UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

(Mark One)

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2013

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-03262

      

COMSTOCK RESOURCES, INC.

(Exact name of registrant as specified in its charter)

      

   

 

NEVADA

   

94-1667468

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification Number)

5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034

(Address of principal executive offices)

Telephone No.: (972) 668-8800

      

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

   

 

Large accelerated filer  þ

   

Accelerated filer  ¨

   

Non-accelerated filer  ¨

   

Smaller reporting company  ¨

   

   

   

   

(Do not check if a smaller reporting company)

   

   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  þ

The number of shares outstanding of the registrant’s common stock, par value $0.50, as of August 2, 2013 was 48,315,612.

      

   

   

   

       


COMSTOCK RESOURCES, INC.

QUARTERLY REPORT

For the Quarter Ended June 30, 2013

INDEX

   

 

   

      

Page

PART I. Financial Information

      

   

   

      

   

Item 1. Financial Statements (Unaudited):

      

   

   

      

   

Consolidated Balance Sheets - June 30, 2013 and December 31, 2012  

      

 

 4

Consolidated Statements of Operations - Three Months and Six Months ended June 30, 2013 and 2012  

      

 

 5

Consolidated Statements of Comprehensive Income (Loss) - Three Months and Six Months ended June 30, 2013 and 2012  

      

 

 6

Consolidated Statement of Stockholders’ Equity Six Months ended June 30, 2013  

      

 

 7

Consolidated Statements of Cash Flows - Six Months ended June 30, 2013 and 2012  

      

 

 8

Notes to Consolidated Financial Statements  

      

 

 9

   

      

   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  

      

 

 20

   

      

   

Item 3. Quantitative and Qualitative Disclosure About Market Risk  

      

 

 24

   

      

   

Item 4. Controls and Procedures  

      

 

 25

   

      

   

PART II. Other Information

      

   

   

      

   

Item 6. Exhibits  

      

 

 26

   

      

   

EX-31.1

      

   

EX-31.2

      

   

EX-32.1

      

   

EX-32.2

      

   

EX-101 INSTANCE DOCUMENT

      

   

EX-101 SCHEMA DOCUMENT

      

   

EX-101 CALCULATION LINKBASE DOCUMENT

      

   

EX-101 LABELS LINKBASE DOCUMENT

      

   

EX-101 PRESENTATION LINKBASE DOCUMENT

      

   

EX-101 DEFINITION LINKBASE DOCUMENT

      

   

   

   

 

 2 

   


PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

   

   

 

 3 

   


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

   

 

   

June 30,
2013

   

      

December 31,
2012

   

   

(In thousands)

   

ASSETS

   

   

   

   

   

   

   

   

   

Cash and Cash Equivalents

$

263,737

      

   

$

4,471

      

Accounts Receivable:

   

   

   

   

   

   

   

Oil and gas sales

   

39,057

   

   

   

35,734

      

Joint interest operations

   

23,045

   

   

   

5,608

      

Marketable Securities

   

—  

   

   

   

12,312

      

Assets of Discontinued Operations

   

—  

   

   

   

7,568

      

Derivative Financial Instruments

   

3,524

   

   

   

11,651

      

Other Current Assets

   

5,143

      

   

   

5,310

      

Total current assets

   

334,506

   

   

   

82,654

      

Property and Equipment:

   

   

   

   

   

   

   

Unevaluated oil and gas properties

   

74,612

   

   

   

112,851

      

Oil and gas properties, successful efforts method

   

3,517,588

   

   

   

3,373,695

      

Other

   

18,440

   

   

   

18,628

      

Accumulated depreciation, depletion and amortization

   

(1,700,831

)

   

   

(1,546,487

)

Net property and equipment

   

1,909,809

   

   

   

1,958,687

      

Assets of Discontinued Operations

   

—  

   

   

   

511,366

      

Other Assets

   

17,907

      

   

   

19,944

      

   

$

2,262,222

      

   

$

2,572,651

      

   

   

   

   

   

   

   

   

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

   

   

   

   

   

   

   

   

Accounts Payable

$

82,679

   

   

$

70,552

      

Deferred Income Taxes

   

1,233

   

   

   

5,340

      

Accrued Liabilities

   

38,214

   

   

   

37,001

      

Liabilities of Discontinued Operations

   

—  

      

   

   

33,280

      

Total current liabilities

   

122,126

   

   

   

146,173

      

Long-term Debt

   

