form10qcrkjune3007.htm
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 Quarterly Period Ended June 30, 2007

OR
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 0-16741

COMSTOCK RESOURCES, INC.
(Exact name of registrant as specified in its charter)

NEVADA
(State or other jurisdiction of
 
94-1667468
(I.R.S. Employer
incorporation or organization)
 
Identification Number)

5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034
(Address of principal executive offices)

Telephone No.: (972) 668-8800

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

Yesþ
 
No o

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

Large accelerated filerþ
 
Accelerated filer o
 
Non-accelerated filer o

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

Yes o
 
Noþ

      The number of shares outstanding of the registrant's common stock, par value $.50, as of August 9, 2007 was 44,406,995.
 
 
 


COMSTOCK RESOURCES, INC.

QUARTERLY REPORT

For The Quarter Ended June 30, 2007

INDEX
 
Page
 
PART I. Financial Information
     
       
Item 1. Financial Statements (Unaudited):
     
 
     
Consolidated Balance Sheets -
  June 30, 2007 and December 31, 2006
 
4
 
Consolidated Statements of Operations -
  Three months and six months ended June 30, 2007 and 2006
 
5
 
Consolidated Statement of Stockholders' Equity -
  Six months ended June 30, 2007
 
6
 
Consolidated Statements of Cash Flows -
  Six months ended June 30, 2007 and 2006
 
7
 
Notes to Consolidated Financial Statements
 
8
 
Independent Accountants' Review Report
 
21
 
       
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
22
 
       
Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
28
 
       
Item 4. Controls and Procedures
 
28
 
       
       
     
       
 
29
 
       
Awareness Letter of Ernst & Young LLP
     
Section 302 Certification of the Chief Executive Officer
     
Section 302 Certification of the Chief Financial Officer
     
Certification for the Chief Executive Officer as required by Section 906
     
Certification for the Chief Financial Officer as required by Section 906
     

 
 
 
 
 
 
 
 

 

2


PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)



INTRODUCTORY NOTE

In the third quarter of 2006, Comstock Resources, Inc. ("Comstock" or the "Company") acquired additional interests in Bois d'Arc Energy, Inc. ("Bois d'Arc Energy") and, as a result, began including Bois d'Arc Energy in its financial statements as a consolidated subsidiary.  In accordance with generally accepted accounting principles, Comstock has applied consolidation accounting for its ownership in Bois d'Arc Energy retroactively as of January 1, 2006.  Revenues and expenses have been adjusted beginning January 1, 2006 to include Bois d'Arc Energy as a consolidated subsidiary.  There was no effect on net income as a result of using the consolidation method.  A summary of the impact of consolidating Bois d'Arc Energy on the previously reported financial results for the three and six months ended June 30, 2006 is included in Note 1 to the consolidated financial statements.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
3

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)


   
June 30,
   
December 31,
  
   
2007
   
2006
  
   
(In thousands)
  
                  
ASSETS
                  
Cash and Cash Equivalents                                                                                                                     
 
$
48,882
   
$
10,715
  
Accounts Receivable:
                
Oil and gas sales 
   
68,011
     
56,328
  
Joint interest operations 
   
22,963
     
19,233
  
Other Current Assets    
   
19,630
     
12,552
  
Total current assets              
   
159,486
     
98,828
  
Property and Equipment:
                
Unevaluated oil and gas properties
   
13,009
     
13,645
  
Oil and gas properties, successful efforts method 
   
2,809,677
     
2,511,782
  
Other property and equipment      
   
9,423
     
8,483
  
Accumulated depreciation, depletion and amortization
   
(874,933
)
   
(760,284
) 
Net property and equipment                              
   
1,957,176
     
1,773,626
  
Other Assets                  
   
4,979
     
5,671
  
   
$
2,121,641
   
$
1,878,125
  

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term Debt                                                                                                                     
 
$
7,764
   
$
3,250
 
Accounts Payable                                                                                                                     
   
151,812
     
132,504
 
Accrued Expenses                                                                                                                     
   
10,714
     
16,107
 
Total current liabilities
   
170,290
     
151,861
 
Long-term Debt                                                                                                                     
   
594,000
     
455,000
 
Deferred Income Taxes Payable
   
339,554
     
311,236
 
Reserve for Future Abandonment Costs
   
59,605
     
57,116
 
Minority Interest in Bois d'Arc Energy
   
238,855
     
220,349
 
Total liabilities                                                                                                        
   
1,402,304
     
1,195,562
 
Commitments and Contingencies
               
Stockholders' Equity:
               
Common stock – $0.50 par, 50,000,000 shares authorized, 44,406,995 and 44,395,495
  shares outstanding at June 30, 2007 and December 31, 2006, respectively
   
