane emissions, with the fee starting at $900 per metric ton in 2024, and increasing to $1,500 per metric ton by 2026. The calculation of the methane fee is determined by (1) the facility's reported emissions under the federal Greenhouse Gas Reporting Program, and (2) an emissions threshold that varies by facility type. For example, for offshore and onshore petroleum and natural gas production facilities, the fee applies to the number of reported tons of methane that exceed (i) 0.2% of the natural gas sent to sale from the facility. We believe our operations will not be materially adversely affected by the IRA, and the requirements will not be any more burdensome to us than to other similarly situated companies involved in natural gas and oil exploration and production activities.
In 2010, the BLM began implementation of a proposed natural gas and oil gas leasing reform that would increase environmental review requirements and was expected to have the effect of reducing the amount of new federal lands made available for lease, increasing the competition for and cost of available parcels. This leasing reform initiative was replaced by
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a new BLM policy, dated January 31, 2018, which is expected to remove the additional environmental review created under the 2010 initiative and streamline the leasing process. Additionally, on December 28, 2017, the BLM rescinded a rule the BLM adopted in 2015 concerning hydraulic fracturing on federal land. The 2015 rule would have required increased well integrity testing, increased requirements for the managing of fluids, and the disclosure of chemicals used in fracturing. In 2021, the Biden administration issued an Executive Order pausing new natural gas and oil leasing and drilling permits for U.S. public lands and offshore waters until the Secretary of the Interior conducts a comprehensive review and reconsideration of Federal natural gas and oil permitting and leasing practices. In 2022, the Biden administration reopened federal lands for natural gas and oil leasing under a reformed program that significantly reduces the acreage available for lease. We believe our operations will not be materially adversely affected by these changes and expect that the impacts to our operations will be similar to other similarly situated companies involved in natural gas and oil exploration and production activities.
Such changes in environmental laws and regulations which result in more stringent and costly reporting, or waste handling, storage, transportation, disposal or cleanup activities, could materially affect companies operating in the energy industry. Adoption of new regulations further regulating emissions from natural gas and oil production could adversely affect our business, financial position, results of operations and prospects, as could the adoption of new laws or regulations which levy taxes or other costs on greenhouse gas emissions from other industries, which could result in changes to the consumption and demand for natural gas. We may also be assessed administrative, civil and/or criminal penalties if we fail to comply with any such new laws and regulations applicable to natural gas and oil production.
Regulation of natural gas and oil exploration and production. Our exploration and production operations are subject to various types of regulation at the federal, state and local levels. Such regulations include requiring permits and drilling bonds for the drilling of wells, regulating the location of wells, the method of drilling and casing wells and the surface use and restoration of properties upon which wells are drilled. Many states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of natural gas and oil properties, the establishment of maximum rates of production from natural gas and oil wells and the regulation of spacing, plugging and abandonment of such wells. Some state statutes limit the rate at which natural gas and oil can be produced from our properties. It is also possible that certain states may increase regulatory activity in response to changing federal regulations or policies.
State regulation. Most states regulate the production and sale of natural gas and oil, including requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of natural gas and oil resources. The rate of production may be regulated and the maximum daily production allowable from both natural gas and oil wells may be established on a market demand or conservation basis or both.
Office and Operations Facilities
Our executive offices are located at 5300 Town and Country Blvd., Suite 500 in Frisco, Texas 75034 and our telephone number is (972) 668-8800. We lease office space in Frisco, Texas covering 66,382 square feet. This lease expires on December 31, 2031, with an early termination provision at the end of the fourth year. We also own production offices and pipe yard facilities near Carthage, Franklin, Nacogdoches, Marshall, Marquez and Tennessee Colony in Texas and Bossier City, Grand Cane, Greenwood, Homer, Mansfield and Logansport in Louisiana.
Human Capital
As of December 31, 2023, we had 251 employees and utilized contract employees for certain of our drilling, completion and production operations. We seek to attract a qualified and diverse workforce and maintain strong non-discrimination and anti-harassment policies.
The safety of our employees, contractors and the community is a core business value and in order to obtain our goals of operational excellence and an injury free workplace, we maintain a strong health and safety management system. The framework includes policies and procedures outlining how we do our work, programs to engage employees and drive a proactive safety culture, employee training to help ensure our employees have the knowledge to perform their work safely, setting targets and objectives for clearly defined deliverables and accountabilities and periodic audit and inspection of results using data collection of key performance indicators and scorecards to measure our success and develop improvement strategies.
We utilize a third party contractor management service to ensure a consistent approach in aligning our expectations with all third parties involved in our operations. We hold our contractors accountable to the highest performance standards through our contractor onboarding and continuous auditing process.
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Directors and Executive Officers
The following table sets forth certain information concerning our executive officers and directors.
Name |
|
Position with Company |
|
Age |
M. Jay Allison |
|
Chief Executive Officer and Chairman of the Board of Directors |
|
68 |
Roland O. Burns |
|
President, Chief Financial Officer, Secretary and Director |
|
63 |
Daniel S. Harrison |
|
Chief Operating Officer |
|
60 |
Clifford D. Newell |
|
Vice President of Corporate Development and Chief Commercial Officer |
|
45 |
Patrick H. McGough |
|
Vice President of Operations |
|
43 |
Ronald E. Mills |
|
Vice President of Finance and Investor Relations |
|
51 |
Daniel K. Presley |
|
Vice President of Accounting, Controller and Treasurer |
|
63 |
LaRae L. Sanders |
|
Vice President of Land |
|
61 |
Brian C. Claunch |
|
Vice President of Financial Reporting |
|
49 |
Elizabeth B. Davis |
|
Director |
|
61 |
Morris E. Foster |
|
Director |
|
81 |
Jim L. Turner |
|
Director |
|
78 |
A brief biography of each person who serves as an executive officer or director follows below.
Executive Officers
M. Jay Allison has been our Chief Executive Officer since 1988. Mr. Allison was elected Chairman of the Board in 1997 and has been a director since 1987. From 1988 to 2013, Mr. Allison served as our President. From 1981 to 1987, he was a practicing oil and gas attorney with the firm of Lynch, Chappell & Alsup in Midland, Texas. He received B.B.A., M.S. and J.D. degrees from Baylor University in 1978, 1980 and 1981, respectively.
Roland O. Burns has been our President since 2013, Chief Financial Officer since 1990, Secretary since 1991 and a director since 1999. Mr. Burns served as our Senior Vice President from 1994 to 2013 and Treasurer from 1990 to 2013. From 1982 to 1990, Mr. Burns was employed by the public accounting firm, Arthur Andersen. During his tenure with Arthur Andersen, Mr. Burns worked primarily in the firm's oil and gas audit practice. Mr. Burns received B.A. and M.A. degrees from the University of Mississippi in 1982 and is a Certified Public Accountant.
Daniel S. Harrison became our Chief Operating Officer in July 2019 and served as Vice President of Operations since 2017. Mr. Harrison has been with us since 2008 and served in various engineering and operations management positions of increasing responsibility during that time. Prior to joining us, Mr. Harrison was an operations engineer at Cimarex Energy Company from 2005 to 2008. Prior to 2005, he worked in various petroleum engineering operations management positions for several independent oil and gas exploration and development companies. Mr. Harrison received a B.S. Degree in Petroleum Engineering from the Louisiana State University in 1985.
Clifford D. Newell became our Vice President of Corporate Development and Chief Commercial Officer in December 2022. Mr. Newell brings over 15 years of experience in commercial, marketing and operations experience in the midstream energy industry. Prior to joining us, Mr. Newell was responsible for producer relationships, business development, project management, scheduling and marketing as Commercial Vice President at Trace Midstream, Blue Mountain Midstream and Penntex Midstream. He received his Bachelor of Business Administration in Economics and Pre-Law and Executive Master of Business Administration from Centenary College of Louisiana in 2006 and 2013, respectively. He also received his Master of Energy Business from the University of Tulsa in 2015.
Patrick H. McGough became our Vice President of Operations in July 2019 following our acquisition of Covey Park Energy, LLC. He joined Covey Park in August 2018 as the Vice President of Operations, where he was responsible for drilling, completion, and production operations and engineering. Prior to his time at Covey Park, Mr. McGough held significant roles as a drilling, completion, and production engineer at Brammer Engineering. Mr. McGough received a Bachelor of Science in Chemical Engineering from Louisiana Tech University in 2003 and an MBA from Centenary College of Louisiana in 2010.
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Ronald E. Mills became our Vice President of Finance and Investor Relations in August 2019. Prior to joining us, Mr. Mills was an Equity Member and Senior Analyst responsible for covering exploration and production companies at Johnson Rice & Company LLC. Mr. Mills joined Johnson Rice in August 1995. Mr. Mills received a Bachelor of Arts in Economics and Master of Business Administration from Tulane University in 1994 and 1995, respectively.
Daniel K. Presley has been our Treasurer since 2013. Mr. Presley, who has been with us since 1989, also continues to serve as our Vice President of Accounting and Controller, positions he has had held since 1997 and 1991, respectively. Prior to joining us, Mr. Presley had six years of experience with several independent oil and gas companies including AmBrit Energy, Inc. Prior thereto, Mr. Presley spent two and one-half years with B.D.O. Seidman, a public accounting firm. Mr. Presley received a Bachelor of Business Administration degree from Texas A & M University in 1983.
LaRae L. Sanders has been our Vice President of Land since 2014. Ms. Sanders has been with us since 1995. She has served as Land Manager since 2007, and has been instrumental in all of our active development programs and major acquisitions. Prior to joining us, Ms. Sanders held positions with Bridge Oil Company and Kaiser-Francis Oil Company, as well as other independent exploration and production companies. Ms. Sanders is a Certified Professional Landman and became the nation's first Certified Professional Lease and Title Analyst in 1990.
Brian C. Claunch became our Vice President of Financial Reporting in June 2021. Mr. Claunch joined the Company in June 2020 as Director of Financial Reporting. Prior to joining Comstock, Mr. Claunch served as Director of Financial Reporting at Guidon Energy and Controller at Pioneer Natural Resources Company. He received his Bachelor of Business Administration and Master of Science in Accounting degrees from the University of Texas at Arlington in 1999 and is a Certified Public Accountant.
Outside Directors
Elizabeth B. Davis has served as a director since 2014. Dr. Davis is currently the President of Furman University. Dr. Davis was the Executive Vice President and Provost for Baylor University until July 2014, and served as Interim Provost from 2008 until 2010. Prior to her appointment as Provost, she was a professor of accounting in the Hankamer School of Business at Baylor University where she also served as associate dean for undergraduate programs and as acting chair for the Department of Accounting and Business Law. Prior to joining Baylor University, she worked for the public accounting firm Arthur Andersen from 1984 to 1987.
Morris E. Foster has served as a director since 2017. Mr. Morris retired in 2008 as Vice President of ExxonMobil Corporation and President of ExxonMobil Production Company following more than 40 years of service with the ExxonMobil group. Mr. Foster served in a number of production engineering and management roles domestically as well as in the United Kingdom and Malaysia prior to his appointment in 1995 as a Senior Vice President in charge of the upstream business of Exxon Company, USA. In 1998, Mr. Foster was appointed President of Exxon Upstream Development Company, and following the merger of Exxon and Mobil in 1999, he was named to the position of President of ExxonMobil Development Company. In 2004, Mr. Foster was named President of Exxon Mobil Production Company, the division responsible for ExxonMobil's upstream oil and gas exploration and production business, and a Vice President of ExxonMobil Corporation. Mr. Foster currently serves as Chairman of Stagecoach Properties Inc., a real estate holding corporation with properties in Salado, Houston and College Station, Texas and Carmel, California and as a member of the Board of Regents of Texas A&M University. In addition, Mr. Foster currently serves on the board of directors of Scott & White Medical Institute.
Jim L. Turner has served as a director since 2014. Mr. Turner currently serves as Chairman of Turner Holdings, LLC and CEO of JLT Automotive, Inc. Mr. Turner served as President and Chief Executive Officer of Dr Pepper/Seven Up Bottling Group, Inc. from its formation in 1999 through 2005, when he sold this interest in that company. Prior to that, Mr. Turner served as Owner/Chairman of the Board and Chief Executive Officer of the Turner Beverage Group, the largest privately owned independent bottler in the United States. Mr. Turner is past-Chairman and currently serves on the Board of Trustees of Baylor Scott and White Health, the largest not-for-profit healthcare system in the State of Texas, where he also serves as Chairman of the Finance Committee and as a member of the Executive Committee. He is a Director of Crown Holdings where he also serves as Chairman of the Compensation Committee and as a member of the Nominating and Governance Committee. He is on the Board of Directors of INSURICA, a full service insurance agency. Mr. Turner is former Chairman of Dean Foods Company where he also served as Chairman of the Compensation Committee.
Available Information
We file annual, quarterly and current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934. The SEC maintains a website that contains reports, proxy and information statements, and other
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COMSTOCK RESOURCES, INC.
information that is electronically filed with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov. We also make available free of charge on our website (www.comstockresources.com) our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we file such material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
You should carefully consider the following material risk factors as well as the other information contained or incorporated by reference in this report, as these important factors, among others, could cause our actual results to differ from our expected or historical results. It is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete statement of all of our potential risks or uncertainties. Based on the information currently known to us, we believe the following information identifies the most material risk factors affecting us, but the below risks and uncertainties are not the only ones related to our businesses and are not necessarily listed in the order of their significance. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
An extended period of depressed natural gas prices would adversely affect our business, financial condition, cash flow, liquidity, results of operations and our ability to meet our capital expenditure obligations and financial commitments.
Our business is heavily dependent upon the price of, and demand for, natural gas. Historically, natural gas prices have been volatile and are likely to remain volatile in the future. The prices we receive for our natural gas production depend on numerous factors beyond our control, including the following:
Lower natural gas prices will adversely affect:
Our future production and revenues depend on our ability to replace our reserves.
Our future production and revenues depend upon our ability to find, develop or acquire additional natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful drilling activities or acquire properties containing proved reserves, or both. To increase reserves and production, we must continue our acquisition and drilling activities. We cannot assure you that we will have adequate capital resources to conduct acquisition and drilling activities or that our acquisition and drilling activities will result in significant additional reserves or that we will have continuing success drilling productive wells at low finding and development costs. Furthermore, while our revenues may increase if prevailing natural gas and oil prices increase significantly, our finding costs for additional reserves could also increase.
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COMSTOCK RESOURCES, INC.
Substantial exploration and development activities could require significant outside capital, which could dilute the value of our common shares and restrict our activities. Also, we may not be able to obtain needed capital or financing on satisfactory terms, which could lead to a limitation of our future business opportunities and a decline in our natural gas and oil reserves.
We expect to expend substantial capital in the acquisition of, exploration for and development of natural gas reserves. In order to finance these activities, we may need to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of non-strategic assets or other means. The issuance of additional equity securities could have a dilutive effect on the value of our common shares, and may not be possible on terms acceptable to us given the current volatility in the financial markets. The issuance of additional debt would likely require that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions, dividends and general corporate requirements, which could place us at a competitive disadvantage relative to other competitors. Our cash flow from operations and access to capital is subject to a number of variables, including:
If our revenues decrease as a result of lower natural gas prices, operating difficulties or declines in reserves, our ability to obtain the capital necessary to undertake or complete future exploration and development programs and to pursue other opportunities may be limited, which could result in a curtailment of our operations relating to exploration and development of our prospects, which in turn could result in a decline in our natural gas and oil reserves.
Prospects that we decide to drill may not yield natural gas in commercially viable quantities or quantities sufficient to meet our targeted rate of return and firm transportation commitments.
A prospect is a property in which we own an interest, or have operating rights to, and that has what our geoscientists believe, based on available seismic and geological information, to be an indication of potential oil or natural gas. Our prospects are in various stages of evaluation, ranging from a prospect that is ready to be drilled to a prospect that will require substantial additional evaluation and interpretation. There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable. The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities. The analysis that we perform using data from other wells, more fully explored prospects and/or producing fields may not be useful in predicting the characteristics and potential reserves associated with our drilling prospects. If we drill additional unsuccessful wells, our drilling success rate may decline and we may not achieve our targeted rate of return. Further, unsuccessful drilling may impact our ability to fulfill our firm transportation commitments.
Our operations may incur substantial liabilities due to compliance with environmental laws and regulations.
We are subject to stringent federal, state and local laws. These laws, among other things, govern the issuance of permits to conduct exploration, drilling and production operations, the amounts and types of materials that may be released into the environment, the discharge and disposition of waste materials, the remediation of contaminated sites and the reclamation and abandonment of wells, sites and facilities. Numerous governmental departments issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial civil and even criminal penalties for failure to comply. The regulatory burden on the natural gas and oil industry from these environmental laws and regulations increases our cost of doing business and consequently affects our profitability.
Environmental laws and regulations have been subject to frequent changes over the years, and the imposition of more stringent requirements or new regulatory schemes such as carbon "cap and trade" or pricing programs could have a material adverse effect upon our capital expenditures, earnings or competitive position, including the suspension or cessation of operations in affected areas.
We may be subject to physical and financial risks associated with climate change.
Changing climate may create physical and financial risks to our business. Energy needs vary with weather conditions. To the extent weather conditions may be affected by climate change, energy use could increase or decrease depending on the
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COMSTOCK RESOURCES, INC.
duration and magnitude of any changes. Increased energy use due to weather changes may require us to invest in more infrastructure to serve increased demand. A decrease in energy use due to weather changes may affect our financial condition through decreased revenues. Extreme weather conditions in general require more equipment redundancy, adding to costs, and can contribute to increased risk of delivery disruptions.
Additionally, many climate models indicate that global warming is likely to result in rising sea levels and increased frequency and severity of weather events, which may lead to higher insurance costs, or a decrease in available coverage, for our assets in areas subject to severe weather. These climate-related changes could damage our physical assets, especially operations located in low-lying areas near coasts and river banks, and facilities situated in hurricane-prone and rain-susceptible regions. To the extent the frequency of extreme weather events increases, this could increase our cost of producing products. We may not be able to pass on the higher costs to our customers or recover all costs related to mitigating these physical risks.
Regulations relating to climate change and/or greenhouse gases could also reduce demand for our products or increase our operating and drilling costs. Our business could also be affected by the potential for lawsuits against companies that emit greenhouse gases, based on links drawn between greenhouse gas emissions and climate change. To the extent financial markets view climate change and GHG emissions as a financial risk, this could negatively impact our cost of and access to capital.
Increasing scrutiny and changing expectations from stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies across all industries are facing increasing scrutiny from stakeholders related to their environmental, social and governance ("ESG") practices. Investor advocacy groups, certain institutional investors, investment funds and other influential investors are also increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. Regardless of the industry, investors' increased focus and activism related to ESG and similar matters may hinder access to capital, as investors may decide to reallocate capital or to not commit capital as a result of their assessment of a company's ESG practices. Companies that do not adapt to or comply with investor or other stakeholder expectations and standards, which are evolving, or that are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial condition, and/or stock price of such a company could be materially and adversely affected.
We face pressures from our stockholders, who are increasingly focused on climate change, to prioritize sustainable energy practices, reduce our carbon footprint and promote sustainability. Our stockholders may require us to implement new ESG procedures or standards in order to continue engaging with us, to remain invested in us or before they may make further investments in us. Additionally, we may face reputational challenges in the event our ESG procedures or standards do not meet the standards set by certain constituencies. We have adopted certain practices and metrics as highlighted on our website, including with respect to air emissions, land use, environmental, health and safety management and corporate governance. It is possible, however, that our stockholders might not be satisfied with our sustainability efforts or the speed of their adoption. If we do not meet our stockholders' expectations, our business, ability to access capital, and/or our stock price could be harmed.
Additionally, adverse effects upon the oil and gas industry related to the worldwide social and political environment, including uncertainty or instability resulting from climate change, changes in political leadership and environmental policies, changes in geopolitical-social views toward fossil fuels and renewable energy, concern about the environmental impact of climate change, and investors' expectations regarding ESG matters, may also adversely affect demand for our products. Any long-term material adverse effect on the natural gas and oil industry could have a significant financial and operational adverse impact on our business.
The occurrence of any of the foregoing could have a material adverse effect on the price of our stock and our business and financial condition.
We pursue acquisitions as part of our growth strategy and there are risks associated with such acquisitions.
Our growth has been attributable in part to acquisitions of producing properties and companies. Recently we have been focused on acquiring acreage for our drilling program. We expect to continue to evaluate and, where appropriate, pursue acquisition opportunities on terms we consider favorable. However, we cannot assure you that suitable acquisition candidates will be identified in the future, or that we will be able to finance such acquisitions on favorable terms. In addition, we compete against other companies for acquisitions, and we cannot assure you that we will successfully acquire any material property interests. Further, we cannot assure you that future acquisitions by us will be integrated successfully into our operations or will increase our profits.
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COMSTOCK RESOURCES, INC.
The successful acquisition of producing properties requires an assessment of numerous factors beyond our control, including, without limitation:
In connection with such assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. The resulting assessments are inexact and their accuracy uncertain, and such a review may not reveal all existing or potential problems, nor will it necessarily permit us to become sufficiently familiar with the properties to fully assess their merits and deficiencies. Inspections may not always be performed on every well, and structural and environmental problems are not necessarily observable even when an inspection is made.
Additionally, significant acquisitions can change the nature of our operations and business depending upon the character of the acquired properties, which may be substantially different in operating and geologic characteristics or geographic location than our existing properties. While our current operations are focused in Texas and Louisiana, we may pursue acquisitions or properties located in other geographic areas.
Market conditions or operational impediments may hinder our access to natural gas markets or delay our production.
Market conditions or the unavailability of satisfactory natural gas transportation arrangements may hinder our access to natural gas markets or delay our production. The availability of a ready market for our natural gas production depends on a number of factors, including the demand for and supply of natural gas and the proximity of reserves to pipelines and processing facilities. Our ability to market our production depends in a substantial part on the availability and capacity of gathering systems, pipelines and processing facilities, which, in some cases, may be owned and operated by third parties. Our failure to obtain such services on acceptable terms could materially harm our business. We may be required to shut in wells due to a lack of market demand or because of the inadequacy or unavailability of pipelines or gathering system capacity. If that were to occur, then we would be unable to realize revenue from those wells until arrangements were made to deliver our production to market.
Our debt service requirements could adversely affect our operations and limit our growth.
We had $2.7 billion principal amount of debt as of December 31, 2023.
Our outstanding debt has important consequences, including, without limitation:
Future acquisitions or development activities may require us to alter our capitalization significantly. These changes in capitalization may significantly increase our debt. Moreover, our ability to meet our debt service obligations and to reduce our total debt will be dependent upon our future performance, which will be subject to general economic conditions and financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to service our indebtedness and to meet other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or seeking to raise additional debt or equity capital. We cannot assure you that any of these actions could be effected on a timely basis or on satisfactory terms or that these actions would enable us to continue to satisfy our capital requirements.
