| Summary of Significant Accounting Policies | (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —
Basis of Presentation In management’s opinion, the accompanying
unaudited consolidated financial statements contain all adjustments
necessary to present fairly the financial position of Comstock
Resources, Inc. and subsidiaries (“Comstock” or the
“Company”) as of June 30, 2016, the related
results of operations for the three and six months ended
June 30, 2016 and 2015, and cash flows for the six months
ended June 30, 2016 and 2015. Net loss and comprehensive loss
are the same in all periods presented. All adjustments are of a
normal recurring nature unless otherwise disclosed. The accompanying unaudited consolidated financial
statements have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to those
rules and regulations, although Comstock believes that the
disclosures made are adequate to make the information presented not
misleading. These unaudited consolidated financial statements
should be read in conjunction with the financial statements and
notes thereto included in Comstock’s Annual Report on Form
10-K for the year ended December 31, 2015 and its current
report on Form 8-K dated August 1, 2016. The results of operations for the three and six
months ended June 30, 2016 are not necessarily an indication
of the results expected for the full year. These unaudited consolidated financial statements
include the accounts of Comstock and its wholly-owned and
controlled subsidiaries. On July 19, 2016, the Company announced a
one-for-five (1:5) reverse split of its issued and outstanding
common stock which became effective on July 29, 2016. All
amounts disclosed in these financial statements have been adjusted
to give effect to the effect of this reverse stock split in all
periods.
Property and Equipment The Company follows the successful efforts method
of accounting for its oil and gas properties. Costs incurred to
acquire oil and gas leasehold are capitalized. At June 30, 2016, the Company reflected
certain of its natural gas properties located in South Texas as
assets held for sale in the accompanying consolidated balance
sheet. The Company engaged financial advisors in February 2016 to
sell the properties. At June 30, 2016, these assets were
reflected on the balance sheet at $42.5 million, representing their
estimated net realizable value on a sale less costs to sell. The
Company has recognized an impairment charge of $20.8 million during
the six months ended June 30, 2016 to adjust the carrying value of
these assets to their net realizable value. The impairment, which
is a Level 3 fair value measurement, was computed using a
discounted cash flow valuation approach which is consistent with
the Company’s methodology for determining impairments of its
proved oil and gas properties. The asset retirement obligation
related to these properties of $3.4 million is included in accrued
liabilities at June 30, 2016. In June 30, 2015, Comstock
entered into an agreement to sell certain of its oil and gas
properties located in and near Burleson County, Texas to a third
party. This sale closed on July 22, 2015 with an effective
date of May 1, 2015 and the Company received net proceeds from
this sale of $102.5 million in the third quarter of 2015. The
Company recognized a loss on this sale of $111.8 million in the
three months and six months ended June 30, 2015 operating
results.
Results of operations for the properties that were
sold or are being held for sale were as follows:
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
(In
thousands)
Total oil and gas sales $ 1,728 $ 14,208 $ 3,528 $ 22,755
Total operating expenses (1) (1,712 ) (18,616 ) (3,399 ) (72,977 )
Operating income (loss) $ 16 $ (4,408 ) $ 129 $ (50,222 )
(1)
Includes direct operating expenses, depreciation,
depletion and amortization and exploration expense. Excludes
interest expense, general and administrative expenses and
depreciation, depletion and amortization expense subsequent to the
date the assets were designated as held for sale. In January 2016, the Company exchanged certain oil
and gas properties with another operator in a non-monetary
exchange. Under the exchange, the Company received 3,637 net acres
in DeSoto Parish, Louisiana, prospective for the Haynesville shale,
including four producing wells (3.5 net). The Company exchanged
2,547 net acres in Atascosa County, Texas, including seven
producing wells (5.3 net) for the Haynesville shale properties. The
Company recognized a gain of $0.7 million on this transaction which
is included in the net loss on sales and exchange of oil and gas
properties for the six months ended June 30, 2016. The Company
also sold certain oil and gas properties during the first six
months of 2016 for total proceeds of $2.1 million. The Company
recognized a loss of $1.6 million on these divestitures. Unproved oil and gas properties are periodically
assessed and any impairment in value is charged to exploration
expense. The costs of unproved properties which are determined to
be productive are transferred to oil and gas properties and
amortized on an equivalent unit-of-production basis. The Company
recognized impairment charges in exploration expense and $23.0
million during the three months ended June 30, 2015 and $7.8
million and $63.5 million during the six months ended June 30,
2016 and 2015, respectively, related to certain leases that the
Company currently does not plan to develop. No unproved impairments
were recognized during the three months ended June 30,
2016. The Company also assesses the need for an
impairment of the capitalized costs for its proved oil and gas
properties on a property basis. Reductions to management’s
oil and natural gas price outlooks in 2016 and 2015 resulted in
indications of impairment of certain of the Company’s
properties. Accordingly, the Company recognized additional
impairments of its oil and gas properties of $1.7 million and $2
million for the three months ended June 30, 2016 and 2015,
respectively, and $3.7 million and $2.4 million for the six months
ended June 30, 2016 and 2015, respectively, to reduce the
carrying value of these properties to their estimated fair
value. The Company determines the fair values of its oil
and gas properties using a discounted cash flow model and proved
and risk adjusted probable reserves. Undrilled acreage can also be
valued based on sales transactions in comparable areas. Significant
Level 3 assumptions associated with the calculation of discounted
future cash flows included in the cash flow model include
management’s outlook for oil and natural gas prices,
production costs, capital expenditures, and future production as
well as estimated proved reserves and risk-adjusted probable
reserves. Management’s oil and natural gas price outlook is
developed based on third-party longer-term price forecasts as of
each measurement date. The expected future net cash flows are
discounted using an appropriate discount rate in determining a
property’s fair value. It is reasonably possible that the Company’s
estimates of undiscounted future net cash flows attributable to its
oil and gas properties may change in the future. The primary
factors that may affect estimates of future cash flows
include future adjustments, both positive and negative, to
proved and appropriate risk-adjusted probable oil and gas reserves,
results of future drilling activities, future prices for oil and
natural gas, and increases or decreases in production and capital
costs. As a result of these changes, or if in the future the
Company does not have access to sufficient capital to develop any
undrilled reserves used in its assessment, there may be further
impairments in the carrying values of these or other
properties.
