form10qjune302008.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, 2008

OR

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

Commission File No. 001-03262

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

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

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

Telephone No.: (972) 668-8800

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

Yes þ
 
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 filer þ
 
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
 
No þ

The number of shares outstanding of the registrant's common stock, par value $.50, as of August 8, 2008 was 46,016,345.

 
 
 
 


 
 
 

COMSTOCK RESOURCES, INC.

QUARTERLY REPORT

For The Quarter Ended June 30, 2008





INDEX
 
Page
 
PART I. Financial Information
     
       
Item 1. Financial Statements (Unaudited):
     
       
Consolidated Balance Sheets -
June 30, 2008 and December 31, 2007
 
4
 
Consolidated Statements of Operations -
Three months and six months ended June 30, 2008 and 2007
 
5
 
Consolidated Statement of Stockholders' Equity and Comprehensive Income -
Six months ended June 30, 2008
 
6
 
Consolidated Statements of Cash Flows -
Six months ended June 30, 2008 and 2007
 
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
 
27
 
       
Item 4. Controls and Procedures
 
27
 
       
       
PART II. Other Information
     
       
Item 4.  Submission of Matters to a Vote of Security Holders
 
28
 
       
Item 6. Exhibits    28  
       
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)



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
3

 
 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Unaudited)


   
June 30,
   
December 31,
 
   
2008
   
2007
 
       
ASSETS
   
(In thousands)
 
                 
Cash and Cash Equivalents                                                                                                                     
 
$
8,709
   
$
5,565
 
Accounts Receivable:
               
Oil and gas sales                                                                                                                
   
63,258
     
36,245
 
Joint interest operations                                                                                                                
   
10,706
     
12,406
 
Current Deferred Tax Asset                                                                                                                     
   
10,140
     
 
Other Current Assets                                                                                                                     
   
5,162
     
3,987
 
Total current assets                                                                                                        
   
97,975
     
58,203
 
Property and Equipment:
               
Unevaluated oil and gas properties
   
19,362
     
5,804
 
Oil and gas properties, successful efforts method 
   
1,798,610
     
1,812,637
 
Other property and equipment                                                                                                                
   
5,487
     
5,013
 
Accumulated depreciation, depletion and amortization
   
(547,275
)
   
(512,895
)
Net property and equipment                                                                                                        
   
1,276,184
     
1,310,559
 
Other Assets                                                                                                                     
   
3,554
     
3,943
 
Assets of Discontinued Operations                                                                                                                     
   
1,031,982
     
981,682
 
   
$
2,409,695
   
$
2,354,387
 
                 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Accounts Payable                                                                                                                     
 
$
85,415
   
$
71,579
 
Accrued Expenses                                                                                                                     
   
11,193
     
11,888
 
Derivatives                                                                                                                 
   
29,331
     
 
Total current liabilities                                                                                                        
   
125,939
     
83,467
 
Long-term Debt                                                                                                                     
   
495,000
     
680,000
 
Deferred Income Taxes Payable                                                                                                                     
   
132,198
     
92,088
 
Derivatives                                                                                                                   
   
10,749
     
 
Reserve for Future Abandonment Costs 
   
7,555
     
7,512
 
Liabilities of Discontinued Operations  
   
434,775
     
452,235
 
Minority Interest in Discontinued Operations 
   
311,306
     
267,441
 
Total liabilities                                                                                                        
   
1,517,522
     
1,582,743
 
Commitments and Contingencies
               
Stockholders' Equity:
               
Common stock – $0.50 par, 50,000,000 shares authorized, 46,016,345 and 45,428,095
shares outstanding at June 30, 2008 and December 31, 2007, respectively
   
23,008
     
22,714
 
Additional paid-in capital                                                                                                                
   
409,318
     
386,986
 
Retained earnings                                                                                                                
   
485,666
     
361,944
 
Accumulated other comprehensive loss
   
(25,819
)
   