883,324

   

   

   

1,324,383

      

Deferred Income Taxes

   

209,529

   

   

   

149,901

      

Reserve for Future Abandonment Costs

   

16,660

   

   

   

16,387

      

Other Non-Current Liabilities

   

2,202

      

   

   

2,273

      

Total liabilities

   

1,233,841

   

   

   

1,639,117

      

Commitments and Contingencies

   

   

   

   

   

   

   

Stockholders’ Equity:

   

   

   

   

   

   

   

Common stock – $0.50 par, 75,000,000 shares authorized, 48,315,612 and 48,408,734 shares outstanding at June 30, 2013 and December 31, 2012, respectively

   

24,158

   

   

   

24,204

      

Additional paid-in capital

   

483,386

   

   

   

480,595

      

Retained earnings

   

520,837

   

   

   

424,317

      

Accumulated other comprehensive income

   

—  

      

   

   

4,418

      

Total stockholders’ equity

   

1,028,381

      

   

   

933,534

      

   

$

2,262,222

      

   

$

2,572,651

      

   

   

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 4 

   


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

   

 

   

Three Months Ended June 30,

   

      

Six Months Ended June 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

   

(In thousands, except per share amounts)

   

Revenues:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Oil and gas sales

$

107,820

   

      

$

90,329

   

      

$

202,840

   

      

$

194,101

   

Gain on sale of oil and gas properties

      

81

   

      

   

20,338

   

      

      

81

   

      

   

27,065

   

Total revenues

      

107,901

   

      

   

110,667

   

      

      

202,921

   

      

   

221,166

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Operating expenses:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Production taxes

   

3,883

   

      

   

2,861

   

      

   

6,004

   

      

   

6,108

   

Gathering and transportation

   

4,354

   

      

   

7,106

   

      

   

8,556

   

      

   

14,821

   

Lease operating

   

12,962

   

      

   

12,193

   

      

   

26,168

   

      

   

25,651

   

Exploration

   

9,754

   

      

   

37

   

      

   

12,347

   

      

   

1,390

   

Depreciation, depletion and amortization

   

85,244

   

      

   

85,675

   

      

   

170,211

   

      

   

162,986

   

General and administrative, net

   

9,056

   

      

   

9,033

   

      

   

17,843

   

      

   

17,831

   

Impairment of oil and gas properties

      

652

   

      

   

5,301

   

      

      

652

   

      

   

5,350

   

Total operating expenses

      

125,905

   

      

   

122,206

   

      

      

241,781

   

      

   

234,137

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Operating loss

   

(18,004

)

      

   

(11,539

)

      

   

(38,860

)

      

   

(12,971

)

Other income (expenses):

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Gain on sale of marketable securities

   

—  

   

      

   

—  

   

      

   

7,877

   

      

   

26,621

   

Realized gain from derivatives

   

2,881

   

      

   

2,719

   

      

   

5,201

   

      

   

1,365

   

Unrealized gain (loss) from derivatives

   

640

   

      

   

34,797

   

      

   

(8,127

)

      

   

24,610

   

Interest and other income

   

196

   

      

   

283

   

      

   

441

   

      

   

522

   

Interest expense

      

(19,240

)

      

   

(13,351

)

      

      

(36,818

)

      

   

(25,654

)

Total other income (expenses)

      

(15,523

)

   

   

24,448

   

      

      

(31,426

)

   

   

27,464

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income (loss) before income taxes

   

(33,527

)

      

   

12,909

   

      

   

(70,286

)

      

   

14,493

   

Benefit from income taxes

      

11,996

   

      

   

3,801

   

      

      

24,238

   

      

   

3,634

   

Income (loss) from continuing operations

   

(21,531

)

      

   

16,710

   

      

   

(46,048

)

      

   

18,127

   

Income (loss) from discontinued operations, net of income taxes

      

151,236

   

      

   

(9,545

)

   

   

148,609

   

      

   

(9,587

)

Net income

$

129,705

   

      

$

7,165

   

      

$

102,561

   

      

$

8,540

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net income (loss) per share:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Basic

- income (loss) from continuing operations

$

(0.45

)

      

$

0.35

   

      

$

(0.95

)

      

$

0.38

   

   

- income (loss) from discontinued operations

   

3.13

   

      

   

(0.20

)

   

   

3.07

   

   

   

(0.20

)

   

- net income

$

2.68

   

      

$

0.15

   

      

$

2.12

   