Accrued Liabilities Accrued liabilities at June 30, 2016 and
December 31, 2015 consist of the following:
As of As of
(In
thousands)
Accrued interest $ 26,892 $ 29,075
Accrued drilling costs 2,005 5,306
Accrued ad valorem taxes 2,400
—
Asset retirement obligation of assets held for sale 3,442
—
Other accrued liabilities 5,481 4,063
$ 40,220 $ 38,444
Reserve for Future Abandonment Costs Comstock’s asset retirement obligations
relate to future plugging and abandonment expenses on its oil and
gas properties and related facilities disposal. The following table
summarizes the changes in Comstock’s total estimated
liability for such obligations during the six months ended
June 30, 2016 and 2015:
Six Months Ended June 30,
2016 2015
(In
thousands)
Future abandonment costs — beginning of period $ 20,093 $ 14,900
Accretion expense 496 401
New wells placed on production 2 262
Assets held for sale (3,442 ) (628 )
Liabilities settled and assets disposed of (1,177 )
—
Future abandonment costs — end of period $ 15,972 $ 14,935
Derivative Financial Instruments and Hedging
Activities Comstock periodically uses swaps, floors and
collars to hedge oil and natural gas prices and interest rates.
Swaps are settled monthly based on differences between the prices
specified in the instruments and the settlement prices of futures
contracts. Generally, when the applicable settlement price is less
than the price specified in the contract, Comstock receives a
settlement from the counterparty based on the difference multiplied
by the volume or amounts hedged. Similarly, when the applicable
settlement price exceeds the price specified in the contract,
Comstock pays the counterparty based on the difference. Comstock
generally receives a settlement from the counterparty for floors
when the applicable settlement price is less than the price
specified in the contract, which is based on the difference
multiplied by the volumes hedged. For collars, generally Comstock
receives a settlement from the counterparty when the settlement
price is below the floor and pays a settlement to the counterparty
when the settlement price exceeds the cap. No settlement occurs
when the settlement price falls between the floor and cap. All of
the Company’s derivative financial instruments are used for
risk management purposes and, by policy, none are held for trading
or speculative purposes. Comstock minimizes credit risk to
counterparties of its derivative financial instruments through
formal credit policies, monitoring procedures, and diversification.
All of Comstock’s derivative financial instruments are with
parties that are lenders under its bank credit facility. The
Company is not required to provide any credit support to its
counterparties other than cross collateralization with the assets
securing its bank credit facility. None of the Company’s
derivative financial instruments involve payment or receipt of
premiums. As of June 30, 2016, the Company had no
outstanding commodity derivatives. The Company had derivative
financial instruments outstanding on June 30, 2015 that hedged
production for the subsequent twelve month period. None of the
Company’s derivative contracts were designated as cash flow
hedges. The Company recognized cash settlements and changes in the
fair value of its derivative financial instruments as a single
component of other income (expenses). The Company recognized gains
of $18,000 and $0.7 million related to the change in fair value of
its natural gas swap agreements during the three months and six
months ended June 30, 2016, respectively. The Company
recognized a gain of $0.6 million related to the change in fair
value of its natural gas swap agreements during the three and six
months ended June 30, 2015. Cash settlements on the
Company’s natural gas derivative financial instruments were
receipts of $1.1 million and $2.1 million for the three months and
six months ended June 30, 2016, respectively. The Company had
no cash settlements from derivative financial instruments in the
first six months of 2015.