Our debt agreements contain a number of significant covenants. These covenants limit our ability to, among other things:
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COMSTOCK RESOURCES, INC.
Our failure to comply with any of these covenants could cause a default under our bank credit facility and the indentures governing our outstanding notes. A default, if not waived, could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it given the current status of the credit markets. Even if new financing is available, it may not be on terms that are acceptable to us. Furthermore, our bank credit facility is subject to various interest rates that are tied to adjusted SOFR or an alternate base rate, at our option. Any increase in these interest rates would have an adverse impact on our results of operations and cash flow.
Complying with these covenants may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take.
Our business involves many uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses.
Our success depends on the success of our exploration and development activities. Exploration activities involve numerous risks, including the risk that no commercially productive natural gas reserves will be discovered. In addition, these activities may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of a natural gas well does not ensure we will realize a profit on our investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical. In addition to their costs, unsuccessful wells can hurt our efforts to replace production and reserves.
Our business involves a variety of operating risks, including:
If we experience any of the above operating risks, our well bores, gathering systems and processing facilities could be affected, which could adversely affect our ability to conduct operations.
We could also incur substantial losses as a result of:
We maintain insurance against "sudden and accidental" occurrences, which may cover some, but not all, of the risks described above. Most significantly, the insurance we maintain will not cover the risks described above which occur over a sustained period of time. Further, there can be no assurance that such insurance will continue to be available to cover all such cost or that such insurance will be available at a cost that would justify its purchase. The occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our financial condition and results of operations.
Loss of our information and computer systems could adversely affect our business.
We are heavily dependent on our information systems and computer-based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of these programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, possible consequences include loss of our communication links, our inability to find, produce, process and sell natural gas and oil and the inability to automatically
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COMSTOCK RESOURCES, INC.
process commercial transactions or engage in similar automated or computerized business activities. Any of these consequences could have a material effect on our business.
Our business could be negatively impacted by security threats, including cybersecurity threats and other disruptions.
As a natural gas and oil producer, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable, threats to the safety of our employees, threats to the security or operation of our facilities and infrastructure or third party facilities and infrastructure, such as processing plants and pipelines, and threats from terrorist acts. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Although we utilize various procedures and controls to monitor and protect against these threats and to mitigate our exposure to such threats, there can be no assurance that these procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, either to the Company or a third party upon which we rely, they could lead to:
Any of the foregoing could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.
We are subject to extensive governmental laws and regulations that may adversely affect the cost, manner or feasibility of doing business.
Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration for, and the development, production and transportation of, natural gas and oil, as well as the safe operations thereof. Future laws or regulations, adverse changes in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may harm our business, results of operations and financial condition. We may be required to make large and unanticipated capital expenditures to comply with present and future governmental laws and regulations, such as:
Under these laws and regulations, we could be liable for:
Our operations could be significantly delayed or curtailed and our cost of operations could significantly increase as a result of regulatory requirements or restrictions. In addition, the Biden administration has made, and is expected to make additional changes to applicable regulations, and in each case we expect changes to be more stringent than those of the prior administration. There are also costs associated with responding to changing regulations and policies, whether such regulations are more or less stringent. As such, there can be no assurance that material cost and liabilities will not be incurred in the future.
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COMSTOCK RESOURCES, INC.
Our hedging transactions could result in financial losses or could reduce our income. To the extent we have hedged a significant portion of our expected production and our actual production is lower than we expected or the costs of goods and services increase, our profitability would be adversely affected.
To achieve more predictable cash flows and to reduce our exposure to adverse fluctuations in the prices of natural gas, we have entered into and may continue to enter into hedging transactions for certain of our expected natural gas production. These transactions could result in both realized and unrealized hedging losses. Further, these hedges may be inadequate to protect us from continuing and prolonged declines in the price of natural gas. To the extent that the natural gas prices remain at current levels or declines further, we will not be able to hedge future production at the same level as our current hedges, and our results of operations and financial condition would be negatively impacted.
The extent of our commodity price exposure is related largely to the effectiveness and scope of our derivative activities. For example, the derivative instruments we utilize are primarily based on NYMEX futures prices, which may differ significantly from the actual natural gas prices we realize in our operations. Furthermore, we have adopted a policy that requires that we enter into derivative transactions related to only a portion of our expected production volumes and, as a result, we will continue to have direct commodity price exposure on the portion of our production volumes not covered by these derivative financial instruments.
Our actual future production may be significantly higher or lower than we estimate at the time we enter into derivative transactions. If our actual future production is higher than we estimated, we will have greater commodity price exposure than we intended. If our actual future production is lower than the nominal amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale or purchase of the underlying physical commodity, resulting in a substantial diminution in our profitability and liquidity. As a result of these factors, our derivative activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows.
In addition, our hedging transactions are subject to the following risks:
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
We face various cybersecurity threats that could adversely affect our business, financial condition, and results of operations. We have implemented processes and procedures to assess, identify, and manage these risks, as well as to respond to and mitigate the impact of any potential or actual cybersecurity incidents to our information systems and the information residing therein.
Our processes for assessing and identifying cybersecurity risks include regular network security assessments, vulnerability scans, penetration tests, and audits of our information systems, as well as monitoring and analysis of network activity and threat intelligence. We engage third-party service providers to assist us with some of these activities. We also have processes to oversee and identify cybersecurity risks associated with our use of third-party service providers, such as conducting due diligence, reviewing contracts, and verifying compliance with security standards and best practices.
Our cybersecurity risk management processes have been integrated into our enterprise risk framework, which identifies, aggregates, and evaluates risks across the enterprise. We identify our enterprise risks through each member of our management team, along with counsel from our internal auditors and attorneys and we present an assessment of our enterprise risks to our board of directors on an annual basis. Our information technology management plays an integral part in the identification and communication of cybersecurity risks to our management team.
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COMSTOCK RESOURCES, INC.
Despite our efforts, there is the ever-present risk that our systems and/or data will suffer a successful cyber incident such as unauthorized access, use, disclosure, modification, or destruction by hackers, cybercriminals, state-sponsored actors, insiders, or other malicious actors. We have experienced attempts to compromise our systems and/or data. These attempts included phishing attacks, malware infections, and unauthorized access attempts. We do not believe that these attempts, if successful, would have resulted in a material adverse effect on our business, financial condition, or results of operations. We continue to be diligent in preventing, detecting, and responding to a cyber incident. However, we cannot guarantee that we will not suffer cybersecurity incidents in the future, which could result in:
Any of these outcomes could have a material adverse effect on our business, financial condition, or results of operations.
The Audit Committee of our Board of Directors provides oversight over our cybersecurity risk management and strategy. The committee receives updates from our information technology management and external advisors on our cybersecurity posture, initiatives, and incidents on an annual or as needed basis. Our information technology department is responsible for assessing and managing our cybersecurity risks on a day-to-day basis and their processes for managing cybersecurity risks include implementing and maintaining security controls, policies, and procedures to protect our information systems and the information residing therein. They also provide periodic awareness notifications to our employees and contractors on cybersecurity best practices and their roles and responsibilities. In addition, we have established an incident response plan to coordinate our response to and recovery from any cybersecurity incidents. Our Director of Information Technology has over 20 years of experience in managing organizations in the energy and telecom industries. We also have a Certified Information Systems Security Professional, who has eight years of experience in cyber and information security.
ITEM 2. PROPERTIES
The information set forth under Item 1 of this report is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings which management believes will have a material adverse effect on our consolidated results of operations or financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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COMSTOCK RESOURCES, INC.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed for trading on the New York Stock Exchange under the symbol "CRK". As of February 16, 2024, we had 278,429,463 shares of common stock outstanding, which were held by 161 holders of record. During 2023, we paid quarterly cash dividends on our common stock of 12.5¢ per share. The declaration and payment of future dividends will be at the discretion of the board of directors and will depend upon the results of our operations, capital requirements, our financial condition and such other factors as our board of directors may deem relevant.
Stockholder Return Performance
The following graph compares the yearly percentage change in the cumulative total stockholder return on our common stock during the five years ended December 31, 2023 with the cumulative returns during the same period for the New York Stock Exchange Index and the SPDR Standard & Poor's ("S&P") Oil and Gas Exploration and Production ETF. The graph assumes that $100.00 was invested on the last trading day of 2018, and that dividends, if any, were reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1)
Among Comstock, the NYSE Composite Index and the S&P Oil & Gas Exploration and Production ETF Index
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As of December 31, |
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Total Return Analysis |
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2018 |
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2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
||||||
Comstock |
|
$ |
100.00 |
|
|
$ |
181.68 |
|
|
$ |
96.47 |
|
|
$ |
178.59 |
|
|
$ |
304.71 |
|
|
$ |
206.02 |
|
NYSE Composite |
|
$ |
100.00 |
|
|
$ |
125.51 |
|
|
$ |
134.28 |
|
|
$ |
162.04 |
|
|
$ |
146.89 |
|
|
$ |
167.12 |
|
SPDR S&P Oil and Gas Exploration and Production ETF |
|
$ |
100.00 |
|
|
$ |
90.56 |
|
|
$ |
57.59 |
|
|
$ |
96.03 |
|
|
$ |
139.60 |
|
|
$ |
144.57 |
|
_______________
ITEM 6. [RESERVED]
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COMSTOCK RESOURCES, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our selected historical consolidated financial data and our accompanying consolidated financial statements and the notes to those financial statements included elsewhere in this report. The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are an independent energy company engaged in the acquisition, exploration, development and production of natural gas and oil in the United States. Our assets are concentrated in the Haynesville and Bossier shale located in North Louisiana and East Texas, a premier natural gas basin with superior economics due to the geographic proximity to Gulf Coast natural gas markets. We own interests in 2,478 producing natural gas and oil wells (1,516.7 net to us) and we operate 1,703 of these wells.
We use the successful efforts method of accounting, which allows only for the capitalization of costs associated with developing proven natural gas and oil properties as well as exploration costs associated with successful exploration activities. Accordingly, our exploration costs consist of costs we incur to acquire seismic data used for exploration, impairments of our unevaluated leasehold where we were not successful in discovering reserves and the costs of unsuccessful exploratory wells that we drill.
We generally sell our natural gas and oil at current market prices at the point our wells connect to third party purchaser pipelines or terminals. We have entered into certain transportation and treating agreements with midstream and pipeline companies to transport a substantial portion of our natural gas production to long-haul gas pipelines. We market our products several different ways depending upon a number of factors, including the availability of purchasers for the product, the availability and cost of pipelines near our wells, market prices, pipeline constraints and operational flexibility. Accordingly, our revenues are heavily dependent upon the prices of, and demand for, natural gas. Natural gas prices have historically been volatile and are likely to remain volatile in the future.
Our operating costs are generally comprised of several components, including costs of our field personnel, insurance, repair and maintenance costs, production supplies, fuel used in operations, transportation costs, workover expenses and state production and ad valorem taxes.
Like all natural gas and oil exploration and production companies, we face the challenge of replacing our reserves. Although in the past we have offset the effect of declining production rates from existing properties through successful acquisition and drilling efforts, there can be no assurance that we will be able to continue to offset production declines or maintain production at current rates through future acquisitions or drilling activity.
Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration for, and the development, production and transportation of, natural gas and oil, and operating safety. Future laws or regulations, any adverse changes in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may have an adverse effect on our business, results of operations and financial condition. Applicable environmental regulations require us to remove our equipment after production has ceased, to plug and abandon our wells and to remediate any environmental damage our operations may have caused. The present value of the estimated future costs to plug and abandon our natural gas and oil wells and to dismantle and remove our production facilities is included in our reserve for future abandonment costs, which was $30.8 million as of December 31, 2023.
Prices for natural gas and oil have been highly volatile in recent years but we expect our natural gas production to increase, assuming we maintain a sufficient development program to offset expected production declines from our producing wells. The level of our drilling activity is dependent on natural gas prices. If we are unable to offset production declines with the new wells we plan to drill in 2024 and future periods, our production volumes and cash flows from our operating activities may not be sufficient to fund our capital expenditures, and thus, we may need to either curtail drilling activity or seek additional borrowings, which would result in an increase in our interest expense in 2024 and future periods. We may need to recognize impairments of our natural gas and oil properties if natural gas and oil prices decline, and as a result, the expected future cash flows from these properties becomes insufficient to recover their carrying value.
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COMSTOCK RESOURCES, INC.
Results of Operations
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Our operating data for the year ended December 31, 2023 and 2022 are summarized below:
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Year Ended December 31, |
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2023 |
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2022 |
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(In thousands except per unit amounts) |
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Net Production Data: |
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|
|
|
|
|
||
Natural gas (MMcf) |
|
|
524,467 |
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|
|
500,616 |
|
Oil (MBbls) |
|
|
70 |
|
|
|
82 |
|
Natural gas equivalent (MMcfe) |
|
|
524,890 |
|
|
|
501,107 |
|
Revenues: |
|
|
|
|
|
|
||
Natural gas sales |
|
$ |
1,259,450 |
|
|
$ |
3,117,094 |
|
Oil sales |
|
|
5,161 |
|
|
|
7,597 |
|
Total natural gas and oil sales |
|
$ |
1,264,611 |
|
|
$ |
3,124,691 |
|
Expenses: |
|
|
|
|
|
|
||
Production and ad valorem taxes |
|
$ |
91,803 |
|
|
$ |
77,917 |
|
Gathering and transportation |
|
$ |
184,906 |
|
|
$ |
155,679 |
|
Lease operating |
|
$ |
132,203 |
|
|
$ |
111,134 |
|
Exploration |
|
$ |
1,775 |
|
|
$ |
8,287 |
|
Average Sales Price: |
|
|
|
|
|
|
||
Natural gas (per Mcf) |
|
$ |
2.40 |
|
|
$ |
6.23 |
|
Oil (per Bbl) |
|
$ |
73.73 |
|
|
$ |
92.65 |
|
Average equivalent (Mcfe) |
|
$ |
2.41 |
|
|
$ |
6.24 |
|
Expenses ($ per Mcfe): |
|
|
|
|
|
|
||
Production and ad valorem taxes |
|
$ |
0.18 |
|
|
$ |
0.16 |
|
Gathering and transportation |
|
$ |
0.35 |
|
|
$ |
0.31 |
|
Lease operating |
|
$ |
0.25 |
|
|
$ |
0.22 |
|
Gas Services: |
|
|
|
|
|
|
||
Gas services revenue |
|
$ |
300,498 |
|
|
$ |
503,366 |
|
Gas services expense |
|
$ |
282,050 |
|
|
$ |
465,044 |
|
Natural gas and oil sales. Natural gas and oil sales of $1.3 billion in 2023 decreased by $1.9 billion, or 60%, as compared to $3.1 billion in 2022. The decrease was primarily due to lower prices received for our natural gas production. Our 2023 natural gas production increased 5% to 524.5 Bcf (1.4 Bcf per day), and was sold at an average price of $2.40 per Mcf as compared to 500.6 Bcf (1.4 Bcf per day) sold at an average price of $6.23 in 2022.
We utilize natural gas derivative financial instruments to manage our exposure to changes in prices of natural gas to protect returns on investment from our drilling activities. The following table presents our natural gas prices before and after the effect of cash settlements of our derivative financial instruments:
|
|
Year Ended December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Average Realized Natural Gas Price: |
|
|
|
|
|
|
||
Natural gas, per Mcf |
|
$ |
2.40 |
|
|
$ |
6.23 |
|
Cash settlements on derivative financial instruments, per Mcf |
|
|
0.15 |
|
|
|
(1.73 |
) |
Price per Mcf, including cash settlements on derivative |
|
$ |
2.55 |
|
|
$ |
4.50 |
|
Gas services revenues. Gas services revenues of $300.5 million in 2023 decreased $202.9 million (40%) from $503.4 million in 2022. Gas services activities include sales of natural gas purchased from unaffiliated third parties for resale and fees received from unaffiliated third parties for natural gas gathering and treating services. These activities commenced in 2022 with the acquisition of a pipeline and natural gas treating plant and the opportunity to utilize our excess transport capacity in North Louisiana. Gas services revenues decreased in 2023 due primarily to lower natural gas prices on sales of natural gas purchased to utilize our excess transport capacity.
33
COMSTOCK RESOURCES, INC.
Production and ad valorem taxes. Our production and ad valorem taxes increased $13.9 million (18%) to $91.8 million in 2023 from $77.9 million in 2022. This increase was primarily related to increases in the Louisiana production tax rate and higher ad valorem taxes.
Gathering and transportation. Gathering and transportation costs increased $29.2 million (19%) to $184.9 million in 2023 as compared to $155.7 million in 2022. This increase was due to production growth in areas with higher average gathering and transportation rates.
Lease operating expenses. Our lease operating expense of $132.2 million ($0.25 per Mcfe) in 2023 was $21.1 million, or 19%, higher than lease operating expenses in 2022 of $111.1 million ($0.22 per Mcfe). The increase in lease operating expense was due to higher production and increased water disposal costs and other production costs.
Gas services expenses. Gas services expenses of $282.1 million in 2023 were $183.0 million (39%) lower than gas services expenses in 2022 of $465.0 million. The decrease was due primarily to lower natural gas prices for purchases of third party natural gas for resale.
Depreciation, depletion and amortization expense ("DD&A"). DD&A expense increased $118.5 million (24%) to $607.9 million in 2023 from $489.5 million in 2022 and our DD&A expense per equivalent Mcf produced was $1.16 per Mcfe in 2023 as compared to $0.98 per Mcfe in 2022. The increase in DD&A rate was primarily due to higher drilling and completion costs incurred for wells turned to sales in 2023 combined with lower estimated proved reserves resulting from the low natural gas price used in the determination of proved reserves at December 31, 2023.
General and administrative expenses. General and administrative expenses, which are reported net of overhead reimbursements, decreased to $38.0 million in 2023 from $39.4 million in 2022 due primarily to lower personnel costs. Stock-based compensation included in general and administrative expenses was $9.9 million and $6.6 million in 2023 and 2022, respectively.
Derivative financial instruments. We use derivative financial instruments as part of our price risk management program to protect the cash flow we generate from our operating activities. We had net gains on derivative financial instruments of $187.6 million for 2023 as compared to net losses on derivative financial instruments of $662.5 million for 2022. Realized net gains from our natural gas price risk management program were $80.3 million in 2023 as compared to $862.7 million of realized net losses in 2022. We recognized unrealized gains on derivative financial instruments of $107.3 million and $200.2 million in 2023 and 2022, respectively.
Interest expense. Interest expense was $169.0 million for 2023 as compared to $171.1 million for 2022. Included in interest expense was amortization of the premiums or discounts on our senior notes and the debt issuance cost amortization associated with our outstanding debt. The non-cash interest expense for 2023 totaled $8.0 million compared with $10.3 million for 2022. The decrease in interest expense in 2023 was due primarily to the retirement of our 7.5% senior notes in 2022.
Loss on early retirement of debt. During 2022, we retired $244.4 million principal amount of our 7.5% senior notes and $26.1 million principal amount of our 6.75% senior notes. As a result of premiums paid over face value and costs associated with the retirements, we recognized a loss on early retirement of debt of $46.8 million during 2022.
Income taxes. Our income tax provision was $35.1 million and $261.1 million in 2023 and 2022, respectively. Our effective tax rate of 14% in 2023 and 19% in 2022 differed from the federal income tax rate of 21% primarily due to changes in our valuation allowance on our federal and state net operating loss carryforwards and state income taxes.
Net income. We reported net income available to common stockholders of $211.9 million or $0.76 per diluted share in 2023 and a net income available to common stockholders of $1.1 billion or $4.11 per diluted share in 2022. The decrease in net income in 2023 is primarily due to the impact of lower natural gas prices in 2023. Income from operations in 2023 decreased to $226.6 million as compared to $2.3 billion in 2022.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Discussions of 2022 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 17, 2023.
34
COMSTOCK RESOURCES, INC.
Cash Flows, Liquidity and Capital Resources
Cash Flows
The following table summarizes sources and uses of cash and cash equivalents:
|
|
Year Ended December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
Sources of cash and cash equivalents: |
|
|
|
|
|
|
||
Operating activities |
|
$ |
1,016,846 |
|
|
$ |
1,698,388 |
|
Borrowings on bank credit facility, net of repayments |
|
|
480,000 |
|
|
|
— |
|
Proceeds from asset sales |
|
|
41,295 |
|
|
|
4,186 |
|
Contributions from noncontrolling interest |
|
|
24,000 |
|
|
|
— |
|
Total |
|
$ |
1,562,141 |
|
|
$ |
1,702,574 |
|
|
|
|
|
|
|
|
||
Uses of cash and cash equivalents: |
|
|
|
|
|
|
||
Capital expenditures |
|
$ |
1,459,096 |
|
|
$ |
1,101,869 |
|
Retirement of senior notes |
|
|
— |
|
|
|
273,920 |
|
Repayments on bank credit facility, net of borrowings |
|
|
— |
|
|
|
235,000 |
|
Common stock dividends |
|
|
138,985 |
|
|
|
34,688 |
|
Preferred stock dividends |
|
|
— |
|
|
|
16,014 |
|
Debt issuance costs |
|
|
144 |
|
|
|
10,839 |
|
Other |
|
|
1,899 |
|
|
|
6,255 |
|
Total |
|
$ |
1,600,124 |
|
|
$ |
1,678,585 |
|
Cash flows from operating activities. Net cash provided by our operating activities decreased $681.5 million (40%) to $1.0 billion in 2023 from $1.7 billion in 2022. The decrease was primarily due to the lower realized natural gas prices we had in 2023.
Proceeds from asset sales. In 2023, we sold certain non-operated properties for net proceeds of $41.3 million. In 2022, we sold certain non-operated properties for net proceeds of $4.2 million.
Contributions from noncontrolling interest. During the fourth quarter of 2023, we formed a midstream partnership to fund the future build-out of our Western Haynesville midstream system over the next several years. During 2023, the noncontrolling interest contributed $24.0 million to the midstream partnership.
Capital expenditures. The increase in capital expenditures of $357.2 million is primarily due to higher drilling, completion and acquisition activities in 2023.
35
COMSTOCK RESOURCES, INC.