 
Total stockholders' equity                                                                                                        
   
892,173
     
771,644
 
   
$
2,409,695
   
$
2,354,387
 
             
 
 
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,
 
   
2008
   
2007
   
2008
   
2007
 
   
 
(In thousands, except per share amounts)
 
       
Revenues:
                               
        Oil and gas sales
 
$
172,022
   
$
83,160
   
$
299,743
   
$
153,007
 
        Gain on sale of assets
   
21,444
     
     
21,204
     
 
                                 
Operating expenses:
                               
Oil and gas operating
   
23,362
     
17,624
     
44,564
     
31,679
 
Exploration
   
     
1,878
     
2,238
     
2,276
 
Depreciation, depletion and amortization
   
44,422
     
30,248
     
85,927
     
57,608
 
General and administrative, net
   
6,922
     
5,588
     
13,086
     
11,838
 
Total operating expenses
   
74,706
     
55,338
     
145,815
     
103,401
 
                                 
Operating income from continuing operations
   
118,760
     
27,822
     
175,132
     
49,606
 
Other income (expenses):
                               
Interest income
   
205
     
197
     
366
     
388
 
Other income
   
36
     
39
     
58
     
77
 
Interest expense
   
(8,546
)
   
(7,775
)
   
(18,497
)
   
(14,060
)
Total other income (expenses)
   
(8,305
)
   
(7,539
)
   
(18,073
)
   
(13,595
)
                                 
Income from continuing operations before income taxes
   
110,455
     
20,283
     
157,059
     
36,011
 
Provision for income taxes
   
(40,027
)
   
(7,312
)
   
(57,229
)
   
(13,641
)
Income from continuing operations
   
70,428
     
12,971
     
99,830
     
22,370
 
Income from discontinued operations after income
   taxes and minority interest
   
12,199
     
5,246
     
23,892
     
8,405
 
Net income
 
$
82,627
   
$
18,217
   
$
123,722
   
$
30,775
 
                                 
Basic net income per share:
                               
Continuing operations
 
$
1.59
   
$
0.30
   
$
2.25
   
$
0.52
 
Discontinued operations
   
0.28
     
0.12
     
0.54
     
0.19
 
   
$
1.87
   
$
0.42
   
$
2.79
   
$
0.71
 
                                 
Diluted net income per share:
                               
Continuing operations
 
$
1.55
   
$
0.29
   
$
2.21
   
$
0.51
 
Discontinued operations
   
0.26
     
0.12
     
0.51
     
0.18
 
   
$
1.81
   
$
0.41
   
$
2.72
   
$
0.69
 
                                 
Weighted average shares outstanding:
                               
Basic
   
44,287
     
43,374
     
44,296
     
43,369
 
Diluted
   
45,373
     
44,361
     
45,246
     
44,300
 





 

 
The accompanying notes are an integral part of these statements.

 
5

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2008
(Unaudited)




   
Common Stock
(Shares)
   
Common Stock –
Par Value
   
Additional
Paid-in Capital
   
Retained
Earnings
   
Accumulated Other Comprehensive Loss
 
Total
 
   
 
(In thousands)
 
                                               
Balance at January 1, 2008
 
$
45,428
   
$
22,714
   
$
386,986
   
$
361,944
   
$
 
$
771,644
 
Exercise of stock options and warrants
   
591
     
296
     
7,982
     
     
   
8,278
 
Stock-based compensation
   
(3
)
   
(2
)
   
5,718
     
     
   
5,716
 
Tax benefit from stock-based compensation
   
     
     
8,632
     
     
   
8,632
 
Net income                                        
   
     
     
     
123,722
     
   
123,722
 
Unrealized hedging losses, net of income taxes
   
     
     
     
     
(25,819  
)
 
(25,819
)
Total comprehensive income
   
     
     
     
     