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, 2016 and 2015, the Company recognized
$1.2 million and $2.1 million, respectively, of stock-based
compensation expense within general and administrative expenses
related to awards of restricted stock and performance stock units
to its employees and directors. For the six months ended
June 30, 2016 and 2015, the Company recognized $2.5 million
and $4.0 million, respectively, of stock-based compensation expense
within general and administrative expenses. During the six months ended June 30, 2016, the
Company granted 229,618 shares of restricted stock with a grant
date fair value of $1.3 million, or $5.45 per share, to its
employees. The fair value of each restricted share on the date of
grant was equal to its market price. As of June 30, 2016,
Comstock had 354,974 shares of unvested restricted stock
outstanding at a weighted average grant date fair value of $15.25
per share. Total unrecognized compensation cost related to unvested
restricted stock grants of $4.4 million as of June 30, 2016 is
expected to be recognized over a period of 2.1 years. During the six months ended June 30, 2016, the
Company granted 60,013 performance share units (“PSUs”)
with a grant date fair value of $0.4 million, or $7.00 per unit, to
its employees. As of June 30, 2016, Comstock had 134,627 PSUs
outstanding at a weighted average grant date fair value of $22.09
per unit. The number of shares of common stock to be issued related
to the PSUs is based on the Company’s stock price performance
as compared to its peers which could result in the issuance of
anywhere from zero to 269,253 shares of common stock. Total
unrecognized compensation cost related to these grants of $1.7
million as of June 30, 2016 is expected to be recognized over
a period of 1.7 years. As of June 30, 2016, Comstock had outstanding
options to purchase 11,730 shares of common stock at a weighted
average exercise price of $166.10 per share. All of the stock
options were exercisable and there were no unrecognized
compensation costs related to the stock options as of June 30,
2016. No stock options were granted or exercised during the six
months ended June 30, 2016.
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 deferred tax
provision in the first six months of 2016 related to an increase in
the Company’s deferred income tax liability resulting from
state tax law changes enacted during the period. In recording
deferred income tax assets, the Company considers whether it is
more likely than not that some portion or all of its deferred
income tax assets will be realized in the future. The ultimate
realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which
those deferred income tax assets would be deductible. The Company
believes that after considering all the available objective
evidence, historical and prospective, with greater weight given to
historical evidence, management is not able to determine that it is
more likely than not that all of its deferred tax assets will be
realized and, therefore, has recorded an a valuation allowance of
$17.9 million and $4.9 million against its net federal deferred tax
assets and state deferred tax assets (net of the federal tax
benefit), respectively, during the six months ended June 30,
2016. The Company will continue to assess the valuation allowance
against deferred tax assets considering all available information
obtained in future reporting periods. The following is an analysis of consolidated income
tax expense (benefit):
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
(In
thousands)
Current provision $ 15 $ 420 $ 29 $ 483
Deferred provision (benefit) 73 (73,094 ) 4,519 (114,785 )
Provision for (benefit from) income taxes $ 88 $ (72,674 ) $ 4,548 $ (114,302 )
The difference between the Company’s
effective tax rate and the 35% federal statutory rate is caused by
valuation allowances on deferred taxes and state taxes. The impact
of these items varies based upon the Company’s projected full
year loss and the jurisdictions that are expected to generate the
projected losses. The difference between the Company’s
customary rate of 35% and the effective tax rate on the loss before
income taxes is due to the following:
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
(In
thousands)
Tax at statutory rate 35.0 % 35.0 % 35.0 % 35.0 %
Tax effect of:
Valuation allowance on deferred tax assets (22.1 ) (3.2 ) (48.5 ) (2.1 )
State income taxes net of federal benefit (11.8 ) 3.4 4.2 2.1
Other 0.7 (0.2 ) (0.3 ) (0.1 )
Effective tax rate 1.8 % 35.0 % (9.6 )% 34.9 %
The Company’s federal income tax returns for
the years subsequent to December 31, 2011, remain subject to
examination. The Company’s income tax returns in major state
income tax jurisdictions remain subject to examination for the year
ended December 31, 2008 and for various periods subsequent to
December 31, 2010. A state tax return in one state
jurisdiction is currently under review. The Company has evaluated
the preliminary findings in this jurisdiction and believes it is
more likely than not that the ultimate resolution of these matters
will not have a material effect on the Company’s financial
statements. The Company currently believes that all other
significant filing positions are highly certain and that all of its
other significant income tax positions and deductions would be
sustained under audit or the final resolution would not have a
material effect on the consolidated financial statements.
Therefore, the Company has not established any significant reserves
for uncertain tax positions. Future use of the Company’s federal and state
net operating loss carryforwards may be limited in the event that a
cumulative change in the ownership of Comstock’s common stock
by more than 50% occurs within a three-year period. Such a change
in ownership could result in a substantial portion of
Comstock’s net operating loss carryforwards being eliminated
or becoming restricted, and the Company may need to recognize an
additional valuation allowance reflecting the restricted use of
these net operating loss carryforwards in the period when such an
ownership change occurred. In October 2015, the Company established
a rights plan to deter ownership changes that would trigger this
limitation.
Fair Value Measurements The Company holds or has held certain items that
are required to be measured at fair value. These include cash and
cash equivalents held in bank accounts and derivative financial
instruments in the form of oil and natural gas price swap
agreements. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants
on the measurement date. A three-level hierarchy is followed for
disclosure to show the extent and level of judgment used to
estimate fair value measurements: Level 1 — Inputs used to measure fair value
are unadjusted quoted prices that are available in active markets
for the identical assets or liabilities as of the reporting
date. Level 2 — Inputs used to measure fair value,
other than quoted prices included in Level 1, are either directly
or indirectly observable as of the reporting date through
correlation with market data, including quoted prices for similar
assets and liabilities in active markets and quoted prices in
markets that are not active. Level 2 also includes assets and
liabilities that are valued using models or other pricing
methodologies that do not require significant judgment since the
input assumptions used in the models, such as interest rates and
volatility factors, are corroborated by readily observable data
from actively quoted markets for substantially the full term of the
financial instrument. Level 3 — Inputs used to measure fair value
are unobservable inputs that are supported by little or no market
activity and reflect the use of significant management judgment.