Our capital expenditures are summarized in the following table:
|
|
Year Ended December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
Acquisitions: |
|
|
|
|
|
|
||
Proved property |
|
$ |
— |
|
|
$ |
500 |
|
Unproved property |
|
|
98,553 |
|
|
|
54,120 |
|
Exploration and development: |
|
|
|
|
|
|
||
Developmental leasehold costs |
|
|
27,905 |
|
|
|
13,727 |
|
Exploratory drilling and completion costs |
|
|
244,129 |
|
|
|
63,520 |
|
Development drilling and completion costs |
|
|
974,664 |
|
|
|
901,026 |
|
Other development costs |
|
|
25,130 |
|
|
|
53,693 |
|
Asset retirement obligations |
|
|
(19 |
) |
|
|
686 |
|
Total exploration and development |
|
|
1,370,362 |
|
|
|
1,087,272 |
|
Midstream property |
|
|
35,694 |
|
|
|
17,972 |
|
Other property |
|
|
491 |
|
|
|
803 |
|
Total capital expenditures |
|
$ |
1,406,547 |
|
|
$ |
1,106,047 |
|
Change in accrued capital expenditures and other |
|
|
18,562 |
|
|
|
(37,561 |
) |
Prepaid drilling costs |
|
|
34,010 |
|
|
|
34,069 |
|
Asset retirement obligations |
|
|
(23 |
) |
|
|
(686 |
) |
Total cash capital expenditures |
|
$ |
1,459,096 |
|
|
$ |
1,101,869 |
|
We currently expect to spend approximately $750 million to $850 million in 2024 on our development and exploration projects primarily focused on the continued development of our Haynesville/Bossier shale properties including the exploration and development of our Western Haynesville acreage. We also expect to spend $125.0 million to $150.0 million in our Western Haynesville midstream partnership. Under our 2024 operating plan, we currently expect to run five operated drilling rigs and to drill 46 operated horizontal wells (35.9 net) and to turn 44 operated wells (38.2 net) to sales in 2024.
Retirement of senior notes. In 2022, we retired all of our outstanding 7.5% senior notes due in 2025 for $248.9 million, which included premiums paid over face value of $4.5 million, and we retired $26.1 million principal amount of our 6.75% senior notes for $24.9 million.
Common stock and preferred stock dividends. In 2023, we paid a quarterly cash dividend of 12.5¢ per share of common stock. On December 15, 2022, we paid a cash dividend of 12.5¢ per share of common stock. On November 30, 2022, all of the outstanding shares of our Series B Redeemable Convertible Preferred Stock were converted into 43,750,000 shares of common stock.
Debt issuance costs. In 2022, we entered into a new five-year bank credit facility and we incurred $10.8 million of issuance costs associated with the new bank credit facility
Liquidity and Capital Resources
As of December 31, 2023, we had $480.0 million outstanding under a bank credit facility. Aggregate commitments under the credit facility are $1.5 billion, which matures on November 15, 2027. Borrowings under the bank credit facility are subject to a borrowing base, which is currently set at $2.0 billion. The borrowing base is re-determined on a semi-annual basis and upon the occurrence of certain other events. Borrowings under the bank credit facility are secured by substantially all of our assets and those of our restricted subsidiaries and bear interest at our option, at either adjusted SOFR plus 1.75% to 2.75% or an alternate base rate plus 0.75% to 1.75%, in each case depending on the utilization of the borrowing base. We also pay a commitment fee of 0.375% to 0.5% on the unused portion of the committed borrowing base. The bank credit facility places certain restrictions upon our and our restricted subsidiaries' ability to, among other things, incur additional indebtedness, pay cash dividends, repurchase common stock, make certain loans, investments and divestitures and redeem our senior notes. The only financial covenants are the maintenance of a leverage ratio of less than 3.5 to 1.0 and an adjusted current ratio of at least 1.0 to 1.0. We were in compliance with the covenants as of December 31, 2023.
As of December 31, 2023, we had $1.0 billion of liquidity, comprised of $1.0 billion of unused borrowing capacity under our bank credit facility and $16.7 million of cash and cash equivalents on hand. Our short and long-term capital
36
COMSTOCK RESOURCES, INC.
requirements consist primarily of funding our development and exploration activities, acquisitions, payments of contractual obligations, and debt service.
We expect to fund our future development and exploration activities with future operating cash flow. The timing of most of our capital expenditures is mostly discretionary. We have a significant degree of flexibility to adjust the level of our capital expenditures as circumstances warrant. If our plans or assumptions change or prove to be inaccurate, we may be required to seek additional capital, including debt or equity financing. We expect to fund future acquisitions, depending on the size and timing, with future operating cash flow, borrowings under our bank credit facility, or other debt or equity financings, to the extent available. The availability and attractiveness of debt or equity financing will depend upon a number of factors, some of which will relate to our financial condition and performance and some of which will be beyond our control, such as prevailing interest rates, natural gas and oil prices and other market conditions. We cannot provide any assurance that we will be able to obtain such capital, or if such capital is available, that we will be able to obtain it on acceptable terms.
Our contractual obligations consist primarily of natural gas transportation and gathering contracts, principal and interest payments on our senior notes and bank credit facility and other operating lease obligations. Our natural gas transportation and gathering contracts extend to 2031 and commitments under these contracts are $97.8 million for 2024, $89.6 million for 2025, $63.9 million for 2026, $62.7 million for 2027, $56.3 million for 2028 and $96.4 million for commitments thereafter. Interest payments under our senior notes and bank credit facility are $175.1 million for 2024 through 2026, $170.6 million for 2027, $139.3 million for 2028 and $72.8 million for all periods thereafter.
Federal and State Taxation
At December 31, 2023, we had $754.1 million in U.S. federal net operating loss carryforwards and $1.7 billion in certain state net operating loss carryforwards. As a result of a change of control in August 2018, our ability to use U.S. federal net operating losses ("NOLs") to reduce taxable income is limited. If we do not generate a sufficient level of taxable income prior to the expiration of the pre-2018 NOL carry-forward periods, then we will lose the ability to apply those NOLs as offsets to future taxable income. We estimate that $740.6 million of the U.S. federal NOL carryforwards and $1.2 billion of the estimated state NOL carryforwards will expire unused.
Our federal income tax returns for the years subsequent to December 31, 2019 remain subject to examination. Our income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2020. Currently, we are under examination with the state of Louisiana and we believe that our significant filing positions are highly certain and that all of our other significant income tax filing positions and deductions would be sustained upon audit or the final resolution would not have a material effect on our consolidated financial statements. Therefore, we have not established any significant reserves for uncertain tax positions.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and use assumptions that can affect the reported amounts of assets, liabilities, revenues or expenses.
Successful efforts accounting. We are required to select among alternative acceptable accounting policies. There are two generally acceptable methods for accounting for natural gas and oil producing activities. The full cost method allows the capitalization of all costs associated with finding natural gas and oil reserves, including certain general and administrative expenses. The successful efforts method allows only for the capitalization of costs associated with developing proven natural gas and oil properties as well as exploration costs associated with successful exploration projects. Costs related to exploration that are not successful are expensed when it is determined that commercially productive oil and gas reserves were not found. We have elected to use the successful efforts method to account for our oil and gas activities and we do not capitalize any of our general and administrative expenses.
Natural gas and oil reserve quantities. The determination of depreciation, depletion and amortization expense is highly dependent on the estimates of the proved natural gas and oil reserves attributable to our properties. The determination of whether impairments should be recognized on our oil and gas properties is also dependent on these estimates, as well as estimates of probable reserves. Reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be precisely measured. The accuracy of any reserve estimate depends on the quality of available data, production history and engineering and geological interpretation and judgment. Because all reserve estimates are to some degree imprecise, the quantities and timing of natural gas and oil that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future natural gas and oil prices may all differ materially from
37
COMSTOCK RESOURCES, INC.
those assumed in these estimates. Proved reserve estimates included in this report were prepared by the Company's engineers and audited by independent petroleum engineers.
The information regarding present value of the future net cash flows attributable to our proved natural gas and oil reserves are estimates only and should not be construed as the current market value of the estimated natural gas and oil reserves attributable to our properties. Thus, such information includes revisions of certain reserve estimates attributable to proved properties included in the preceding year's estimates. Such revisions reflect additional information from subsequent activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices. Any future downward revisions could adversely affect our financial condition, our future prospects and the value of our common stock.
Impairment of natural gas and oil properties. We evaluate our proved properties for potential impairment when circumstances indicate that the carrying value of an asset may not be recoverable. If impairment is indicated based on a comparison of the asset's carrying value to its undiscounted expected future net cash flows, then it is recognized to the extent that the carrying value exceeds fair value. A significant amount of judgment is involved in performing these evaluations since the results are based on estimated future events. Expected future cash flows are determined using estimated future prices based on market based forward prices applied to projected future production volumes. The projected production volumes are based on the property's proved and risk adjusted probable natural gas and oil reserves estimates at the end of the period. The estimated future cash flows that we use in our assessment of the need for an impairment are based on a corporate forecast which considers forecasts from multiple independent price forecasts. Prices are not escalated to levels that exceed observed historical market prices. Costs are also assumed to escalate at a rate that is based on our historical experience, currently estimated at 2% per annum. The natural gas and oil prices used for determining asset impairments will generally differ from those used in the standardized measure of discounted future net cash flows because the standardized measure requires the use of the average first day of the month historical price for the year. Unproved properties are evaluated for impairment based upon the results of drilling, planned future drilling and the terms of our natural gas and oil leases. It is reasonably possible that our estimates of undiscounted future net cash flows attributable to our natural gas and oil properties may change in the future. The primary factors that may affect estimates of future cash flows include future adjustments, both positive and negative, to proved and appropriate risk-adjusted probable natural gas and oil reserves, results of future drilling activities, future prices for natural gas and oil, and increases or decreases in production and capital costs. As a result of these changes, there may be impairments in the carrying values of our proved and unproved natural gas and oil properties in the future.
Goodwill. We have goodwill of $335.9 million as of December 31, 2023 that was recorded in 2018. Goodwill represents the excess of purchase price over fair value of net tangible and identifiable intangible assets. We are not required to amortize goodwill as a charge to earnings; however, we are required to conduct an annual review of goodwill for impairment. We determine the potential for impairment of our goodwill by initially preparing a qualitative fair value assessment of our business value. In performing this qualitative assessment, we examine relevant events and circumstances that could have a negative effect on our business, including macroeconomic conditions, industry and market conditions (including current commodity price), earnings and cash flows, overall financial performance and other relevant entity specific events.
If the qualitative assessment indicates that it is more likely than not that our business is impaired, a quantitative analysis would be performed to assess our fair value and to determine the amount of impairment, if any, that requires recognition. When performing a quantitative impairment assessment of goodwill, fair value is determined based on a market approach or an income approach. If the carrying value of goodwill exceeds the fair value calculated using the quantitative approach, an impairment charge would be recorded for the difference between fair value and carrying value. If oil or natural gas prices decrease, drilling efforts are unsuccessful or our market capitalization declines, it is reasonably possible that impairments would need to be recognized. We performed a quantitative assessment of goodwill as of October 1, 2023 and determined there was no goodwill impairment.
Income Taxes. We account for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as the future tax consequences attributable to the future utilization of existing tax net operating loss and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change in rate is enacted.
In recording deferred income tax assets, we consider whether it is more likely than not that some portion or all of our deferred income tax assets will be realized in the future. The ultimate realization of deferred income tax assets is dependent
38
COMSTOCK RESOURCES, INC.
upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. We believe that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, we are not able to determine that it is more likely than not that all of our deferred tax assets will be realized. As a result, we established valuation allowances for our deferred tax assets and U.S. federal and state net operating loss carryforwards that are not expected to be utilized due to the uncertainty of generating taxable income prior to the expiration of the carryforward periods. We will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future reporting periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial condition, results of operations and capital resources are highly dependent upon the prevailing market prices of natural gas and oil. 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 natural gas and oil prices include the level of global demand for oil, the foreign supply of natural gas and oil, 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 natural gas and oil prices with any degree of certainty. Sustained weakness in natural gas and oil prices may adversely affect our financial condition and results of operations, and may also reduce the amount of natural gas and oil reserves that we can produce economically. Any reduction in our natural gas and oil 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 natural gas and oil prices can have a favorable impact on our financial condition, results of operations and capital resources.
As of December 31, 2023, we had natural gas price swap agreements to hedge approximately 146.4 Bcf of our 2024 production at an average price of $3.55 per MMBtu. None of our derivative contracts have margin requirements or collateral provisions that could require funding prior to the scheduled cash settlement date.
A change of 10% in the market price of natural gas on December 31, 2023 would change the fair value of our natural gas swaps by approximately $38.2 million. The impact of hypothetical changes in market prices of natural gas on our natural gas derivative financial instruments does not include the offsetting impact that the same hypothetical changes in market prices of natural gas may have on our physical sales of natural gas. Since our outstanding natural gas derivative financial instruments hedge only a portion of our forecasted physical gas production, a positive or negative impact to the fair value of our natural gas derivative financial instruments would be partially offset by our physical sales of natural gas.
Interest Rates
At December 31, 2023, we had approximately $2.7 billion principal amount of long-term debt outstanding. $965.0 million of our long-term debt bear interest at a fixed rate of 5.875% and $1.2 billion of our long-term debt bear interest at a fixed rate of 6.75%. The fair market value of the senior notes due 2030 and senior notes due 2029 as of December 31, 2023 were $849.2 million and $1.1 billion, respectively, based on the market price of approximately 88% and 93% of the face amount of such debt. At December 31, 2023, we had $480.0 million of outstanding borrowings under our bank credit facility, which is subject to variable rates of interest that are tied to adjusted SOFR or an alternate base rate, at our option. Any increase in these interest rates would have an adverse impact to our results of operations and cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements are included on pages F-1 to F-25 of this report.
We have prepared these financial statements in conformity with generally accepted accounting principles. We are responsible for the fairness and reliability of the financial statements and other financial data included in this report. In the preparation of the financial statements, it is necessary for us to make informed estimates and judgments based on currently available information on the effects of certain events and transactions.
Our registered independent public accountants, Ernst & Young LLP, are engaged to audit our financial statements and to express an opinion thereon. Their audit is conducted in accordance with the standards of the Public Company Accounting Oversight Board to enable them to report whether the financial statements present fairly, in all material respects, our financial position and results of operations in accordance with accounting principles generally accepted in the United States.
The audit committee of our board of directors is comprised of three directors who are not our employees. This committee meets periodically with our independent public accountants and management. Our independent public accountants have full
39
COMSTOCK RESOURCES, INC.
and free access to the audit committee to meet, with and without management being present, to discuss the results of their audits and the quality of our financial reporting.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2023. The evaluation was performed with the participation of senior management of each business segment and key corporate functions, and under the supervision of the Chief Executive Officer and Chief Financial Officer.
Based on our evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2023 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.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2023 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting. We are responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, we conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As of December 31, 2023, we assessed the effectiveness of the Company's internal control over financial reporting based on the COSO criteria, and based on that assessment we determined that the Company maintained effective internal control over financial reporting as of December 31, 2023.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2023. The report, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2023, follows below.
40
COMSTOCK RESOURCES, INC.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Comstock Resources, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Comstock Resources, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Comstock Resources, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and our report dated February 16, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
February 16, 2024
41
COMSTOCK RESOURCES, INC.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURSIDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to "Business – Directors and Executive Officers" in this Form 10-K and to our definitive proxy statement which will be filed with the SEC within 120 days after December 31, 2023.
Section 16(a) Beneficial Ownership Reporting Compliance. Our directors, executive officers and stockholders with ownership of 10% or greater are required, under Section 16(a) of the Securities Exchange Act of 1934, to file reports of their ownership and changes to their ownership of our securities with the SEC. Based solely on our review of the reports and any written representations we received that no other reports were required, we believe that, during the year ended December 31, 2023, all of our officers, directors and stockholders with ownership of 10% or greater complied with all Section 16(a) filing requirements applicable to them.
Code of Ethics. We have adopted a Code of Business Conduct and Ethics that is applicable to all of our directors, officers and employees as required by New York Stock Exchange rules. We have also adopted a Code of Ethics for Senior Financial Officers that is applicable to our Chief Executive Officer and Senior Financial Officers. Both the Code of Business Conduct and Ethics and Code of Ethics for Senior Financial Officers may be found on our website at www.comstockresources.com. Both of these documents are also available, without charge, to any stockholder upon request to: Comstock Resources, Inc., Attn: Investor Relations, 5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034, (972) 668-8800. We intend to disclose any amendments or waivers to these codes that apply to our Chief Executive Officer and senior financial officers on our website in accordance with applicable SEC rules. Please see the definitive proxy statement for our 2024 annual meeting, which will be filed with the SEC within 120 days of December 31, 2023, for additional information regarding our corporate governance policies.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to our definitive proxy statement which will be filed with the SEC within 120 days after December 31, 2023.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table summarizes certain information regarding our equity compensation plans as of December 31, 2023:
|
|
Number of securities to be |
|
Number of securities authorized |
Equity compensation plans approved by stockholders |
|
1,521,802 |
|
3,262,987 |
We do not have any equity compensation plans that were not approved by stockholders.
Further information required by this item is incorporated herein by reference to our definitive proxy statement which will be filed with the SEC within 120 days after December 31, 2023.
42
COMSTOCK RESOURCES, INC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to our definitive proxy statement which will be filed with the SEC within 120 days after December 31, 2023.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to our definitive proxy statement which will be filed with the SEC within 120 days after December 31, 2023.
43
COMSTOCK RESOURCES, INC.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. |
The following consolidated financial statements and notes of Comstock Resources, Inc. are included on Pages F-1 to F-25 of this report: |
|
|
F-1 |
|
|
Consolidated Balance Sheets as of December 31, 2023 and 2022 |
F-3 |
|
Consolidated Statements of Operations For the Years Ended December 31, 2023, 2022 and 2021 |
F-4 |
|
F-5 |
|
|
Consolidated Statements of Cash Flows For the Years Ended December 31, 2023, 2022 and 2021 |
F-6 |
|
F-7 |
|
2. |
All financial statement schedules are omitted because they are not applicable, or are immaterial or the required information is presented in the consolidated financial statements or the related notes. |
|
The exhibits to this report required to be filed pursuant to Item 15(c) are listed below.
44
COMSTOCK RESOURCES, INC.
Exhibit No. |
|
Description |
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
||
|
Consent of Independent Petroleum Engineers Netherland, Sewell & Associates, Inc. |
|
|
Chief Executive Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
Chief Financial Officer certification under Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
Chief Executive Officer certification under Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
Chief Financial Officer certification under Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
||
|
Audit Letter of Netherland, Sewell & Associates, Inc. on Proved Reserves as of December 31, 2023. |
|
101.INS* |
|
XBRL Instance Document |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbases Document |
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
_______________
* Filed herewith.
+ Furnished herewith.
# Management contract or compensatory plan document.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
45
COMSTOCK RESOURCES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
|
|
By: |
/s/ M. JAY ALLISON |
|
|
M. Jay Allison Chief Executive Officer |
Date: February 16, 2024 |
|
(Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ M. JAY ALLISON |
|
Chief Executive Officer and |
February 16, 2024 |
M. Jay Allison |
|
Chairman of the Board of Directors (Principal Executive Officer) |
|
/s/ ROLAND O. BURNS |
|
President, Chief Financial Officer, |
February 16, 2024 |
Roland O. Burns |
|
Secretary and Director (Principal Financial and Accounting Officer) |
|
/s/ ELIZABETH B. DAVIS |
|
Director |
February 16, 2024 |
Elizabeth B. Davis |
|
|
|
/s/ MORRIS E. FOSTER |
|
Director |
February 16, 2024 |
Morris E. Foster |
|
|
|
/s/ JIM L. TURNER |
|
Director |
February 16, 2024 |
Jim L. Turner |
|
|
|
46
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
INDEX
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Comstock Resources, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Comstock Resources, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
|
Depreciation, Depletion and Amortization of Proved Natural Gas and Oil Properties |
|
|
Description of the Matter |
At December 31, 2023, the net book value of the Company's proved natural gas and oil properties was $4,982 million, and depreciation, depletion and amortization expense ("DD&A") was $608 million for the year then ended. As described in Note 1 to the consolidated financial statements, the Company follows the successful efforts method of accounting for its natural gas and oil properties. Under this method, the capitalized costs of proved properties are depleted using the unit-of-production method based on proved reserves, as estimated by the Company's engineers. Proved natural gas and oil reserves are prepared using standard geological and engineering methods generally recognized in the petroleum industry based on evaluations of estimated in-place hydrocarbon volumes using financial and non-financial inputs. Judgment is required by the Company's engineers in interpreting the data used to estimate reserves. Estimating proved natural gas and oil reserves requires the selection and evaluation of inputs, including historical production, natural gas and oil price assumptions, future operating and capital cost assumptions, among others. Because of the complexity involved in estimating natural gas and oil reserves, management used independent petroleum engineers to audit the proved reserve estimates prepared by the Company's engineers as of December 31, 2023. |
F-1
|
Auditing the Company's DD&A calculation is complex because of the use of the work of the Company's engineers and the independent petroleum engineers and the evaluation of management's determination of the inputs described above used by these engineers in estimating proved natural gas and oil reserves. |
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that address the risks of material misstatement relating to the DD&A calculation, including controls over the completeness and accuracy of the financial data used in estimating proved natural gas and oil reserves. |
|
Our testing of the Company's DD&A calculation included, among other procedures, evaluating the professional qualifications and objectivity of the Company's engineers responsible for the preparation of the reserve estimates and the independent petroleum engineers used to audit the estimates. On a sample basis, we tested the completeness and accuracy of the financial data used in the estimation of proved natural gas and oil reserves by agreeing significant inputs to source documentation, where applicable, and assessing the inputs for reasonableness based on our review of corroborative evidence and consideration of any contrary evidence. Additionally, we performed analytic procedures on select inputs into the natural gas and oil reserve estimate as well as lookback procedures on the output. For proved undeveloped reserves, we evaluated management's development plan for compliance with SEC requirements. Finally, we tested that the DD&A calculation is based on the appropriate proved natural gas and oil reserve amounts from the Company's reserve report. |
/s/ ERNST & YOUNG LLP
We have served as the Company's auditor since 2003.
Dallas, Texas
February 16, 2024
F-2
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
As of December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
ASSETS |
|
(In thousands) |
|
|||||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable: |
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|
|
|
|
|
||
Natural gas and oil sales and gas services |
|
|
|
|
|
|
||
Joint interest operations |
|
|
|
|
|
|
||
From affiliates |
|
|
|
|
|
|
||
Derivative financial instruments |
|
|
|
|
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|
||
Other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
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|
||
Property and equipment: |
|
|
|
|
|
|
||
Natural gas and oil properties, successful efforts method: |
|
|
|
|
|
|
||
Proved |
|
|
|
|
|
|
||
Unproved |
|
|
|
|
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|
||
Other |
|
|
|
|
|
|
||
Accumulated depreciation, depletion and amortization |
|
|
( |
) |
|
|
( |
) |
Net property and equipment |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued expenses |
|
|
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|
|
|
||
Operating leases |
|
|
|
|
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||
Derivative financial instruments |
|
|
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||
Total current liabilities |
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|
||
Long-term debt |
|
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|
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|
||
Deferred income taxes |
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Long-term operating leases |
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||
Reserve for future abandonment costs |
|
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|
||
Total liabilities |
|
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||
|
|
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|
|
|
|||
Stockholders' equity: |
|
|
|
|
|
|
||
Common stock—$ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Accumulated earnings |
|
|
|
|
|
|
||
Total stockholders' equity attributable to Comstock |
|
|
|
|
|
|
||
Noncontrolling interest |
|
|
|
|
|
|
||
Total stockholders' equity |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these statements.