   
97,903
 
Balance at June 30, 2008
 
$
46,016
   
$
23,008
   
$
409,318
   
$
485,666
   
$
(25,819
)
$
892,173
 






















 



 





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,
 
   
2008
   
2007
 
       
   
(In thousands)
 
                 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
 
$
123,722
   
$
30,775
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Income from discontinued operations
   
(23,892
)
   
(8,405
)
Deferred income taxes
   
52,504
     
11,846
 
Dry hole costs and leasehold impairments
   
2,238
     
2,276
 
Depreciation, depletion and amortization
   
85,927
     
57,608
 
Gain on sale of assets
   
(21,204
)
   
 
Debt issuance cost amortization
   
405
     
405
 
Stock-based compensation
   
5,716
     
5,261
 
Excess tax benefit from stock-based compensation
   
(8,632
)
   
(600
)
Unrealized loss on derivatives
   
359
     
 
Increase in accounts receivable
   
(25,316
)
   
(10,839
)
(Decrease) increase in other current assets
   
(1,175
)
   
57
 
Increase in accounts payable and accrued expenses
   
10,078
     
28,687
 
Net cash provided by operating activities from continuing operations
   
200,730
     
117,071
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
   
(143,281
)
   
(205,804
)
Proceeds from asset sales
   
113,801
     
 
Net cash used for investing activities from continuing operations
   
(29,480
)
   
(205,804
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings
   
10,000
     
114,000
 
Principal payments on debt
   
(195,000
)
   
 
Proceeds from issuance of common stock
   
8,278
     
138
 
Excess tax benefit from stock-based compensation
   
8,632
     
600
 
Debt issuance costs
   
(16
)
   
 
Net cash provided by (used for) financing activities from continuing operations
   
(168,106
)
   
114,738
 
                 
CASH FLOWS FROM DISCONTINUED OPERATIONS:
               
Net cash flows provided by operating activities
   
180,143
     
98,254
 
Net cash flows used for investing activities
   
(117,013
)
   
(123,541
)
Net cash flows provided by (used for) financing activities
   
(63,130
)
   
25,221
 
Net cash used for discontinued operations
   
     
(66
)
                 
Net increase in cash and cash equivalents
   
3,144
     
25,939
 
Cash and cash equivalents, beginning of period
   
5,565
     
1,228
 
Cash and cash equivalents, end of period
 
$
8,709
   
$
27,167
 
                 

 

 


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

 
COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008
(Unaudited)



(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –

Basis of Presentation

In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of Comstock Resources, Inc. and subsidiaries ("Comstock" or the "Company") as of June 30, 2008 and the related results of operations for the three months and six months ended June 30, 2008 and 2007 and cash flows for the six months ended June 30, 2008 and 2007.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to those rules and regulations, although Comstock believes that the disclosures made are adequate to make the information presented not misleading.  These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto of the Company included in Comstock's Annual Report on Form 10-K for the year ended December 31, 2007.

The results of operations for the three months and six months ended June 30, 2008 are not necessarily an indication of the results expected for the full year.

These unaudited consolidated financial statements include the accounts of Comstock and subsidiaries in which it has a controlling interest.  Intercompany balances and transactions have been eliminated in consolidation.
 
Comstock's offshore operations have historically been conducted through its subsidiary, Bois d'Arc Energy, Inc. ("Bois d'Arc Energy").  Bois d'Arc Energy has entered into a definitive merger agreement with Stone Energy Corporation ("Stone") in which Bois d'Arc Energy stockholders will exchange each share of Bois d'Arc Energy common stock for $13.65 in cash and 0.165 shares of Stone common stock.  Subsequent to this merger, Comstock's stock ownership of Stone will be less than a controlling interest.  The merger agreement has been approved by the respective boards' of directors of Bois d'Arc Energy and Stone, and the stockholders of Bois d'Arc Energy and Stone will be holding stockholder meetings on August 27, 2008 to consider and vote upon the proposed merger.  The Company has entered into a voting agreement with Stone in which among other matters Comstock has agreed to vote its shares in favor of the merger.  The Company believes it is highly likely that the stockholders of both companies will approve the merger and that the merger will close during the third quarter of 2008.  Accordingly, the Company is presenting the results of the offshore operations of Bois d'Arc Energy as discontinued operations.  Below is the summary financial information of discontinued operations.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
8

