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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
x THE SECURITIES EXCHANGE ACT OF 1934
----
For The Quarter Ended March 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
----
Commission File No. 0-16741
COMSTOCK RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 94-1667468
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034
(Address of principal executive offices)
Telephone No.: (972) 668-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes x No
---
The number of shares outstanding of the registrant's common stock, par
value $.50, as of May 14, 2002 was 28,826,678.
COMSTOCK RESOURCES, INC.
QUARTERLY REPORT
For The Quarter Ended March 31, 2002
INDEX
PART I. Financial Information Page
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 2002 and December 31, 2001................................4
Consolidated Statements of Operations -
Three Months ended March 31, 2002 and 2001..........................5
Consolidated Statement of Stockholders' Equity -
Three Months ended March 31, 2002...................................6
Consolidated Statements of Cash Flows -
Three Months ended March 31, 2002 and 2001..........................7
Notes to Consolidated Financial Statements...............................8
Independent Accountants' Review Report..................................13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................14
Item 3. Quantitative and Qualitative Disclosure About Market Risks..........17
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders................19
Item 6. Exhibits and Reports on Form 8-K....................................20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
--------- ---------
(Unaudited)
(In thousands)
Cash and Cash Equivalents ................................................. $ 1,334 $ 6,122
Accounts Receivable:
Oil and gas sales ..................................................... 18,531 20,015
Joint interest operations ............................................. 1,515 4,717
Derivatives ............................................................... 1,412 1,342
Other Current Assets ...................................................... 8,495 7,418
--------- ---------
Total current assets .......................................... 31,287 39,614
Property and Equipment:
Unevaluated oil and gas properties .................................... 15,450 13,416
Oil and gas properties, successful efforts method ..................... 896,142 901,206
Other ................................................................. 2,541 2,633
Accumulated depreciation, depletion and amortization .................. (277,109) (278,679)
--------- ---------
Net property and equipment .................................... 637,024 638,576
Derivatives ............................................................... 89 254
Other Assets .............................................................. 6,539 4,627
--------- ---------
$ 674,939 $ 683,071
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Portion of Long-Term Debt ......................................... $ 42 $ 229
Accounts Payable and Accrued Expenses ..................................... 29,798 37,389
Derivatives ............................................................... 1,833 798
--------- ---------
Total current liabilities ..................................... 31,673 38,416
Long-Term Debt, less current portion ...................................... 378,002 372,235
Deferred Taxes Payable .................................................... 45,553 47,911
Derivatives ............................................................... 1,273 1,053
Reserve for Future Abandonment Costs ...................................... 7,169 7,794
Stockholders' Equity:
Preferred stock--$10.00 par, 5,000,000 shares authorized,
1,757,310 shares outstanding ........................................ 17,573 17,573
Common stock--$0.50 par, 50,000,000 shares authorized,
28,572,553 and 28,552,553 shares outstanding at
March 31, 2002 and December 31, 2001, respectively .................. 14,286 14,276
Additional paid-in capital ............................................ 131,265 130,956
Retained earnings ..................................................... 48,758 54,183
Deferred compensation-restricted stock grants ......................... (1,128) (1,187)
Accumulated other comprehensive income (loss) ......................... 515 (139)
--------- ---------
Total stockholders' equity .................................... 211,269 215,662
--------- ---------
$ 674,939 $ 683,071
========= =========
The accompanying notes are an integral part of these statements.
4
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2002 2001
-------- --------
(In thousands, except
per share amounts)
Revenues:
Oil and gas sales ..................................... $ 26,678 $ 67,257
Other income .......................................... 120 147
-------- --------
Total revenues ............................... 26,798 67,404
-------- --------
Expenses:
Oil and gas operating ................................. 8,136 9,440
Exploration ........................................... 1,953 2,831
Depreciation, depletion and amortization .............. 13,561 11,980
General and administrative, net ....................... 930 829
Interest .............................................. 6,810 5,505
Loss from derivatives ................................. 1,964 --
-------- --------
Total expenses ............................... 33,354 30,585
-------- --------
Income (loss) from continuing operations before income taxes (6,556) 36,819
Income tax benefit (expense) ......................... 2,295 (12,887)
-------- --------
Net income (loss) from continuing operations ............... (4,261) 23,932
Preferred stock dividends ............................ (395) (395)
-------- --------
Net income (loss) from continuing operations attributable
to common stock ....................................... (4,656) 23,537
Income (loss) from discontinued operations,
including loss on disposal, net of income taxes .. (769) 41
-------- --------
Net income (loss) attributable to common stock ............. $ (5,425) $ 23,578
======== ========
Net income (loss) per share:
Basic -
Net income (loss) from continuing operations per share.. $ (0.16) $ 0.81
======== ========
Net income (loss) per share............................. $ (0.19) $ 0.81
======== ========
Diluted -
Net income (loss) from continuing operations per share.. $ 0.68
========
Net income (loss) per share............................. $ 0.68
========
Weighted average shares outstanding:
Basic................................................... 28,560 29,001
======== ========
Diluted................................................. 35,074
========
The accompanying notes are an integral part of these statements.