These values are generally determined using pricing models for
which the assumptions utilize management’s estimates of
market participant assumptions. The Company’s valuation of cash and cash
equivalents is a Level 1 measurement. The Company’s natural
gas price swap agreements are not traded on a public exchange.
Their value is determined utilizing a discounted cash flow model
based on inputs that are readily available in public markets and,
accordingly, the valuation of these swap agreements is categorized
as a Level 2 measurement. There were no price swap agreements
outstanding as of June 30, 2016. As of June 30, 2016, the Company’s
financial assets and liabilities accounted for at fair value
consisted of cash and cash equivalents of $67.4 million, a Level 1
measurement. As of June 30, 2016, the Company’s other
financial instruments, comprised solely of its fixed rate debt, had
a carrying value of $1.1 billion and a fair value of $730.2
million. The fair market value of the Company’s fixed rate
debt was based on quoted prices as of June 30, 2016, a Level 2
measurement.
Earnings Per Share Basic earnings per share is determined without the
effect of any outstanding potentially dilutive stock options or
PSUs and diluted earnings per share is determined with the effect
of outstanding stock options and PSUs that are potentially
dilutive. Unvested share-based payment awards containing
nonforfeitable rights to dividends are considered to be
participatory securities and are included in the computation of
basic and diluted earnings per share pursuant to the two-class
method. PSUs represent the right to receive a number of shares of
the Company’s common stock that may range from zero to up to
two times the number of PSUs granted on the award date based on the
achievement of certain performance measures during a performance
period. The number of potentially dilutive shares related to PSUs
is based on the number of shares, if any, which would be issuable
at the end of the respective period, assuming that date was the end
of the contingency period. The treasury stock method is used to
measure the dilutive effect of PSUs. Basic and diluted income
(loss) per share for the three months and six ended June 30,
2016 and 2015 were determined as follows:
Three Months Ended
June 30,
2016 2015
Income Shares Per Loss Shares Per
(In thousands,
except per share amounts)
Net income (loss) $ 4,852 $ (135,068 )
Income allocable to unvested stock grants (143 )
—
Basic and diluted net income (loss) attributable to common
stock $ 4,709 11,557 $ 0.41 $ (135,068 ) 9,224 $ (14.64 )
Six Months Ended
June 30,
2016 2015
Loss Shares Per Loss Shares Per
(In thousands,
except per share amounts)
Basic and Diluted net loss attributable to common stock $ (51,725 ) 10,729 $ (4.82 ) $ (213,570 ) 9,215 $ (23.18 )
At June 30, 2016 and December 31, 2015,
354,974 and 314,060 shares of restricted stock, respectively, are
included in common stock outstanding as such shares have a
nonforfeitable right to participate in any dividends that might be
declared and have the right to vote on matters submitted to the
Company’s stockholders. Weighted average shares of unvested
restricted stock outstanding during the three months and six months
ended June 30, 2016 and 2015 were as follows:
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
(In
thousands)
Unvested restricted stock 350 309 332 271 Options to purchase common stock and PSUs that were
outstanding and that were excluded as anti-dilutive from the
determination of diluted earnings per share are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 2015
(In thousands
except per share/unit data)
Weighted average stock options 12 21 12 22
Weighted average exercise price per share $ 166.10 $ 164.75 $ 166.10 $ 164.75
Weighted average performance share units 135 134 138 122
Weighted average grant date fair value per unit $ 22.10 $ 45.65 $ 22.10 $ 45.65 For the three and six months ended June 30,
2016 and 2015, the excluded options that were anti-dilutive were at
exercise prices in excess of the average stock price. Except for
the three months ended June 30, 2016, all unvested PSUs were
anti-dilutive to earnings and excluded from weighted average shares
used in the computation of earnings per share in the periods
presented due to the net loss in those periods.
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,
2016 2015
(In
thousands)
Interest payments $ 58,476 $ 31,836
Income tax payments $
— $ 11 The Company capitalizes interest on its unevaluated
oil and gas property costs during periods when it is conducting
exploration activity on this acreage. No interest was capitalized
during the six months ended June 30, 2016. The Company
capitalized interest of $0.9 million for the six months ended
June 30, 2015 which reduced interest expense.
Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with
Customers (Topic 606) In August 2014, the FASB issued ASU
No. 2014-15, Presentation of Financial Statements —
Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern In February 2016, the FASB issued ASU
No. 2016-02, Leases, In March 2016, the FASB issued ASU
No. 2016-09, Improvements to Employee Share-Based Payment
Accounting, | (1) Summary of Significant Accounting Policies Accounting policies used by Comstock Resources,
Inc. and subsidiaries reflect oil and natural gas industry
practices and conform to accounting principles generally accepted
in the United States of America.