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Income from discontinued operations for the three and six months ended June 30, 2008 was comprised of the following:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
Oil and Gas Sales
 
$
147,990
   
$
91,046
   
$
261,256
   
$
167,228
 
Total Operating Expenses
   
(87,039
)
   
(62,630
)
   
(141,126
)
   
(119,192
)
Operating Income From Discontinued Operations
   
60,951
     
28,416
     
120,130
     
48,036
 
Other Income (Expense):
   
(745
)
   
(2,111
)
   
(1,890
)
   
(4,078
)
Income from Discontinued Operations Before Income Taxes
   
60,206
     
26,305
     
118,240
     
43,958
 
Provision for Income Taxes
   
(27,715
)
   
(12,249
)
   
(54,586
)
   
(20,744
)
Minority Interest in Earnings
   
(20,292
)
   
(8,810
)
   
(39,762
)
   
(14,809
)
Income from Discontinued Operations
 
$
12,199
   
$
5,246
   
$
23,892
   
$
8,405
 



Assets and liabilities of discontinued operations as of June 30, 2008 and December 31, 2007 were as follows:


   
June 30,
2008
   
December 31,
2007
 
   
(In thousands)
 
Current Assets
 
$
83,094
   
$
66,302
 
Property and Equipment, Net
   
948,314
     
912,316
 
Other Assets
   
574
     
3,064
 
Total Assets of Discontinued Operations
 
$
1,031,982
   
$
981,682
 
                 
Current Liabilities
 
$
78,924
   
$
47,333
 
Long-term Debt
   
     
80,000
 
Deferred Income Taxes Payable
   
309,739
     
279,808
 
Reserve for Future Abandonment Costs
   
46,112
     
45,094
 
Liabilities of Discontinued Operations
 
$
434,775
   
$
452,235
 
                 
Minority Interest in Bois d'Arc Energy
 
$
311,306
   
$
267,441
 

Reclassifications

Certain reclassifications have been made to prior periods' financial statements to conform to the current presentation.
 
 
 
 
 
 
 
 
 
 
 

 
 
9

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Asset Retirement Obligations

Comstock's asset retirement obligations relate to future plugging and abandonment expenses on its oil and gas properties and related facilities disposal.  The following table summarizes the changes in Comstock's total estimated liability during the six months ended June 30, 2008 and 2007:

   
Six Months Ended
 
   
June 30,
 
   
2008
   
2007
 
   
(In thousands)
 
                 
Beginning asset retirement obligations 
 
$
7,512
   
$
9,052
 
Accretion expense  
   
227
     
267
 
New wells placed on production and changes in estimates
   
313
     
253
 
Liabilities settled   
   
(497
)
   
(98
)
Future abandonment liability — end of period
 
$
7,555
   
$
9,474
 

Derivative Instruments and Hedging Activities

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

In January 2008, Comstock entered into natural gas swaps which fix the price at $8.00 per Mmbtu (at the Houston Ship Channel) for 520,000 Mmbtu's per month of production from certain properties in South Texas for the period February 2008 through December 2009.  The Company designated these swaps at their inception as cash flow hedges.  Realized gains and losses are included in oil and natural gas sales in the month of production.  Changes in the fair value of derivative instruments designated as cash flow hedges to the extent they are effective in offsetting cash flows attributable to the hedged risk are recorded in other comprehensive income until the hedged item is recognized in earnings.  Any change in fair value resulting from ineffectiveness is recognized currently in oil and natural gas sales as unrealized gains (losses).  The Company realized losses of $4.4 million and $4.6 million on the natural gas price swaps during the three and six months ended June 30, 2008, respectively, which are included in oil and gas sales in the accompanying Consolidated Statements of Operations.  As of June 30, 2008, the estimated fair value of the Company's derivative financial instruments, which equals their carrying value, was a liability of $40.1 million, of which $29.3 million was classified as current and $10.8 million was classified as long-term.