5
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2002
(Unaudited)
Deferred Accumulated
Additional Compensation- Other
Preferred Common Paid-In Retained Restricted Comprehensive
Stock Stock Capital Earnings Stock Grants Income (Loss) Total
--------- --------- ---------- ---------- ---------- ------------ --------
(In thousands)
Balance at December 31, 2001.........$ 17,573 $ 14,276 $130,956 $ 54,183 $(1,187) $ (139) $215,662
Restricted stock grants............ -- -- -- -- 59 -- 59
Value of warrants issued
for exploration prospects....... -- -- 213 -- -- -- 213
Exercise of stock options.......... -- 10 96 -- -- -- 106
Net loss attributable to
common stock.................... -- -- -- (5,425) -- -- (5,425)
Unrealized hedge gains............. -- -- -- -- -- 654 654
-------- -------- -------- --------- ------- -------- --------
Balance at March 31, 2002............$ 17,573 $ 14,286 $131,265 $ 48,758 $(1,128) $ 515 $211,269
======== ======== ======== ========= ======= ======== ========
The accompanying notes are an integral part of these statements.
6
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2002 2001
-------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ (5,030) $ 23,973
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Compensation paid in common stock ........................ 59 56
Exploration .............................................. 1,953 2,831
Depreciation, depletion and amortization ................. 13,561 11,999
Deferred income taxes .................................... (2,824) 10,328
Unrealized losses from derivatives ....................... 2,356 --
Loss (gain) on sale of properties ........................ 1,182 (12)
-------- --------
Working capital provided by operations ................. 11,257 49,175
Decrease in accounts receivable ............................ 4,986 1,114
Increase in other current assets ........................... (1,077) (299)
Increase (decrease) in accounts payable and accrued expenses (7,352) 9,777
-------- --------
Net cash provided by operating activities .............. 7,814 59,767
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of properties .......................... -- 46
Capital expenditures and acquisitions ...................... (15,721) (27,973)
-------- --------
Net cash used for operating activities ................. (15,721) (27,927)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ................................................. 6,000 --
Proceeds from issuance of senior notes ..................... 75,000 --
Debt issuance costs ........................................ (2,172) --
Proceeds from issuance of common stock ..................... 106 867
Principal payments on debt ................................. (75,420) (35,101)
Dividends paid on preferred stock .......................... (395) (395)
-------- --------
Net cash provided by (used for) financing activities ....... 3,119 (34,629)
-------- --------
Net decrease in cash and cash equivalents .............. (4,788) (2,789)
Cash and cash equivalents, beginning of period ......... 6,122 7,105
-------- --------
Cash and cash equivalents, end of period ............... $ 1,334 $ 4,316
======== ========
The accompanying notes are an integral part of these statements.
7
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES -
Basis of Presentation -
In management's opinion, the accompanying consolidated financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial position of Comstock Resources, Inc.
and subsidiaries ("Comstock") as of March 31, 2002 and the related results of
operations and cash flows for the three months ended March 31, 2002 and 2001.
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to those rules and regulations, although
Comstock believes that the disclosures made are adequate to make the information
presented not misleading. These consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in
Comstock's Annual Report on Form 10-K for the year ended December 31, 2001.
The results of operations for the three months ended March 31, 2002 are not
necessarily an indication of the results expected for the full year.
Supplementary Information With Respect to the Consolidated Statements of
Cash Flows -
For the Three Months
Ended March 31,
2002 2001
------ ------
(In thousands)
Cash Payments -
Interest payments........................... $2,367 $1,373
Income tax payments......................... -- 243
Noncash Investing and Financing Activities -
Value of warrants issued
under exploration agreement ............ $ 327 $ 997
Income Taxes -
Deferred income taxes are provided to reflect the future tax consequences
of differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements using enacted tax rates.
8
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Earnings Per Share -
Basic earnings per share is determined without the effect of any
outstanding potentially dilutive stock options or other convertible securities
and diluted earnings per share is determined with the effect of outstanding
stock options and other convertible securities that are potentially dilutive.
Due to the net loss for the three months ended March 31, 2002, common stock
equivalents and convertible securities are anti- dilutive. Therefore basic and
diluted loss per share for the three months ended March 31, 2002 are the same.
Basic and diluted earnings per share for the three months ended March 31, 2002
and 2001 were determined as follows:
For the Three Months Ended March 31,
-----------------------------------------------------------------------
2002 2001
--------------------------------- -----------------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
-------- -------- ------- -------- -------- -------
(Amounts in thousands except per share data)
Basic Earnings Per Share:
Income (Loss) from Continuing Operations....$ (4,261) 28,560 $ 23,932 29,001
Less Preferred Stock
Dividends............................... (395) -- (395) --
-------- -------- -------- --------
Net Income (Loss) from Continuing Operations
Available to Common Stockholders........ (4,656) 28,560 $ (0.16) 23,537 29,001 $ 0.81
======== ========
Income (Loss) from Discontinued Operations (769) 28,560 (0.03) 41 29,001 --
-------- ======== -------- -------- ======== --------
Net Income (loss) Available to Common
Stockholders............................$ (5,425) 28,560 $ (0.19) $ 23,578 29,001 $ 0.81
======== ======== ========
Diluted Earnings Per Share:
Effect of Dilutive Securities:
Stock Options........................... 721 1,679
Convertible Preferred Stock............. 4,393 395 4,393
-------- -------- --------
Net Income (Loss) from Continuing Operations
Available to Common Stockholders
and Assumed Conversions.............. 33,674 47,551 35,073 $ 0.68
======== ========
Income (Loss) from Discontinued Operations 33,674 41 35,073 --
======== ---------- ======== --------
Net Income (loss) Available to Common
Stockholders............................ 33,674 $ 47,592 35,073 $ 0.68
======== ========== ======== ========
9
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Derivative Instruments and Hedging Activities
Comstock uses swaps, floors and collars to hedge oil and natural gas
prices. Swaps are settled monthly based on differences between the prices
specified in the instruments and the settlement prices of futures contracts
quoted on the New York Mercantile Exchange. 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 hedge. 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, Comstock generally 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.