      

$

0.18

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Diluted

- income (loss) from continuing operations

$

(0.45

)

   

$

0.35

   

      

$

(0.95

)

      

$

0.38

   

   

- income (loss) from discontinued operations

   

3.13

   

      

   

(0.20

)

   

   

3.07

   

      

   

(0.20

)

   

- net income

$

2.68

   

      

$

0.15

   

      

$

2.12

   

      

$

0.18

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Dividends per common share

$

0.125

   

      

$

—  

   

      

$

0.125

   

      

$

—  

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Weighted average shares outstanding:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Basic

      

46,754

   

      

   

46,426

   

      

      

46,742

   

      

   

46,399

   

Diluted

      

46,754

   

      

   

46,426

   

      

      

46,742

   

      

   

46,399

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 5 

   


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

   

 

   

Three Months Ended June 30,

   

      

Six Months Ended June 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

   

(In thousands)

   

Net income

$

129,705

   

   

$

7,165

   

   

$

102,561

   

   

$

8,540

   

Unrealized gain from derivatives, net of benefit  from income taxes of  $161

   

—  

      

      

   

—  

      

      

   

—  

      

      

   

(298

)

Net change in unrealized gains and losses on marketable securities, net of benefit from income taxes of $682, $2,380 and $7,475

   

—  

      

      

   

(1,268

)

      

   

(4,418

)

      

   

(13,880

)

Other comprehensive loss

   

—  

   

   

   

(1,268

)

   

   

(4,418

)

   

   

(14,178

)

Comprehensive income (loss)

$

129,705

   

   

$

5,897

   

   

$

98,143

   

   

$

(5,638

)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 6 

   


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2013

(Unaudited)

   

 

   

Common
Stock
(Shares)

   

      

Common
Stock –
Par Value

   

   

Additional
Paid-in
Capital

   

   

Retained
Earnings

   

   

Accumulated
Other
Comprehensive
Income

   

   

Total

   

   

(In thousands)

   

Balance at January 1, 2013

   

48,409

   

   

$

24,204

   

   

$

480,595

   

   

$

424,317

   

   

$

4,418

   

   

$

933,534

   

Stock-based compensation

   

18

   

   

   

9

   

   

   

6,431

   

   

   

—  

   

   

   

—  

   

   

   

6,440

   

Restricted stock used for tax withholdings

   

(111

)

   

   

(55

)

   

   

(1,625

)

   

   

—  

   

   

   

—  

   

   

   

(1,680

)

Excess income taxes related to stock-based compensation

   

—  

   

   

   

—  

   

   

   

(2,015

)

   

   

—  

   

   

   

—  

   

   

   

(2,015

)

Net income

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

102,561

   

   

   

—  

   

   

   

102,561

   

Dividends

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(6,041

)

   

   

—  

   

   

   

(6,041

)

Other comprehensive loss

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(4,418

)

   

   

(4,418

)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Balance at June 30, 2013

   

48,316

   

   

$

24,158

   

   

$

483,386

   

   

$

520,837

   

   

$

—  

   

   

$

1,028,381

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 7 

   


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

   

 

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

   

(In thousands)

   

Cash Flows from Operating Activities:

   

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

   

Net income

   

$

102,561

      

      

$

8,540

      

Adjustments to reconcile net income to net cash provided by operating activities:

   

   

   

   

      

   

   

   

(Income) loss from discontinued operations

   

   

(148,609

      

   

9,587

      

Gain on sale of assets

   

   

(7,958

      

   

(53,686

)

Deferred income taxes

   

   

(24,238

      

   

(3,435

)

Dry hole costs and lease impairments

   

   

11,908

   

      

   

1,315

      

Impairment of oil and gas properties

   

   

652

   

      

   

5,350

      

Depreciation, depletion and amortization

   

   

170,211

   

      

   

162,986

      

Unrealized loss (gain) from derivatives

   

   

8,127

   

      

   

(24,610

)

Debt issuance cost and discount amortization

   

   

3,218

   

      

   

2,103

      

Stock-based compensation

   

   

6,440

   

      

   

6,860

      

Excess income taxes related to stock-based compensation

   

   

2,015

   

      

   

1,670

      

Decrease (increase) in accounts receivable

   

   

(20,760

      

   

17,880

      

Decrease (increase) in other current assets

   

   

243

   

      

   

(2,889

)

Increase (decrease) in accounts payable and accrued liabilities

   