The Company had no derivative financial instruments outstanding during the six months ended June 30, 2007.

 
 
 
 
 
 
 
 
 
 
 

 
 
10

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)


 
Stock-Based Compensation

Comstock accounts for employee stock-based compensation under the fair value method.  Compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period.  During the three months ended June 30, 2008 and 2007, the Company recognized $3.1 million and $2.6 million, respectively, in stock-based compensation expense within general and administrative expenses related to stock option and restricted stock grants.  Stock based compensation expense for the six months ended June 30, 2008 and 2007 was $5.7 million and $5.3 million, respectively.  The excess income tax benefit realized from the deductions associated with stock-based compensation for the six months ended June 30, 2008 and 2007 was $8.6 million and $0.6 million, respectively.

The fair value of stock option grants is estimated on the date of the grant using a Black-Scholes option pricing model.  Some of the inputs to the option valuation model are subjective, including assumptions regarding expected stock price volatility.  During the six months ended June 30, 2008, Comstock granted options to purchase 40,000 shares at an exercise price of $54.36 per share.  The fair value of the options awarded was determined to be $19.76 per share.  Assumptions used to value these stock options included expected volatility of 38.9%, expected lives of 4.3 years, a risk-free interest rate of 3.3% and an expected dividend yield of zero.  As of June 30, 2008, total unrecognized compensation cost related to nonvested stock options of $2.2 million is expected to be recognized over a period of 2.5 years.  Options outstanding at June 30, 2008 totaled 456,870, of which 305,120 were exercisable.

As of June 30, 2008, Comstock had 1.3 million shares of unvested restricted stock outstanding at a weighted average grant date fair value of $31.58 per share.  Total unrecognized compensation cost related to the unvested restricted stock grants of $25.1 million as of June 30, 2008 is expected to be recognized over a period of 3.5 years.

Income Taxes

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Tax at statutory rate                                                                                     
 
35.0%
     
35.0%
     
35.0%
     
35.0%
 
Tax effect of:
                             
Nondeductible stock-based compensation
 
0.4%
     
2.2%
 
   
0.9%
     
3.2%
 
Changes due to tax law changes
 
—%
     
(3.8%
)
   
—%
     
(2.1%
)
State income taxes, net of federal benefit
 
0.7%
     
2.2%
     
0.8%
     
1.8%
 
Other                                                                                
 
0.1%
     
0.5%
     
(0.3%
)
   
—%
 
Effective tax rate                                                                           
 
36.2%
     
36.1%
     
36.4%
     
37.9%
 

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
11

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
       
Current provision   
 
$
2,754
   
$
950
   
$
4,725
   
$
1,795
 
Deferred provision
   
37,273
     
6,362
     
52,504
     
11,846
 
Provision for Income Taxes
 
$
40,027
   
$
7,312
   
$
57,229
   
$
13,641
 


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, 2008 and 2007, respectively, were determined as follows:
 
   
Three Months Ended June 30,
 
   
2008
   
2007
 
                   
Per
                   
Per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(In thousands, except per share amounts)
 
Basic Earnings Per Share:
                                               
                                                 
Income From Continuing Operations
 
$
70,428
     
44,287
   
$
1.59
   
$
12,971
     
43,374
   
$
0.30
 
                                                 
Income from Discontinued Operations After Income Taxes and Minority Interest
   
12,199
     
44,287
     
0.28
     
5,246
     
43,374
     
0.12
 
                                                 
Net Income                                                        
 
$
82,627
     
44,287
   
$
1.87
   
$
18,217
     
43,374
   
$
0.42
 
                                                 
Diluted Earnings Per Share:
                                               