In March 2002, Comstock entered into natural gas price swaps covering
10,640,000 MMbtus of its natural gas production at an average price of $3.46.
Comstock has designated these positions as cash flow hedges.
The following table sets out the derivative financial instruments
outstanding at March 31, 2002, which are held for natural gas price risk
management:
Volume Type Floor Ceiling Swap
Period Beginning Period Ending (MMBtu) of Instrument Price Price Price
- ----------------- ------------------ ------------ ------------- ----------- ----------- ----------
April 1, 2002 October 31, 2002 5,320,000 Swap -- -- $3.44
April 1, 2002 October 31, 2002 2,800,000 Swap -- -- $3.50
April 1, 2002 October 31, 2002 2,520,000 Swap -- -- $3.48
April 1, 2002 December 31, 2002 480,000 Floor $1.90 -- --
April 1, 2002 December 31, 2002 1,912,500 Floor $2.00 -- --
April 1, 2002 December 31, 2002 1,200,000 Swap -- -- $2.40
April 1, 2002 December 31, 2002 675,000 Collar $4.00 $6.75 --
------------
14,907,500
------------
January 1, 2003 December 31, 2003 560,000 Floor $1.90 -- --
January 1, 2003 December 31, 2003 2,250,000 Floor $2.00 -- --
January 1, 2003 December 31, 2003 1,400,000 Swap -- -- $2.40
------------
4,210,000
------------
19,117,500
============
The counterparty for the $1.90 floor position and $2.40 swap price position
is a subsidiary of Enron Corporation which has filed for bankruptcy protection.
The net liability owed to Enron as of March 31, 2002 was $3.0 million. Comstock
intends to monitor this position and will assess the credit exposure to the
extent this position becomes a net asset. These positions together with the
other floor and collar postions have not been designated as cash flow hedges.
10
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Comstock periodically enters into interest rate swap agreements to hedge
the impact of interest rate changes on its floating rate long-term debt. As of
March 31, 2002, Comstock had an interest rate swap agreement covering $25.0
million of its floating rate debt, which fixed the LIBOR rate at 4.5% for the
period through April 2002. Comstock has designated this position as a hedge. As
a result of certain hedging transactions for interest rates, Comstock has
realized losses of $159,000 for the three months ended March 31, 2002 which were
included in interest expense.
The fair value of all derivative financial instruments is included on the
consolidated balance sheet at the fair value. Comstock estimates fair value
based on quotes obtained from the counterparties to the derivative contract. 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. Derivative financial
instruments that are not accounted for as hedges are adjusted to fair value
through income. If the derivative is designated as a cash flow hedge, changes in
fair value are recognized in other comprehensive income until the hedged item is
recognized in earnings.
The change in fair value of the derivative contracts not accounted for
hedges resulted in a loss of $2.0 million for the three months ended March 31,
2002. The loss on derivatives was comprised of a $2.4 million unrealized loss
and a $392,000 realized gain. For the derivative contracts designated as cash
flow hedges, the change in fair value of these instruments resulted in an
unrealized after tax gain of $654,000 which was recognized in other
comprehensive income.
(2) LONG-TERM DEBT -
As of March 31, 2002, Comstock's long-term debt was comprised of the
following:
(In thousands)
Revolving Bank Credit Facility........... $ 158,000
11 1/4% Senior Notes due 2007............ 220,000
Other.................................... 44
-----------
378,044
Less current portion..................... (42)
-----------
$ 378,002
===========
Comstock's bank credit facility consists of a $350.0 million three-year
revolving credit commitment provided by a syndicate of banks for which Toronto
Dominion (Texas), Inc. serves as administrative agent. The credit facility is
subject to borrowing base availability, which is redetermined semiannually based
on the banks' estimates of the future net cash flows of Comstock's oil and
natural gas properties. The borrowing base at March 31, 2002 was $240.0 million.
The revolving credit line bears interest, based on the utilization of the
borrowing base, at the option of Comstock at either (i) LIBOR plus 1.5% to
2.375% or (ii) the base rate plus 0.5% to 1.375%. The facility matures on
January 2, 2005. Indebtedness under the bank credit facility is secured by
substantially all of Comstock's assets. The bank credit facility contains
covenants that, among other things, restrict the payment of cash dividends,
limit the amount of consolidated debt and limit Comstock's ability to make
certain loans and investments. Financial covenants include the maintenance of a
current ratio, maintenance of tangible net worth and maintenance of an interest
coverage ratio. Comstock was in compliance with all the covenants during the
three months ended March 31, 2002.
11
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Comstock issued $150.0 million in aggregate principal amount of 11 1/4%
Senior Notes due in 2007 (the "Notes") on April 29, 1999. Interest on the Notes
is payable semiannually on May 1 and November 1, commencing on November 1, 1999.