F-3
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended December 31, |
|
|||||||||
|
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2023 |
|
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2022 |
|
|
2021 |
|
|||
|
|
(In thousands, except per share amounts) |
|
|||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|||
Natural gas sales |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Oil sales |
|
|
|
|
|
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|
|||
Total natural gas and oil sales |
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Gas services |
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Total revenues |
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Operating expenses: |
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Production and ad valorem taxes |
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Gathering and transportation |
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Lease operating |
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Depreciation, depletion and amortization |
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Gas services |
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General and administrative, net |
|
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|
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Exploration |
|
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|
|||
(Gain) loss on sale of assets |
|
|
( |
) |
|
|
( |
) |
|
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|
|
Total operating expenses |
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Operating income |
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Other income (expenses): |
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Gain (loss) from derivative financial instruments |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Other income |
|
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|
|
|
|
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|
|||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Loss on early extinguishment of debt |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Total other income (expenses) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Income (loss) before income taxes |
|
|
|
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|
|
|
|
( |
) |
||
Provision for income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net income (loss) |
|
|
|
|
|
|
|
|
( |
) |
||
Preferred stock dividends and accretion |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net income (loss) available to common stockholders |
|
|
|
|
|
|
|
|
( |
) |
||
Net income attributable to noncontrolling interest |
|
|
( |
) |
|
|
|
|
|
|
||
Net income (loss) available to Comstock |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Net income (loss) per share — basic |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Net income (loss) per share — diluted |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|||
Basic |
|
|
|
|
|
|
|
|
|
|||
Diluted |
|
|
|
|
|
|
|
|
|
|||
Dividends per share |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The accompanying notes are an integral part of these statements.
F-4
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
Common |
|
|
Common |
|
|
Additional |
|
|
Accumulated |
|
|
Noncontrolling |
|
|
Total |
|
||||||
|
|
(In thousands) |
|
|||||||||||||||||||||
Balance at December 31, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Income tax withholdings on equity awards |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Stock issuance costs |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Payment of preferred dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance at December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
||||
Conversion of Series B convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Income tax withholdings on equity awards |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Payment of preferred stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Payment of common stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance at December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Income tax withholdings on equity awards |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Payment of common stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Contributions from noncontrolling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance at December 31, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The accompanying notes are an integral part of these statements.
F-5
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|||
Net income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Adjustments to reconcile net income (loss) to net cash provided by |
|
|
|
|
|
|
|
|
|
|||
Deferred and non-current income taxes |
|
|
|
|
|
|
|
|
( |
) |
||
(Gain) loss on sale of assets |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Depreciation, depletion and amortization |
|
|
|
|
|
|
|
|
|
|||
(Gain) loss on derivative financial instruments |
|
|
( |
) |
|
|
|
|
|
|
||
Cash settlements of derivative financial instruments |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amortization of debt discount, premium and issuance costs |
|
|
|
|
|
|
|
|
|
|||
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|||
Loss on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|||
(Increase) decrease in accounts receivable |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
(Increase) decrease in other current assets |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Increase (decrease) in accounts payable and accrued expenses |
|
|
( |
) |
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|||
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Prepaid drilling costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Proceeds from sales of assets |
|
|
|
|
|
|
|
|
|
|||
Net cash used for investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|||
Borrowings on bank credit facility |
|
|
|
|
|
|
|
|
|
|||
Repayments on bank credit facility |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Issuance of Senior Notes |
|
|
|
|
|
|
|
|
|
|||
Retirement of Senior Notes |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Debt and stock issuance costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income tax withholdings on equity awards |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Preferred stock dividends paid |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Common stock dividends paid |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Contributions from noncontrolling interest |
|
|
|
|
|
|
|
|
|
|||
Net cash used for financing activities |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net increase (decrease) in cash and cash equivalents |
|
|
( |
) |
|
|
|
|
|
|
||
Cash and cash equivalents, beginning of the year |
|
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents, end of the year |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The accompanying notes are an integral part of these statements.
F-6
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting policies used by Comstock Resources, Inc. and subsidiaries reflect natural gas and oil industry practices and conform to accounting principles generally accepted in the United States of America.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of Comstock Resources, Inc., its wholly owned or controlled subsidiaries and a variable interest entity for which Comstock is the primary beneficiary (collectively, "Comstock" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for its undivided interest in natural gas and oil properties using the proportionate consolidation method, whereby its share of assets, liabilities, revenues and expenses are included in its financial statements. Net income (loss) and comprehensive income (loss) are the same in all periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed.
Comstock entered into an agreement with an affiliate of Quantum Capital Solutions ("Quantum"), in the fourth quarter of 2023 to form Pinnacle Gas Services, LLC ("PGS"), a midstream company in Comstock's Western Haynesville area. As part of the transaction, Comstock contributed a 145-mile high-pressure pipeline and a natural gas treating plant. Quantum committed to contribute up to $
Comstock has the power to direct the activities that most significantly impact the performance of PGS and has the obligation to absorb losses or right to receive benefits that could potentially be significant to PGS. Accordingly, Comstock is considered the primary beneficiary and consolidates the assets, liabilities and results of operations of PGS in the accompanying consolidated financial statements. PGS assets that cannot be used by Comstock include $
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. Changes in the future estimated natural gas and oil reserves or the estimated future cash flows attributable to the reserves that are utilized for impairment analyses could have a significant impact on the future results of operations.
Concentration of Credit Risk, Accounts Receivable and Credit Losses
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents, accounts receivable and derivative financial instruments. The Company places its cash with high credit quality financial institutions and its derivative financial instruments with financial institutions and other firms that management believes have high credit ratings. Substantially all of the Company's accounts receivable are due from either purchasers of natural gas and oil or participants in natural gas and oil wells for which the Company serves as the operator. Generally, operators of natural gas and oil wells have the right to offset future revenues against unpaid charges related to operated wells. Natural gas and oil sales are generally unsecured. The Company's policy is to assess the collectability of its receivables based upon their age, the credit quality of the purchaser or participant and the potential for revenue offset. The Company has not had any significant credit losses in the past and believes its accounts receivable are fully collectible. Accordingly,
F-7
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Current Assets
Other current assets at December 31, 2023 and 2022 consist of the following:
|
|
As of December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Prepaid drilling costs |
|
$ |
|
|
$ |
|
||
Income tax receivable |
|
|
|
|
|
|
||
Production tax refunds receivable |
|
|
|
|
|
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Accrued proceeds from sale of natural gas and oil properties |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Fair Value Measurements
The Company holds or has held certain financial assets and liabilities that are required to be measured at fair value in the financial statements. These include cash and cash equivalents held in bank accounts and derivative financial instruments. Fair value is defined 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. A three-level hierarchy is followed 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.
The following presents the carrying amounts and the fair values of the Company's financial instruments as of December 31, 2023 and 2022:
|
|
As of December 31, |
|
|||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
Assets: |
|
(In thousands) |
|
|||||||||||||
Commodity-based derivatives (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commodity-based derivatives (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Bank credit facility (2) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
F-8
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
The Company follows the successful efforts method of accounting for its natural gas and oil properties. Costs incurred to acquire natural gas and oil leasehold are capitalized. Acquisition costs for proved natural gas and oil properties, costs of drilling and equipping productive wells, and costs of unsuccessful development wells are capitalized and amortized on an equivalent unit-of-production basis over the life of the remaining related natural gas and oil reserves. Equivalent units are determined by converting oil to natural gas at the ratio of one barrel of oil for six thousand cubic feet of natural gas. This conversion ratio is not based on the price of oil or natural gas, and there may be a significant difference in price between an equivalent volume of oil versus natural gas.
Exploratory well costs are initially capitalized as proved property in the consolidated balance sheets but charged to exploration expense if and when the well is determined not to have found commercial proved natural gas and oil reserves.
|
|
Year Ended December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(in thousands) |
|
|||||
Beginning capitalized exploratory project costs |
|
$ |
|
|
$ |
|
||
Additions to exploratory well costs pending the determination of proved reserves |
|
|
|
|
|
|
||
Determined to have found proved reserves |
|
|
( |
) |
|
|
( |
) |
Ending capitalized exploratory well costs |
|
$ |
|
|
$ |
|
||
As of December 31, 2023 and 2022, the Company had no exploratory wells for which costs have been capitalized greater than one year.
The estimated future costs of dismantlement, restoration, plugging and abandonment of natural gas and oil properties and related facilities disposal are capitalized when asset retirement obligations are incurred and amortized as part of depreciation, depletion and amortization expense. Exploration expense includes geological and geophysical expenses and delay rentals related to exploratory natural gas and oil properties, costs of unsuccessful exploratory drilling and impairments of unproved properties. As of December 31, 2023 and 2022, the unproved properties primarily relate to future drilling locations that were not included in proved undeveloped reserves. Most of these future drilling locations are located on acreage where the reservoir is known to be productive but have been excluded from proved reserves due to uncertainty on whether the wells would be drilled within the next five years as required by SEC rules in order to be included in proved reserves. The costs of unproved properties are transferred to proved natural gas and oil properties when they are either drilled or they are reflected in proved undeveloped reserves and amortized on an equivalent unit-of-production basis. Costs associated with unevaluated exploratory acreage are periodically assessed for impairment on a property by property basis, and any impairment in value is included in exploration expense. Exploratory drilling costs are initially capitalized as proved property but charged to expense if and when the well is determined not to have found commercial proved natural gas and oil reserves. Exploratory drilling costs are evaluated within a one-year period after the completion of drilling.
The Company assesses the need for an impairment of the costs capitalized for its proved natural gas and oil properties when events or changes in circumstances, such as a significant drop in commodity prices, indicate that the Company may not be able to recover its capitalized costs. If impairment is indicated based on undiscounted expected future cash flows attributable to the property, then a provision for impairment is recognized to the extent that net capitalized costs exceed the estimated fair value of the property. The Company determines the fair values of its natural gas and oil properties using a discounted cash flow model and proved and risk-adjusted probable reserves. Significant Level 3 assumptions associated with the calculation of discounted future cash flows included in the cash flow model include management's outlook for natural gas and oil prices, future natural gas and oil production, production costs, capital expenditures, and the total proved and risk-adjusted probable natural gas and oil reserves expected to be recovered. Management's natural gas and oil price outlook is developed based on third-party longer-term price forecasts as of each measurement date. The expected future net cash flows are discounted using an appropriate discount rate in determining a property's fair value. The natural gas and oil prices used for determining asset impairments will generally differ from those used in the standardized measure of discounted future net cash flows because the standardized measure requires the use of an average price based on the first day of each month of the preceding year. Unproved properties are evaluated for impairment based upon the results of drilling, planned future drilling and the terms of the natural gas and oil leases.
F-9
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's estimates of undiscounted future net cash flows attributable to its natural gas and oil properties may change in the future. The primary factors that may affect estimates of future cash flows include future adjustments, both positive and negative, to proved and appropriate risk-adjusted probable natural gas and oil reserves, results of future drilling activities, future prices for natural gas and oil, and increases or decreases in production and capital costs. As a result of these changes, there may be future impairments in the carrying values of our natural gas and oil properties.
Other property and equipment consists primarily of pipelines, natural gas treating plants, computer equipment, furniture and fixtures and an airplane which are depreciated over estimated useful lives ranging from to
Goodwill
The Company had goodwill of $
The Company is required to conduct an annual review of goodwill for impairment and performs the assessment of goodwill on October 1st of each year. If the carrying value of goodwill exceeds the fair value, an impairment charge would be recorded for the difference between fair value and carrying value. The Company performed its quantitative assessment of goodwill as of October 1, 2023 and determined there was no indication of impairment.
Leases
The Company had right-of-use lease assets of $
Comstock contracts for a variety of equipment used in its natural gas and oil exploration and development operations. Contract terms for this equipment vary broadly, including the contract duration, pricing, scope of services included along with the equipment, cancellation terms, and rights of substitution, among others. The Company's drilling and completion operations routinely change due to changes in commodity prices, demand for natural gas and oil, and the overall operating and economic environment. Accordingly, Comstock manages the terms of its contracts for drilling rigs and completion equipment so as to allow for maximum flexibility in responding to these changing conditions. The Company has
F-10
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease costs recognized during the years ended December 31, 2023, 2022 and 2021 were as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Operating lease cost included in general and administrative expense |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Operating lease cost included in lease operating expense |
|
|
|
|
|
|
|
|
|
|||
Operating lease cost included in proved natural gas and oil properties |
|
|
|
|
|
|
|
|
|
|||
Variable lease cost (drilling and completion costs included in proved natural gas and oil properties) |
|
|
|
|
|
|
|
|
|
|||
Short-term lease cost (drilling rig costs included in proved natural gas and oil properties) |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Cash payments for operating leases associated with right-of-use assets included in cash provided by operating activities were $
As of December 31, 2023 and 2022, the operating leases had a weighted average remaining term of
As of December 31, 2023, expected future payments related to contracts that contain operating leases were as follows:
|
|
(In thousands) |
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Total lease payments |
|
|
|
|
Imputed interest |
|
|
( |
) |
Total lease liability |
|
$ |
|
|
Accrued Expenses
Accrued expenses at December 31, 2023 and 2022 consist of the following:
|
|
As of December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Accrued interest payable |
|
$ |
|
|
$ |
|
||
Accrued drilling costs |
|
|
|
|
|
|
||
Accrued transportation costs |
|
|
|
|
|
|
||
Accrued employee compensation |
|
|
|
|
|
|
||
Accrued lease operating expenses |
|
|
|
|
|
|
||
Accrued income and other taxes |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
F-11
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserve for Future Abandonment Costs
The Company's asset retirement obligations relate to future plugging and abandonment costs of its natural gas and oil properties and related facilities disposal. The Company records a liability in the period in which an asset retirement obligation is incurred, in an amount equal to the estimated fair value of the obligation that is capitalized. Thereafter, this liability is accreted up to the final retirement cost. Accretion of the discount is included as part of depreciation, depletion and amortization in the accompanying consolidated statements of operations.
The following table summarizes the changes in the Company's total estimated liability:
|
|
Year Ended December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Reserve for future abandonment costs at beginning of the year |
|
$ |
|
|
$ |
|
||
New wells placed on production |
|
|
|
|
|
|
||
Acquisitions |
|
|
|
|
|
|
||
Changes in estimates and timing |
|
|
( |
) |
|
|
|
|
Liabilities settled |
|
|
( |
) |
|
|
( |
) |
Divestitures |
|
|
( |
) |
|
|
( |
) |
Accretion expense |
|
|
|
|
|
|
||
Reserve for future abandonment costs at end of the year |
|
$ |
|
|
$ |
|
||
Stock-based Compensation
The Company has stock-based employee compensation plans under which stock awards, comprised primarily of restricted stock and performance share units ("PSUs"), are issued to employees and non-employee directors. The Company follows the fair value-based method in accounting for equity-based compensation. 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 on a straight-line basis over the award vesting period. Forfeitures are recognized as they occur.
Segment Reporting
The Company presently operates in
Derivative Financial Instruments and Hedging Activities
The Company accounts for derivative financial instruments (including derivative instruments embedded in other contracts) as either an asset or liability measured at its fair value. Changes in the fair value of derivatives are recognized currently in earnings and in net cash flows from operating activities. The fair value of derivative contracts that expire in less than one year are recognized as current assets or liabilities. Those that expire in more than one year are recognized as long-term assets or liabilities.
Major Purchasers
In 2023, the Company had
Revenue Recognition and Gas Balancing
Comstock produces natural gas and oil and reports revenues separately for each of these
F-12
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
take control of the volumes and receive all the benefits of ownership upon delivery at designated sales points. Costs incurred to gather or transport each product prior to the transfer of control are recognized as operating expenses.
Gas services revenues represent sales of natural gas purchased for resale from unaffiliated third parties and fees received for gathering and treating services for certain natural gas wells not operated by the Company. Revenues are recognized upon completion of the gathering and treating of contracted natural gas volumes and delivery of purchased natural gas volumes to the Company's customers. Profits and losses earned in the gathering and treating of natural gas produced by the Company's natural gas wells are eliminated in consolidation. Revenues and expenses associated with natural gas purchased for resale are presented on a gross basis in the Company's consolidated statements of operations as the Company acts as the principal in the transaction by assuming the risks and rewards from ownership of the natural gas volumes purchased and the responsibility to deliver the natural gas volumes to their sales point.
All natural gas and oil and gas services revenues are subject to contracts that have commercial substance, contain specific pricing terms, and define the enforceable rights and obligations of both parties. These contracts typically provide for cash settlement within
Comstock has elected to exclude all taxes from the measurement of transaction prices, and its natural gas and oil revenues are reported net of royalties and exclude revenue interests owned by others because the Company acts as an agent when selling natural gas and oil, on behalf of royalty owners and working interest owners. Natural gas and oil revenue is recorded in the month of production based on an estimate of the Company's share of volumes produced and prices realized. Gas services revenue is recorded in the month the services are performed or purchased gas is sold based on an estimate of natural gas volumes and contract prices. The Company recognizes any differences between estimates and actual amounts received in the month when payment is received. Historically, differences between estimated revenues and actual revenue received have not been significant. The amount of natural gas or oil sold may differ from the amount to which the Company is entitled based on its revenue interests in the properties. The Company did not have any significant imbalance positions at December 31, 2023 or 2022.
The Company has recognized accounts receivable of $
General and Administrative Expenses
General and administrative expenses are reported net of reimbursements of overhead costs that are received from working interest owners of the natural gas and oil properties operated by the Company of $
Income Taxes
The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as the tax consequences attributable to the future utilization of existing net operating loss and other carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change in rate is enacted.
F-13
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Unvested restricted stock containing non-forfeitable rights to dividends are included in common stock outstanding and are considered to be participating securities and included in the computation of basic and diluted earnings per share pursuant to the two-class method. At December 31, 2023 and 2022,
Weighted average shares of unvested restricted stock outstanding were as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(in thousands) |
|
|||||||||
Unvested restricted stock |
|
|
|
|
|
|
|
|
|
|||
PSUs represent the right to receive a number of shares of the Company's common stock that may range from
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands, except per unit amounts) |
|
|||||||||
Weighted average PSUs |
|
|
|
|
|
|
|
|
|
|||
Weighted average grant date fair value per unit |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The Series B Convertible Preferred Stock was convertible into
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Weighted average convertible preferred stock |
|
|
|
|
|
|
|
|
|
|||
None of the Company's participating securities participate in losses and as such are excluded from the computation of basic earnings per share during periods of net losses. For the year ended December 31, 2023, the weighted average shares of unvested restricted stock and PSUs were excluded from the computation of earnings per share because to include them would have been antidilutive to the calculation.
F-14
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted income (loss) per share were determined as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands, except per share amounts) |
|
|||||||||
Net income (loss) available to common stockholders |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Income allocable to unvested restricted stock |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Basic net income (loss) available to common stockholders |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Income allocable to convertible preferred stock |
|
|
|
|
|
|
|
|
|
|||
Income allocable to unvested restricted stock |
|
|
|
|
|
|
|
|
|
|||
Diluted net income (loss) available to common stockholders |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
|
|
|
|
|
|
|
|
|
|
|||
Basic weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|||
PSUs |
|
|
|
|
|
|
|
|
|
|||
Restricted stock |
|
|
|
|
|
|
|
|
|
|||
Convertible preferred stock |
|
|
|
|
|
|
|
|
|
|||
Diluted weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Basic income (loss) per share |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Diluted income (loss) per share |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
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.
Cash payments made for interest and income taxes and other non-cash investing and financing activities were as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Cash payments for: |
|
|
|
|
|
|
|
|
|
|||
Interest |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Income tax payments |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Non-cash investing activities include: |
|
|
|
|
|
|
|
|
|
|||
Increase (decrease) in accrued capital expenditures |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Liabilities assumed in exchange for right-of-use lease assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Non-cash financing activities include: |
|
|
|
|
|
|
|
|
|
|||
Conversion of preferred stock into common stock |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Recent Accounting Pronouncements
In November 2023, the FASB issued Accounting Standards Update ("ASU") 2023-07 "Segment Reporting–Improvements to Reportable Segment Disclosures". ASU 2023-07 requires additional disclosures about a public entity's reportable segments, including requiring all annual disclosures of reportable segment's profit or loss and assets during interim periods, identifying the title and position of an entity's chief operating decision maker ("CODM"), disclosing significant expenses regularly provided to the CODM that are included in each reported measure of segment profit or loss, and disclosing additional measures of profit or loss used by the CODM in deciding how to allocate resources. The update is effective for public entities for fiscal years beginning after December 15, 2023, and interim and fiscal years beginning after December 15, 2024. ASU 2023-07 will not have an impact on the Company's reported results of operations, financial position or liquidity but will have an impact on the Company's financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09 "Improvements to Income Tax Disclosures". ASU 2023-09 requires additional disclosures around effective tax rates and cash income taxes paid and is effective for public entities for annual periods
F-15
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning after December 15, 2024. ASU 2023-07 will not have an impact on the Company's reported results of operations, financial position or liquidity but will have an impact on the Company's financial statement disclosures.