                                                 
Income from Continuing Operations
 
$
70,428
     
44,287
   
$
1.59
   
$
12,971
     
43,374
   
$
0.30
 
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
     
1,086
             
     
987
         
                                         
Income from Continuing Operations With Assumed Conversions
 
$
70,428
     
45,373
   
$
1.55
   
$
12,971
     
44,361
   
$
0.29
 
                                                 
Income from Discontinued Operations After Income Taxes and Minority Interest
 
$
12,199
     
45,373
   
$
0.27
   
$
5,246
     
44,361
   
$
0.12
 
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
(361
)
   
             
(160
)
   
         
Income from Discontinued Operations, After Income Taxes and Minority Interest with Assumed Conversions
   
11,838
     
45,373
     
0.26
     
5,086
     
44,361
     
0.12
 
                                                 
Net Income
 
$
82,266
     
45,373
   
$
1.81
   
$
18,057
     
44,361
   
$
0.41
 


 
12

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

   
Six Months Ended June 30,
 
   
2008
   
2007
 
                   
Per
                   
Per
 
   
Income
   
Shares
   
Share
   
Income
   
Shares
   
Share
 
   
(In thousands, except per share amounts)
 
Basic Earnings Per Share:
                                               
                                                 
Income From Continuing Operations
 
$
99,830
     
44,296
   
$
2.25
   
$
22,370
     
43,369
   
$
0.52
 
                                                 
Income from Discontinued Operations After Income Taxes and Minority Interest
   
23,892
     
44,296
     
0.54
     
8,405
     
43,369
     
0.19
 
                                                 
Net Income
 
$
123,722
     
44,296
   
$
2.79
   
$
30,775
     
43,369
   
$
0.71
 
                                                 
Diluted Earnings Per Share:
                                       
                                         
Income from Continuing Operations
 
$
99,830
     
44,296
   
$
2.25
   
$
22,370
     
43,369
   
$
0.52
 
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
     
950
             
     
931
         
                                                 
Income from Continuing Operations With Assumed Conversions
 
$
99,830
     
45,246
   
$
2.21
   
$
22,370
     
44,300
   
$
0.51
 
                                                 
Income from Discontinued Operations After Income Taxes and Minority Interest
 
$
23,892
     
44,246
   
$
0.53
   
$
8,405
     
44,300
   
$
0.19
 
Effect of Dilutive Securities:
                                               
Stock Grants and Options
   
(675
)
   
             
(255
)
   
         
Income from Discontinued Operations After Income Taxes and Minority Interest with Assumed Conversions
   
23,217
     
45,246
     
0.51
     
8,150
     
44,300
     
0.18
 
                                                 
Net Income
 
$
123,047
     
45,246
   
$
2.72
   
$
30,520
     
44,300
   
$
0.69
 

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,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands except per share data)
 
                                 
Weighted average anti-dilutive stock options
   
22
     
256
     
21
     
244
 
Weighted average exercise price
 
$
54.36
   
$
32.48
   
$
43.97
   
$
32.64
 

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157").  This statement establishes a framework for fair value measurements in the financial statements by providing a single definition of fair value, provides guidance on the methods used to estimate fair value and increases disclosures about estimates of fair value.  The Company adopted SFAS 157 and its related amendments for financial assets and liabilities effective as of January 1, 2008.  SFAS 157 will be effective for non-financial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2008.
 
13

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 establishes a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value measurements:

Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date.
Level 2 – Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active.  Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

At January 1, 2008, the Company had no financial assets and liabilities that were accounted for at fair value.  Accordingly, adoption of SFAS 157 had no impact on the carrying amounts of the Company's assets and liabilities.  As of June 30, 2008, the Company had derivative instruments, in the form of natural gas price swap agreements, which are required to be measured at fair value on a recurring basis.  The Company's natural gas price swaps are not traded on a public exchange.  The value of natural gas price swap agreements is determined utilizing a discounted cash flow model based on inputs that are not readily available in public markets and, accordingly, these swap agreements have been categorized as Level 3 within the valuation hierarchy.