The Notes are unsecured obligations of Comstock. Comstock repurchased $5.0
million of the Notes in July 2001. The Notes can be redeemed beginning on May 1,
2004.
On March 7, 2002, Comstock closed on a private placement of $75.0 million
of the Notes at a net price of 97.25% after placements agents' discount. As a
result of this transaction, $220.0 million of the aggregate principal amount of
the Notes was outstanding. The net proceeds were used to reduce amounts
outstanding under the bank credit facility.
(3) DISCONTINUED OPERATIONS -
In April 2002, Comstock sold certain marginal oil and gas properties for
cash proceeds of $300,000 plus forgiveness of certain accounts payable related
to the properties. The properties sold include various interests in nonoperated
properties in Nueces, Hardeman and Montague counties in Texas. These properties
had become unprofitable for Comstock. The properties sold were written down to
the net realizable value in March 2002 resulting in a loss of $769,000, net of
income taxes and have been presented as discontinued operations in the
accompanying consolidated statements of operations.
12
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
of Comstock Resources, Inc.:
We have reviewed the accompanying consolidated balance sheet of Comstock
Resources, Inc. and subsidiaries (a Nevada corporation) as of March 31, 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three-month period then ended. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
(signed) KPMG LLP
Dallas, Texas
May 7, 2002
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table reflects certain summary operating data for the periods
presented:
Three Months Ended
March 31,
2002 2001
------- --------
Net Production Data:
Oil (Mbbls) ............................... 344 415
Natural gas (MMcf) ........................ 8,269 7,436
Natural gas equivalent (Mmcfe) ............ 10,335 9,923
Average Sales Price:
Oil (per Bbl) ............................. $ 20.67 $ 28.19
Natural gas (per Mcf) ..................... 2.37 7.47
Average equivalent price (per Mcfe) ....... 2.58 6.78
Expenses ($ per Mcfe):
Oil and gas operating(1) .................. $ 0.79 $ 0.95
General and administrative ................ 0.09 0.08
Depreciation, depletion and amortization(2) 1.28 1.17
Cash Margin ($ per Mcfe)(3) ................. $ 1.70 $ 5.74
- ---------
(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas
properties only.
(3) Represents average equivalent price per Mcfe less oil an gas operating
expenses per Mcfe and general and administrative expenses per Mcfe.
Revenues -
Our oil and gas sales decreased $40.6 million (60%) in the first quarter of
2002, to $26.7 million from $67.3 million in 2001's first quarter due to a
significant drop in our realized crude oil and natural gas prices. Our average
crude oil price fell by 27% and our average natural gas price decreased by 68%
in the first quarter of 2002 as compared to 2001. Production in the first
quarter of 2002 increased 14% over production in the fourth quarter of 2001 and
4% over production in the first quarter of 2001.
Other income decreased to $120,000 in the first quarter of 2002 as compared
to $147,000 in 2001's first quarter, primarily due to a decrease in interest
earned on short-term cash deposits.
Costs and Expenses -
Oil and gas operating expenses, including production taxes, decreased $1.3
million (14%) to $8.1 million in the first quarter of 2002 from $9.4 million in
the first quarter of 2001. Oil and gas operating expenses per equivalent Mcf
produced decreased $0.16 to $0.79 in the first quarter of 2002 from $0.95 in the
first quarter of 2001. The decrease in operating expenses is due to lower
production taxes as a result of the significantly lower crude oil and natural
gas prices.
In the first quarter of 2002, we had a $2.0 million provision for
exploration expense as compared to a $2.8 million provision for exploration in
2001's first quarter. The provision in the first quarter of 2002 primarily
relates to an exploratory well drilled at South Timbalier Block 30, which was
abandoned after numerous drilling problems were encountered culminating with the
drill pipe being stuck. Approximately 43 net feet of productive pay had been
discovered prior to the well being lost. We plan to redrill this prospect
pending the results from other exploration activity in this block.
14
Depreciation, depletion and amortization ("DD&A") increased $1.6 million
(13%) to $13.6 million in the first quarter of 2002 from $12.0 million in the
first quarter of 2001 due to the 4% increase in oil and natural gas production
and an increase in our DD&A rate. DD&A per equivalent Mcf produced increased by
$0.11 to $1.28 for the three months ended March 31, 2002 from $1.17 for the
three months ended March 31, 2001.
General and administrative expenses, which are reported net of overhead
reimbursements, of $930,000 for the first quarter of 2002 were 12% higher than
general and administrative expenses of $829,000 for the first quarter of 2001
due primarily to an increase in personnel costs in 2002.
Interest expense increased $1.3 million (24%) to $6.8 million for the first
quarter of 2002 from $5.5 million for the first quarter of 2001. The increase is
attributable to higher borrowings outstanding under our bank credit facility and
the issuance of an additional $75.0 million of our 11 1/4% Senior Notes on March
7, 2002. The average outstanding balance under our bank credit facility
increased to $200.1 million in the first quarter of 2002 as compared to $70.5
million in the first quarter of 2001. The higher debt was offset partially by a
lower interest rate on our bank credit facility. The weighted average annual
interest rate for borrowings under our bank credit facility decreased to 4.1%
for the first quarter of 2002 as compared to 7.2% for the same period in 2001.