Basis of Presentation and Principles of
Consolidation Comstock Resources, Inc. and its subsidiaries are
engaged in oil and natural gas exploration, development and
production, and the acquisition of producing oil and natural gas
properties. The Company’s operations are primarily focused in
Texas, Louisiana and Mississippi. The consolidated financial
statements include the accounts of Comstock Resources, Inc. and its
wholly owned or controlled subsidiaries (collectively,
“Comstock” or the “Company”). All
significant intercompany accounts and transactions have been
eliminated in consolidation. The Company accounts for its undivided
interest in oil and gas properties using the proportionate
consolidation method, whereby its share of assets, liabilities,
revenues and expenses are included in its financial statements. The Company’s Board of Directors has
authorized a one-for-five (1:5) reverse split of its issued and
outstanding common stock which became effective on July 29,
2016. All amounts disclosed in these financial statements have been
adjusted to give effect to the effect of this reverse stock split
in all periods.
Reclassifications Certain reclassifications have been made to prior
periods’ financial statements, consisting primarily of
reclassifications of the presentation of debt issuance costs as a
reduction in long term debt and presentation of current deferred
income taxes as non-current due to the early adoption of new
accounting standards.
Use of Estimates in the Preparation of Financial
Statements The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from those
estimates. Changes in the future estimated oil and natural gas
reserves or the estimated future cash flows attributable to the
reserves that are utilized for impairment analyses could have a
significant impact on the future results of operations.
Concentration of Credit Risk and Accounts
Receivable Financial instruments that potentially subject the
Company to a concentration of credit risk consist principally of
cash and cash equivalents, accounts receivable and derivative
financial instruments. The Company places its cash with high credit
quality financial institutions and its derivative financial
instruments with financial institutions and other firms that
management believes have high credit ratings. Substantially all of
the Company’s accounts receivable are due from either
purchasers of oil and gas or participants in oil and gas wells for
which the Company serves as the operator. Generally, operators of
oil and gas wells have the right to offset future revenues against
unpaid charges related to operated wells. Oil and gas sales are
generally unsecured. The Company’s policy is to assess the
collectability of its receivables based upon their age, the credit
quality of the purchaser or participant and the potential for
revenue offset. The Company has not had any significant credit
losses in the past and believes its accounts receivable are fully
collectible. Accordingly, no allowance for doubtful accounts has
been provided.
Marketable Securities During 2013, the Company sold 600,000 shares of
Stone Energy Corporation common stock for proceeds of $13.4
million. Realized gains before income taxes of $7.9 million on
these sales during 2013 are included in gain on sale of marketable
securities in the consolidated statements of operations.
Other Current Assets Other current assets at December 31, 2014 and 2015
consist of the following:
As of December 31,
2014 2015
(In
thousands)
Settlements receivable on derivative financial instruments $ 7,890 $
—
Pipe and oil field equipment inventory 1,379 1,198
Other 836 795
$ 10,105 $ 1,993
Fair Value Measurements Certain accounts within the Company’s
consolidated balance sheets are required to be measured at fair
value on a recurring basis. These include cash equivalents held in
bank accounts and derivative financial instruments in the form of
oil and natural gas price swap agreements. Fair value is defined as
the price that would be received to sell an asset or paid to
transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. A
three-level hierarchy is followed for disclosure to show the extent
and level of judgment used to estimate fair value measurements: Level 1 – Inputs used to measure fair value
are unadjusted quoted prices that are available in active markets
for the identical assets or liabilities as of the reporting
date. Level 2 – Inputs used to measure fair value,
other than quoted prices included in Level 1, are either directly
or indirectly observable as of the reporting date through
correlation with market data, including quoted prices for similar
assets and liabilities in active markets and quoted prices in
markets that are not active. Level 2 also includes assets and
liabilities that are valued using models or other pricing
methodologies that do not require significant judgment since the
input assumptions used in the models, such as interest rates and
volatility factors, are corroborated by readily observable data
from actively quoted markets for substantially the full term of the
financial instrument. Level 3 – Inputs used to measure fair value
are unobservable inputs that are supported by little or no market
activity and reflect the use of significant management judgment.
These values are generally determined using pricing models for
which the assumptions utilize management’s estimates of
market participant assumptions. The Company’s cash and cash equivalents
valuation is based on Level 1 measurements. The
Company’s oil and natural gas price swap agreements were not
traded on a public exchange, and their value is determined
utilizing a discounted cash flow model based on inputs that are
readily available in public markets and, accordingly, the valuation
of these swap agreements is categorized as a Level 2
measurement.
The following table summarizes financial assets
accounted for at fair value as of December 31, 2015:
Carrying Level 1 Level 2
(In thousands)
Assets measured at fair value on a recurring basis:
Cash and cash equivalents $ 134,006 $ 134,006 $
—
Derivative financial instruments 1,446
— 1,446
Total assets $ 135,452 $ 134,006 $ 1,446
At December 31, 2015, the Company had natural gas
price swap agreements covering approximately 1.8 Bcf of
natural gas to be produced in 2016 with a fair value of
$1.4 million. The Company has recognized an asset for
this amount and has recognized a corresponding gain representing
the change in fair value of its natural gas swaps as a component of
other income (expense). The Company had no derivative
financial instruments outstanding at December 31, 2014. The following table presents the carrying amounts
and estimated fair value of the Company’s long-term debt as
of December 31, 2014 and 2015:
2014 2015
(In
thousands)
Fixed rate debt:
Principal amount $ 700,000 $ 1,270,457
Discount or premium (4,555 ) (1,457 )
Carrying value $ 695,445 $ 1,269,000
Fair Value $ 453,000 $ 428,767
Variable rate debt:
Carrying value $ 375,000 $
—
Fair value $ 375,000 $
—
The fair market value of the Company’s fixed
rate debt was based on quoted prices as of December 31, 2014 and
2015, a Level 2 measurement. The fair value of the floating rate
debt outstanding at December 31, 2014 approximated its carrying
value, a Level 2 measurement.
