Comstock Resources(US:CRK)2024-02-15 16:00Part I Business Comstock Resources is an independent natural gas producer focused on Haynesville and Bossier shale, strategically developing reserves and managing risk, with 4.9 Tcfe proved reserves Business Overview and Strategy The company is a leading natural gas producer focused on the Haynesville and Bossier shale, pursuing strategic growth and financial discipline - Comstock is a leading independent natural gas producer with operations primarily in the Haynesville and Bossier shale, which constituted 99% of its proved reserves as of December 31, 202358 - The company's business strategy focuses on prudently growing cash flow and reserves through developing high-return drilling locations, expanding its reserve base via exploration in the Western Haynesville play, pursuing strategic acquisitions, maintaining financial discipline, focusing on environmental stewardship, and managing commodity price exposure through hedging65 - As of December 31, 2023, Comstock has identified 2,959 drilling locations (1,463 net), providing decades of potential drilling activity65 - In 2023, the company spent $1.3 billion on exploration and development, drilling 71 wells (55.5 net) and replacing 109% of its 2023 production63 Property Transactions and Midstream Ventures The company expanded acreage in Western Haynesville and formed a midstream partnership for development financing - In 2023, Comstock added 79,741 net acres in the Western Haynesville through a leasing program at a cost of $98.6 million65 - The company sold non-operated wells for $41.3 million in 2023, following a $138.1 million sale of its Bakken shale properties in 202168 - On October 31, 2023, Comstock formed Pinnacle Gas Services LLC, a midstream partnership with Quantum Capital Solutions, to finance the buildout of natural gas gathering and treating facilities for its Western Haynesville development, with Quantum agreeing to fund up to $300 million67 Natural Gas and Oil Reserves Proved reserves as of 2023 totaled 4.9 Tcfe with a PV-10 value of $2.5 billion, impacted by lower gas prices Proved Reserves as of December 31, 2023 (SEC Prices) | Reserve Type | Oil (Thousand Barrels) | Natural Gas (Million Cubic Feet) | Total (Million Cubic Feet Equivalent) | PV-10 Value (Thousands of Dollars) | | :--- | :--- | :--- | :--- | :--- | | Proved Developed | 548 | 2,734,175 | 2,737,466 | $2,185,796 | | Proved Undeveloped | — | 2,206,051 | 2,206,051 | $315,900 | | Total Proved | 548 | 4,940,226 | 4,943,517 | $2,501,696 | Historical Proved Reserves (Total) | Year | Oil (Thousand Barrels) | Natural Gas (Million Cubic Feet) | | :--- | :--- | :--- | | 2023 | 548 | 4,940,226 | | 2022 | 549 | 6,697,570 | | 2021 | 627 | 6,118,083 | - Proved undeveloped reserves decreased by 2.0 Trillion cubic feet in 2023, primarily because 164 undeveloped locations were no longer economic at the SEC-prescribed low natural gas prices78 - A sensitivity analysis using alternative higher prices ($3.24 per Mcf gas, $69.39 per Barrel oil) shows total proved reserves would be 6.6 Tcfe with a PV-10 value of $5.2 billion, compared to 4.9 Tcfe and $2.5 billion under SEC prices85 Production, Drilling, and Acreage The company increased natural gas production in 2023 despite lower prices, maintaining significant acreage Annual Production and Average Prices | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Natural Gas Production (Thousand Cubic Feet) | 524,467 | 500,616 | 489,274 | | Oil Production (Barrel) | 70 | 82 | 1,210 | | Avg. Gas Price ($/Thousand Cubic Feet) | $2.40 | $6.23 | $3.63 | | Avg. Oil Price ($/Barrel) | $73.73 | $92.65 | $61.95 | Drilling Activity (Gross Wells) | Well Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Development | 64 | 116 | 100 | | Exploratory | 7 | 2 | 0 | | Total | 71 | 118 | 100 | - As of December 31, 2023, the company held 319,274 net developed acres and 292,832 net undeveloped acres, primarily in Louisiana and Texas100 Markets, Customers, and Regulation Sales are concentrated among a few customers, and operations are subject to extensive federal and state regulations - In 2023, three customers accounted for a significant portion of total sales: Enterprise Products Operating (20%), Southwest Energy L.P. (17%), and Venture Global LNG, Inc. (10%)104 - The company's operations are subject to extensive federal and state regulations covering natural gas transportation (FERC), environmental protection (EPA rules on air, water, and waste), and production practices107109120 - The Inflation Reduction Act (IRA) established the Methane Emission Reduction Program, imposing a federal fee on methane emissions from the oil and gas sector starting in 2024, which the company does not expect to have a material adverse effect142 Risk Factors The company faces significant risks from volatile natural gas prices, reserve replacement challenges, substantial capital needs, and stringent environmental regulations - The business is heavily dependent on volatile natural gas prices, and a prolonged period of depressed prices would adversely affect financial condition, cash flow, and ability to fund capital expenditures174 - Future production and revenue depend on the ability to find, develop, or acquire additional economically recoverable reserves, which requires significant capital and is not guaranteed to be successful175177 - The company is subject to stringent and changing environmental regulations, including those related to climate change and ESG practices, which could increase costs, restrict operations, and impact access to capital179181186 - As of December 31, 2023, the company had $2.7 billion in principal debt, and its debt agreements contain covenants that limit borrowing, investments, and dividend payments195197 - Cybersecurity threats pose a risk of operational disruptions, unauthorized release of confidential information, and corruption of data, which could have a material adverse effect on the business210 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None218 Cybersecurity Cybersecurity risk management is integrated into the enterprise framework with Board oversight, despite past compromise attempts - The company's cybersecurity risk management is integrated into its enterprise risk framework and includes regular assessments, vulnerability scans, and penetration tests220221 - The Audit Committee of the Board of Directors provides oversight for cybersecurity risk management, receiving regular updates from IT management225 - The company has experienced attempts to compromise its systems, such as phishing and malware, but does not believe these have resulted in a material adverse effect on the business223 Properties Information regarding the company's properties is incorporated by reference from Item 1 - The information