Comstock reported a net loss from continuing operations of $4.7 million for
the three months ended March 31, 2002, as compared to net income from continuing
operations of $23.5 million for the three months ended March 31, 2001. Net loss
per share from continuing operations for the first quarter was $0.16 on weighted
average shares outstanding of 28.6 million as compared to net income per share
from continuing operations of $0.68 for the first quarter of 2001 on weighted
average diluted shares outstanding of 35.1 million.
In April 2002, we sold certain marginal oil and gas properties, which
resulted in a loss of $1.2 million. The operating results of these properties
have been reflected as discontinued operations in the consolidated financial
statements including the expected loss on disposal.
Liquidity and Capital Resources
Funding for our activities has historically been provided by our operating
cash flow, debt or equity financings or asset dispositions. For the three months
ended March 31, 2002, our net cash flow provided by operating activities before
changes to other working capital accounts totaled $11.3 million. Our other
primary funding sources in the first quarter of 2002 were borrowings of $6.0
million under our bank credit facility and proceeds of $72.8 million received
from the issuance of our 11 1/4% Senior Notes.
Our primary needs for capital, in addition to funding our ongoing
operations, relate to the acquisition, development and exploration of our oil
and gas properties and the repayment of our debt. In the first quarter of 2002,
we incurred capital expenditures of $15.7 million for development and
exploration activities. We also repaid $75.0 million of borrowings under our
bank credit facility.
15
The following table summarizes our capital expenditure activity for the
three months ended March 31, 2002 and 2001:
Three Months Ended
March 31,
2002 2001
------- -------
(In thousands)
Leasehold costs $ 2,034 $ 1,139
Development drilling 5,649 11,878
Exploratory drilling 6,634 13,173
Offshore production facilities 620 107
Workovers and recompletions 777 1,634
Other 7 42
------- -------
$15,721 $27,973
======= =======
The timing of most of our capital expenditures is discretionary because we
have no material long-term capital expenditure commitments. Consequently, we
have a significant degree of flexibility to adjust the level of our capital
expenditures as circumstances warrant. We spent $15.7 million and $27.9 million
on development and exploration activities in the three months ended March 31,
2002 and 2001, respectively. We have budgeted approximately $75.0 million for
development and exploration projects in 2002. We expect to use internally
generated cash flow to fund development and exploration activity.
We do not have a specific acquisition budget for 2002 since the timing and
size of acquisitions are not predictable. We intend to use borrowings under our
bank credit facility, or other debt or equity financings to the extent
available, to finance significant acquisitions. The availability and
attractiveness of these sources of financing will depend upon a number of
factors, some of which will relate to our financial condition and performance
and some of which will be beyond our control, such as prevailing interest rates,
oil and natural gas prices and other market conditions.
On December 17, 2001, we entered into a new three year $350.0 million
revolving credit facility with Toronto Dominion (Texas), Inc. as administrative
agent. Indebtedness under the new bank credit facility is secured by
substantially all of our assets. The revolving credit line is subject to
borrowing base availability, which will be redetermined semiannually based on
the banks' estimates of the future net cash flows of our oil and gas properties.
The current borrowing base is $240.0 million. The borrowing base may be affected
by the performance of our properties and changes in oil and gas prices. The
determination of the borrowing base is at the sole discretion of the
administrative agent and the bank group. The revolving credit line bears
interest, based on the utilization of the borrowing base, at our option at
either (i) LIBOR plus 1.5% to 2.375% or (ii) the base rate plus 0.5% to 1.375%.
The bank credit facility matures on January 2, 2005 and contains covenants that,
among other things, restrict our ability to pay cash dividends, limit the amount
of our consolidated debt and limit our ability to make certain loans and
investments. Financial covenants include the maintenance of a current ratio,
maintenance of tangible net worth and maintenance of an interest coverage ratio.
On March 7, 2002, we closed the sale in a private placement of $75.0
million of our 11 1/4% Senior Notes due 2007 (the "Notes") at a net price of
97.25% after the placements agents' discount. As a result of this transaction,
$220.0 million of aggregate principal amount of the Notes were outstanding. The
net proceeds were used to reduce amounts outstanding under our bank credit
facility.
We believe that our cash flow from operations and our available borrowings
under the new bank credit facility will be sufficient to fund our operations and
future growth as contemplated under our current business plan. However, if our
plans or assumptions change or if our assumptions prove to be inaccurate, we may
be required to seek additional capital. We cannot provide any assurance that we
will be able to obtain such capital, or if such capital is available, that we
will be able to obtain it on acceptable terms.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Oil and Natural Gas Prices
Our financial condition, results of operations and capital resources are
highly dependent upon the prevailing market prices of oil and natural gas. These
commodity prices are subject to wide fluctuations and market uncertainties due
to a variety of factors that are beyond our control. Factors influencing oil and
natural gas prices include the level of global demand for crude oil, the foreign
supply of oil and natural gas, the establishment of and compliance with
production quotas by oil exporting countries, weather conditions that determine
the demand for natural gas, the price and availability of alternative fuels and
overall economic conditions. It is impossible to predict future oil and natural
gas prices with any degree of certainty. Sustained weakness in oil and natural
gas prices may adversely affect our financial condition and results of
operations, and may also reduce the amount of oil and natural gas reserves that
we can produce economically. Any reduction in our oil and natural gas reserves,
including reductions due to price fluctuations, can have an adverse effect on
our ability to obtain capital for our exploration and development activities.