Property and Equipment The Company follows the successful efforts method
of accounting for its oil and gas properties. Costs incurred to
acquire oil and gas leasehold are capitalized. Acquisition costs
for proved oil and gas properties, costs of drilling and equipping
productive wells, and costs of unsuccessful development wells are
capitalized and amortized on an equivalent unit-of-production basis
over the life of the remaining related oil and gas reserves.
Equivalent units are determined by converting oil to natural gas at
the ratio of one barrel of oil for six thousand cubic feet of
natural gas. This conversion ratio is not based on the price of oil
or natural gas, and there may be a significant difference in price
between an equivalent volume of oil versus natural gas.
Amortization is calculated at the field level. The estimated future
costs of dismantlement, restoration, plugging and abandonment of
oil and gas properties and related facilities disposal are
capitalized when asset retirement obligations are incurred and
amortized as part of depreciation, depletion and amortization
expense. The costs of unproved properties which are determined to
be productive are transferred to proved oil and gas properties and
amortized on an equivalent unit-of-production basis. Exploratory
expenses, including geological and geophysical expenses and delay
rentals for unevaluated oil and gas properties, are charged to
expense as incurred. Unproved oil and gas properties are
periodically assessed for impairment on a property by property
basis, and any impairment in value is charged to exploration
expense. During 2013, 2014 and 2015, impairment charges of $33.0
million, $0.5 million and $68.9 million, respectively, were
recognized in exploration expense related to certain leases that
the Company no longer expects to drill on. Exploratory drilling
costs are initially capitalized as unproved property but charged to
expense if and when the well is determined not to have found
commercial quantities of proved oil and gas reserves. Exploratory
drilling costs are evaluated within a one-year period after the
completion of drilling. The Company periodically assesses the need for an
impairment of the costs capitalized for its evaluated oil and gas
properties on a property or cost center basis. If impairment is
indicated based on undiscounted expected future cash flows
attributable to the property, then a provision for impairment is
recognized to the extent that net capitalized costs exceed the
estimated fair value of the property. The Company determines the
fair values of its oil and gas properties using a discounted cash
flow model and proved and risk-adjusted probable
reserves. Undrilled acreage is valued based on sales
transactions in comparable areas. At December 31, 2015, the
Company excluded probable undeveloped reserves from its
impairment analysis given the Company’s limited capital
resources available for future drilling
activities. Significant Level 3 assumptions associated with
the calculation of discounted future cash flows included in the
cash flow model include management’s outlook for oil and
natural gas prices, production costs, capital expenditures, and
future production as well as estimated proved reserves and
risk-adjusted probable reserves. Management’s oil and
natural gas price outlook is developed based on third-party
longer-term price forecasts as of each measurement date. The
expected future net cash flows are discounted using an appropriate
discount rate in determining a property’s fair
value. The oil and natural gas prices used for determining
asset impairments will generally differ from those used in the
standardized measure of discounted future net cash flows because
the standardized measure requires the use of an average price based
on the first day of each month of the preceding year and is limited
to proved reserves. In 2015, reductions to management’s oil and
natural gas price outlook resulted in indications of impairment of
the Company’s oil properties in South Texas and Mississippi,
and certain of its natural gas properties in Texas and
Louisiana. The following table presents the fair value and
impairments recorded by the Company in the third quarter and fourth
quarter of 2015, as well as the average oil price per barrel and
gas price per thousand cubic feet over the life of the properties
and the applicable discount rates utilized in the Company’s
assessments:
Fair Value Impairment
Management’s Price Outlook Annual
Oil
Gas
(In
thousands)
(Per barrel) (Per
Mcf)
Impairments recorded at September 30, 2015:
Oil properties $ 330,257 $ 405,308 $ 73.70 $ 4.04 10%-20%
Natural gas properties $ 61,625 $ 139,406 $ 75.91 $ 3.91 10%-20%
Impairments recorded at December 31, 2015:
Oil properties $ 3,030 $ 16,036 $ 73.48 10%-20%
Natural gas properties $ 123,926 $ 238,210 $ 70.76 $ 3.74 10%-20% In the aggregate we recognized impairments of
$801.3 million related to our evaluated oil and gas properties in
2015. In 2014, the Company recognized impairment charges of
$60.3 million on certain of its oil and gas properties which had a
fair value of $18.0 million. It is reasonably possible that the Company’s
estimates of undiscounted future net cash flows attributable to its
oil and gas properties may change in the future. The primary
factors that may affect estimates of future cash flows include
future adjustments, both positive and negative, to proved and
appropriate risk-adjusted probable and possible oil and gas
reserves, results of future drilling activities, future prices for
oil and natural gas, and increases or decreases in production and
capital costs. As a result of these changes, there may be
further impairments in the carrying values of these or other
properties. Specifically, as part of the impairment review
performed at December 31, 2015, the Company observed that a decline
in excess of 30% in its future cash flow estimates for its
Eagleville field in South Texas could result in an additional
impairment being recorded in an amount that could be at least
$130.0 million. Other property and equipment consists primarily of
gas gathering systems, computer equipment, furniture and fixtures
and an airplane which are depreciated over estimated useful lives
ranging from three to 31 1 2
Other Assets Other assets primarily consist of deferred costs
associated with the Company’s bank credit facility. These
costs are amortized over the life of the bank credit facility on a
straight-line basis which approximates the amortization that would
be calculated using an effective interest rate method.