22,203
     
22,197
 
Additional paid-in capital
   
373,316
     
367,323
 
Retained earnings                                                                                                                
   
323,818
     
293,043
 
Total stockholders' equity
   
719,337
     
682,563
 
   
$
2,121,641
   
$
1,878,125
 

 
 
 
 
 

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,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands, except per share amounts)
 
 
 
       
Oil and gas sales
 
$
174,206
   
$
124,178
   
$
320,235
   
$
255,902
 
Operating expenses:
                               
Oil and gas operating
   
30,180
     
25,021
     
57,263
     
51,316
 
Exploration
   
19,866
     
3,718
     
30,999
     
8,593
 
Depreciation, depletion and amortization
   
59,760
     
33,063
     
116,467
     
63,748
 
Impairment
   
     
8,780
     
     
8,780
 
General and administrative, net
   
8,162
     
7,233
     
17,864
     
15,368
 
Total operating expenses
   
117,968
     
77,815
     
222,593
     
147,805
 
                                 
Income from operations
   
56,238
     
46,363
     
97,642
     
108,097
 
Other income (expenses):
                               
Interest income
   
335
     
229
     
631
     
466
 
Other income
   
221
     
375
     
351
     
429
 
Interest expense
   
(10,206
)
   
(6,106
)
   
(18,655
)
   
(11,589
)
Gain on derivatives
   
     
1,303
     
     
9,428
 
Total other income (expenses)
   
(9,650
)
   
(4,199
)
   
(17,673
)
   
(1,266
)
                                 
Income before income taxes and minority interest
   
46,588
     
42,164
     
79,969
     
106,831
 
Provision for income taxes
   
(19,561
)
   
(18,886
)
   
(34,385
)
   
(45,185
)
Minority interest in earnings of Bois d'Arc Energy
   
(8,810
)
   
(7,695
)
   
(14,809
)
   
(16,429
)
Net income
 
$
18,217
   
$
15,583
   
$
30,775
   
$
45,217
 
                                 
Net income per share:
                               
Basic
 
$
0.42
   
$
0.37
   
$
0.71
   
$
1.07
 
Diluted
 
$
0.41
   
$
0.35
   
$
0.69
   
$
1.03
 
                                 
Weighted average common and common stock equivalent shares outstanding:
                               
Basic
   
43,374
     
42,077
     
43,369
     
42,070
 
Diluted
   
44,361
     
43,521
     
44,300
     
43,481
 

 



 
 


The accompanying notes are an integral part of these statements.
5

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2007
(Unaudited)


 
   
Common
Stock
(Shares)
  
Common
Stock -
Par Value
  
Additional
Paid-in
Capital
  
Retained
Earnings
  
Total
 
                 
                 
   
(In thousands)
 
       
Balance at January 1, 2007
 
$
44,395
  
$
22,197
  
$
367,323
  
$
293,043
  
$
682,563
 
  Exercise of stock options
   
12
    
6
    
133
    
    
139
 
  Stock-based compensation
   
    
    
5,260
    
    
5,260
 
  Excess tax benefit from stock-based
                   
 
          
 
  compensation
   
    
    
600
    
    
600
 
  Net income
   
    
    
    
30,775
    
30,775
 
Balance at June 30, 2007
 
$
44,407
  
$
22,203
  
$
373,316
  
$
323,818
  
$
719,337
 

 
 



















 






The accompanying notes are an integral part of these statements.
6

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended
 
   
June 30,
 
   
2007
   
2006
 
   
(In thousands)
 
                 
                 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
 
$
30,775
   
$
45,217
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Deferred income taxes
   
28,694
     
40,015
 
Dry hole costs and leasehold impairments
   
27,803
     
6,629
 
Depreciation, depletion and amortization
   
116,467
     
63,748
 
Impairment
   
     
8,780
 
Debt issuance cost amortization
   
563
     
579
 
Stock-based compensation
   
8,630
     
6,492
 
Excess tax benefit from stock-based compensation
   
(600
)
   
(922
)
Minority interest in earnings of Bois d'Arc Energy
   
14,809
     
16,429
 
Gain on derivatives
   
     
(9,428
)
(Increase) decrease in accounts receivable
   
(15,413
)
   
13,140
 
Increase in other current assets
   
(2,564
)
   
(949
)
Increase (decrease) in accounts payable and accrued expenses
   
18,389
     
(13,666
)
Net cash provided by operating activities
   
227,553
     
176,064
 
                 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(329,345
)
   
(203,026
)
Payments to settle derivatives
   
     
(703
)
Net cash used for investing activities
   
(329,345
)
   
(203,729
)
                 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings
   
146,000
     
60,000
 
Principal payments on debt
   
(7,000
)
   