Similarly, any improvements in oil and natural gas prices can have a favorable
impact on our financial condition, results of operations and capital resources.
Based on our oil and natural gas production in the three months ended March 31,
2002, a $1.00 change in the price per barrel of oil would have resulted in a
change in our cash flow for such period by approximately $0.3 million and a
$1.00 change in the price per Mcf of natural gas would have changed our cash
flow by approximately $7.4 million.
We periodically use hedging transactions with respect to a portion of our
oil and natural gas production to mitigate our exposure to price changes. While
the use of these hedging arrangements limits the downside risk of price
declines, such use may also limit any benefits that may be derived from price
increases. We use swaps, floors and collars to hedge oil and natural gas prices.
Swaps are settled monthly based on differences between the prices specified in
the instruments and the settlement prices of futures contracts quoted on the New
York Mercantile Exchange. Generally, when the applicable settlement price is
less than the price specified in the contract, we receive a settlement from the
counterparty based on the difference multiplied by the volume hedge. Similarly,
when the applicable settlement price exceeds the price specified in the
contract, we pay the counterparty based on the difference. We generally receive
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, we generally receive a
settlement from the counterparty when the settlement price is below the floor
and pay 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.
In March 2002, we hedged a portion of our natural gas production for the
period April 2002 through October 2002 in order to increase the predictability
of our cash flow from operations in order to support our planned 2002 drilling
program. The hedges cover approximately 45% to 50% of our expected 2002 natural
gas production from April 2002 to October 2002. We entered into price swaps
covering 50 MMBtus per day of our natural gas production at an average price of
$3.46. The price swaps will be settled using the closing index price for natural
gas delivered to the Houston Ship Channel for 38.2 MMBtus per day and the
closing contract price for natural gas delivered to the Henry Hub on the New
York Mercantile Exchange for 11.8 MMBtus per day.
17
The following table sets out the derivative financial instruments
outstanding at March 31, 2002, which are held for natural gas price risk
management:
Volume Type Floor Ceiling Swap
Period Beginning Period Ending (MMBtu) of Instrument Price Price Price
- ----------------- ------------------ ------------ ------------- ----------- ----------- ----------
April 1, 2002 October 31, 2002 5,320,000 Swap -- -- $3.44
April 1, 2002 October 31, 2002 2,800,000 Swap -- -- $3.50
April 1, 2002 October 31, 2002 2,520,000 Swap -- -- $3.48
April 1, 2002 December 31, 2002 480,000 Floor $1.90 -- --
April 1, 2002 December 31, 2002 1,912,500 Floor $2.00 -- --
April 1, 2002 December 31, 2002 1,200,000 Swap -- -- $2.40
April 1, 2002 December 31, 2002 675,000 Collar $4.00 $6.75 --
------------
14,907,500
------------
January 1, 2003 December 31, 2003 560,000 Floor $1.90 -- --
January 1, 2003 December 31, 2003 2,250,000 Floor $2.00 -- --
January 1, 2003 December 31, 2003 1,400,000 Swap -- -- $2.40
------------
4,210,000
------------
19,117,500
============
The counterparty for the $1.90 floor position and $2.40 swap price position
is a subsidiary of Enron Corporation, which has filed for bankruptcy protection.
The net liability owed to Enron as of March 31, 2002 was $3.0 million. We intend
to monitor this position and will assess the credit exposure to the extent this
position becomes a net asset.
The fair value of the commodity price derivative financial instruments at
March 31, 2002 was a net liability of $1.5 million. Certain of the positions
have not designated as cash flow hedges. Changes in fair value of the derivative
financial instruments not designated as cash flow hedges are recorded in
earnings.
Interest Rates
At March 31, 2002, we had long-term debt of $378.0 million. Of this amount,
$220.0 million bears interest at a fixed rate of 11 1/4%. We had $158.0 million
outstanding under our revolving bank credit facility, which is subject to
floating market rates of interest. Borrowings under the bank credit facility
bear interest at a fluctuating rate that is linked to LIBOR or the corporate
base rate, at our option. Any increases in these interest rates can have an
adverse impact on our results of operations and cash flow. In March 2001, we
entered into an interest rate swap agreement to hedge the impact of interest
rate changes on $25.0 million of our floating rate debt beginning on April 30,
2001 and expiring on April 30, 2002. As a result of this interest rate swap, we
realized a loss of $159,000 in the first quarter of 2002. The fair value of this
interest rate derivative financial instrument was a net liability of $59,000 at
March 31, 2002.
18
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of stockholders was held in Frisco, Texas
at 4:00 p.m., local time, on May 13, 2002.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to the nominees listed in the proxy
statement for election as Class B directors and such nominees were
elected.
(c) Out of a total 33,139,128 shares of the Company's common stock and
preferred stock outstanding and entitled to vote, 30,730,254 shares
were present at the meeting in person or by proxy, representing
approximately 93%. Matters voted upon at the meeting were as follows:
(i) Two Class B Director was reelected to Company's board of
directors. The vote tabulation was as follows:
Nominee For Withheld
----------------- ---------- ----------
M. Jay Alllison 27,733,439 2,996,815
David W. Sledge 30,359,854 370,400
Other directors of the Company whose term of office as a Director
continued after the meeting are as follows:
Class A Director Class C Directors
------------------- --------------------
Cecil E. Martin Roland O. Burns
David K. Lockett
(ii) The appointment of KPMG LLP as the Company's certified public
accountants for 2002 was ratified by a vote of 33,129,128 shares
for, no shares against and no shares abstaining. This
ratification was not listed in the proxy statement but was voted
on by the named proxies.