Acquisitions
During 2023, 2022 and 2021, the Company spent $
In 2022, the Company acquired a
In 2021, the Company acquired approximately
Dispositions
The Company sold its interest in certain natural gas and oil non-operated properties for $
Set forth below is certain information regarding the aggregate capitalized costs of natural gas and oil properties and costs incurred by the Company for its natural gas and oil property acquisition, development and exploration activities:
Capitalized Costs
|
|
As of December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Proved properties: |
|
|
|
|
|
|
||
Leasehold costs |
|
$ |
|
|
$ |
|
||
Wells and related equipment and facilities |
|
|
|
|
|
|
||
Accumulated depreciation depletion and amortization |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Unproved properties |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Costs Incurred
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Property acquisitions: |
|
|
|
|
|
|
|
|
|
|||
Proved property |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Unproved property |
|
|
|
|
|
|
|
|
|
|||
Exploration and development: |
|
|
|
|
|
|
|
|
|
|||
Developmental leasehold costs |
|
|
|
|
|
|
|
|
|
|||
Exploratory drilling and completion costs |
|
|
|
|
|
|
|
|
|
|||
Development drilling and completion costs |
|
|
|
|
|
|
|
|
|
|||
Other development costs |
|
|
|
|
|
|
|
|
|
|||
Asset retirement obligations |
|
|
( |
) |
|
|
|
|
|
|
||
Total capital expenditures |
|
$ |
|
|
$ |
|
|
$ |
|
|||
F-16
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt is comprised of the following:
|
|
As of December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Bank Credit Facility: |
|
|
|
|
|
|
||
Principal |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|||
Principal |
|
|
|
|
|
|
||
Premium, net of amortization |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Principal |
|
|
|
|
|
|
||
Debt issuance costs, net of amortization |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
The premium on the
The following table summarizes Comstock's principal amount of debt as of December 31, 2023 by year of maturity:
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
2027 |
|
|
2028 |
|
|
Thereafter |
|
|
Total |
|
|||||||
|
|
(In thousands) |
|
|||||||||||||||||||||||||
Bank Credit Facility |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
As of December 31, 2023, the Company had $
In May 2022, the Company completed the early redemption of all of its outstanding
In June 2022, the Company repurchased $
In 2021, the Company refinanced $
F-17
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount of its
The Company has drilling rig contracts with terms ranging from less than one year to
The Company has natural gas transportation and gathering contracts which extend to 2031. Commitments under these contracts are $
From time to time, the Company is involved in certain litigation that arise 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 adverse effect on the Company's financial position, results of operations or cash flows and no material amounts are accrued relative to these matters at December 31, 2023 or 2022.
On November 30, 2022, all of the outstanding shares of the Series B Redeemable Convertible Preferred Stock were converted into
The authorized capital of the Company is
The Company grants restricted shares of common stock and PSUs to key employees and directors as part of their compensation. Grants are made pursuant to the Company's 2019 Long-term Incentive Plan (the "2019 Plan"), which was approved by the Company's shareholders on May 31, 2019. Future authorized equity awards available under the 2019 Plan as of December 31, 2023 were
Stock-based compensation expense is included in general and administrative expenses. During the years ended December 31, 2023, 2022 and 2021 the Company had $
Restricted Stock
The fair value of restricted stock grants is amortized over the vesting period, generally
F-18
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of restricted stock activity is presented below:
|
|
Number of |
|
|
Weighted |
|
||
Outstanding at January 1, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Forfeitures |
|
|
( |
) |
|
$ |
|
|
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands, except per share data) |
|
|||||||||
Fair value of vested restricted stock |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Grant date weighted average fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Compensation expense recognized for restricted stock grants |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Unrecognized compensation expense related to unvested shares |
|
$ |
|
|
|
|
|
|
|
|||
Expected recognition period |
|
|
|
|
|
|
|
|
||||
Performance Share Units
The Company issues PSUs as part of its long-term equity incentive compensation. PSU awards can result in the issuance of common stock to the holder if certain performance criteria are met during a performance period. The performance periods consist of
The fair value of PSUs was measured at the grant date using the Geometric Brownian Motion Model ("GBM Model"). Significant assumptions used in this simulation include the Company's expected volatility and a risk-free interest rate based on U.S. Treasury yield curve rates with maturities consistent with the vesting periods, as well as the volatilities for each of the Company's peers. Assumptions regarding volatility included the historical volatility of each company's stock and the implied volatilities of publicly traded stock options.
Significant assumptions used to value PSUs included:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
Risk free interest rate |
|
|
% |
|
|
% |
|
|
% |
|||
Range of implied volatility: |
|
|
|
|
|
|
|
|
|
|||
Minimum |
|
|
% |
|
|
% |
|
|
% |
|||
Maximum |
|
|
% |
|
|
% |
|
|
% |
|||
A summary of PSU activity is presented below:
|
|
Number of |
|
|
Weighted |
|
||
Outstanding at January 1, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Earned |
|
|
( |
) |
|
$ |
|
|
Forfeitures |
|
|
( |
) |
|
$ |
|
|
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
F-19
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands, except per unit data) |
|
|||||||||
Number of PSUs granted |
|
|
|
|
|
|
|
|
|
|||
Grant date fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Grant date fair value per unit |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Compensation expense recognized for PSUs |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Unrecognized compensation expense related to unvested shares |
|
$ |
|
|
|
|
|
|
|
|||
Expected recognition period |
|
|
|
|
|
|
|
|
||||
The fair value of PSUs is amortized over the vesting period of
The Company has a 401(k) profit sharing plan which covers all of its employees. At its discretion, Comstock may match the employees' contributions to the plan. Matching contributions to the plan were approximately $
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 following is an analysis of the consolidated income tax provision (benefit):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Current - Federal |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||
Current - State |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Deferred - Federal |
|
|
|
|
|
|
|
|
( |
) |
||
Deferred - State |
|
|
( |
) |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
In recording deferred income tax assets, the Company considers whether it is more likely than not that its deferred income tax assets will be realized in the future. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. The Company believes that after considering all the available objective evidence, historical and prospective, with greater weight given to historical evidence, management is not able to determine that it is more likely than not that all of its deferred tax assets will be realized. As a result, the Company established valuation allowances for its deferred tax assets and U.S. federal and state net operating loss carryforwards that are not expected to be utilized due to the uncertainty of generating taxable income prior to the expiration of the carryforward periods. The Company will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future periods.
F-20
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of significant temporary differences representing the net deferred tax liabilities were as follows:
|
|
As of December 31, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In thousands) |
|
|||||
Deferred tax assets: |
|
|
|
|
|
|
||
Interest expense limitation |
|
$ |
|
|
$ |
|
||
Net operating loss carryforwards |
|
|
|
|
|
|
||
Unrealized hedging losses |
|
|
|
|
|
|
||
Asset retirement obligation |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Valuation allowance on deferred tax assets |
|
|
( |
) |
|
|
( |
) |
Deferred tax assets |
|
|
|
|
|
|
||
Deferred tax liabilities: |
|
|
|
|
|
|
||
Property and equipment |
|
|
( |
) |
|
|
( |
) |
Unrealized hedging gains |
|
|
( |
) |
|
|
( |
) |
Amortization of debt issuance costs and bond discount |
|
|
|
|
|
|
||
Other |
|
|
( |
) |
|
|
( |
) |
Deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
Net deferred tax liability |
|
$ |
( |
) |
|
$ |
( |
) |
The difference between the customary rate of 21.0% and the effective tax rate on income (losses) is due to the following:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Tax at statutory rate |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Tax effect of: |
|
|
|
|
|
|
|
|
|
|||
Valuation allowance on deferred tax assets |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
State income taxes, net of federal benefit |
|
|
( |
) |
|
|
|
|
|
|
||
Other |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
Tax at statutory rate |
|
|
% |
|
|
% |
|
|
% |
|||
Tax effect of: |
|
|
|
|
|
|
|
|
|
|||
Valuation allowance on deferred tax assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
State income taxes, net of federal benefit |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Other |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Effective tax rate |
|
|
% |
|
|
% |
|
|
( |
)% |
||
F-21
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2023, Comstock had the following carryforwards available to reduce future income taxes:
Types of Carryforward |
|
Years of |
|
Amount |
|
|
|
|
|
|
(In thousands) |
|
|
Net operating loss – U.S. federal |
|
2024-2037 |
|
$ |
|
|
Net operating loss – U.S. federal |
|
Unlimited |
|
$ |
|
|
Net operating loss – state taxes |
|
Unlimited |
|
$ |
|
|
Interest expense – U.S. federal |
|
Unlimited |
|
$ |
|
|
Interest expense – state taxes |
|
Unlimited |
|
$ |
|
|
The Company's ability to use net operating losses ("NOLs") generated before its ownership change in 2018 to reduce taxable income is limited under IRC Section 382. NOLs that exceed the Section 382 limitation in any year continue to be allowed as carry forwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. NOLs incurred prior to 2018 generally have a
The Company's federal income tax returns for the years subsequent to December 31, 2019 remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2020. The Company is currently under examination with the state of Louisiana and believe that its significant filing positions are highly certain and that all of its other significant income tax filing positions and deductions would be sustained upon audit or the final resolution would not have a material effect on the consolidated financial statements. Therefore, the Company has not established any significant reserves for uncertain tax positions.
Comstock generally uses commodity price swaps, basis swaps and collars to hedge natural gas and oil prices to manage price risk. 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 counterparty 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 counterparty based on the difference. Comstock generally receives a settlement from the counterparty 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 volumes hedged. For collars, generally Comstock receives a settlement from the counterparty when the settlement price is below the floor and pays a settlement to the counterparty when the settlement price exceeds the cap. No settlement occurs when the settlement price falls between the floor and cap.
All of the Company's derivative financial instruments are used for risk management purposes and, by policy, none are held for trading or speculative purposes. Comstock minimizes credit risk to counterparties of its derivative financial instruments through formal credit policies, monitoring procedures, and diversification. The Company is not required to provide any credit support to its counterparties other than cross collateralization with the assets securing its bank credit facility. None of the Company's derivative financial instruments involve payment or receipt of premiums. The Company classifies the fair value amounts of derivative financial instruments as net current or noncurrent assets or liabilities, whichever the case may be, by commodity contract. None of the Company's derivative contracts are designated as fair value or cash flow hedges. The Company recognizes cash settlements and changes in the fair value of its derivative financial instruments as a single component of other income (expenses) in the consolidated statements of operations and as separate components within cash flows from operating activities in the consolidated statements of cash flows. All of Comstock's natural gas derivative financial instruments are tied to the Henry Hub-NYMEX price index.
F-22
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had the following outstanding natural gas price derivative financial instruments at December 31, 2023:
|
|
Future |
|
|
Natural Gas Swap Contracts: |
|
|
|
|
Volume (MMBtu) |
|
|
|
|
Average Price per MMBtu |
|
$ |
|
|
The aggregate fair value of the Company's derivative financial instruments are presented on a gross basis in the accompanying consolidated balance sheets. The classification of derivative financial instruments between assets and liabilities, consists of the following:
|
|
|
|
As of December 31, |
|
|||||
Type |
|
Consolidated Balance Sheet Location |
|
2023 |
|
|
2022 |
|
||
|
|
|
|
(in thousands) |
|
|||||
Asset Derivative Financial Instruments: |
|
|
|
|
|
|
|
|
||
Natural gas price derivatives |
|
Derivative Financial Instruments – current |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
||
Liability Derivative Financial Instruments: |
|
|
|
|
|
|
|
|
||
Natural gas price derivatives |
|
Derivative Financial Instruments – current |
|
$ |
|
|
$ |
|
||
The Company recognizes cash settlements and changes in the fair value of its derivative financial instruments as a single component of other income (expenses).
|
|
Year Ended December 31, |
|
|||||||||
Gain/(Loss) Recognized in Earnings on Derivatives |
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Natural gas price derivatives |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Oil price derivatives |
|
|
|
|
|
|
|
|
( |
) |
||
Interest rate derivatives |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
The Company operates natural gas and oil properties held by a partnerships owned by its majority stockholder. Comstock charges the partnership for the costs incurred to drill, complete and produce the wells, as well as drilling and operating overhead fees. Comstock also provides natural gas marketing services to the partnerships in return for a fee equal to $
In connection with the operation of the wells, the Company had a $
F-23
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Set forth below is a summary of the Company's proved natural gas and oil reserves:
|
|
Year Ended December 31, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||||||||||||||
|
|
Oil |
|
|
Natural |
|
|
Oil |
|
|
Natural |
|
|
Oil |
|
|
Natural |
|
||||||
Proved Reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revisions of previous estimates |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Extensions and discoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Acquisitions of minerals in place |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Sales of minerals in place |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
||
Production |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
End of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Proved Developed Reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
End of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Proved Undeveloped Reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
End of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revisions of previous estimates. Revisions of previous estimates in 2023 were primarily attributable to significantly lower natural gas and oil prices that were used to determine proved reserves at the end of the year. Revisions of previous estimates in 2022 were insignificant. Revisions of previous natural gas estimates in 2021 were primarily attributable to higher production performance from the Company's wells as compared to expected performance from proved undeveloped locations included in proved reserves in the previous year.
Extensions and discoveries. Extensions and discoveries for 2023, 2022 and 2021 were primarily comprised of proved reserve additions attributable to the wells drilled in the current year that were not classified as proved undeveloped in prior years and additional proved undeveloped locations that are planned to be drilled in the Company's current development plan.
The following table sets forth the standardized measure of discounted future net cash flows relating to proved reserves:
|
|
As of December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Cash Flows Relating to Proved Reserves: |
|
|
|
|
|
|
|
|
|
|||
Future Cash Flows |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Future Costs: |
|
|
|
|
|
|
|
|
|
|||
Production |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Development and Abandonment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Future Income Taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Future Net Cash Flows |
|
|
|
|
|
|
|
|
|
|||
10% Discount Factor |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Standardized Measure of Discounted Future Net Cash Flows |
|
$ |
|
|
$ |
|
|
$ |
|
|||
F-24
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the changes in the standardized measure of discounted future net cash flows relating to proved reserves:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
|
|
(In thousands) |
|
|||||||||
Standardized Measure, Beginning of Year |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Net change in sales price, net of production costs |
|
|
( |
) |
|
|
|
|
|
|
||
Development costs incurred during the year which were previously estimated |
|
|
|
|
|
|
|
|
|
|||
Revisions of quantity estimates |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Accretion of discount |
|
|
|
|
|
|
|
|
|
|||
Changes in future development and abandonment costs |
|
|
|
|
|
( |
) |
|
|
|
||
Changes in timing and other |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Extensions and discoveries |
|
|
|
|
|
|
|
|
|
|||
Acquisitions of minerals in place |
|
|
|
|
|
|
|
|
|
|||
Sales of minerals in place |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Sales, net of production costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net changes in income taxes |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Standardized Measure, End of Year |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The standardized measure of discounted future net cash flows was determined based on the simple average of the first of month market prices for natural gas and oil for each year. Prices used in determining quantities of natural gas and oil reserves and future cash inflows from natural gas and oil reserves represent prices received at the Company's sales point. These prices have been adjusted from posted or index prices for both location and quality differences.
|
|
Year Ended December 31, |
|
|||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||
Crude Oil: $/barrel |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Natural Gas: $/Mcf |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Proved reserve information utilized in the preparation of the financial statements were based on estimates prepared by the Company's petroleum engineering staff in accordance with guidelines established by the Securities and Exchange Commission and the Financial Accounting Standards Board, which require that reserve reports be prepared under existing economic and operating conditions with no provision for price and cost escalation except by contractual agreement. All of the Company's reserves are located onshore in the continental United States of America. The Company retained an independent petroleum consultant to conduct an audit of the Company's 2023 reserve estimates. The purpose of this audit was to provide additional assurance on the reasonableness of internally prepared reserve estimates. The engineering firm was selected for their geographic expertise and their historical experience.
Future development and production costs are computed by estimating the expenditures to be incurred in developing and producing proved natural gas and oil reserves at the end of the year, based on year end costs and assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the appropriate statutory tax rates to the future pre-tax net cash flows relating to proved reserves, net of the tax basis of the properties involved. The future income tax expenses give effect to permanent differences and tax credits, but do not reflect the impact of future operations.
F-25
Exhibit 4.4
DESCRIPTION OF SECURITIES
The following description of our securities is intended as a summary only and therefore is not complete. This description is based upon, and is qualified by reference to, our Second Amended and Restated Articles of Incorporation, our Amended and Restated Bylaws, and our Certificate of Designations, each as amended from time to time, and by applicable provisions of the common law of the State of Nevada. For the complete terms of the capital stock, please refer to our Second Amended and Restated Articles of Incorporation, our Amended and Restated Bylaws, which are incorporated by reference as exhibits to this Annual Report on Form 10-K.
General
We are a company incorporated under the laws of the State of Nevada and our affairs are governed by our Second Amended and Restated Articles of Incorporation (as amended, our “Articles of Incorporation”), our Amended and Restated Bylaws (as amended, our “Amended and Restated Bylaws”) and the common law of the State of Nevada. Our authorized capital stock currently consists of 400,000,000 shares of common stock, par value $0.50 per share ("Common Stock") and 5,000,000 shares of preferred stock, par value $10.00 per share ("Preferred Stock"). The following description summarizes certain terms of our shares as set out more particularly in our Articles of Incorporation and our Amended and Restated Bylaws.
Common Stock
Each holder of Common Stock is entitled to one vote per share. Subject to the rights, if any, of the holders of any series of Preferred Stock pursuant to applicable law or the provision of the certificate of designation creating that series, all voting rights are vested in the holders of shares of Common Stock. Holders of shares of Common Stock have no right to cumulate votes in the election of directors, thus, the holders of a majority of the shares of Common Stock can elect all of the members of the board of directors standing for election. All outstanding shares of Common Stock are fully paid and non-assessable. Any additional Common Stock we offer and issue under this prospectus, and any related prospectus supplement, will also be fully paid and non-assessable.
Dividends may be paid to the holders of Common Stock when, as, and if declared by the board of directors out of funds legally available for their payment. On November 1, 2022, we announced that the dividend was being reinstated at an annual dividend rate of $0.50 per share. Any future determination as to the payment of dividends will depend upon the results of our operations, capital requirements, our financial condition and such other factors as our board of directors may deem relevant.
In the event of our voluntary or involuntary liquidation, dissolution, or winding up, the holders of Common Stock will be entitled to share equally, in proportion to the number of shares of Common Stock held by them, in any of our assets available for distribution after the payment in full of all debts and distributions have received their liquidation preferences in full. Holders of Common Stock are not entitled to preemptive purchase rights in future offerings of our Common Stock. Although our restated articles of incorporation do not specifically deny preemptive rights, pursuant to Nevada law, our stockholders do not have preemptive rights with respect to shares that are registered under Section 12 of the Exchange Act and our Common Stock is so registered.
Preferred Stock
Our board of directors can, without approval of our stockholders, issue one or more series of preferred stock and determine the number of shares of each series and the rights, preferences, and limitations of each series.
Anti-Takeover Provisions
Our Articles of Incorporation, our Amended and Restated Bylaws, and Nevada law include certain provisions which may have the effect of delaying or deterring a change in control or in our management or encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include authorized blank check preferred stock, restrictions on business combinations, and the availability of authorized but unissued Common Stock.
1
Combination with Interested Stockholders Statute
Sections 78.411 to 78.444 of the Nevada Revised Statutes (“N.R.S.”), which apply to any publicly traded Nevada corporation with 200 or more stockholders of record which has not otherwise effectively opted out of application of the Combinations with Interested Stockholders Statute in its Articles of Incorporation, or by amendment thereto, including us, prohibits an “interested stockholder” from entering into a “combination” with the corporation for two years, unless certain conditions are met. A “combination” includes:
under any agreement, arrangement or understanding, whether or not in writing, with the interested stockholder or any affiliate or associate of the interested stockholder, which has the immediate and proximate effect of increasing the proportionate share of the outstanding shares of any class or series of voting shares or securities convertible into voting shares of the corporation or any subsidiary of the corporation which is beneficially owned by the interested stockholder or any affiliate or associate of the interested stockholder, except as a result of immaterial changes because of adjustments of fractional shares.
2
An “interested stockholder” is a person who is:
A corporation to which the Combinations with Interested Stockholders Statute applies may not engage in a “combination” within two years after the interested stockholder first became an interested stockholder, unless the combination meets all of the requirements of the corporation’s articles of incorporation and (i) the combination or the transaction by which the person first became an interested stockholder is approved by the board of directors before the person first became an interested stockholder, or (ii)(a) the combination is approved by the board of directors and (b) at or after that time, the combination is approved at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of the stockholders representing at least sixty percent (60%) of the outstanding voting power of the corporation not beneficially owned by the interested stockholder or the affiliates or associates of the interested stockholder. If this approval is not obtained, the combination may be consummated after the two year period expires if either (i)(a) the combination or transaction by which the person first became an interested stockholder is approved by the board of directors before such person first became an interested stockholder, (b) the combination is approved by a majority of the outstanding voting power of the corporation not beneficially owned by the interested stockholder or any affiliate or associate of the interested stockholder, or (c) the combination otherwise meets the requirements of the Combination with Interested Stockholders statute. Alternatively, a combination with an interested stockholder engaged in more than 2 years after the date the person first became an interested stockholder may be permissible if the aggregate amount of cash and the market value of consideration other than cash to be received by holders of shares of Common Stock and holders of any other class or series of shares meets the minimum requirements set forth in the statue, and prior to the completion of the combination, except in limited circumstances, the interested stockholder has not become the beneficial owner of additional voting shares of the corporation.
Acquisition of Controlling Interest Statute
In addition, Nevada’s “Acquisition of Controlling Interest Statute,” prohibits an acquiror, under certain circumstances, from voting shares of a target corporation’s stock after crossing certain threshold ownership percentages, unless the acquiror obtains the approval of the target corporation’s stockholders. Sections 78.378 to 78.3793 of the N.R.S. only apply to Nevada corporations with at least 200 stockholders, including at least 100 record stockholders who are Nevada residents, that do business directly or indirectly in Nevada and whose articles of incorporation or bylaws in effect 10 days following the acquisition of a controlling interest by an acquiror do not prohibit its application.
We do not intend to “do business” in Nevada within the meaning of the Acquisition of Controlling Interest Statute. Therefore, we believe it is unlikely that this statute will apply to us. The statute specifies three thresholds that constitute a controlling interest:
Once an acquiror crosses one of these thresholds, shares which it acquired in the transaction taking it over the threshold (or within ninety days preceding the date thereof) become “control shares” which could be deprived of the right to vote until a majority of the disinterested stockholders restore that right.
A special stockholders’ meeting may be called at the request of the acquiror to consider the voting rights of the acquiror’s shares. If the acquiror requests a special meeting and gives an undertaking to pay the expenses of said meeting, then the meeting must take place no earlier than 30 days (unless the acquiror requests that the meeting be held sooner) and no more than 50 days (unless the acquiror agrees to a later date) after the delivery by the acquiror to the corporation of an information statement which sets forth the range of voting power that the acquiror has acquired or proposes to acquire and certain other information concerning the acquiror and the proposed control share acquisition.
3
If no such request for a stockholders’ meeting is made, consideration of the voting rights of the acquiror’s shares must be taken at the next special or annual stockholders’ meeting. If the stockholders fail to restore voting rights to the acquiror, or if the acquiror fails to timely deliver an information statement to the corporation, then the corporation may, if so provided in its articles of incorporation or bylaws, call certain of the acquiror’s shares for redemption at the average price paid for the control shares by the acquiror.