required for this item is incorporated by reference from Item 1. Business226 Legal Proceedings The company is not party to any legal proceedings expected to have a material adverse effect - The company is not a party to any legal proceedings expected to have a material adverse effect227 Mine Safety Disclosures This section is not applicable to the company - Not applicable228 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'CRK', paying quarterly dividends, with performance compared to market indices - Common stock is listed on the New York Stock Exchange under the symbol "CRK"232 - During 2023, the company paid quarterly cash dividends on its common stock of $0.125 per share232 Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased significantly in 2023 due to lower natural gas prices, despite increased production, with strong liquidity and planned 2024 capital expenditures Results of Operations Natural gas and oil sales significantly decreased in 2023 due to lower prices, despite increased production volume Financial Performance Comparison (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Natural Gas & Oil Sales | $1.3 billion | $3.1 billion | | Net Income to Common Stockholders | $211.9 million | $1.1 billion | | Diluted EPS | $0.76 | $4.11 | | Average Realized Gas Price (per Thousand Cubic Feet) | $2.40 | $6.23 | | Gas Production (Billion Cubic Feet) | 524.5 | 500.6 | - The 60% decrease in natural gas and oil sales in 2023 was primarily due to lower realized prices for natural gas production, which was partially offset by a 5% increase in production volume246 - DD&A expense increased by 24% to $607.9 million in 2023, with the rate rising to $1.16 per Mcfe from $0.98 per Mcfe in 2022, due to higher drilling costs for new wells and lower estimated proved reserves from low year-end gas prices254 - The company recognized a net gain on derivative financial instruments of $187.6 million in 2023, compared to a net loss of $662.5 million in 2022256 Cash Flows, Liquidity and Capital Resources Operating cash flow decreased due to lower gas prices, while liquidity remains strong with planned 2024 capital expenditures - Net cash from operating activities decreased by 40% to $1.0 billion in 2023 from $1.7 billion in 2022, primarily due to lower realized natural gas prices263 Capital Expenditures (in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | Acquisitions (Unproved) | $98,553 | $54,120 | | Exploration & Development | $1,370,362 | $1,087,272 | | Total Capital Expenditures | $1,406,547 | $1,106,047 | - For 2024, the company expects to spend approximately $750 million to $850 million on development and exploration projects, primarily in the Haynesville/Bossier shale268 - As of December 31, 2023, the company had $1.0 billion of liquidity, consisting of $1.0 billion of unused capacity under its bank credit facility and $16.7 million in cash272 Critical Accounting Policies and Estimates Key accounting policies involve the successful efforts method, reserve estimation, impairment assessments, and goodwill review - The company uses the successful efforts method of accounting, capitalizing costs for successful exploration and development while expensing costs for unsuccessful exploration280 - The estimation of proved natural gas and oil reserve quantities is a critical and subjective process that significantly impacts depreciation, depletion, and amortization (DD&A) expense and impairment calculations281 - Proved properties are evaluated for impairment when circumstances indicate the carrying value may not be recoverable, with assessment involving significant judgment using estimated future cash flows based on projections of prices, production volumes, and costs285 - Goodwill of $335.9 million is reviewed annually for impairment, with a quantitative assessment as of October 1, 2023, determining there was no impairment286287 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are volatile commodity prices, mitigated by hedging, and interest rate exposure on variable-rate debt - The company's financial condition is highly dependent on volatile natural gas and oil prices292 - As of December 31, 2023, the company had natural gas price swap agreements to hedge 146.4 Billion cubic feet of its 2024 production at an average price of $3.55 per Million British thermal units293 - At year-end 2023, the company had $2.7 billion in long-term debt, of which $480.0 million under the bank credit facility is subject to variable interest rates tied to SOFR or an alternate base rate295 Financial Statements and Supplementary Data Consolidated financial statements are included in the report and have been audited by Ernst & Young LLP - The company's consolidated financial statements are included on pages F-1 to F-25 of the report296 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants - None302 Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023305 - Management assessed the company's internal control over financial reporting as effective as of December 31, 2023, based on the COSO criteria307 - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023308311 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming definitive proxy statement322 - The company has adopted a Code of Business Conduct and Ethics and a Code of Ethics for Senior Financial Officers, both available on its website324 Executive Compensation Information on executive compensation is incorporated by reference from the definitive proxy statement - Information required by this item is incorporated by reference from the company's definitive proxy statement325 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity compensation plan information as of December 31, 2023, is provided, with further details incorporated by reference Equity Compensation Plan Information as of December 31, 2023 | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Securities authorized for future issuance under equity compensation plans | | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 1,521,802 | 3,262,987 | - The company does not have any equity compensation plans that were not approved by stockholders327 Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference - Information required by this item is incorporated by reference from the company's definitive proxy statement329 Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the definitive proxy statement - Information required by this item is incorporated by reference from the company's definitive proxy statement330 Part IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements and provides an index of all exhibits filed with the Form 10-K - This section lists the consolidated financial statements and all exhibits filed with the report333334 Form 10-K Summary This section is not applicable - Not applicable339