19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
10.1 Amendment No. 3 dated April 15, 2002 to the Credit Agreement,
dated as of December 17, 2001, by and among Comstock, as
borrower, each lender from time to time party thereto, Toronto
Dominion (Texas), Inc., as administrative agent, and
Toronto-Dominion Bank, as Issuing Bank.
- -------------
b. Reports on Form 8-K
-------------------
Form 8-K Reports filed subsequent to December 31, 2001 are as follows:
Date Item Description
- ---------------- ------- ---------------------------------------------
February 6, 2002 2 Historical and Proforma Financial Information of
DevX Energy, Inc.
March 12, 2002 5 Issued $75 million of 11 1/4% Senior Notes due 2007
April 26, 2002 4 Changes in registrant's certifying accountant
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMSTOCK RESOURCES, INC.
/s/M. JAY ALLISON
-----------------
Date May 14, 2002 M. Jay Allison, Chairman, President and Chief
------------ Executive Officer (Principal Executive Officer)
/s/ROLAND O. BURNS
------------------
Date May 14, 2002 Roland O. Burns, Senior Vice President,
------------ Chief Financial Officer, Secretary, and Treasurer
(Principal Financial and Accounting Officer)
20
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement (this "Third Amendment") dated as
of April 15, 2002, to be effective as set forth in Section 5 hereof, is among
Comstock Resources, Inc., a Nevada corporation ("Borrower"), the Lenders from
time to time party to the Credit Agreement (as defined below), Toronto Dominion
(Texas), Inc., ("Administrative Agent"), and The Toronto-Dominion Bank ("Issuing
Bank").
PRELIMINARY STATEMENT
A. The Borrower, the Lenders, the Administrative Agent and the Issuing Bank
have entered into that certain Credit Agreement dated as of December 17, 2001,
as amended by the First Amendment to Credit Agreement dated as of December 26,
2001, and as further amended by the Second Amendment to Credit Agreement dated
as of February 4, 2002 (such Credit Agreement, as amended by such First
Amendment to Credit Agreement and by such Second Amendment to Credit Agreement,
and as otherwise amended, restated or supplemented from time to time until the
date hereof, the "Credit Agreement").
B. The Borrower intends to sell certain Oil and Gas Properties located in
Nueces County, Texas having a fair market value of less than $1,000,000 in the
aggregate.
C. The Borrower, the Administrative Agent, the Issuing Bank and the Lenders
intend to amend Section 10.1 of the Credit Agreement to permit the
Administrative Agent to release from the lien of the Security Documents without
the consent of the Lenders any assets of the Borrower or any Guarantor sold,
assigned, transferred or conveyed by Borrower or such Guarantor pursuant to a
Disposition permitted by Section 7.5 of the Credit Agreement.
D. The Borrower, the Lenders, the Administrative Agent and the Issuing Bank
intend to amend certain provisions of the Credit Agreement as set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
set forth herein, the parties agree as follows:
Section 5. Definitions. Unless otherwise defined in this Third Amendment,
each capitalized term used in this Third Amendment has the meaning assigned to
such term in the Credit Agreement.
Section 6. Amendment of Credit Agreement. Section 10.1(h) of the Credit
Agreement is hereby amended and restated in its entirety to provide as follows:
(h) release any collateral under any of the Security Documents, or
permit any termination, amendment, modification, waiver or release of
any Security Document or an provision thereof, provided that,
notwithstanding the foregoing, the consent of the Lenders shall not be
required for any release of any collateral under any of the Security
Documents in connection with a Disposition by the Borrower or any
Guarantor if such Disposition is permitted by Section 7.5 hereof;
1
Section 7. Consent to Release of Liens. The Lenders hereby consent to the
release by the Administrative Agent of any and all liens created by any of the
Security Documents on the assets of Comstock Oil & Gas, Inc. set forth on
Exhibit A hereto.
Section 8. Ratification. The Borrower hereby ratifies and confirms all of
the Obligations under the Credit Agreement and the other Loan Documents.
Section 9. Effectiveness. This Third Amendment shall become effective as of
the date first written above upon satisfaction of each of the conditions set
forth in this Section 5:
(a) The Administrative Agent shall have received duly executed
counterparts of this Third Amendment from the Borrower, the Issuing
Bank and each Lender, together with a duly executed consent of each
Guarantor to this Third Amendment and a ratification of each Loan
Document to which such Guarantor is a party.
(b) The Borrower shall have confirmed and acknowledged to the
Administrative Agent, the Issuing Bank and the Lenders, and by its
execution and delivery of this Third Amendment the Borrower does
hereby confirm and acknowledge to the Administrative Agent, the
Issuing Bank and the Lenders, that (i) the execution, delivery and
performance of this Third Amendment has been duly authorized by all
requisite corporate action on the part of the Borrower; (ii) the
Credit Agreement and each other Loan Document to which it is a party
constitute valid and legally binding agreements enforceable against
the Borrower in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws
relating to or affecting the enforcement of creditors' rights
generally and by general principles of equity, (iii) the
representations and warranties by the Borrower contained in the Credit
Agreement and in the other Loan Documents are true and correct on and
as of the date hereof in all material respects as though made as of
the date hereof, and (iv) no Default or Event of Default exists under
the Credit Agreement or any of the other Loan Documents.