      

11,917

      

      

   

(14,283

)

Net cash provided by continuing operations

   

   

115,727

   

      

   

117,388

      

Net cash provided by (used for) discontinued operations

   

      

(7,715

)  

      

   

24,510

      

Net cash provided by operating activities

   

      

108,012

      

      

   

141,898

      

   

   

   

   

   

   

   

   

   

Cash Flows from Investing Activities:

   

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

   

Capital expenditures

   

   

(132,826

      

   

(258,587

)

Proceeds from sales of oil and gas properties

   

   

—  

   

   

   

121,322

   

Proceeds from sales of marketable securities

   

      

13,392

      

      

   

37,705

      

Investing activities of continuing operations

   

   

(119,434

      

   

(99,560

)

Cash flows from investing activities of discontinued operations:

   

      

   

      

      

   

   

   

Capital expenditures

   

   

(101,037

)

   

   

(89,750

)

Proceeds from sale of oil and gas properties

   

   

823,701

   

   

   

24,750

   

Net cash provided by (used for) investing activities of discontinued operations

   

   

722,664

   

   

   

(65,000

)

Net cash provided by (used for) investing activities

   

      

603,230

      

      

   

(164,560

)

   

   

   

   

   

   

   

   

   

Cash Flows from Financing Activities:

   

   

   

   

      

   

   

   

   

   

   

   

   

   

   

   

   

Borrowings

   

   

95,000

   

      

   

390,912

      

Principal payments on debt

   

   

(537,225

      

   

(365,000

)

Debt issuance costs

   

   

(15

      

   

(6,535

)

Tax withholding related to stock grants

   

   

(1,680

      

   

—  

      

Excess income taxes from stock-based compensation

   

   

(2,015

      

   

(1,670

)

Dividends paid

   

      

(6,041

)  

      

   

—  

      

Net cash provided by (used for) financing activities

   

      

(451,976

)  

      

   

17,707

      

   

   

   

   

   

   

   

   

   

Net increase (decrease) in cash and cash equivalents

   

   

259,266

   

      

   

(4,955

)

Cash and cash equivalents, beginning of period

   

      

4,471

      

      

   

8,460

      

Cash and cash equivalents, end of period

   

$

263,737

      

      

$

3,505

      

   

   

The accompanying notes are an integral part of these statements.

   

   

 

 8 

   


COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – 

Basis of Presentation

In management’s opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of Comstock Resources, Inc. and subsidiaries (“Comstock” or the “Company”) as of June 30, 2013 and the related results of operations and cash flows for the three months and six months ended June 30, 2013 and 2012.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Comstock’s Annual Report on Form 10-K for the year ended December 31, 2012.

The results of operations for the three months and six months ended June 30, 2013 are not necessarily an indication of the results expected for the full year.

These unaudited consolidated financial statements include the accounts of Comstock and its wholly owned and controlled subsidiaries. The consolidated financial statements for the three months and six months ended June 30, 2012 also include the accounts of a variable interest entity where the Company was the primary beneficiary of the arrangements. Intercompany balances and transactions have been eliminated in consolidation. In connection with a reverse like-kind exchange in accordance with Section 1031 of the Internal Revenue Code, the Company assigned the rights to acquire ownership of certain oil and gas properties acquired in 2011 to a variable interest entity formed by an exchange accommodation titleholder. The Company operated these properties pursuant to lease and management agreements with that entity, and had a call option which allowed the Company to terminate the exchange transaction at any time up and until the expiration date of the exchange. Because the Company was the primary beneficiary of these arrangements, all revenues and expenses incurred related to the properties are included in the Company’s consolidated results of operations for the three months and six months ended June 30, 2012. These agreements terminated upon the transfer of the acquired properties from the exchange accommodation titleholder to Comstock in May 2012, when the exchange was finalized. The results of operations of the variable interest entity in the three months and six months ended June 30, 2012 are reflected as the results of operations of discontinued operations presented separately in these footnotes to the financial statements.

Reclassifications

Certain reclassifications have been made to prior period’s financial statements, consisting primarily of reclassifications to reflect the Company’s West Texas oil and gas properties as discontinued operations.