Accrued Expenses Accrued expenses at December 31, 2014 and 2015
consist of the following:
As of December 31,
2014 2015
(In
thousands)
Accrued drilling costs $ 26,269 $ 5,306
Accrued interest payable 9,011 29,075
Accrued rig termination fees 2,600
—
Other 6,962 4,063
$ 44,842 $ 38,444
Reserve for Future Abandonment Costs The Company’s asset retirement obligations
relate to future plugging and abandonment costs of its oil and gas
properties and related facilities disposal. The Company records a
liability in the period in which an asset retirement obligation is
incurred, in an amount equal to the estimated fair value of the
obligation that is capitalized. Thereafter, this liability is
accreted up to the final retirement cost. Accretion of the discount
is included as part of depreciation, depletion and amortization in
the accompanying consolidated statements of operations. The following table summarizes the changes in the
Company’s total estimated liability:
2014 2015
(In
thousands)
Reserve for Future Abandonment Costs at beginning of the year $ 14,534 $ 14,900
New wells placed on production 1,480 310
Changes in estimates and timing (1,796 ) 4,927
Liabilities settled and assets disposed of (153 ) (717 )
Accretion expense 835 673
Reserve for Future Abandonment Costs at end of the year $ 14,900 $ 20,093
Stock-based Compensation The Company has stock-based employee compensation
plans under which stock awards, comprised of restricted stock and
performance share units, are issued to employees and non-employee
directors. The Company follows the fair value based method in
accounting for equity-based compensation. Under the fair value
based method, compensation cost is measured at the grant date based
on the fair value of the award and is recognized on a straight-line
basis over the award vesting period. Excess taxes on stock-based
compensation are recognized as an adjustment to additional paid-in
capital and as a part of cash flows from financing activities.
Segment Reporting The Company presently operates in one business
segment, the exploration and production of oil and natural gas.
Derivative Financial Instruments and Hedging
Activities The Company accounts for derivative financial
instruments (including certain derivative instruments embedded in
other contracts) as either an asset or liability measured at its
fair value. Changes in the fair value of derivatives are recognized
currently in earnings unless specific hedge accounting criteria are
met. The Company estimates fair value based on a discounted cash
flow model. The fair value of derivative contracts that expire in
less than one year are recognized as current assets or liabilities.
Those that expire in more than one year are recognized as long-term
assets or liabilities. If the derivative is designated as a cash
flow hedge, changes in fair value are recognized in other
comprehensive income until the hedged item is recognized in
earnings.
Major Purchasers The Company has one major purchaser of its oil
production that represented 36%, 35% and 25% of its total oil and
gas sales in 2013, 2014 and 2015, respectively. The Company
also has one major purchaser of its natural gas production that
represented 51%, 53% and 52% of its total oil and gas sales in
2013, 2014 and 2015, respectively. The loss of any of these
purchasers would not have a material adverse effect on the Company
as there is an available market for its oil and natural gas
production from other purchasers.
Revenue Recognition and Gas Balancing Comstock utilizes the sales method of accounting
for oil and natural gas revenues whereby revenues are recognized at
the time of delivery based on the amount of oil or natural gas sold
to purchasers. Revenue is typically recorded in the month of
production based on an estimate of the Company’s share of
volumes produced and prices realized. The amount of oil or
natural gas sold may differ from the amount to which the Company is
entitled based on its revenue interests in the properties. The
Company did not have any significant imbalance positions at
December 31, 2014 or 2015. Sales of oil and natural gas generally
occur at the wellhead. When sales of oil and gas occur at locations
other than the wellhead, the Company accounts for costs incurred to
transport the production to the delivery point as operating
expenses.
General and Administrative Expenses General and administrative expenses are reported
net of reimbursements of overhead costs that are received from
working interest owners of the oil and gas properties operated by
the Company of $11.9 million, $13.2 million and $13.9 million in
2013, 2014 and 2015, respectively.
Income Taxes The Company accounts for income taxes using the
asset and liability method, whereby deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax
basis, as well as the future tax consequences attributable to the
future utilization of existing tax net operating loss and other
types of carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences and
carryforwards are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that the change in rate is
enacted.