Our Articles of Incorporation and Amended and Restated Bylaws do not currently permit us to redeem an acquiror’s shares under these circumstances. The Acquisition of Controlling Interest Statute also provides that in the event the stockholders restore full voting rights to a holder of control shares that owns a majority of the voting stock, then all other stockholders who do not vote in favor of restoring voting rights to the control shares may demand payment for the “fair value” of their shares as determined by a court in dissenters rights proceeding pursuant to Chapter 92A of the N.R.S.
Our Transfer Agent
Equiniti Trust Company, LLC is transfer agent and registrar for our Common Stock.
Listing of Common Stock
Our Common Stock trades on the NYSE under the symbol “CRK”.
4
Exhibit 10.6
COMSTOCK AMENDED AND RESTATED LEASE
BASIC LEASE INFORMATION
Year |
Annual Rent Per Square Foot of Rentable Area |
Basic Annual Rent |
Basic Monthly Rent |
1 |
$22.00 |
$1,460,404.00 |
$121,700.33 |
2 |
$22.50 |
$1,493,595.00 |
$124,466.25 |
3 |
$23.00 |
$1,526,786.00 |
$127,232.17 |
4 |
$23.50 |
$1,559,977.00 |
$129,998.08 |
5 |
$24.00 |
$1,593,168.00 |
$132,764.00 |
6 |
$24.50 |
$1,626,359.00 |
$135,529.92 |
7 |
$25.00 |
$1,659,550.00 |
$138,295.83 |
EXHIBITS:
Exhibit A: Legal Description of the Property
Exhibit B: Premises
Exhibit C: Intentionally Omitted
Exhibit D: Acceptance of Premises Memorandum Exhibit E: Rules and Regulations
Exhibit F: Parking Agreement Exhibit G: Additional Provisions
ii
AMENDED AND RESTATED LEASE
This Amended and Restated Lease dated the 22nd of December 2023 (this "Lease") is made by and between Stonebriar I Office Partners Ltd., a Texas limited partnership, by its general partner Stonebriar Partners, LLC, by its authorized manager Western Securities (USA) Limited ("Landlord") and Comstock Resources, Inc., a Nevada corporation ("Tenant"). The Basic Lease Information attached hereto as pages i and ii (the "Basic Lease Information") and all exhibits, riders and other attachments to this Lease are incorporated into this Lease and made a part hereof. Capitalized terms used in this Lease without definitions have the respective meanings assigned to them in the Basic Lease Information.
ARTICLE 1 TERM AND POSSESSION
SECTION 1.1 LEASE OF PREMISES, COMMENCEMENT AND EXPIRATION
SECTION 1.2 DELIVERY OF PREMISES
SECTION 1.3 REDELIVERY OF THE PREMISES
1
SECTION 1.4 HOLDING OVER. If Tenant or any party under Tenant claiming rights to this Lease, retains possession of the Premises after the expiration or earlier termination of this Lease, such possession shall constitute a tenancy at will only, subject, however, to all of the terms, provisions, covenants and agreements on the part of Tenant hereunder; such parties shall be subject to immediate eviction and removal and Tenant or any such party shall pay Landlord as rent for the period of such holdover an amount equal to 150% of the Basic Annual Rent and 100% of Additional Rent (each as hereinafter defined) in effect immediately preceding expiration or termination, as applicable, prorated on a daily basis. Tenant shall also pay any actual damages sustained by Landlord as a result of such holdover. Tenant will vacate the Premises and deliver same to Landlord immediately upon Tenant's receipt of notice from Landlord to so vacate. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend the term of this Lease; no payments of money by Tenant to Landlord after the expiration or earlier termination of this Lease shall reinstate, continue or extend the term of this Lease; and no extension of this Lease after the expiration or earlier termination thereof shall be valid unless reduced to writing and signed by both Landlord and Tenant.
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ARTICLE 2 RENT
SECTION 2.1 BASIC RENT. Tenant shall pay as annual rent for the Premises the sum of the products obtained by multiplying (x) the Premises Rentable Area by (y) the annual rate per square foot of Premises Rentable Area, respectively, shown in the Basic Lease Information (the sum of such products is herein called "Basic Annual Rent"). The Basic Annual Rent shall be payable in monthly installments equal to the applicable Basic Monthly Rent shown in the Basic Lease Information in advance, without demand, offset or deduction, which monthly installments shall commence on the Commencement Date and shall continue on the first (1st) day of each calendar month thereafter. If the Commencement Date occurs on a day other than the first day of a calendar month, the Basic Monthly Rent for such partial month shall be prorated on the basis of days elapsed in the applicable calendar year. Upon execution of this Lease, Tenant shall pay to Landlord the first month's Basic Monthly Rent.
SECTION 2.2 ADDITIONAL RENT.
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SECTION 2.3 RENT DEFINED AND NO OFFSETS. Basic Annual Rent, Additional Rent and all other sums (whether or not expressly designated as rent) required to be paid to Landlord by Tenant under this Lease (including, without limitation, any sums payable to Landlord under any addendum, exhibit, rider or schedule attached hereto) shall constitute rent and are sometimes collectively referred to as “Rent”. Each payment of Rent shall be paid by Tenant when due, without prior demand therefor and without deduction or setoff, except as otherwise set forth in this Lease.
SECTION 2.4 LATE CHARGES. Tenant's failure to promptly pay sums due under this Lease may cause Landlord to incur unanticipated costs. The exact amount of those costs is impractical or extremely difficult to ascertain. The costs may include, but are not limited to, processing and accounting charges and late charges that may be imposed on Landlord by any ground lease or deed of trust encumbering the Premises. Payments due to Landlord under this Lease are not an extension of credit. Therefore, if any payment under the Lease is not actually received on or before the due date (and not merely deposited in the mail), Landlord may, at Landlord's option and to the extent allowed by applicable law, impose a Late Charge on any late payments in an amount equal to one-half of one percent (0.5%) of the amount of the past due payment (the "Late Charge") per day for each day after the due date, until the past due amount in good funds is received
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by Landlord, up to a maximum of five percent (5%) of the past due amount. A Late Charge may be imposed only once on each past due payment. Any Late Charge will be in addition to Landlord's other remedies for nonpayment of Rent. If any check tendered to Landlord by Tenant under this Lease is dishonored for any reason, Tenant shall pay to the party receiving payments under this Lease a fee of fifty dollars ($50.00), plus (at Landlord's option) a Late Charge as provided above until good funds are received by Landlord. The parties agree that any Late Charge and dishonored check fee represent a fair and reasonable estimate of the costs Landlord will incur by reason of the late payment or dishonored check. Payments received from Tenant will be applied first to any Late Charges, second to Basic Rent, and last to other unpaid charges or reimbursements due to Landlord.
SECTION 2.5 ASSESSMENT OF CHARGES. Landlord and Tenant agree that each provision of this Lease for determining charges, amounts, and Additional Rent payments by Tenant is commercially reasonable, and as to each such charge or amount, constitutes a "method by which the charge is to be computed" for purposes of Section 93.012 (Assessment of Charges) of the Texas Property Code, as such section now exists or as it may be hereafter amended or succeeded.
ARTICLE 3 SECURITY DEPOSIT
Intentionally deleted.
ARTICLE 4 OCCUPANCY AND USE
SECTION 4.1 USE OF PREMISES
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SECTION 4.2 RULES AND REGULATIONS. Tenant will comply with such rules and regulations (the "Rules and Regulations") generally applying to tenants in the Building as may be adopted from time to time by Landlord for the management, safety, care and cleanliness of, and the preservation of good order and protection of property in, the Premises and the Building and at the Property. All such Rules and Regulations are hereby made a part hereof. The Rules and Regulations in effect on the date hereof are attached hereto as Exhibit E. All changes and amendments to the Rules and Regulations sent by Landlord to Tenant in writing and conforming to the foregoing standards shall be carried out and observed by Tenant. Landlord hereby reserves all rights necessary to implement and enforce the Rules and Regulations.
SECTION 4.3 COMPLIANCE WITH LAWS
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SECTION 4.4 ACCESS. Without being deemed guilty of an eviction of Tenant and without abatement of Rent, Landlord and its authorized agents shall have the right to enter the Premises to inspect the Premises (after giving reasonable notice to Tenant, but in any event (other than an emergency) at least twenty-four (24) hours), and allowing Tenant to accompany Landlord), to show the Premises to prospective lenders or purchasers, and within the last twelve (12) months of the Lease Term, to show the Premises to prospective tenants, to post a "for rent" sign on the Premises, and to fulfill Landlord's obligations or exercise its rights under this Lease. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock the doors to and within the Premises, excluding Tenant's vaults and safes. Landlord shall use commercially reasonable efforts to minimize disturbance of Tenant’s use and occupancy of the Premises in its exercise of its rights pursuant to this Section 4.4.
SECTION 4.5 QUIET POSSESSION. Provided Tenant timely pays Rent and observes and performs all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have the quiet possession of the Premises for the entire Term hereof, subject to all of the provisions of this Lease and all laws and restrictive covenants to which the Property is subject.
SECTION 4.6 PERMITS. Tenant shall obtain the certificate of occupancy, if any, required for occupancy of the Premises following construction of Tenant's Improvements. Tenant shall pay for the cost of any such certificate of occupancy. If any additional governmental license or permit shall be required for the proper and lawful conduct of
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Tenant's business in the Premises or any part thereof, Tenant, at its expense, shall procure and thereafter maintain such license or permit. Additionally, if any subsequent alteration or improvement made to the Premises by Tenant or Tenant’s use of Premises require any modification or amendment of any certificate of occupancy for the Building or the issuance of any other permit of any nature whatsoever, Tenant shall, at its expense, take all actions to procure any such modification or amendment or additional permit and Landlord agrees to reasonably to cooperate with Tenant in such regard.
ARTICLE 5 UTILITIES AND SERVICES
SECTION 5.1 SERVICES TO BE PROVIDED.
Landlord agrees to furnish to the Premises the utilities and services described in subsections 5.101 through 5.108 below.
(a) Landlord shall furnish to the Premises electric power in sufficient quantities to operate Tenant’s lighting and for electrical outlets to operate Tenant’s equipment (provided such equipment is not of a type or quantity not typical for Tenant’s Permitted Use). Tenant shall be solely responsible for the cost of any electricity consumed at the Premises and for the cost of any changes made to the Building’s electrical system required in order to accommodate usage by the Tenant that is greater than that permitted by this subparagraph (a).
(b) Landlord may, from time to time, engage a reputable consultant to conduct a survey of electrical usage within the Premises (a “Consumption Survey”) or install, at Tenant’s expense, one or more submeters (“Submeters”) to measure electrical consumption within the Premises.
(c) Without the prior, written consent of Landlord, Tenant shall not install or use or permit the installation or use of any lighting fixtures or any electrical plugs, connections or outlets in the Premises beyond those installed by Landlord as part of Tenant’s Improvements. In no event shall Tenant (i) install any lighting device in any fixture or connect any equipment or other electrical device to any electrical outlet which requires a voltage greater than that supplied by the fixture or outlet in question.
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SECTION 5.2 ADDITIONAL SERVICES. Landlord may, with advance notice in writing, impose a reasonable charge for any utilities and services, including without limitation air conditioning, electrical current and water, provided by Landlord by reason of any use of the services at any time other than Normal Business Hours or beyond the levels or quantities that Landlord agrees herein to furnish or because of special electrical, cooling or ventilating needs created by Tenant's hybrid telephone equipment, computers or other equipment.
SECTION 5.3 TENANT’S OBLIGATION. Tenant agrees to cooperate fully at all times with Landlord and to abide by all regulations and requirements which Landlord reasonably prescribes for the use of the above utilities and services; provided that such regulations and requirements do not adversely and materially impact Tenant’s business or the Premises.
SECTION 5.4 SERVICE INTERRUPTION.
5.401 Service Interruption/Waiver of Landlord Liability. Landlord shall not be liable for and, except as provided in subsection 5.402 below, Tenant shall not be entitled to any abatement or reduction of Rent by reason of, Landlord’s failure to maintain temperature or electrical constancy levels or to furnish any of the foregoing services when such failure is caused by accident, breakage, repairs, strikes, lockouts or other labour disturbance or labor dispute of any character, governmental regulation, moratorium or other governmental action, inability by exercise of reasonable diligence to obtain electricity, water or fuel, or by any other cause beyond Landlord’s reasonable control (collectively, “Uncontrollable Events”), nor shall any such Uncontrollable Event or results or effects thereof be construed as an eviction (constructive or actual) of Tenant or as a breach of the implied warranty of suitability, or relieve Tenant from the obligation to perform any covenant or agreement herein and in no event shall Landlord be liable for damage to persons or property (including, without limitation, business interruption), or be in default hereunder, as a result of any such Uncontrollable Event or results or effects thereof; provided that Landlord otherwise complies with its obligations under this Lease, and exercises diligence to resolve such Uncontrollable Events. The foregoing notwithstanding in the event such Uncontrollable Events render the Premises untenantable for a period of time in excess of 30 days during any 60 day period, Tenant may terminate this Lease.
5.402 Limited Right to Abatement of Rent. If any portion of the Premises becomes unfit for occupancy because Landlord fails to deliver any service (excluding any separately metered utility services) as required under subsections 5.10l through 5.110 above for any period (other than a reconstruction period conducted pursuant to Section 7.1 or Article 8 below) exceeding ten (10) business days after written notice by Tenant to Landlord and provided such failure is not caused by Tenant, Tenant's Contractors or any of their respective agents or employees, Tenant shall be entitled to a fair partial abatement of Basic Annual Rent and Additional Rent for any such portion of the Premises from the expiration of such thirty (30) day period until such portion is again fit for occupancy.
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SECTION 5.5 TELECOMMUNICATION EQUIPMENT. In the event that Tenant wishes at any time to utilize the services of a telephone or telecommunications provider whose equipment is not then servicing the Building, no such provider shall be permitted to install its lines or other equipment within the Building without first securing the prior written approval of the Landlord, which approval shall include, without limitation, approval of the plans and specifications for the installation of the lines and/or other equipment within the Building. Landlord's approval shall not be deemed any kind of warranty or representation by Landlord, including, without limitation, any warranty or representation as to the suitability, competence, or financial strength of the provider. Without limitation of the foregoing standard, unless all of the following conditions are satisfied to Landlord's reasonable satisfaction, it shall be reasonable for Landlord to refuse to give its approval: (i) Landlord shall incur no expense with respect to any aspect of the provider's provision of its services, including without limitation, the costs of installation, materials and services; (ii) prior to commencement of any work in or about the Building by the provider, the provider shall supply Landlord with such written indemnities, insurance, financial statements, and such other items as Landlord determines to be necessary to protect its financial interests and the interests of the Building relating to the proposed activities of the provider; (iii) the provider agrees to abide by such rules and regulations, building and other codes, job site rules and such other requirements as are determined by Landlord to be necessary to protect the interests of the Building, the tenants in the Building and Landlord, in the same or similar manner as Landlord has the right to protect itself and the Building with respect to proposed alterations as described in subsection 6.303 of this Lease; (iv) Landlord determines that there is sufficient space in the Building for the placement of all of the provider's equipment and materials; (v) the provider agrees to abide by Landlord requirements, if any, that the provider use existing Building conduits and pipes or use Building contractors (or other contractors approved by Landlord); (vi) Landlord receives from the provider such compensation as is determined by Landlord to compensate it for space used in the Building for the storage and maintenance of the provider's equipment, for the fair market value of a provider's access to the Building, and the costs which may reasonably be expected to be incurred by Landlord; (vii) the provider agrees to deliver to Landlord detailed "as built" plans immediately after the installation of the provider's equipment is complete; and (viii) all of the foregoing matters are documented in a written license agreement between Landlord and the provider, the form and content of which is reasonably satisfactory to Landlord.
SECTION 5.6 MODIFICATIONS. Notwithstanding anything herein to the contrary, Landlord reserves the right from time to time to make reasonable modifications to the above standards for utilities and services; provided that such modifications do not interfere with Tenant’s business.
ARTICLE 6
MAINTENANCE, REPAIRS, ALTERATIONS AND IMPROVEMENTS
SECTION 6.1 LANDLORD'S OBLIGATION TO MAINTAIN AND REPAIR. Landlord shall (subject to Section 7.1, Section 7.4 and Article 8 below and Landlord's rights under Section 2.2 above and except for ordinary wear and tear) maintain (i) the exterior walls, foundation, and roof and load bearing elements of the Building, (ii) the mechanical (including HVAC), electrical, plumbing, and fire/life and safety systems serving the Building, (iii) all exterior portions of the Building, (iv) elevators serving the Building, (v) public restrooms, parking areas, paved walkways and drives, and landscaping on the Property, and perform routine maintenance in the Common Areas. Except for load bearing elements of the Building located within the Premises, Landlord shall not be required to maintain or repair any portion of the Premises.
SECTION 6.2 TENANT'S OBLIGATION TO MAINTAIN,REPAIR AND OPERATE.
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6.202 Rights of Landlord. Tenant shall notify Landlord in advance of any material maintenance, repair or replacement work required in the Premises. All such work shall be performed by contractors and subcontractors approved by Landlord, not to be unreasonably withheld. In the event Tenant fails, in the reasonable judgment of Landlord, to maintain the Premises in good order, condition and repair, or otherwise satisfy its repair and replacement obligations under subsection 6.201 above after providing written notice to Tenant and Tenant thereafter fails to commence performance of obligations within ten (10) days of receipt of such notice, Landlord shall have the right to perform such maintenance, repairs and replacements, and Tenant shall pay Landlord on demand, as Additional Rent, the cost thereof plus a construction management fee of ten percent (10%) of such cost.
6. 203 Operation. Tenant shall be under no obligation to operate out of the Premises so long as Tenant continues to pay rent and otherwise perform its obligations hereunder. Notwithstanding the foregoing, if the Tenant does not occupy the Premises for a period of greater than one hundred and eighty (180) days, the Landlord may terminate the Lease with sixty (60) days written notice, and Tenant shall have no further obligations after the effective date of such termination.
SECTION 6.3 IMPROVEMENTS AND ALTERATIONS.
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ARTICLE 7
INSURANCE AND CASUALTY
SECTION 7.1 TOTAL OR PARTIAL DESTRUCTION OF THE BUILDING OR THE PREMISES
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SECTION 7.2 INDEMNITY. SUBJECT TO SECTION 7.5, TENANT SHALL DEFEND, INDEMNIFY, AND HOLD HARMLESS LANDLORD AND ITS AGENTS (INCLUDING THE PROPERTY MANAGER) (COLLECTIVELY, "LANDLORD PARTIES") FROM AND AGAINST ALL CLAIMS, DEMANDS, LIABILITIES, CAUSES OF ACTION, SUITS, JUDGMENTS, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) FOR ANY LOSS ARISING FROM ANY OCCURRENCE ON THE PREMISES OR FROM TENANT'S FAILURE TO PERFORM ITS OBLIGATIONS UNDER THIS LEASE (OTHER THAN A LOSS ARISING FROM THE SOLE OR GROSS NEGLIGENCE OF LANDLORD PARTIES) THIS INDEMNITY PROVISION SHALL SURVIVE TERMINATION OR EXPIRATION OF THIS LEASE.
SECTION 7.3 TENANT'S INSURANCE.
(a) Tenant shall maintain the following insurance ("Tenant's Insurance"), at its sole cost and expense: (1) commercial general liability insurance applicable to the Premises and its appurtenances providing, on an occurrence basis, a per occurrence limit of no less than $3,000,000; (2) causes of loss-special form (formerly "all risk") property insurance, including flood and earthquake, covering all above building standard leasehold improvements and Tenant's trade fixtures, equipment, furniture and other personal property within the Premises ("Tenant's Property") in the amount of the full replacement cost thereof; (3) business income (formerly "business interruption") insurance written on an actual loss sustained form or with sufficient limits to address reasonably anticipated business interruption losses; (4) business automobile liability insurance to cover all owned, hired and non-owned automobiles owned or operated by Tenant providing a minimum combined single limit of $1,000,000; (5) workers' compensation insurance as required by the state in which the Premises is located and in amounts as may be required by applicable statute (provided, however, if no workers' compensation insurance is statutorily required, Tenant shall carry workers' compensation insurance in a minimum amount of $500,000); (6) employer's liability insurance in an amount of at least $500,000 per occurrence; and (7) umbrella liability insurance that follows form in excess of the limits specified in (1), (4) and (6) above, of no less than $4,000,000 per occurrence and in the aggregate. Any company underwriting any of Tenant's Insurance shall have, according to A.M Best Insurance Guide, a Best's rating of not less than A- and a Financial Size Category of not less than VIII. All commercial general liability, business automobile liability, liquor liability and umbrella liability insurance policies shall name Landlord (or any successor), Landlord's property manager, Landlord's Mortgagee (if any) and their respective members, principals, beneficiaries, partners, officers, directors, employees, and agents, and other designees of Landlord as the interest of such designees shall appear, as "additional insured" and shall be primary with Landlord's policy being secondary and non-contributory, IT BEING THE INTENT THAT SUCH POLICIES AFFORD INSURANCE COVERAGE TO LANDLORD AND THE PROPERTY MANAGER AGAINST CLAIMS FOR PERSONAL OR BODILY INJURY OR DEATH OR PROPERTY DAMAGE OCCURRING UPON, IN OR ABOUT THE PREMISES AS THE RESULT OF THE NEGLIGENCE OF LANDLORD OR THE PROPERTY MANAGER, whether or not required by the other provisions of this Lease. If any aggregate limit is reduced because of losses paid to below 75% of the limit required by this Lease, Tenant will notify Landlord in writing within ten (10) days of the date of reduction. All policies of Tenant's Insurance shall contain endorsements that the insurer(s) shall give Landlord and its designees at least 30 days' advance written notice of any change, cancellation, termination or lapse of insurance. Tenant shall provide Landlord with a certificate of insurance and all required endorsements evidencing Tenant's Insurance prior to the earlier to occur of the Commencement Date or the date Tenant is provided access to the Premises for any reason, and upon renewals at least ten (10) days prior to the expiration of the insurance coverage. All of Tenant's Insurance policies, endorsements and certificates will be on forms and with deductibles and self- insured retention, if any, reasonably acceptable to Landlord. The limits of Tenant's insurance shall not limit Tenant's liability under this Lease.
SECTION 7.4 LANDLORD'S INSURANCE. Landlord shall maintain: (1) commercial general liability insurance applicable to the Property which provides, on an occurrence basis, a minimum combined single limit of no less than $3,000,000 (coverage in excess of $1,000,000 may be provided by way of an umbrella/excess liability policy); and (2) causes of loss-special form (formerly "all risk") property insurance on the Building in the amount of the replacement cost thereof, as reasonably estimated by Landlord. The foregoing insurance and any other insurance carried by Landlord may be effected by a policy or policies of blanket insurance and shall be for the sole benefit of Landlord and under
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Landlord's sole control. Consequently, Tenant shall have no right or claim to any proceeds thereof or any other rights there under.