(39,000
)
Proceeds from issuance of common stock
   
448
     
1,742
 
Excess tax benefit from stock-based compensation
   
600
     
922
 
Debt issuance costs
   
(89
)
   
(100
)
Net cash provided by financing activities
   
139,959
     
23,564
 
                 
Net increase (decrease) in cash and cash equivalents
   
38,167
     
(4,101
)
Cash and cash equivalents, beginning of period
   
10,715
     
89
 
Bois d'Arc Energy cash and equivalents as of January 1, 2006
   
     
12,043
 
Cash and cash equivalents, end of period
 
$
48,882
   
$
8,031
 
                 

 
 


The accompanying notes are an integral part of these statements.
7

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007
(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, 2007 and the related results of operations for the three months and six months ended June 30, 2007 and 2006 and cash flows for the six months ended June 30, 2007 and 2006.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading.  These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto of the Company included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2006.

The results of operations for the six months ended June 30, 2007 are not necessarily an indication of the results expected for the full year.

These unaudited consolidated financial statements include the accounts of Comstock and subsidiaries in which it has a controlling interest.  Intercompany balances and transactions have been eliminated in consolidation.

In the third quarter of 2006, Comstock purchased additional shares of common stock in Bois d'Arc Energy, Inc. ("Bois d'Arc Energy") increasing its ownership of Bois d'Arc Energy's common stock to 32,220,761 shares.  As of June 30, 2007 Comstock owns 32,224,661 shares.  As a result, as of September 30, 2006, Comstock has voting control of Bois d'Arc Energy through the combined share ownership of the Company and members of its Board of Directors.  Upon obtaining voting control of Bois d'Arc Energy, Comstock began including Bois d'Arc Energy in its financial statements as a consolidated subsidiary.  As permitted by generally accepted accounting principles, consolidated revenues, expenses and cash flows for 2006 have been retroactively adjusted to reflect Bois d'Arc Energy as a consolidated subsidiary as of January 1, 2006.  The inclusion of Bois d'Arc Energy as a consolidated subsidiary in the Company's financial statements had no impact on the Company's net income.

 
 
 
 
 
 
 
 

 

8

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The following summarizes the impact of retroactively consolidating the results of Bois d'Arc Energy:

   
As of June 30, 2006
 
Balance Sheet:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Current assets                                                                     
 
$
40,723
   
$
51,450
   
$
92,173
 
Property and equipment, net
   
758,707
     
741,164
     
1,499,871
 
Investment in Bois d'Arc Energy
   
267,269
     
(267,269
)
   
 
Other assets                                                                     
   
4,340
     
703
     
5,043
 
Total assets                                                                
 
$
1,071,039
   
$
526,048
   
$
1,597,087
 
                         
Current liabilities                                                                     
 
$
51,086
   
$
73,196
   
$
124,282
 
Long-term debt                                                                     
   
243,000
     
90,000
     
333,000
 
Deferred income taxes payable
   
139,383
     
138,344
     
277,727
 
Reserve for future abandonment costs
   
3,357
     
37,988
     
41,345
 
Minority interest in Bois d'Arc Energy
   
     
186,520
     
186,520
 
Stockholders' equity                                                                     
   
634,213
     
     
634,213
 
Total liabilities and stockholders' equity
 
$
1,071,039
   
$
526,048
   
$
1,597,087
 

   
Three Months Ended June 30, 2006
 
Statement of Operations:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Revenues                                                                     
 
$
64,571
   
$
59,607
   
$
124,178
 
Operating expenses                                                                     
   
(42,294
)
   
(35,521
)
   
(77,815
)
Income from operations                                                                     
   
22,277
     
24,086
     
46,363
 
Other income (expenses)                                                                     
   
(3,014
)
   
(1,185
)
   
(4,199
)
Income before income taxes, minority interest in
                       
    earnings and equity in earnings of Bois d'Arc Energy
   
19,263
     
22,901
     
42,164
 
Provision for income taxes
   
(10,768
)
   
(8,118
)
   
(18,886
)
Minority interest in earnings of Bois d'Arc Energy
   
     
(7,695
)
   
(7,695
)
Equity earnings in earnings of Bois d'Arc Energy
   
7,088
     
(7,088
)
   
 
Net income                                                                     
 
$
15,583
   
$
   
$
15,583
 

   
Six Months Ended June 30, 2006
 
Statement of Operations:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Revenues                                                                     
 
$
134,462
   
$
121,440
   
$
255,902
 
Operating expenses                                                                     
   
(77,679
)
   
(70,126
)
   
(147,805
)
Income from operations                                                                     
   
56,783
     
51,314
     
108,097
 
Other income (expenses)                                                                     
   
927
     
(2,193
)
   