Section 10. Governing Law. This Third Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York (without giving
effect to the principles thereof relating to conflicts of law except section
5-1401 of the New York General Obligations Law).
Section 11. Miscellaneous. (a) On and after the effectiveness of this Third
Amendment, each reference in each Loan Document to "this Agreement", "this
Note", "this Mortgage", "hereunder", "hereof" or words of like import, referring
to such Loan Document, and each reference in each other Loan Document to "the
Credit Agreement", "the Notes", "the Mortgages", "thereunder", "thereof" or
words of like import referring to the Credit Agreement, the Notes, or the
Mortgage or any of them, shall mean and be a reference to such Loan Document,
the Credit Agreement, the Notes, the Mortgage or any of them, as amended or
otherwise modified by this Third Amendment; (b) the execution, delivery and
effectiveness of this Third Amendment shall not, except as expressly provided
2
herein, operate as a waiver of any default of the Borrower or any other Loan
Party or any right, power or remedy of the Administrative Agent, the Issuing
Bank and the Lenders under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents; (c) this Third Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement; and (d) delivery of an executed counterpart of a signature page to
this Third Amendment by telecopier shall be effective as delivery of a manually
executed counterpart of this Third Amendment.
Section 12. Final Agreement. THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
3
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be executed by its officers thereunto duly authorized as of the date first above
written.
BORROWER:
COMSTOCK RESOURCES, INC.,
a Nevada corporation
By:/s/ROLAND O. BURNS
---------------------
Name: Roland O. Burns
Title: Senior Vice President
ADMINISTRATIVE AGENT, ISSUING BANK
AND LENDERS:
TORONTO DOMINION (TEXAS), INC.
as Administrative Agent and Lender
By:/s/NEVA NESBITT
------------------
Name: Neva Nesbitt
Title: Vice President
THE TORONTO-DOMINION BANK,
as Issuing Bank
By:/s/NEVA NESBITT
------------------
Name: Neva Nesbitt
Title: Manager, Syndication and Credit
Administration
BANK OF MONTREAL,
as Syndication Agent and Lender
By:/s/ JAMES V. DUCOTE
----------------------
Name: James V. Ducote
Title: Director
4
FORTIS CAPITAL CORP.
By:/s/DARRELL W. HOLLEY
-----------------------
Name: Darrell W. Holley
Title: Managing Direct
By:/s/DAVID MONTGOMERY
----------------------
Name: David Montgomery
Title: Vice President
BANK OF SCOTLAND
By:/s/JOSEPH FRATUS
-------------------
Name: Joseph Fratus
Title: Vice President
WASHINGTON MUTUAL BANK, FA
By:/s/MARK M. ISENEE
-----------------
Name: Mark M. Isensee
Title: Vice President
CIBC INC.
By:/s/NIRA Q. CATIKIS
---------------------
Name: Nura Q. Catikis
Title:Authorized Signatory
COMERICA BANK-TEXAS
By:/s/PETER L. SEFZIK
---------------------
Name: Peter L. Sefzik
Title: Assistant Vice President
5
COMPASS BANK
By: /s/DOROTHY MARCHAND
-----------------------
Name: Dorothy Marchand
Title: Senior Vice President
PNC BANK, NATIONAL ASSOCIATION
By:/s/DOUG CLARK
----------------
Name: Doug Clark
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By:/s/SEAN MURPHY
-----------------
Name: Sean Murphy
Title: Assistant Vice President
HIBERNIA NATIONAL BANK
By:/s/DARIA MAHONEY
-------------------
Name: Daria Mahoney
Title: Vice President
NATEXIS BANQUES POPULAIRES
By:/s/DONOVAN C. BROUSSARD
--------------------------
Name: Donovan C. Broussard
Title: Vice President
By:/s/DANIEL PAYER
------------------
Name Daniel Payer
Title: Vice President
6
ACKNOWLEDGMENT BY GUARANTORS
Each of the undersigned Guarantors hereby (i) consents to the terms and
conditions of that certain Third Amendment to Credit Agreement dated as of April
15, 2002 (the Third Amendment), (ii) acknowledges and agrees that its consent is
not required for the effectiveness of the Third Amendment, (iii) ratifies and
acknowledges its respective Obligations under each Loan Document to which it is
a party, and (iv) represents and warrants that (a) no Default or Event of
Default has occurred and is continuing, (b) it is in full compliance with all
covenants and agreements pertaining to it in the Loan Documents, and (c) it has
reviewed a copy of the Third Amendment.
COMSTOCK OIL & GAS, INC.
COMSTOCK OIL & GAS HOLDINGS, INC.
COMSTOCK OIL & GAS - LOUISIANA, LLC
COMSTOCK OFFSHORE, LLC
DEVX ENERGY, INC., a Delaware corporation
DEVX ENERGY, INC., a Nevada corporation
DEVX OPERATING COMPANY
By: /s/ROLAND O. BURNS
----------------------
Name: Roland O. Burns
Title: Senior Vice President
7