SECTION 7.5 MUTUAL WAIVER OF SUBROGATION. Notwithstanding anything in this Lease to the contrary, Tenant waives, and shall cause its insurance carrier(s) and any other party claiming through or under such carrier(s), by way of subrogation or otherwise, to waive any and all rights of recovery, Claim, action or causes of action against all Landlord Parties for any loss or damage to Tenant's business, any loss of use of the Premises, and any loss, theft or damage to Tenant's Property (including Tenant's automobiles or the contents thereof), including all rights (by way of subrogation or otherwise) of recovery, Claims, actions or causes of action, which loss or damage is (or would have been, had the insurance required by this Lease been maintained) covered by insurance, even if such loss or Claim arises in whole or in part as a result of the negligence of the Landlord Parties. In addition, Landlord shall cause its insurance carrier(s) and any other party claiming through or under such carrier(s), by way of subrogation or otherwise, to waive any and all rights of recovery, Claim, action or causes of action against all Tenant Parties for any loss of or damage to or loss of use of the Building, any additions or improvements to the Building, or any contents thereof, including all rights (by way of subrogation or otherwise) of recovery, Claims, actions or causes of action, which loss or damage is (or would have been, had the insurance required by this Lease been maintained) covered by insurance, even if such loss or Claim arises in whole or in part as a result of the negligence of the Tenant Parties.
ARTICLE 8 CONDEMNATION
SECTION 8.1 CONDEMNATION RESULTING IN CONTINUED USE NOT FEASIBLE. If the Property or any portion thereof that, in Landlord's reasonable opinion, is necessary to the continued efficient and/or economically feasible use of the Property shall be taken or condemned for public purposes, or sold to a condemning authority in lieu of taking, then Landlord or Tenant may, at its option, terminate this Lease.
SECTION 8.2 CONDEMNATION OF PREMISES. If all or a substantial portion of the Premises is taken or condemned or sold in lieu thereof or Tenant will be unable to use a substantial portion of the Premises for a period of one hundred eighty (180) consecutive days or more by reason of a temporary taking of the Premises or by reason of a taking of all or a portion of the Property through condemnation or sale in lieu thereof, then either Landlord or Tenant may terminate this Lease by delivering written notice thereof to the other within ten days after the taking, condemnation or sale in lieu thereof. If all or any portion of the Premises becomes subject to a taking for a period of time of less than 180 days, this Lease shall remain in full force and effect and Tenant shall continue to perform all of the terms, conditions and covenants of this Lease, including the payment of Rent and all other amounts required hereunder. If any such temporary taking terminates prior to the expiration of the Term, Tenant shall restore the Premises as nearly as possible to the condition prior to such temporary taking, at Tenant’s sole cost and expense. Landlord shall be entitled to receive the entire award for any such temporary Taking, except that Tenant shall be entitled to receive the portion of such award which (i) compensates Tenant for its loss of use of the Premises within the Term and (ii) reimburses Tenant for the reasonable out-of-pocket costs actually incurred by Tenant to restore the Premises as required by this Section 8.2.
SECTION 8.3 CONDEMNATION WITHOUT TERMINATION. If upon a taking or condemnation or sale in lieu of the taking of all or less than all of the Property which gives either Landlord or Tenant the right to terminate this Lease pursuant to Section 8.1 or 8.2 above shall occur and neither Landlord nor Tenant elects to exercise such termination right, then this Lease shall continue in full force and effect, provided that if the taking, condemnation or sale includes any portion of the Premises, the Basic Annual Rent and Additional Rent shall be redetermined on the basis of the remaining square feet of Premises Rentable Area. Landlord, at Landlord's expense, shall restore and reconstruct the Building to substantially its former condition to the extent that the same may be reasonably feasible, but such work shall not be required to exceed the scope of the work done by Landlord in originally constructing the Building, nor shall Landlord in any event be required to spend for such work an amount in excess of the amount received by Landlord as compensation or damages (over and above amounts going to the mortgagee of the property taken) for the part of the Building or the Premises so taken.
SECTION 8.4 CONDEMNATION PROCEEDS. Landlord shall receive the entire award (which shall include sales proceeds) payable as a result of a condemnation, taking or sale in lieu thereof. Tenant hereby assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in and to any such award. Tenant shall, however, have the right to recover from such authority through a separate award which does not reduce Landlord's award, any compensation as may be awarded to Tenant on account of moving and relocation expenses, depreciation to and removal of Tenant's physical property.
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ARTICLE 9 LIENS
Tenant shall keep the Premises and the Property free from all liens arising out of any work performed, materials furnished or obligations incurred by or for Tenant, and Tenant shall defend, indemnify and hold harmless Landlord from and against any and all claims, causes of action, damages and expenses (including reasonable attorneys' fees) arising from or in connection with any such liens. If Tenant shall not, within ten (10) days following notification to Tenant of the imposition of any such lien, cause the same to be released of record by payment or the posting of a bond in amount, form and substance acceptable to Landlord, Landlord shall have, in addition to all other remedies provided herein and by law, the right but not the obligation, to cause the same to be released by such means as it shall deem proper, including payment of or defense against the claim giving rise to such lien. Nothing in this Lease shall be construed as constituting the consent or request of Landlord, express or implied, to any contractor, subcontractor, laborer or materials for the performance of any labor or the furnishing of any materials for any specific improvement, alteration or repair of or to the Building or the Premises or any part thereof, nor as giving Tenant any right, power or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to the filing of any mechanic's or other liens against the interest of Landlord in the Property or the Premises.
ARTICLE 10
TAXES ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, prior to their becoming delinquent, any and all taxes and assessments levied against, and any increases in Taxes as a result of, any personal property or trade or other fixtures placed by Tenant in or about the Premises and any improvements (other than Tenant's Improvements which by their nature, have become a permanent part of the Building) constructed in the Premises by or on behalf of Tenant. If Landlord pays any such additional taxes or increases, Tenant will, within ten (10) days after demand, reimburse Landlord for the amount thereof.
ARTICLE 11 SUBLETTING AND ASSIGNING
Refer to Section 3 of Exhibit G.
ARTICLE 12
TRANSFERS BY LANDLORD, SUBORDINATION AND TENANT'S ESTOPPEL CERTIFICATE
SECTION 12.1 SALE OF THE PROPERTY. In the event of any transfer of title to the Property, the transferor shall automatically be relieved and freed of all obligations of Landlord under this Lease accruing after such transfer.
SECTION 12.2 SUBORDINATION, ATTORNMENT AND NOTICE. This Lease is subject and subordinate to each lease of all or any portion of the Property wherein Landlord is the tenant and to the lien of each mortgage and deed of trust encumbering all or any portion of the Property, regardless of whether such lease, mortgage or deed of trust now exists or may hereafter be created, (ii) to any and all advances (including interest thereon) to be made under each such lease, mortgage or deed of trust and (iii) to all modifications, consolidations, renewals, replacements and extensions of each such lease, mortgage or deed of trust; provided that the foregoing subordination to any mortgage or deed of trust impacting the Property, whether such mortgage or deed of trust is placed on the Property before or after the Effective Date, shall not become effective until and unless the holder of such mortgage or deed of trust delivers to Tenant a non-disturbance agreement (which may include Tenant's agreement to attorn as set forth below) permitting Tenant, if Tenant is not then in default under, this Lease, to remain in occupancy of the Premises in the event of a foreclosure of any such mortgage or deed of trust. Tenant also agrees that any Landlord, mortgagee (whether under a mortgage or deed of trust) or trustee may elect (which election shall be revocable) (collectively, “Landlord’s Mortgagee”) to have this Lease superior to any lease or lien of its mortgage or deed of trust and, in the event of such election and upon notification by such Landlord, mortgagee or trustee to that effect, this Lease shall be deemed superior to such lease, mortgage or deed of trust, whether this Lease is dated prior to or subsequent to the date of such lease, mortgage or deed of trust. Tenant shall, in the event of the sale or assignment of Landlord's interest in the Premises (except in a sale-leaseback financing transaction), or in the event of the termination of any lease in a sale-leaseback financing transaction wherein Landlord is the Tenant attorn to and recognize such purchaser, assignee or Landlord as Landlord under this Lease. Tenant shall, in the event of any proceedings brought for the foreclosure of, or in the event of the exercise of the power of sale under,
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any mortgage or deed of trust covering the Premises, attorn to and recognize the purchaser at foreclosure as Landlord under this Lease. The above subordination and attornment clauses shall be self-operative and no further instruments of subordination or attornment need be required by any mortgagee, trustee, Landlord purchaser or assignee. In confirmation thereof, Tenant agrees that, upon the request of Landlord, or any such mortgagee, trustee, Landlord, purchaser or assignee, Tenant shall execute and deliver whatever instruments may be required for such purposes and to carry out the intent of this Section 12.2.
Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord’s Mortgagee whose address has been given to Tenant, and affording such Landlord’s Mortgagee a reasonable opportunity to perform Landlord’s obligations hereunder.
If Landlord’s Mortgagee shall succeed to the interest of Landlord under this Lease, Landlord’s Mortgagee shall not be: (a) liable for any act or omission of any prior Landlord (including Landlord); (b) bound by any rent or additional rent or advance rent which Tenant might have paid for more than the current month to any prior Landlord (including Landlord), and all such rent shall remain due and owing, notwithstanding such advance payment; (c) bound by any security or advance rental deposit made by Tenant which is not delivered or paid over to Landlord’s Mortgagee and with respect to which Tenant shall look solely to Landlord for refund or reimbursement; (d) bound by any termination, amendment or modification of this Lease made without Landlord’s Mortgagee’s consent and written approval, except for those terminations (except Tenant’s express termination rights herein), amendments and modifications permitted to be made by Landlord without Landlord’s Mortgagee’s consent pursuant to the terms of the loan documents between Landlord and Landlord’s Mortgagee; (e) subject to the defenses which Tenant might have against any prior Landlord (including Landlord); and (f) subject to the offsets which Tenant might have against any prior Landlord (including Landlord) except for those offset rights which are expressly provided in this Lease, relate to periods of time following the acquisition of the Building by Landlord’s Mortgagee, and Tenant has provided written notice to Landlord’s Mortgagee and provided Landlord’s Mortgagee a reasonable opportunity to cure the event giving rise to such offset event. Landlord’s Mortgagee shall have no liability or responsibility under or pursuant to the terms of this Lease or otherwise after it ceases to own an interest in the Project. Nothing in this Lease shall be construed to require Landlord’s Mortgagee to see to the application of the proceeds of any loan, and Tenant’s agreements set forth herein shall not be impaired on account of any modification of the documents evidencing and securing any loan.
SECTION 12.3 TENANT'S ESTOPPEL CERTIFICATE. Tenant shall, upon the request of Landlord or any mortgagee of Landlord (whether under a mortgage or deed of trust), without additional consideration, within seven (7) days of written request therefor, deliver an estoppel certificate, consisting of reasonable statements required by Landlord, any mortgagee or purchaser of any interest in the Property, which statements may include but shall not be limited to the following: this Lease is in full force and effect, with rental paid through the date specified in the certificate; this Lease has not been modified or amended; Landlord is not in default and Landlord has fully performed all of Landlord's obligations hereunder; and such other statements as may reasonably be required by the requesting party. If Tenant is unable to make any statements contained in the estoppel certificate because the same is untrue, Tenant shall with specificity state the reason why such statement is untrue.
ARTICLE 13 DEFAULT
SECTION 13.1 DEFAULTS BY TENANT. The occurrence of any of the events described in subsections 13.101 through 13.110 shall constitute a default by Tenant under this Lease.
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SECTION 13.2 REMEDIES OF LANDLORD.
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13.207 Consequential Damages. In no event shall Tenant be liable to Landlord for consequential or special damages by reason of failure to perform (or default) by Tenant hereunder or otherwise.
SECTION 13.3 LANDLORD'S LIABILITY.
13.301 Tenant's Rights in Respect of Landlord Default. Tenant is granted no contractual right of termination by this Lease, except to the extent and only to the extent set forth in Sections 7. 1 and 8.2 above. If Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the right, title and interest of Landlord in the Property as the same may then be encumbered and Landlord shall not be liable for any deficiency. In no event shall Landlord be liable to Tenant for consequential or special damages by reason of a failure to perform (or a default) by Landlord hereunder or otherwise. In no event shall Tenant have the right to levy execution against any property of Landlord other than its interest in the Property as above provided.
13.302 Certain Limitations on Landlord's Liability. Unless caused by Landlord's gross negligence, willful misconduct or default under this Lease, and without limiting the provisions of Section 7.4, Landlord shall not be liable to Tenant for any claims, actions, demands, costs, expenses, damage or liability of any kind, EVEN IF CAUSED BY LANDLORD'S JOINT NEGLIGENCE, which (i) arise out of the use, occupancy or enjoyment of the Premises by Tenant or any person therein or holding under Tenant or by or through the acts or omissions of any of their respective employees, officers, agents, invitees or contractors, are caused by or arise out of fire, explosion, falling sheetrock, gas, electricity, water, rain, snow or dampness, or leaks in any part of the Premises, (iii) are caused by or arise out of damage to the roof, pipes, appliances, plumbing works, electrical works or any damage to or malfunction of heating, ventilation or air conditioning equipment, (iv) are caused by tenants or any persons either in the Premises or elsewhere in the Building (unless caused by Landlord's negligence in the Common Areas) or by occupants of property adjacent to the Building or Common Areas or by the public or by the construction of any private, public or quasi-public work, (v) are caused by any act, neglect or negligence of Tenant, or (vi) are caused by any theft or burglary at the Premises or the Property.
SECTION 13.4 WAIVER OF TEXAS DECEPTIVE TRADE PRACTICES ACT. TENANT HEREBY WAIVES ALL ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET. SEQ. OF THE TEXAS BUSINESS AND COMMERCE CODE (THE "DTPA"), A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF TENANT'S OWN SELECTION, TENANT VOLUNTARILY CONSENTS TO THIS WAIVER. Accordingly, Tenant’s rights and remedies with respect to the transactions contemplated under this Lease shall be governed by legal principles other than the DTPA. The foregoing waiver by Tenant shall also be binding on any permitted assignee, subtenant or successor of Tenant under this Lease. The provisions of this Section shall survive any termination of this Lease.
SECTION 13.5 LANDLORD'S LIEN. To secure the payment of Rent and the performance of Tenant's other obligations as and when required under this Lease, Tenant grants to Landlord an express contract lien on and security
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interest in all goods, equipment, furnishings, fixtures, furniture, chattels and personal property of whatever nature owned by Tenant attached or affixed to or used in and about the Premises on the date of this Lease or at any time after the date of this Lease or otherwise located in the Premises and all renewals or replacements or substitutions for any of the foregoing, all building materials and equipment now or hereafter delivered to the Premises and intended to be installed in the Premises and all security deposits and advance rentals under lease agreements on the date of this Lease or at any time after the date of this Lease covering or affecting the Premises and held by or for the benefit of Tenant and all proceeds of the foregoing. Landlord shall have all the rights and remedies of a secured party under the Texas Business and Commerce Code and this lien and security interest may be foreclosed by process of law. The requirement of reasonable notice prior to any sale under Article 9 of the Texas Business and Commerce Code shall be met if such notice is given in the manner prescribed herein at least ten (10) days before the day of sale. Any sale made pursuant to the provisions of this Section shall be deemed to have been a public sale conducted in a commercially reasonable manner if held in the Premises after the time, place and method of sale and a general description of the types of property to be sold have been advertised for ten (10) consecutive days prior to the date of sale in a daily newspaper published in the county in Texas where the Building is located. Notwithstanding any provision of this Lease to the contrary, Landlord shall not have, and expressly releases and waives, any contractual or statutory lien on any of Tenant’s information, data, trade secrets, or intellectual property in whatever form maintained, including, without limitation, hard files, papers, software and computer files.
ARTICLE 14 NOTICES
Any notice or communication required or permitted in this Lease shall be given in writing, sent by (a) personal delivery, with proof of delivery, (b) expedited delivery service, with proof of delivery, or (c) United States mail, postage prepaid, registered or certified mail, return receipt requested, addressed as follows:
Landlord: Stonebriar I Office Partners, Ltd. by Stonebriar Partners, LLC, its general partner, by its authorized manager Western Securities (USA) Limited
2626 Howell Street, Suite 850, Dallas, Texas, 75204
Attention: Leasing
Email: leasing@westernsecurities.com
Phone: (469) 210-0460
Tenant: the Premises
or to such other address or to the attention of such other person as shall be designated from time to time in writing by the applicable party and sent in accordance herewith. Notice also may be given by fax, provided each such transmission is confirmed (and such confirmation is supported by documented evidence) as received. Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of fax, upon receipt. Reference is made to Section 13.3 of this Lease for other provisions governing notices.
ARTICLE 15
MISCELLANEOUS PROVISIONS
SECTION 15.1 BUILDING NAME AND ADDRESS. Tenant shall not, without the written consent of Landlord, use the name of the Building for any purpose other than as the address of the business to be conducted by Tenant in the Premises and in no event shall Tenant acquire any rights in or to such names. Landlord shall have the right at any time to change the name, number or designation by which the Building is known.
SECTION 15.2 SIGNS. See Exhibit G.
SECTION 15.3 NO WAIVER. No waiver by Landlord or by Tenant of any provision of this Lease shall be deemed to be a waiver by either party of any other provision of this Lease. No waiver by Landlord of any breach by Tenant shall be deemed a waiver of any subsequent breach by Tenant of the same or any other provision. The failure of Landlord or Tenant to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right,
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power or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act of Tenant. No act or thing done by Landlord or Landlord's agents during the term of this Lease shall be deemed an acceptance of a surrender of the Premises, unless done in writing signed by Landlord. The delivery of the keys to any employee or agent of Landlord shall not operate as a termination of this Lease or a surrender of the Premises. The acceptance of any Rent by Landlord following a breach of this Lease by Tenant shall not constitute a waiver by Landlord of such breach or any other breach. The payment of Rent by Tenant following a breach of this Lease by Landlord shall not constitute a waiver by Tenant of any such breach or any other breach. No waiver by Landlord or Tenant of any provision of this Lease shall be deemed to have been made unless such waiver is expressly stated in writing signed by the waiving party. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of Rent due under this Lease shall be deemed to be other than on account of the earliest Rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy which may be available to Landlord.
SECTION 15.4 APPLICABLE LAW; VENUE. This Lease shall be governed by and construed in accordance with the laws of the State of Texas. Venue for any litigation or other dispute resolution proceeding arising out of this Lease shall lie in Dallas County, Texas.
SECTION 15.5 COMMON AREA. "Common Areas" shall mean all areas, spaces, facilities and equipment (whether or not located within the Building) made available by Landlord for the common and joint use of Landlord, Tenant and others designated by Landlord using or occupying space in the Building, including but not limited to, tunnels, walkways, sidewalks and driveways necessary for access to the Building, Building lobbies, the Garage, landscaped areas, public corridors, public rest rooms, Building stairs, elevators open to the public, service elevators (provided that such service elevators shall be available only for tenants of the Building and others designated by Landlord), drinking fountains and any such other areas and facilities as are designated by Landlord from time to time as Common Areas. "Service Corridors" shall mean all loading docks, loading areas and all corridors that are not open to the public but which are available for use by Tenant and others designated by Landlord. "Service Areas" will refer to areas, spaces, facilities and equipment serving the Building (whether or not located within the Building) but to which Tenant and other occupants of the Building will not have access, including, but not limited to, mechanical, telephone, electrical, maintenance, janitorial and similar rooms and air and water refrigeration equipment. Tenant is hereby granted a nonexclusive right to use the Common Areas and Service Corridors during the term of this Lease for their intended purposes, in common with others designated by Landlord, subject to the terms and conditions of this Lease, including, without limitation, the Rules and Regulations and the Garage Parking Agreement attached hereto as Exhibit F. The Building, Common Areas, Service Corridors and Service Areas will be at all times under the exclusive control, management and operation of the Landlord. Subject to Tenant's repair and maintenance obligations under this Lease, Tenant agrees and acknowledges that the Premises (whether consisting of less than one floor or consisting of one or more full floors within the Building) do not include, and Landlord hereby expressly reserves for its sole and exclusive use, any and all mechanical, electrical, telephone and similar rooms, janitor closets, elevator, pipe and other vertical shafts and ducts, flues, stairwells, any area above the acoustical ceiling and any other areas not specifically shown on Exhibit B as being part of the Premises.
SECTION 15.6 SUCCESSORS AND ASSIGNS. Subject to Article 11 hereof, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns.
SECTION 15.7 BROKERS. Landlord agrees to pay Tenant’s broker, Robert Lynn Company, dba NAI Robert Lynn, a Texas Corporation, a commission for its representation of Tenant, by way of separate agreement, to Robert Lynn Company, dba NAI Robert Lynn, a Texas Corporation. Landlord and Tenant each warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease other than Robert Lynn Company, dba NAI Robert Lynn, a Texas Corporation, and Fults Commercial, LLC and that it knows of no other real estate brokers or agents who are or claim to be entitled to a commission through Landlord or Tenant, respectively, in connection with this Lease. Notwithstanding the foregoing, Landlord and Tenant agree and acknowledge, that the Landlord shall only be responsible for the payment of a commission to Robert Lynn Company, dba NAI Robert Lynn, a Texas Corporation. Landlord and Tenant each agrees to defend, indemnify and hold harmless the other party from and against any liability or claim, whether meritorious or not, arising with respect to any broker and/or agent known to the indemnifying party and not so named.
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SECTION 15.8 SEVERABILITY. If any provision of this Lease or the application thereof to any person or circumstances shall be invalid or unenforceable to any extent, the application of such provisions to other persons or circumstances and the remainder of this Lease shall not be affected thereby and shall be enforced to the greatest extent permitted by law.
SECTION 15.9 INTEREST ON TENANT'S OBLIGATIONS. Unless otherwise specified within a particular Section to this Lease, any amount due from Tenant to Landlord which is not paid on the date due shall bear interest at the lower of (i) twelve percent (12%) per annum or (ii) the highest rate from time to time allowed by applicable law (taking into account any and all other interest, charges or other amounts which are levied on the past-due amount under this Lease and which constitute "interest" under applicable law), from the date such payment is due until paid, but the payment of such interest shall not excuse or cure the default.
SECTION 15.10 TIME. Time is of the essence in this Lease and in each and all of the provisions hereof. Whenever a period of days is specified in this Lease, such period shall refer to calendar days unless otherwise expressly stated in this Lease. If any date provided under this Lease for performance of an obligation or expiration of a time period is a Saturday, Sunday or a holiday generally recognized by businesses, the obligation shall be performed or the time period shall expire, as the case may be, on the next succeeding business day. The “date of this Lease” shall mean the date of execution hereof, as set forth on the signature page hereof.