Earnings Per Share Basic earnings per share is determined without the
effect of any outstanding potentially dilutive stock options and
diluted earnings per share is determined with the effect of
outstanding stock options that are potentially dilutive. Unvested
share-based payment awards containing nonforfeitable rights to
dividends are considered to be participatory securities and
included in the computation of basic and diluted earnings per share
pursuant to the two-class method. Performance share units
(“PSUs”) represent the right to receive a number of
shares of the Company’s common stock that may range from zero
to up to three times the number of PSUs granted on the award date
based on the achievement of certain performance measures during a
performance period. The number of potentially dilutive shares
related to PSUs is based on the number of shares, if any, which
would be issuable at the end of the respective period, assuming
that date was the end of the contingency period. The treasury stock
method is used to measure the dilutive effect of PSUs. Basic and diluted earnings per share for 2013, 2014
and 2015 were determined as follows:
2013 2014 2015
Income Shares
Per Share Loss Shares
Per Share Loss Shares Per Share
(In thousands except per share data)
Net Loss From Continuing Operations $ (106,723 ) $ (57,111 ) $ (1,047,109 )
Loss (Income) Allocable to Unvested Stock Grants 3,424 (595 )
—
Basic and Diluted Net Loss From Continuing Operations Attributable
to Common Stock $ (103,299 ) 9,311 $ (11.09 ) $ (57,706 ) 9,309 $ (6.20 ) $ (1,047,109 ) 9,223 $ (113.53 )
Net Income From Discontinued Operations $ 147,752
Income Allocable to Unvested Stock Grants (4,742 )
Basic and Diluted Net Income From Discontinued Operations
Attributable to Common Stock $ 143,010 9,311 $ 15.36
Basic and diluted per share amounts are the same
for each of the years ended December 31, 2013, 2014, and 2015 due
to the net loss from continuing operations reported during each of
those years.
At December 31, 2013, 2014 and 2015, 303,178,
241,505 and 314,060 shares of unvested restricted stock,
respectively, are included in common stock outstanding as such
shares have a nonforfeitable right to participate in any dividends
that might be declared and have the right to vote. Weighted average
shares of unvested restricted stock included in common stock
outstanding were as follows:
2013 2014 2015
(In
thousands)
Unvested restricted stock 309 238 293 All stock options and PSUs were anti-dilutive to
earnings and excluded from weighted average shares used in the
computation of earnings per share due to the net loss from
continuing operations in each period. Options to purchase common stock and PSUs that were
outstanding and that were excluded as anti-dilutive from
determination of diluted earnings per share were as follows:
2013
2014
2015
(In thousands except per share data)
Weighted average anti-dilutive stock options 26 23 20
Weighted average exercise price $164.50 $164.50 $164.75
Weighted average performance share units 51 100 136
Weighted average grant date fair value per unit $104.60 $99.40 $35.35
Supplementary Information With Respect to the Consolidated
Statements of Cash Flows For the purpose of the consolidated statements of
cash flows, the Company considers all highly liquid investments
purchased with an original maturity of three months or less to be
cash equivalents. Cash payments made for interest and income taxes
for the years ended December 31, 2013, 2014 and 2015, respectively,
were as follows:
2013 2014 2015
(In
thousands)
Cash Payments:
Interest payments $ 83,560 $ 62,812 $ 94,177
Income tax payments $ 769 $ 682 $ 77 The Company capitalizes interest on its unevaluated
oil and gas property costs during periods when it is conducting
exploration activity on this acreage. The Company capitalized
interest of $4.7 million, $10.2 million and $0.9 million in 2013,
2014 and 2015, respectively, which reduced interest expense and
increased the carrying value of its unevaluated oil and gas
properties.
Discontinued West Texas Operations In May 2013, the Company sold its oil and gas
properties in the Delaware Basin located in Reeves County in West
Texas which it acquired in December 2011 and certain other
undeveloped leases in West Texas (the “West Texas
Properties”) to a third party. The Company received proceeds
of $823.1 million and realized a gain of $230.0 million which is
reflected as a component of income from discontinued operations in
2013. As a result of this divestiture, the consolidated
financial statements and the related notes thereto present the
results of the Company’s West Texas Properties as
discontinued operations. No general and administrative cost
incurred by Comstock was allocated to discontinued operations
during the periods presented. Unless indicated otherwise, the
amounts presented in the accompanying notes to the consolidated
financial statements relate to the Company’s continuing
operations.
Income from discontinued operations is comprised of
the following:
Year Ended
(In
thousands)
Revenues:
Oil and gas sales $ 25,125
Costs and expenses:
Production taxes 1,120
Gathering and transportation 501
Lease operating 9,853
Depletion, depreciation and amortization 8,649
Interest expense (1) 6,346
Total costs and expenses 26,469
Gain on sale 230,008
Income from discontinued operations before income taxes 228,664
Income tax expense:
Current (2,218 )
Deferred (78,694 )
Total income tax expense (80,912 )
Net income from discontinued operations $ 147,752
(1)
Interest expense was allocated to discontinued
operations based on the ratio of the net assets of discontinued
operations to our consolidated net assets plus long-term debt.
Interest expense is net of capitalized interest of $2,010 for the
year ended December 31, 2013.
Recent accounting pronouncements In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with
Customers (Topic 606) In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern
In April 2015, the FASB issued ASU No. 2015-03,
Interest-Imputation of Interest, Simplifying the Presentation of
Debt Issuance Costs In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
Subsequent Events In January 2016, the Company completed an acreage
swap with another operator which increased its Haynesville shale
acreage by 3,637 net acres in DeSoto Parish, Louisiana including
four producing wells (3.5 net). The Company exchanged 2,547
net acres in Atascosa County, Texas including seven producing wells
(5.3 net) for the Haynesville shale properties. The swap was
an equal value exchange that required no cash outlays. In February 2016, the Company issued approximately
0.9 million shares of common stock in exchange for $40.0 million in
principal amount of the Company’s 7 3 4 |