Marketable Securities

As of December 31, 2012, the Company held 600,000 shares of Stone Energy Corporation common stock which was reflected in the consolidated balance sheet as marketable securities. During the six months ended June 30, 2013, these shares with a cost basis of $5.5 million were sold for proceeds of $13.4 million. Comstock realized a gain before income taxes of $7.9 million on the sale which is included in other income in the consolidated statements of operations. During the six months ended June 30, 2012, the Company sold 1,206,000 shares of Stone Energy Corporation common stock for

 

 9 

   


total proceeds of $37.7 million and realized a gain before income taxes of $26.6 million for the six months ended June 30, 2012. The Company utilized the specific identification method to determine the cost of the securities that were sold.

Property and Equipment

The Company follows the successful efforts method of accounting for its oil and gas properties. Costs incurred to acquire oil and gas leasehold are capitalized. The Company also assesses the need for an impairment of the costs capitalized for its oil and gas properties on a property or cost center basis. Impairment charges related to the Company’s oil and gas properties of $0.7 million were recognized during the three months and six months ended June 30, 2013 and $5.4 million were recognized during the six months ended June 30, 2012.

Unproved oil and gas properties are periodically assessed and any impairment in value is charged to exploration expense. The costs of unproved properties which are determined to be productive are transferred to oil and gas properties and amortized on an equivalent unit-of-production basis. The Company’s assessments of its unevaluated acreage have indicated that certain leases were expected to expire prior to the Company conducting drilling operations.  Accordingly, impairment charges were recognized in exploration expense of $9.5 million for the three months ended June 30, 2013 and $11.9 million and $1.3 million for the six months ended June 30, 2013 and 2012, respectively.

West Texas Divestiture

On May 14, 2013, the Company completed the sale of its oil and gas properties located in Reeves and Gaines counties in West Texas to third parties for $823.7 million and realized a gain of $230.6 million which is reflected as a component of income from discontinued operations in the three and six months ended June 30, 2013.

Assets and liabilities of discontinued operations as of December 31, 2012 were as follows:

   

 

   

   

   

   

(In thousands)

   

Accounts Receivable

$

5,924

      

Other Current Assets

   

1,644

      

Total Current Assets

   

7,568

      

   

   

   

   

Unproved Oil and Gas Properties

   

150,801

      

Proved Oil and Gas Properties:

   

   

   

Leasehold Costs

   

225,546

      

Wells and related equipment and facilities

   

180,475

      

Other

   

673

      

Accumulated depreciation, depletion and amortization

   

(46,129

Net Property and Equipment

   

511,366

      

Total Assets of Discontinued Operations

$

518,934

      

   

   

   

   

Accounts Payable

$

21,302

      

Accrued Liabilities

   

10,371

      

Reserve for Future Abandonment Costs

   

1,607

      

Liabilities of Discontinued Operations

$

33,280

      

 

 10 

   


Income (loss) from discontinued operations was comprised of the following:

   

 

   

Three Months Ended

June 30,

   

   

Six Months Ended

June 30,

   

   

2013

   

      

2012

   

   

2013

   

      

2012

   

   

(In thousands)

   

Revenues:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Oil and gas sales

$

8,826

      

      

$

10,407

      

   

$

25,125

      

      

$

18,324

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Costs and expenses:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Production taxes

   

427

   

      

   

519

      

   

   

1,120

   

      

   

909

      

Gathering and transportation

   

170

   

      

   

232

      

   

   

501

   

      

   

409

      

Lease operating

   

3,545

   

      

   

1,755

      

   

   

9,853

   

      

   

3,046

      

Depletion, depreciation and amortization

   

—  

   

      

   

4,408

      

   

   

8,649

   

      

   

6,194

      

Interest expense(1)

      

2,847

      

      

   

1,178

      

   

      

6,346

      

      

   

2,112

      

Total costs and expenses

      

6,989

      

      

   

8,092

      

   

      

26,469

      

      

   

12,670

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Gain on sale of discontinued operations

   

230,637

   

   

   

—  

   

   

   

230,637

   

   

   

—  

   

Income from discontinued operations before income taxes

   

232,474

   

   

   

2,315

   

   

   

229,293

   

   

   

5,654

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income tax expense:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Current

   

(637

)

      

   

—  

      

   

   

(637

)

      

   

—  

      

Deferred

      

(80,601

)

      

   

(11,860

)

   

      

(80,047

)

      

   

(15,241

)

Total income tax expense

      

(81,238

)

      

   

(11,860

)

   

      

(80,684

)

      

   

(15,241

)

Net income (loss) from discontinued operations

$

151,236

      

      

$

(9,545

)

   

$

148,609

      

      