The following table summarizes the changes in the fair values of the natural gas swaps, which are Level 3 liabilities, for the six months ended June 30, 2008:

   
(In thousands)
 
         
Balance at January 1, 2008
 
$
 
Purchases and settlements (net) 
   
4,269
 
Hedge ineffectiveness  
   
359
 
Total realized or unrealized losses:
       
Included in earnings
   
(4,628
)
Included in other comprehensive income
   
40,080
 
Balance at June 30, 2008
 
$
40,080
 

 
 
 
 
 
 
 
 
 
 
 
 
 

 

 
14

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Supplementary Information With Respect to the Consolidated Statements of Cash Flows –

For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.  At June 30, 2008 and December 31, 2007 the Company's cash investments consisted of overnight Eurodollar deposits with a bank.

The following is a summary of cash payments made for interest and income taxes:

   
Six Months Ended
June 30,
 
   
2008
   
2007
 
Cash Payments -
 
(In thousands)
 
Interest payments
 
$
18,274
   
$
14,200
 
Income tax payments (refunds)
 
$
2,644
   
$
114
 



(2)  LONG-TERM DEBT  –

At June 30, 2008, long-term debt was comprised of the following:

   
(In thousands)
 
Comstock Revolving Bank Credit Facility
 
$
320,000
 
Comstock 6⅞% Senior Notes due 2012
   
175,000
 
   
$
495,000
 

Comstock has a $850.0 million bank credit facility with Bank of Montreal, as the administrative agent.  The credit facility is a five-year revolving credit commitment that matures on December 15, 2011.  Indebtedness under the credit facility is secured by Comstock 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, 2008, the borrowing base was $590.0 million, $270.0 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, 2008.

(3)  COMMITMENTS AND CONTINGENCIES 

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

In connection with its exploration and development activities, the Company contracts for drilling rigs under terms of up to 5 years.  As of June 30, 2008, the Company had commitments for contracted drilling services of $126.4 million.
 

 
 
15

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(4)  SALE OF PROPERTIES 

In June 2008, the Company sold its interests in certain producing properties in East and South Texas and received net proceeds of $113.8 million.  These properties had estimated proved reserves attributable of 44.3 Bcfe and production attributable to these properties averaged 8.4 MMcfe per day during the six months ended June 30, 2008.  Comstock recognized a gain of $21.4 million ($13.9 million after income taxes) on these sales which is included in the accompanying consolidated statement 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 sheets, statements of operations and statements 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.  As a result of the pending sale of the Company's interest in Bois d'Arc Energy, which is expected to close in late August 2008, the balances of Bois d'Arc Energy, which represent all of the Company's offshore operations, are reflected as discontinued operations in these consolidating financial statements.
 
Balance Sheet:
 
As of June 30, 2008
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Assets:
                                       
Cash and Cash Equivalents
 
$
   
$
8,709  
   
$
—  
   
$
—  
   
$
8,709  
 
Accounts Receivable
   
     
73,964  
     
—  
     
—  
     
73,964  
 
Current Deferred Tax Asset
   
     
10,140  
     
—  
     
—  
     
10,140  
 
Other Current Assets
   
775
     
4,387  
     
—  
     
—  
     
5,162  
 
Total current assets
   
775
     
97,200  
     
—  
     
—  
     
97,975  
 
                                         
Net Property and Equipment
   
3,404
     
1,272,780  
     
—  
     
—  
     
1,276,184  
 
Investment in Subsidiaries
   
565,797
     
—  
     
—  
     
(565,797  
)
   