SECTION 15.11
SECTION 15.12 FORCE MAJEURE. Whenever a period of time is herein prescribed for action to be taken by Landlord or Tenant, the party taking the action shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes which are beyond the reasonable control of such party; provided, however, in no event shall the foregoing apply to the financial obligations of either Landlord or Tenant to the other under this Lease, including Tenant's obligation to pay Basic Annual Rent, Additional Rent or any other amount payable to Landlord hereunder.
SECTION 15.13 RECORDING. This Lease shall not be recorded. However, Landlord shall have the right to record a short form or memorandum hereof, at Landlord’s expense, at any time during the term hereof and, if requested, Tenant agrees (without charge to Landlord) to join in the execution thereof.
SECTION 15.14 NO REPRESENTATIONS. Landlord and Landlord's agents have made no warranties, representations or promises (express or implied) with respect to the Premises, the Building or any other part of the Property (including, without limitation, the condition, use or suitability of the Premises, the Building or the Property), except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease.
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SECTION 15.15 ATTORNEYS' FEES. In the event of any legal action or proceeding brought by either party against the other arising out of this Lease, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs incurred in such action (including, without limitation, all costs of appeal) and such amount shall be included in any judgment rendered in such proceeding.
SECTION 15.16 PARKING. Exhibit F attached hereto sets forth the Parking Agreement..
SECTION 15.17. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off light, air or view by any structure which may be erected on the Property or lands adjacent to the Property shall in no way affect this Lease or impose any liability on Landlord (even if Landlord is the adjacent land owner).
SECTION 15.18 MODIFICATION OF AREA. As used herein, the following terms have the following, respective definitions:
If, following the date of this Lease, changes are made to the configurations of any leased premises, Common Areas, Service Corridors or Service Areas within the Building, and if any such changes cause the Building Rentable Area and/or the Premises Rentable Area to change, Landlord shall have the option (but no obligation), by written notice to Tenant, (1) to remeasure the Building using the BOMA Publication and amend the definitions in this Lease of Building Rentable Area and/or Premises Rentable Area as necessary to reflect the results of such remeasurement, and (2) to amend the Tenant's Share to equal the most current Premises Rentable Area divided by the most current Building Rentable Area, expressed in a percentage. Any such amendments shall be deemed effective upon the date the notice from Landlord is delivered to Tenant.
SECTION 15.19 SURVIVAL OF INDEMNITIES. Each indemnity agreement and hold harmless agreement contained herein shall survive the expiration or termination of this Lease.
SECTION 15.20 WAIVER OF JURY TRIAL. LANDLORD AND TENANT WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY OF ANY CONTRACT OR TORT CLAIM, COUNTERCLAIM, CROSS-COMPLAINT, OR CAUSE OF ACTION IN ANY ACTION, PROCEEDINGS, OR HEARING BROUGHT BY EITHER PARTY AGAINST THE OTHER ON ANY MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, OR TENANT'S USE OR OCCUPANCY OF THE PREMISES, INCLUDING WITHOUT LIMITATION ANY CLAIM OF INJURY OR DAMAGE OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY CURRENT OR FUTURE LAW, STATUTE, REGULATION, CODE, OR ORDINANCE.
SECTION 15.21 ENTIRE AGREEMENT. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease and no prior agreement, including without limitation any prior lease agreement between the Tenant and the Landlord, shall be effective for any purpose. The Tenant
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acknowledges and agrees that the Landlord has made no representations, covenants, warranties, guarantees, promises or agreements (verbal or otherwise) with the Tenant other than those contained in this Lease and that no agreement collateral hereto whether made before or after the date hereof will be binding upon the Landlord unless made in writing and signed by the Landlord. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest.
SECTION 15.22 PROHIBITED PERSONS AND TRANSACTIONS. Tenant represents and warrants to Landlord that Tenant is currently in compliance with and shall at all times during the Term (including any extension thereof) remain in compliance with the regulations of the OFAC of the Department of the Treasury (including those named on OFAC's Specially Designated Nationals and Blocked Persons List) and any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism), or other governmental action relating thereto.
SECTION 15.23 CONFIDENTIALITY. Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord’s benefit, and may not be disclosed by Tenant to anyone, by any manner or means, directly or indirectly, without Landlord’s prior written consent; provided however, Tenant may disclose the terms and conditions of this Lease if required by Law or court order, and Tenant may disclose the terms and conditions of this Lease to its attorneys, accountants, employees and existing or prospective financial partners, provided the same are advised by Tenant of the confidential nature of such terms and conditions prior to disclosure. Tenant shall be liable for any disclosures made in violation of this Section by Tenant or by any entity or individual to whom the terms of and conditions of this Lease were disclosed or made available by Tenant. The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure.
SECTION 15.24 COUNTERPART EXECUTION. This Lease may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Each party (i) has agreed to permit the use of Docusigned or emailed .pdf signatures in order to expedite the execution and delivery of the Lease; (ii) intends to be bound by its Docusigned or emailed .pdf signature; (iii) is aware that the other party will rely on the Docusigned or emailed .pdf signature; and (iv) acknowledges such reliance and waives any defences (other than fraud) to the enforcement of any document based on the fact that a signature was sent by Docusign or emailed .pdf..
[EXECUTION PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this Lease as of the day first written above.
LANDLORD:
Stonebriar I Office Partners Ltd., a Texas limited partnership, by its general partner Stonebriar Partners, LLC, by its authorized manager Western Securities (USA) Limited
By: /s/Mike Brescia
Name: Mike Brescia
Title: Vice President
TENANT:
COMSTOCK RESOURCES, INC., a Nevada corporation
By: /s/ Roland O. Burns
Name: Roland O. Burns
Title: President and Chief Financial Officer
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Exhibit 21
SUBSIDIARIES OF COMSTOCK RESOURCES, INC.
Name |
|
Incorporation |
|
Business Name |
Comstock Oil & Gas, LLC |
|
Nevada |
|
Comstock Oil & Gas, LLC |
Comstock Oil & Gas – Louisiana, LLC (1) |
|
Nevada |
|
Comstock Oil & Gas – Louisiana, LLC |
Comstock Oil & Gas – Louisiana Holdings, LLC (1) |
|
Nevada |
|
Comstock Oil & Gas Louisiana Holdings, LLC |
Comstock Gas Services LLC (1) |
|
Texas |
|
Comstock Gas Services LLC |
Pinnacle Gas Services LLC |
|
Delaware |
|
Pinnacle Gas Services LLC |
Pinnacle Gas Treating LLC |
|
Texas |
|
Pinnacle Gas Treating LLC |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
of our reports dated February 16, 2024, with respect to the consolidated financial statements of Comstock Resources, Inc. and subsidiaries and the effectiveness of internal control over financial reporting of Comstock Resources, Inc. and subsidiaries included in this Annual Report (Form 10-K) of Comstock Resources, Inc. for the year ended December 31, 2023.
/s/ ERNST & YOUNG |
Dallas, Texas
February 16, 2024
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the inclusion in the Form 10-K of Comstock Resources, Inc. (the "Form 10-K") of our audit letter dated January 25, 2024 on oil and gas reserves of Comstock Resources, Inc. and its subsidiaries as of December 31, 2023, to all references to our firm included in the Form 10-K, and to the incorporation by reference of such reports in the Registration Statements of Comstock Resources, Inc. on the following forms:
NETHERLAND, SEWELL & ASSOCIATES, INC. |
|
|
|
By: |
/s/ Eric J. Stevens |
|
Eric J. Stevens, P.E. |
|
President and Chief Operating Officer |
Dallas, Texas
February 16, 2024
Exhibit 31.1
Section 302 Certification
I, M. Jay Allison, certify that:
Date: February 16, 2024
/s/ M. JAY ALLISON |
Chief Executive Officer |
Exhibit 31.2
Section 302 Certification
I, Roland O. Burns, certify that:
Date: February 16, 2024
/s/ ROLAND O. BURNS |
President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Comstock Resources, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, M. Jay Allison, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ M. JAY ALLISON |
M. Jay Allison |
Chief Executive Officer |
February 16, 2024 |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Comstock Resources, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Roland O. Burns, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ ROLAND O. BURNS |
Roland O. Burns |
Chief Financial Officer |
February 16, 2024 |
Exhibit 97.1
Comstock Resources, Inc.
Executive Compensation Clawback Policy (as amended and restated)
This Clawback Policy, amended and restated as set forth herein (this “Policy”), has been adopted by the Compensation Committee of the Board of Directors (the “Committee”) of Comstock Resources, Inc. (the “Company”), effective as of June 6, 2023. The purpose of this Policy is to provide the Committee with the ability to recover certain compensation from executive officers upon the occurrence of certain events as set forth in this Policy.
For purposes of this Policy, the term “Company” shall include any subsidiary or affiliate of the Company.
For purposes of this Policy, “Covered Employee” is defined as any current or former officer of the Company who is or was subject to Section 16 of the Securities Exchange Act of 1934, as amended, as determined by the Company’s Board of Directors (the “Board”), regardless of whether such individual continues to hold such position or continues to be employed by the Company or any of its subsidiaries.
In the event the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws (including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period), the Company shall recover reasonably promptly the amount of any erroneously awarded Incentive-Based Compensation from each individual who was a Covered Employee at any time during the applicable performance period for the relevant Incentive-Based Compensation unless an exception (set forth below) applies.
Incentive-Based Compensation shall be considered “erroneously awarded” under this Policy to the extent such Incentive-Based Compensation (1) is received by the Covered Employee on or after June 6, 2023 and while the Company has a class of securities listed on a national securities exchange or a national securities association, (2) is received by the Covered Employee (A) during the three completed fiscal years immediately preceding the date that the Company is required to prepare the accounting restatement or (B) during any transition period that results from any change in the Company’s fiscal year within or immediately following those three completed fiscal years if the transition period between the last day of the Company’s previous fiscal year and the first day of its new fiscal year comprises less than nine months, and (3) the amount of such received Incentive-Based Compensation exceeds the amount of the Incentive-Based Compensation that would have been received by the Covered Employee had it been determined based on the restated financial results (with such Incentive-Based Compensation computed in each case without regard to any taxes paid). For purposes of this Policy, the date that the Company is required to prepare the accounting statement is the earlier to occur of (A) the date the Board or a committee of the Board, or the officer or officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare such accounting restatement, or (B) the date a court, regulator, or other legally authorized body directs the Company to prepare such accounting restatement. In no event shall the Company be required to award a Covered Employee an additional payment if the accounting restatement would have resulted in a higher Incentive-Based Compensation payment to the Covered Employee.
For purposes of this Section III of this Policy, the following definitions will apply:
For Incentive-Based Compensation based on stock price or total shareholder return, where the amount of erroneously awarded compensation is not subject to mathematical recalculation directly from the information in an accounting restatement, the amount of erroneously awarded compensation will be determined by the Committee based on a reasonable estimate of the effect of the accounting restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was received. If the erroneously awarded Incentive-Based Compensation consists of shares (including share-denominated equity awards) or options that are still held by the Covered Employee at the time of recovery, the recoverable amount is the number of shares or options received in excess of the number of shares or options that would have been received based on the accounting restatement (or the value of that excess number). If the options have been exercised but the underlying shares have not been sold, the recoverable amount is the number of shares underlying the excess options based on the restatement (or the value thereof). If the shares have been sold, the recoverable amount is the proceeds that were received in connection with the sale of the excess number of shares. Amounts credited under plans (other than tax-qualified plans) based on erroneously awarded Incentive-Based Compensation and any accrued earnings thereon are also recoverable under this Policy
The Company shall not be required under this Policy to recover erroneously awarded Incentive-Based Compensation if the Committee has made a determination that recovery would be impracticable and any of the following conditions are met: (1) after making a reasonable attempt to recover such erroneously awarded Incentive-Based Compensation, the Committee determines that the direct expense paid to a third party to assist in enforcing this Policy would exceed the amount to be recovered, (2) the recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of Internal Revenue Code Section 401(a)(13) or Internal Revenue Code Section 411(a) and the regulations thereunder, or (3) the recovery would violate home country law (where that law was adopted prior to November 28, 2022) and an opinion of home country counsel to that effect is obtained.
This Section III of this Policy is intended to comply with the requirements of Rule 10D-1 promulgated by the Securities and Exchange Commission and the related listing rules of the New York Stock Exchange, and the terms hereof shall be construed consistent with that intent. The Company shall not indemnify any Covered Employee against the loss of erroneously-awarded Incentive-Based Compensation that is recovered by the Company pursuant to this Section III of this Policy.
If the Committee determines that a Covered Employee who was awarded Incentive Compensation and/or Severance Compensation has committed an act constituting Misconduct, the Committee may, in its sole discretion, take remedial action against such Covered Employee, including (i) the recovery of any or all of the Incentive Compensation and/or Severance Compensation that such Covered Employee was awarded and paid during the period commencing thirty-six (36) months immediately prior to the date of Misconduct and ending thirty-six (36) months following such Misconduct, (ii) the cancellation of some or all the Covered Employee’s then outstanding vested but unsettled Incentive Compensation
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awards and outstanding unvested Incentive Compensation awards and (iii) the forfeiture of any Severance Compensation that has not yet become due or payable.
For purposes of this Section IV of this Policy, the following definitions will apply:
If the Committee determines to seek recovery of a Covered Employee’s Incentive Compensation or Severance Compensation under this Policy due to the Covered Employee’s Misconduct, the Company shall have the right to demand that the Covered Employee repay such Incentive Compensation or Severance Compensation to the Company. In addition, the Committee may seek to recover any shares issued in connection with such Incentive Compensation and to require the Covered Employee to pay to the Company the proceeds resulting from the sale or other disposition of shares issued upon the exercise of options or the settlement or vesting of equity awards.
To the extent the Covered Employee does not reimburse the Company for the demanded Incentive Compensation or Severance Compensation, the Company shall have the right to sue for repayment, and enforce the repayment through the reduction or cancellation of outstanding and future Incentive Compensation, if applicable. To the extent any shares have been issued under vested awards or such shares have been sold by the Covered Employee, the Company shall have the right to cancel any other outstanding stock-based awards with a value equivalent to Incentive-Based Compensation that the Committee has determined should be subject to recoupment in the case of Misconduct.
The Committee and the Board have the exclusive power and authority to administer this Policy, including, without limitation, the right and power to interpret the provisions of this Policy and to make all determinations deemed necessary or advisable for the administration of this Policy. All such actions, interpretations and determinations that are taken or made by the Committee or the Board in good faith will be final, conclusive and binding.
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The Committee may at any time in its sole discretion supplement or amend any provision of this Policy in any respect, terminate this Policy in whole or part, or adopt a new policy relating to recovery of executive compensation with such terms as the Committee and the Board determine in their sole discretion to be appropriate.
Application of the Policy does not preclude the Company from taking any other action to enforce a Covered Employee’s obligations to the Company, including termination of employment or institution of civil or criminal proceedings.
The Policy is in addition to (and not in lieu of) any right of repayment, forfeiture or right of offset against any Covered Employee that the Company may have under Section 304 of the Sarbanes-Oxley Act of 2002 and other applicable laws (regardless of whether implemented at any time prior to or following the adoption of the Policy).
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Exhibit 99.1
January 25, 2024
Ms. Kristine Bartlett
Comstock Resources, Inc.
5300 Town & Country Boulevard, Suite 500
Frisco, Texas 75034
Dear Ms. Bartlett:
In accordance with your request, we have audited the estimates prepared by Comstock Resources, Inc. (Comstock), as of December 31, 2023, of the proved reserves and future revenue to the Comstock interest in certain gas and oil properties located in Louisiana, New Mexico, Oklahoma, Texas, and Wyoming. It is our understanding that the proved reserves estimates shown herein constitute all of the proved reserves owned by Comstock. We have examined the estimates with respect to reserves quantities, reserves categorization, future producing rates, future net revenue, and the present value of such future net revenue, using the definitions set forth in U.S. Securities and Exchange Commission (SEC) Regulation S-X Rule 4-10(a). The estimates of reserves and future revenue have been prepared in accordance with the definitions and regulations of the SEC and, with the exception of the exclusion of future income taxes, conform to the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas. We completed our audit on or about the date of this letter. This report has been prepared for Comstock's use in filing with the SEC; in our opinion the assumptions, data, methods, and procedures used in the preparation of this report are appropriate for such purpose.
The following table sets forth Comstock's estimates of the net reserves and future net revenue, as of December 31, 2023, for the audited properties:
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Net Reserves |
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Future Net Revenue (M$) |
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||||||||||
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Gas(1) |
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|
Oil |
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|
|
|
|
Present Worth |
|
||||
Category |
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(MMCFE) |
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(MBBL) |
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Total |
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at 10% |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Proved Developed Producing |
|
|
2,699,443.5 |
|
|
|
503.8 |
|
|
|
3,687,452.4 |
|
|
|
2,170,425.1 |
|
Proved Developed Non-Producing |
|
|
34,731.1 |
|
|
|
44.6 |
|
|
|
40,496.1 |
|
|
|
15,370.1 |
|
Proved Undeveloped |
|
|
2,206,051.3 |
|
|
|
- |
|
|
|
1,692,504.2 |
|
|
|
315,900.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Proved |
|
|
4,940,225.5 |
|
|
|
548.4 |
|
|
|
5,420,453.4 |
|
|
|
2,501,695.7 |
|
Totals may not add because of rounding.
(1) Gas reserves are inclusive of natural gas liquids (NGL) equivalent volumes, determined using the ratio of 6 MCF of gas to 1 barrel of NGL.
Gas equivalent volumes are expressed in millions of cubic feet equivalent (MMCFE) at standard temperature and pressure bases. The oil volumes shown include crude oil and condensate. Oil volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons.
When compared on a lease-by-lease basis, some of the estimates of Comstock are greater and some are less than the estimates of Netherland, Sewell & Associates, Inc. (NSAI). However, in our opinion the estimates shown herein of Comstock's reserves and future revenue are reasonable when aggregated at the proved level and have been prepared in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE Standards). Additionally, these estimates are within the recommended 10 percent tolerance threshold set forth in the SPE Standards. We are satisfied with the methods and procedures used by Comstock in preparing the December 31, 2023, estimates of reserves and future revenue, and we saw nothing of an unusual nature that would cause us to take exception with the estimates, in the aggregate, as prepared by Comstock.
Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and production status. The estimates of reserves and future revenue included herein have not been adjusted for risk. Comstock's estimates do not include probable or possible reserves that exist for these properties, nor do they include any value for undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated.
Prices used by Comstock are based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December 2023. For gas volumes, the average Henry Hub spot price of $2.637 per MMBTU is adjusted for energy content, transportation fees, and market differentials; when applicable, gas prices have been adjusted to include the value for NGL. For oil volumes, the average West Texas Intermediate spot price of $78.22 per barrel is adjusted for quality and market differentials. All prices are held constant throughout the lives of the properties. The average adjusted product prices weighted by production over the remaining lives of the properties are $2.386 per MCFE of gas and $72.63 per barrel of oil.
Operating costs used by Comstock are based on historical operating expense records. For the nonoperated properties, these costs include the per-well overhead expenses allowed under joint operating agreements along with estimates of costs to be incurred at and below the district and field levels. Operating costs for the operated properties are limited to direct lease- and field-level costs and Comstock's estimate of the portion of its headquarters general and administrative overhead expenses necessary to operate the properties. Operating costs have been divided into per-well costs and per-unit-of-production costs. Capital costs used by Comstock are based on authorizations for expenditure and actual costs from recent activity. Capital costs are included as required for workovers, new development wells, and production equipment. Abandonment costs used are Comstock's estimates of the costs to abandon the wells and production facilities, net of any salvage value. Operating, capital, and abandonment costs are not escalated for inflation.
The reserves shown in this report are estimates only and should not be construed as exact quantities. Proved reserves are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be estimated with reasonable certainty to be economically producible; probable and possible reserves are those additional reserves which are sequentially less certain to be recovered than proved reserves. Estimates of reserves may increase or decrease as a result of market conditions, future operations, changes in regulations, or actual reservoir performance. In addition to the primary economic assumptions discussed herein, estimates of Comstock and NSAI are based on certain assumptions including, but not limited to, that the properties will be developed consistent with current development plans as provided to us by Comstock, that the properties will be operated in a prudent manner, that no governmental regulations or controls will be put in place that would impact the ability of the interest owner to recover the reserves, and that projections of future production will prove consistent with actual performance. If the reserves are recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the sales rates, prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions made while preparing these estimates.
Our audit consisted primarily of substantive testing, wherein we conducted a detailed review of 99.8 percent of the proved reserves. In the conduct of our audit, we have not independently verified the accuracy and completeness of information and data furnished by Comstock with respect to ownership interests, oil and gas production, well test data, historical costs of operation and development, product prices, or any agreements relating to current and future operations of the properties and sales of production. However, if in the course of our examination something came to our attention that brought into question the validity or sufficiency of any such information or data, we did not rely on such information or data until we had satisfactorily resolved our questions relating thereto or had independently verified such information or data. Our audit did not include a review of Comstock's overall reserves management processes and practices.
We used standard engineering and geoscience methods, or a combination of methods, including performance analysis, volumetric analysis, and analogy, that we considered to be appropriate and necessary to establish the conclusions set forth herein. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geoscience data; therefore, our conclusions necessarily represent only informed professional judgment.
Supporting data documenting this audit, along with data provided by Comstock, are on file in our office. The technical persons primarily responsible for conducting this audit meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the SPE Standards. Matthew T. Dalka, a Licensed Professional Engineer in the State of Texas, has been practicing consulting petroleum engineering at NSAI since 2013 and has over 7 years of prior industry experience. William J. Knights, a Licensed Professional Geoscientist in the State of Texas, has been practicing consulting petroleum geoscience at NSAI since 1991 and has over 10 years of prior industry experience. We are independent petroleum engineers, geologists, geophysicists, and petrophysicists; we do not own an interest in these properties nor are we employed on a contingent basis.
Sincerely, |
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NETHERLAND, SEWELL & ASSOCIATES, INC. |
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Texas Registered Engineering Firm F-2699 |
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By: |
/s/ Richard B. Talley, Jr. |
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Richard B. Talley, Jr., P.E. |
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Chief Executive Officer
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By: |
/s/ Matthew T. Dalka |
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By: |
/s/ William J. Knights |
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Matthew T. Dalka, P.E. 125306 |
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William J. Knights, P.G. 1532 |
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Vice President |
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Vice President |
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Date Signed: January 25, 2024 |
Date Signed: January 25, 2024 |
MTD:JMP