$

(9,587

)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net Production Data:

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Oil (Mbbls)

   

96

   

      

   

124

      

   

   

270

   

      

   

197

      

Natural Gas (Mmcf)

   

141

   

      

   

145

      

   

   

410

   

      

   

272

      

Natural Gas Equivalent (Mmcfe)

   

720

   

      

   

885

      

   

   

2,031

   

      

   

1,451

      

___________________________

 

   

  (1)Interest expense was allocated to discontinued operations based on the ratio of the net assets of discontinued operations to our consolidated net assets plus long-term debt. Interest expense is net of capitalized interest of $- and $2,253 for the three months ended June 30, 2013 and 2012, respectively, and $2,010 and $4,393 for the six months ended June 30, 2013 and 2012, respectively.     

Accrued Liabilities

Accrued liabilities at June 30, 2013 and December 31, 2012 consist of the following:

   

   

   

 

   

As of
June 30,
2013

   

      

As of
December 31,
2012

   

   

(In thousands)

   

Accrued drilling costs

$

15,140

   

   

$

4,726

   

Accrued interest

   

12,244

   

   

   

12,351

      

Accrued transportation costs payable

   

3,075

   

   

   

3,553

      

Accrued taxes payable

   

3,546

   

   

   

—  

   

Accrued oil and gas property acquisition costs

   

—  

   

   

   

2,413

      

Advance from joint venture partner

   

—  

   

   

   

7,286

      

Other accrued liabilities

   

4,209

   

   

   

6,672

      

   

$

38,214

   

   

$

37,001

      

 

 11 

   


Reserve for Future Abandonment Costs

Comstock’s asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal. The following table summarizes the changes in Comstock’s total estimated liability during the six months ended June 30, 2013 and 2012:

   

 

   

Six Months Ended
June 30,

   

   

2013

   

   

2012

   

   

(In thousands)

   

Future abandonment costs – beginning of period

$

16,387

   

   

$

13,997

   

Accretion expense – continuing operations

   

494

   

   

   

331

   

Accretion expense – discontinued operations

   

—  

   

   

   

19

   

New wells placed on production – continuing operations

   

313

   

   

   

503

   

New wells placed on production– discontinued operations

   

—  

   

   

   

441

   

Liabilities settled and assets disposed of – continuing operations

   

(534

)

   

   

(1,077

)

Liabilities settled and assets disposed of – discontinued operations

   

—  

   

   

   

(23

)

Liabilities reclassified to discontinued operations

   

—  

   

   

   

(1,179

)

Future abandonment costs – end of period

$

16,660

   

   

$

13,012

   

Derivative Financial Instruments and Hedging Activities

Comstock periodically uses swaps, floors and collars to hedge oil and natural gas prices and interest rates. Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts. Generally, when the applicable settlement price is less than the price specified in the contract, Comstock receives a settlement from the 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.

As of June 30, 2013, the Company had the following outstanding commodity derivatives:

   

 

Commodity and Derivative Type

   

Weighted-Average

Contract Price

   

Volume (barrels)

   

Contract Period

   

   

   

   

Crude Oil Price Swap Agreements

   

$98.69 per Barrel

   

1,040,000

   

July 2013 –

December 2013

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. We attempt to minimize credit risk to counterparties of our derivative financial instruments through formal credit policies, monitoring procedures, and diversification, and all of our derivative financial instruments are with parties that are lenders under our bank credit facility. 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 derivative contracts have been designated as cash flow hedges. The Company recognizes the realized gains and losses and unrealized gains and losses due to the change in the fair value of its derivative financial instruments as separate components of other income (expenses). The Company had realized gains on its oil price swaps of $2.9 million and $2.7 million during the three months ended June 30, 2013 and 2012, respectively, and $5.2 million and $1.4 million during the six months ended June 30, 2013 and 2012, respectively. The estimated fair value of the Company’s derivative financial instruments, which equals their carrying value, was an asset of $3.5 million and $11.7 million as of June 30, 2013 and December 31, 2012, respectively, and are reflected as current assets based on estimated settlement dates. The Company had unrealized gains of $0.6 million and $34.8 million during the three months ended June 30, 2013 and 2012, respectively, due to the change in the fair value.  The Company had an unrealized loss of

 

 12 

   


$8.1 million and an unrealized gain of $24.6 million during the six months ended June 30, 2013 and 2012, respectively, due to the change in the fair value.