(1,266
)
Income before income taxes, minority interest in
                       
    earnings and equity in earnings of Bois d'Arc Energy
   
57,710
     
49,121
     
106,831
 
Provision for income taxes
   
(27,628
)
   
(17,557
)
   
(45,185
)
Minority interest in earnings of Bois d'Arc Energy
   
     
(16,429
)
   
(16,429
)
Equity earnings in earnings of Bois d'Arc Energy
   
15,135
     
(15,135
)
   
 
Net income                                                                     
 
$
45,217
   
$
   
$
45,217
 
9

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

   
Six Months Ended June 30, 2006
 
Statement of Cash Flows:
 
As Previously
Reported
   
Consolidating
Adjustments
   
As
Consolidated
 
   
(In thousands)
 
                         
Cash flows provided by operating activities
 
$
92,037
   
$
84,027
   
$
176,064
 
Cash flows used for investing activities
 
$
(94,119
)
 
$
(109,610
)
 
$
(203,729
)
Cash flows provided by financing activities
 
$
2,664
   
$
20,900
   
$
23,564
 

In connection with its acquisitions of additional common shares of Bois d'Arc Energy, Comstock allocated the $36.5 million purchase price paid for the shares in excess of its underlying net book value in Bois d'Arc Energy of $19.0 million together with the related deferred income tax liability of $10.1 million to oil and gas properties.  This additional amount is being amortized over the productive lives of Bois d'Arc Energy's oil and gas properties using the unit-of-production method.  The pro forma impact of the acquisition of these shares was not material to the Company's results of operations for the six months ended June 30, 2006.

Asset Retirement Obligations

Comstock's asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal.  The following table summarizes the changes in Comstock's total estimated liability during the six months ended June 30, 2007 and 2006:

   
Six Months Ended
 
   
June 30,
 
   
2007
   
2006
 
   
(In thousands)
 
                 
Beginning asset retirement obligations                                                                               
 
$
57,116
   
$
3,206
 
Bois d'Arc abandonment liability(1)                                                                           
   
     
35,034
 
Accretion expense                                                                           
   
1,780
     
1,203
 
New wells placed on production and changes in estimates
   
807
     
1,923
 
Liabilities settled                                                                           
   
(98
)
   
(21
)
Future abandonment liability — end of period
 
$
59,605
   
$
41,345
 
                
 (1)
Concurrent with including Bois d'Arc Energy as a consolidated subsidiary as of January 1, 2006, the asset retirement obligations of Bois d'Arc Energy are included in the Company's financial statements. 
 

Derivative Instruments and Hedging Activities

Comstock periodically uses swaps, floors and collars to hedge oil and natural gas prices and interest rates.  Swaps are settled monthly based on differences between the prices specified in the instruments and the settlement prices of futures contracts.  Generally, when the applicable settlement price is less than the price specified in the contract, Comstock receives a settlement from the counter party based on the difference multiplied by the volume or amounts hedged.  Similarly, when the applicable settlement price exceeds the price specified in the contract, Comstock pays the counter party based on the difference.  Comstock generally receives a settlement from the counter party for floors when the applicable settlement price is less than the price specified in the contract, which is based on the difference multiplied by the volume amounts hedged.  For collars, generally Comstock receives a settlement from the counter party when the settlement price is below the floor and pays a settlement to the counter party when the settlement price exceeds the cap.  No settlement occurs when the settlement price falls between the floor and cap.

10

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company had no derivative financial instruments outstanding during the three months and six months ended June 30, 2007.  The fair value of the Company's derivative contracts held for price risk management at June 30, 2006 was a liability of $1.1 million.  Comstock did not designate these instruments as cash flow hedges, and accordingly unrealized gains on derivatives of $1.3 million and $10.1 million were recorded for the three months and six months ended June 30, 2006.  The Company realized losses of $0.7 million for the six months ended June 30, 2006 to settle derivative positions.
 
       Stock-Based Compensation

Comstock Resources, Inc. and Bois d'Arc Energy maintain separate incentive compensation plans under which they grant common stock and stock options to key employees and directors.

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, 2007 and 2006, the Company recognized $4.3 million and $3.3 million, respectively, in stock-based compensation expense within general and administrative expenses related to stock option and restricted stock grants, including $1.7 million and $1.6 million, respectively, attributable to Bois d'Arc Energy's incentive plan.  Stock based compensation expense for the six months ended June 30, 2007 and 2006 was $8.6 million and $6.5 million, respectively which includes $3.4 million and $3.0 million, respectively, attributable to Bois d'Arc Energy's incentive plan.  The excess income tax benefit realized from the deductions associated with stock-based compensation for the six months ended June 30, 2007 and 2006 was $0.6 million and $0.9 million, respectively.