—  
 
Intercompany Receivables
   
493,377
     
—  
     
—  
     
(493,377  
)
   
—  
 
Other Assets
   
3,554
     
—  
     
—  
     
—  
     
3,554  
 
Assets of Discontinued Operations
   
397,559
     
—  
     
1,006,340  
     
(371,917  
)
   
1,031,982  
 
Total assets
 
$
1,464,466
   
$
1,369,980  
   
$
1,006,340  
   
$
(1,431,091  
)
 
$
2,409,695  
 
                                         
Liabilities and Stockholders' Equity:
                                       
Accounts Payable and Accrued Expenses
 
$
9,025  
   
$
87,583  
   
$
—  
   
$
—  
   
$
96,608  
 
Derivatives
   
     
29,331  
     
—  
     
—  
     
29,331  
 
Total current liabilities
   
9,025
     
116,914  
     
—  
     
—  
     
125,939  
 
                                         
Long-term Debt
   
495,000
     
—  
     
—  
     
—  
     
495,000  
 
Intercompany Payables
   
     
493,377  
     
—  
     
(493,377  
)
   
—  
 
Deferred Income Taxes Payable
   
(2,705
)
   
134,903  
     
—  
     
—  
     
132,198  
 
Derivatives
   
     
10,749  
     
—  
     
—  
     
10,749  
 
Reserve for Future Abandonment Costs
   
     
7,555  
     
—  
     
—  
     
7,555  
 
Liabilities of Discontinued Operations
   
45,156
     
66,502  
     
323,117  
     
—  
     
434,775  
 
Minority Interest in Discontinued Operations
   
     
—  
     
—  
     
311,306  
     
311,306  
 
Total liabilities
   
546,476
     
830,000  
     
323,117  
     
(182,071  
)
   
1,517,522  
 
Stockholders' Equity
   
917,990
     
539,980  
     
683,223  
     
(1,249,020  
)
   
892,173  
 
Total liabilities and stockholders' equity
 
$
1,464,466
   
$
1,369,980  
   
$
1,006,340  
   
$
(1,431,091  
)
 
$
2,409,695  
 

 
16

 

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Balance Sheet:
 
As of December 31, 2007
 
   
Comstock Resources
   
Guarantor Subsidiaries
   
Non-Guarantor
Subsidiaries
   
Eliminating Entries
   
Consolidated
 
   
(In thousands)
 
Assets:
                                       
Cash and Cash Equivalents
 
$
   
$
5,565  
   
$
—  
   
$
—  
   
$
5,565  
 
Accounts Receivable
   
     
48,651  
     
—  
     
—  
     
48,651  
 
Other Current Assets
   
1,546
     
2,441  
     
—  
     
—  
     
3,987  
 
Total current assets
   
1,546
     
56,657  
     
—  
     
—  
     
58,203  
 
                                         
Net property and equipment
   
3,222
     
1,307,337  
     
—  
     
—  
     
1,310,559  
 
Investment in subsidiaries
   
447,473
     
—  
     
—  
     
(447,473  
)
   
—  
 
Intercompany receivables
   
674,688
     
—  
     
—  
     
(674,688  
)
   
—  
 
Other assets
   
3,943
     
—  
     
—  
     
—  
     
3,943  
 
Assets of Discontinued Operations
   
360,103
     
—  
     
956,636  
     
(335,057  
)
   
981,682  
 
Total assets
 
$
1,490,975
   
$
1,363,994  
   
$
956,636  
   
$
(1,457,218  
)
 
$
2,354,387  
 
                                         
Liabilities and Stockholders' Equity:
                                       
Accounts Payable
 
$
17  
   
$
71,562  
   
$
—  
   
$
—  
   
$
71,579  
 
Accrued Expenses
   
10,698
     
1,190  
     
—  
     
—  
     
11,888  
 
Total current liabilities
   
10,715
     
72,752  
     
—  
     
—  
     
83,467