Stock-Based Compensation

Comstock accounts for employee stock-based compensation under the fair value method. Compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period. During the three months ended June 30, 2013 and 2012, the Company recognized $3.2 million and $3.4 million, respectively, of stock-based compensation expense within general and administrative expenses related to awards of restricted stock and performance stock units to its employees and directors. For the six months ended June 30, 2013 and 2012, the Company recognized $6.4 million and $6.9 million, respectively, of stock-based compensation expense within general and administrative expenses.

As of June 30, 2013, Comstock had 1,519,889 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $24.02 per share. Total unrecognized compensation cost related to unvested restricted stock grants of $14.3 million as of June 30, 2013 is expected to be recognized over a period of 2.0 years. As of June 30, 2013, Comstock had 249,302 performance stock units outstanding at a weighted average grant date fair value of $21.19 per unit. Total unrecognized compensation cost related to these grants of $3.7 million as of June 30, 2013 is expected to be recognized over a period of 1.7 years.

As of June 30, 2013, Comstock had outstanding options to purchase 115,150 shares of common stock at a weighted average exercise price of $32.90 per share. All of the stock options were exercisable and there were no unrecognized costs related to the stock options as of June 30, 2013. No stock options were exercised during the six months ended June 30, 2013 or 2012.

Income Taxes

The following is an analysis of consolidated income tax benefit from continuing operations:

   

 

   

Three Months Ended

June 30,

   

   

Six Months Ended

June 30,

   

   

2013

   

      

2012

   

   

2013

   

      

2012

   

   

(In thousands)

   

Current benefit

$

3

      

      

$

116

   

   

$

—  

      

      

$

199

   

Deferred benefit

      

11,993

      

      

   

3,685

   

   

      

24,238

   

      

   

3,435

   

Benefit from income taxes

$

11,996

      

      

$

3,801

   

   

$

24,238

      

      

$

3,634

   

Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The difference between the Company’s effective tax rate and the 35% federal statutory rate is mainly caused by non-deductible stock compensation and state taxes. The impact of these items varies based upon the Company’s projected full year income or loss and the jurisdictions that are expected to generate the projected income and/or losses.

The difference between the Company’s customary rate of 35% and the effective tax rate on income before income taxes from continuing operations is due to the following:

   

 

   

Three Months Ended

June 30,

   

   

Six Months Ended

June 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Tax at statutory rate

   

35.0

   

   

35.0

   

   

35.0

   

   

35.0

Tax effect of:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Nondeductible stock-based compensation

   

0.6

   

   

   

(55.9

   

   

(1.4

   

   

(51.2

State income taxes, net of federal benefit

   

0.3

   

   

   

(4.2

   

   

1.1

   

   

   

(4.8

Other

   

(0.1

   

   

(4.4

   

   

(0.2

   

   

(4.1

Effective tax rate

   

35.8

   

   

(29.5

%) 

   

   

34.5

   

   

(25.1

%) 

 

 13 

   


The Company’s federal income tax returns for the years subsequent to December 31, 2007 remain subject to examination.  The Company’s income tax returns in major state income tax jurisdictions remain subject to examination from various periods subsequent to December 31, 2007. State tax returns in two state jurisdictions are currently under review. The Company has evaluated the preliminary findings in these jurisdictions and believes it is more likely than not that the ultimate resolution of these matters will not have a material effect on its financial statements. The Company currently believes that all other significant filing positions are highly certain and that all of its other significant income tax positions and deductions would be sustained under 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.

Fair Value Measurements

The Company holds or has held certain items that are required to be measured at fair value. These include cash equivalents held in bank accounts and derivative financial instruments in the form of oil price swap agreements. 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 Company’s cash equivalents and restricted cash valuations are a Level 1 measurement. The Company’s oil price swap agreements are not traded on a public exchange, and their value is determined utilizing a discounted cash flow model based on inputs that are readily available in public markets and, accordingly, the valuation of these swap agreements is categorized as a Level 2 measurement.