The fair value of stock option grants is estimated on the date of the grant using a Black-Scholes option pricing model.  Some of the inputs to the option valuation model are subjective, including assumptions regarding expected stock price volatility.  During the six months ended June 30, 2007, Comstock granted options to purchase 40,000 shares at an exercise price of $29.49 per share.  The fair value of the Comstock options awarded was determined to be $10.32 per share.  Assumptions used to value these Comstock stock options included expected volatility of 36.1%, expected lives of 3.9 years, a risk-free interest rate of 4.9% and an expected dividend yield of zero.  Bois d'Arc Energy granted options to purchase 258,500 shares at a weighted average exercise price of $16.24 per share during the six months ended June 30, 2007.  The fair value of the Bois d'Arc Energy options awarded was determined to be $6.17 per option share.  Assumptions used to value the Bois d'Arc Energy stock options included expected volatility of 36.4%, expected lives of 4.5 years, a risk free interest rate of 4.9% and a dividend yield of zero.  As of June 30, 2007, total unrecognized compensation cost related to nonvested Comstock stock options of $2.9 million is expected to be recognized over a period of 3.5 years.  As of June 30, 2007, total unrecognized compensation cost related to nonvested Bois d'Arc Energy stock options of $10.4 million is expected to be recognized over a period of 5.4 years.

As of June 30, 2007, Comstock had 1,033,000 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $28.46 per share.  Total unrecognized compensation cost related to Comstock unvested restricted stock grants of $20.1 million as of June 30, 2007 is expected to be recognized over a period of 3.5 years.  As of June 30, 2007, Bois d'Arc Energy had 1,301,000 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $6.93 per share.  Total unrecognized compensation cost related to Bois d'Arc Energy unvested restricted stock grants of $6.2 million as of June 30, 2007 is expected to be recognized over a period of 3.8 years.
 
 
 
 
 
 

 

11

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Income Taxes

Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates.  The difference between the Company's customary rate of 35% and the effective tax rate on income before income taxes and minority interest is due to the following:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
Tax at statutory rate                                                                                     
 
35.0%
     
35.0%
     
35.0%
     
35.0%
 
Tax effect of:
                             
Undistributed earnings of Bois d'Arc Energy, not consolidated for federal income tax purposes
 
6.5%
     
5.9%
     
6.3%
     
5.0%
 
Nondeductible stock-based compensation
 
1.5%
     
1.9%
     
2.1%
     
1.5%
 
Changes due to tax law changes
 
(1.7%
)
   
2.6%
     
(1.0%
)
   
1.0%
 
State income taxes, net of federal benefit        
 
1.0%
     
0.3%
     
0.9%
     
0.2%
 
Other                                                                                
 
(0.3%
)
   
(0.9%
)
   
(0.3%
)
   
(0.4%
)
Effective tax rate                                                                           
 
42.0%
     
44.8%
     
43.0%
     
42.3%
 
 
The following is an analysis of consolidated income tax expense:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
       
Current provision
 
$
3,304
   
$
2,595
   
$
5,691
   
$
5,170
 
Deferred provision
   
16,257
     
16,291
     
28,694
     
40,015
 
Provision for Income Taxes
 
$
19,561
   
$
18,886
   
$
34,385
   
$
45,185
 

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109" (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions.  The Company has analyzed its filing positions in all jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions.  The Company has identified its federal income tax return and its state income tax returns in Texas, Louisiana, Mississippi and Oklahoma in which it operates as "major" tax jurisdictions.  The Company's federal income tax returns for the years subsequent to December 31, 2004 remain subject to examination.  The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2004.  The Company currently believes that all significant filing positions are highly certain and that all of its significant income tax filing positions and deductions would be sustained upon audit.  Therefore, the Company has no significant reserves for uncertain tax positions and no adjustments to such reserves were required upon adoption of FIN 48.  Interest and penalties resulting from audits by tax authorities have been immaterial and are included in the provision for income taxes in the consolidated statements of operations.
 
 
 
 

 
12

 
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 unvested restricted stock and diluted earnings per share is determined with the effect of outstanding stock options and unvested restricted stock that are potentially dilutive.  Basic and diluted earnings per share for the three months and six months ended June 30, 2007 and 2006, respectively, were determined as follows:

   
Three Months Ended June 30,
 
   
2007
   
2006
 
                   
Per
                   
Per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(In thousands, except per share amounts)
 
Basic Earnings Per Share:
                                               
Net Income
 
$
18,217
     
43,374
   
$
0.42
   
$
15,583
   
 
42,077
   
$
0.37
 
                                                 
Diluted Earnings Per Share:
                                               
Net Income
 
$
18,217
     
43,374
           
$
15,583
     
42,077
         
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
(160
)
   
987
             
(147
)
   
1,444
         
                                         
Net Income Available to Common
                         
 
                   
Stockholders With Assumed Conversions
 
$
18,057
     
44,361
   
$
0.41
   
$
15,436
     
43,521
   
$
0.35
 

   
Six Months Ended June 30,
 
   
2007
   
2006
 
                   
Per
                   
Per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(In thousands, except per share amounts)
 
Basic Earnings Per Share:
                                               
Net Income
 
$
30,775
     
43,369
   
$
0.71
   
$
45,217
   
 
42,070
   
$
1.07
 
                                                 
Diluted Earnings Per Share:
                                               
Net Income
 
$
30,775
     
43,369
           
$
45,217
     
42,070
         
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
(255
)
   
931
             
(305
)
   
1,411
         
                                         
Net Income Available to Common
                         
 
                   
Stockholders With Assumed Conversions
 
$
30,520
     
44,300
   
$
0.69
   
$
44,912
     
43,481
   
$
1.03
 
 
 
 
 
 
 
 

 
13

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
Stock options to purchase common stock at exercise prices in excess of the average actual stock price for the period that were anti-dilutive and that were excluded from the determination of diluted earnings per share are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands except per share data)
 
                                 
Weighted average anti-dilutive stock options
   
256
     
114
     
244
     
103
 
Weighted average exercise price
 
$
32.48
   
$
32.49
   
$
32.64
   
$
32.49
 
 
Supplementary Information With Respect to the Consolidated Statements of Cash Flows –

For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  The following is a summary of cash payments made for interest and income taxes:

   
Six Months Ended
 
   
June 30,
 
   
2007
   
2006
 
   
(In thousands)
 
Cash Payments -
               
Interest payments
 
$
18,644
   
$
11,517
 
Income tax payments
 
$
7,087
   
$
6,606
 

(2)  LONG-TERM DEBT  –

At June 30, 2007, long-term debt was comprised of the following:

   
(In thousands)
 
Comstock Revolving Bank Credit Facility
 
$
294,000
 
Bois d'Arc Energy Revolving Bank Credit Facility
   
125,000
 
Comstock 6⅞% Senior Notes due 2012
   
175,000
 
   
$
594,000
 

Comstock has a $600.0 million bank credit facility with Bank of Montreal, as the administrative agent.  The credit facility is a five-year revolving credit commitment that matures on December 15, 2011.  Indebtedness under the credit facility is secured by Comstock and its wholly-owned subsidiaries' oil and gas properties and is guaranteed by all of its wholly-owned subsidiaries.  The credit facility is subject to borrowing base availability, which is redetermined semiannually based on the banks' estimates of the future net cash flows of Comstock's oil and natural gas properties.  The borrowing base may be affected by the performance of Comstock's properties and changes in oil and natural gas prices.  The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group.  As of June 30, 2007, the borrowing base was $400.0 million, $106.0 million of which was available.  Borrowings under the credit facility bear interest, based on the utilization of the borrowing base, at Comstock's option at either (1) LIBOR plus 1.0% to 1.75% or (2) the base rate (which is the higher of the prime rate or the federal funds rate) plus 0% to 0.25%.  A commitment fee of 0.25% to 0.375%, based on the utilization of the borrowing base, is payable on the unused borrowing base.  The credit facility contains covenants that, among other things, restrict the payment of cash dividends in excess of $40.0 million, limit the amount of consolidated debt that Comstock may incur and limit the Company's ability to make certain loans and investments.  The only financial covenants are the maintenance of a ratio of current assets, including availability under the bank credit facility, to current liabilities of at least one-to-one and maintenance of a minimum tangible net worth.  The Company was in compliance with these covenants as of June 30, 2007.
14

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Bois d'Arc Energy has a bank credit facility with The Bank of Nova Scotia and several other banks.  Borrowings under the credit facility are limited to a borrowing base that is re-determined semi-annually based on the banks' estimate of the future net cash flows of Bois d'Arc Energy's oil and natural gas properties.  The determination of the borrowing base is at the sole discretion of the administrative agent and the bank group.  The borrowing base was $225.0 million as of June 30, 2007.  Availability under this credit facility was $100.0 million as of June 30, 2007.  The Bois d'Arc Energy credit facility matures on May 11, 2009.  Borrowings under the credit facility bear interest at Bois d'Arc Energy's option of either (1) LIBOR plus a margin that varies from 1.25% to 2.0% depending upon the ratio of the amounts outstanding to the borrowing base or (2) the base rate (which is the higher of the prime rate or the federal funds rate) plus a margin that varies from 0% to 0.75% depending upon the ratio of the amounts outstanding to the borrowing base.  A commitment fee ranging from 0.375% to 0.50% (depending upon the ratio of the amounts outstanding to the borrowing base) is payable on the unused borrowing base.  Indebtedness under the credit facility is secured by substantially all of Bois d'Arc Energy and its subsidiaries' assets, and all of Bois d'Arc Energy's subsidiaries are guarantors of the indebtedness.  The Bois d'Arc Energy credit facility contains covenants that restrict the payment of cash dividends in excess of $5.0 million, borrowings, sales of assets, loans to others, capital expenditures, investments, merger activity, hedging contracts, liens and certain other transactions without the prior consent of the lenders and requires Bois d'Arc Energy to maintain a ratio of current assets, including the availability under the bank credit facility, to current liabilities of at least one-to-one and a ratio of indebtedness to earnings before interest, taxes, depreciation, depletion, and amortization, exploration and impairment expense of no more than 2.5-to-one.  Bois d'Arc Energy was in compliance with these covenants as of June 30, 2007.

(3)  COMMITMENTS AND CONTINGENCIES 

From time to time, Comstock is involved in certain litigation that arises in the normal course of its operations.  The Company records a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  The Company does not believe the resolution of these matters will have a material effect on the Company's financial position or results of operations.

In connection with its exploration and development activities, the Company contracts for drilling rigs and for the acquisition of seismic data under terms of up to three years.  The Company has commitments to acquire seismic data totaling $11.0 million through December 2008.  As of June 30, 2007, the Company had commitments for contracted drilling services of $39.8 million through September 2008.

(4)  ACQUISITION OF OIL AND GAS PROPERTIES –

In June 2007, Comstock completed an acquisition of additional working interests in the Javelina field in Hildalgo County in South Texas for $32.0 million.  Comstock estimates that the additional interests acquired have proved reserves of approximately 10.6 billion cubic feet ("Bcf") of natural gas.  The transaction was funded with borrowings under Comstock's bank credit facility, and the pro forma impact of the transaction was not material to the Company's historical results of operations.

(5)  CONSOLIDATING FINANCIAL STATEMENTS 

Comstock Resources, Inc. ("Parent") has $175.0 million of 6⅞% senior notes outstanding which are guaranteed by all of the Parent's wholly-owned subsidiaries.  There are no restrictions on the Parent's ability to obtain funds from any of the guarantor subsidiaries or on a guarantor subsidiary's ability to obtain funds from the Parent or their direct or indirect subsidiaries.  The 6⅞% senior notes are not guaranteed by Bois d'Arc Energy and its subsidiaries (the non-guarantor subsidiaries).  The following condensed consolidating balance sheet, statements of operations and statement of cash flows are provided for the Parent, all guarantor subsidiaries and all non-guarantor subsidiaries.  The information has been presented as if the Parent accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.
 

 
15

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 

 
Balance Sheet:
 
As of June 30, 2007
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Assets:
                                       
Cash and cash equivalents
 
$
   
$
27,167
   
$
21,715
   
$
   
$
48,882
 
Accounts receivable
   
     
47,896
     
43,078
     
     
90,974
 
Other current assets
   
768
     
2,932
     
15,930
     
     
19,630
 
Total current assets
   
768
     
77,995
     
80,723
     
     
159,486
 
                                         
Net property and equipment
   
29,341
     
1,058,367
     
869,468
     
     
1,957,176
 
Investment in subsidiaries
   
712,161
     
     
     
(712,161
)
   
 
Intercompany receivables
   
469,698
     
     
     
(469,698
)
   
 
Other assets
   
4,317
     
     
662
     
     
4,979
 
Total assets
 
$
1,216,285
   
$
1,136,362
   
$
950,853
   
$
(1,181,859
)
 
$
2,121,641
 
                                         
Liabilities and Stockholders' Equity:
                                       
Short-term debt
 
$
   
$
   
$
7,764
   
$
   
$
7,764
 
Accounts payable
   
19
     
98,951
     
52,842
     
     
151,812
 
Accrued expenses
   
6,305
     
3,168
     
1,241
     
     
10,714
 
Total current liabilities
   
6,324
     
102,119
     
61,847
     
     
170,290
 
                                         
Long-term debt
   
469,000
     
     
125,000
     
     
594,000
 
Intercompany payables
   
     
469,698
     
     
(469,698
)
   
 
Deferred income taxes payable
   
21,624
     
153,697
     
164,233
     
     
339,554
 
Reserve for future abandonment costs
   
     
9,474
     
50,131
     
     
59,605
 
Minority interest
   
     
     
     
238,855
     
238,855
 
Total liabilities
   
496,948
     
734,988
     
401,211
     
(230,843
)
   
1,402,304
 
Stockholders' equity
   
719,337
     
401,374
     
549,642
     
(951,016
)
   
719,337
 
Total liabilities and stockholders' equity
 
$
1,216,285
   
$
1,136,362
   
$
950,853
   
$
(1,181,859
)
 
$
2,121,641
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
   
As of December 31, 2006
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Assets:
                                       
Cash and cash equivalents
 
$
   
$
1,228
   
$
9,487
   
$
   
$
10,715
 
Accounts receivable
   
     
37,049
     
38,512
     
     
75,561
 
Other current assets
   
210
     
3,547
     
8,795
     
     
12,552
 
Total current assets
   
210
     
41,824
     
56,794
     
     
98,828
 
                                         
Net property and equipment
   
30,345
     
915,486
     
827,795
     
     
1,773,626
 
Investment in subsidiaries
   
654,840
     
     
     
(654,840
)
   
 
Intercompany receivables
   
374,858
     
     
     
(374,858
)
   
 
Other assets
   
4,757
     
2
     
912
     
     
5,671
 
Total assets
 
$
1,065,010
   
$
957,312
   
$
885,501
   
$
(1,029,698
)
 
$
1,878,125
 
                                         
Liabilities and Stockholders' Equity:
                                       
Short-term debt
 
$
   
$
   
$
3,250
   
$
   
$
3,250
 
Accounts payable
   
9,687
     
62,041
     
60,776
     
     
132,504
 
Accrued expenses
   
     
11,265
     
4,842
     
     
16,107
 
Total current liabilities
   
9,687
     
73,306
     
68,868
     
     
151,861
 
                                         
Long-term debt
   
355,000
     
     
100,000
     
     
455,000
 
Intercompany payables
   
     
374,858
     
     
(374,858
)
   
 
Deferred income taxes payable
   
17,760
     
141,517
     
151,959
     
     
311,236
 
Reserve for future abandonment costs
   
     
9,052
     
48,064
     
     
57,116
 
Minority interest
   
     
     
     
220,349
     
220,349
 
Total liabilities
   
382,447
     
598,733
     
368,891
     
(154,509
)
   
1,195,562
 
Stockholders' equity
   
682,563
     
358,579
     
516,610
     
(875,189
)
   
682,563
 
Total liabilities and stockholders' equity
 
$
1,065,010
   
$
957,312
   
$
885,501
   
$
(1,029,698
)
 
$
1,878,125
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Statement of Operations:
     
   
Three Months Ended June 30, 2007
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Oil and gas sales
 
$
   
$
83,160
   
$
91,046
   
$
   
$
174,206
 
Operating expenses:
                                       
Oil and gas operating
   
     
17,624
     
12,556
     
     
30,180
 
Exploration
   
     
1,878
     
17,988
     
     
19,866
 
Depreciation, depletion and amortization
   
847
     
30,134
     
28,779
     
     
59,760
 
General and administrative, net
   
7,993
     
(2,405
)
   
2,574
     
     
8,162
 
Total operating expenses
   
8,840
     
47,231
     
61,897
     
     
117,968
 
Income from operations
   
(8,840
)
   
35,929
     
29,149
     
     
56,238
 
Other income (expenses):
                                       
Interest income
   
     
197
     
138
     
     
335
 
Other income
   
     
39
     
182
     
     
221
 
Interest expense
   
(7,775
)
   
     
(2,431
)
   
     
(10,206
)
Intercompany interest income (expense)
   
1,443
 
   
(1,443
)
   
     
     
 
Total other income (expenses)
 
 
(6,332
)
   
(1,207
)
   
(2,111
)
           
(9,650
)
Income (loss) before income taxes and minority interest in earnings of Bois d'Arc Energy
   
(15,172
)
   
34,722
     
27,038
     
     
46,588
 
(Provision for) benefit from income taxes
   
1,830
     
(11,784
)
   
(9,607
)
   
     
(19,561
)
Minority interest in earnings of Bois d'Arc Energy
   
     
     
     
(8,810
)
   
(8,810
)
Equity in earnings of subsidiaries
   
31,559
     
     
     
(31,559
)
   
 
Net income
 
$
18,217
   
$
22,938
   
$
17,431
   
$
(40,369
)
 
$
18,217
 
   
   
Three Months Ended June 30, 2006
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Oil and gas sales
 
$
   
$
64,571
   
$
59,607
   
$
   
$
124,178
 
Operating expenses:
                                       
Oil and gas operating
   
     
13,200
     
11,821
     
     
25,021
 
Exploration
   
     
     
3,718
     
     
3,718
 
Depreciation, depletion and amortization
   
58
     
16,510
     
16,495
     
     
33,063
 
Impairment
   
     
7,934
     
846
     
     
8,780
 
General and administrative, net
   
6,244
     
(1,652
)
   
2,641
     
     
7,233