The following table summarizes financial assets accounted for at fair value as of June 30, 2013:

   

 

   

Carrying
Value
Measured at
Fair Value at
June 30, 2013

   

      

Level 1

   

      

Level 2

   

   

(In thousands)

   

Assets measured at fair value on a recurring basis:

   

   

   

      

   

   

   

      

   

   

   

Cash held in bank accounts

$

263,737

      

      

$

263,737

      

      

$

—  

      

Derivative financial instruments

      

3,524

      

      

      

—  

      

      

      

3,524

      

Total assets

$

267,261

      

      

$

263,737

      

      

$

3,524

      

 

 14 

   


The following table summarizes the changes in the fair values of derivative financial instruments, which are Level 2 assets, for the three months and six months ended June 30, 2013:

   

 

   

Three Months
Ended
June 30,

2013

   

      

Six Months
Ended
June 30,

2013

   

   

(In thousands)

   

Balance beginning of period

$

2,884

      

      

$

11,651

      

Purchases and settlements (net)

   

(2,881

      

   

(5,201

Realized gains included in other income (expenses)

   

2,881

   

      

   

5,201

   

Unrealized gains (losses) included in other income (expenses)

      

640

      

      

      

(8,127

)  

Balance at end of period

$

3,524

      

      

$

3,524

      

The following table presents the carrying amounts and estimated fair value of the Company’s other financial instruments:

   

 

   

As of June 30, 2013

   

      

As of December 31, 2012

   

   

Carrying
Value

   

      

Fair
Value

   

      

Carrying
Value

   

      

Fair

Value

   

   

(In thousands)

   

Long-term debt, including current portion

$

883,324

      

      

$

947,547

      

      

$

1,324,383

      

      

$

1,382,000

      

The fair market value of the Company’s fixed rate debt was based on the market prices as of June 30, 2013 and December 31, 2012, a Level 1 measurement. The fair value of the floating rate debt approximated its carrying value, a Level 2 measurement.

Earnings Per Share

Basic earnings per share is determined without the effect of any outstanding potentially dilutive stock options and diluted earnings per share is determined with the effect of outstanding stock options that are potentially dilutive. Unvested share-based payment awards containing nonforfeitable rights to dividends are considered to be participatory securities and are included in the computation of basic and diluted earnings per share pursuant to the two-class method. Performance share units (“PSUs”) represent the right to receive a number of shares of the Company’s common stock that may range from zero to up to three times the number of PSUs granted on the award date based on the achievement of certain performance measures during a performance period. The number of potentially dilutive shares related to PSUs is based on the number of shares, if any, which would be issuable at the end of the respective period, assuming that date was the end of the contingency period. The treasury stock method is used to measure the dilutive effect of PSUs.

 

 15 

   


Basic and diluted earnings per share for the three months and six months ended June 30, 2013 and 2012 were determined as follows:  

   

 

   

Three Months Ended June 30,

   

2013

   

      

2012

   

Income
(Loss)

   

      

Shares

      

Per

Share

   

      

Income
(Loss)

   

   

Shares

   

      

Per
Share

   

   

(In thousands, except per share amounts)

   

Net Income (Loss) From Continuing Operations

$

(21,531

)

      

   

   

   

   

   

      

$

16,710

   

   

   

   

   

      

   

   

   

(Income) Loss Allocable to Unvested Stock Grants

      

697

   

      

   

   

   

   

   

      

   

(601

)

   

   

   

   

      

   

   

   

Basic Net Income (Loss) From Continuing Operations  Attributable to Common Stock

$

(20,834

)

      

46,754

   

$

(0.45

)

      

$

16,109

   

   

   

46,426

   

      

$

0.35

   

Effect of Dilutive Securities:

   

   

   

      

   

   

   

   

   

      

   

   

   

   

   

   

   

      

   

   

   

Stock Options

   

—  

   

      

—  

   

   

   

   

      

   

—  

   

   

   

—  

   

      

   

   

   

Performance Stock Units

      

—  

   

      

—  

   

   

   

   

      

   

—  

   

   

   

—  

   

      

   

   

   

Diluted Net Income (Loss) From Continuing Operations Attributable to Common Stock

$

(20,834

)

      

46,754

   

$

(0.45

)

      

$

16,109

   

   

   

46,426

   

      

$

0.35

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net Income (Loss) From Discontinued Operations

$

151,236

   

      

   

   

   

   

   

      

$

(9,545

)

   

   

   

   

      

   

   

   

(Income) Loss Allocable to Unvested Stock Grants

      

(4,893

)

      

   

   

   

   

   

      

   

343

   

   

   

   

   

      

   

   

   

Basic Net Income (Loss) From Discontinued Operations Attributable to Common Stock

$

146,343

   

      

46,754

   

$

3.13

   

      

$

(9,202

)

   

   

46,426

   

      

$

(0.20

)

Effect of Dilutive Securities: