| COMSTOCK RESOURCES INC ITEM 1A RISK FACTORS You should carefully consider the following risk factors as well as the other information contained or incorporated by reference in this report, as these are important factors, among others, that could cause our actual results to differ from our expected or historical results |
| It is not possible to predict or identify all such factors |
| Consequently, you should not consider any such list to be a complete statement of all of our potential risks or uncertainties |
| A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition, cash flow, liquidity or results of operations and our ability to meet our capital expenditure obligations and financial commitments and to implement our business strategy |
| Our business is heavily dependent upon the prices of, and demand for, oil and natural gas |
| Historically, the prices for oil and natural gas have been volatile and are likely to remain volatile in the future |
| The prices we receive for our oil and natural gas production and the level of such production will be subject to wide fluctuations and depend on numerous factors beyond our control, including the following: • the domestic and foreign supply of oil and natural gas; • weather conditions; • the price and quantity of imports of crude oil and natural gas; • political conditions and events in other oil-producing and natural gas-producing countries, including embargoes, continued hostilities in the Middle East and other sustained military campaigns, and acts of terrorism or sabotage; • the actions of the Organization of Petroleum Exporting Countries, or OPEC; • domestic government regulation, legislation and policies; • the level of global oil and natural gas inventories; • technological advances affecting energy consumption; • the price and availability of alternative fuels; and • overall economic conditions |
| Any continued and extended decline in the price of crude oil or natural gas will adversely affect: • our revenues, profitability and cash flow from operations; • the value of our proved oil and natural gas reserves; • the economic viability of certain of our drilling prospects; • our borrowing capacity; and • our ability to obtain additional capital |
| In the future we may enter into additional hedging arrangements in order to reduce our exposure to price risks |
| Such arrangements would limit our ability to benefit from increases in oil and natural gas prices |
| 23 _________________________________________________________________ [77]Table of Contents The unavailability or high cost of drilling rigs, equipment, supplies or qualified personnel and oilfield services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget |
| Costs and delivery times of rigs, equipment and supplies are substantially greater than they were several years ago |
| In addition, demand for, and wage rates of, qualified drilling rig crews rise with increases in the number of active rigs in service |
| Shortages of drilling rigs, equipment or supplies or qualified personnel in the areas in which we operate could delay or restrict our exploration and development operations, which in turn could adversely affect our financial condition and results of operations because of our concentration in those areas |
| We plan to pursue acquisitions as part of our growth strategy and there are risks in connection with acquisitions |
| Our growth has been attributable in part to acquisitions of producing properties and companies |
| We expect to continue to evaluate and, where appropriate, pursue acquisition opportunities on terms we consider favorable |
| However, we cannot assure you that suitable acquisition candidates will be identified in the future, or that we will be able to finance such acquisitions on favorable terms |
| In addition, we compete against other companies for acquisitions, and we cannot assure you that we will successfully acquire any material property interests |
| Further, we cannot assure you that future acquisitions by us will be integrated successfully into our operations or will increase our profits |
| The successful acquisition of producing properties requires an assessment of numerous factors beyond our control, including, without limitation: • recoverable reserves; • exploration potential; • future oil and natural gas prices; • operating costs; and • potential environmental and other liabilities |
| In connection with such an assessment, we perform a review of the subject properties that we believe to be generally consistent with industry practices |
| The resulting assessments are inexact and their accuracy uncertain, and such a review may not reveal all existing or potential problems, nor will it necessarily permit us to become sufficiently familiar with the properties to fully assess their merits and deficiencies |
| Inspections may not always be performed on every well, and structural and environmental problems are not necessarily observable even when an inspection is made |
| Additionally, significant acquisitions can change the nature of our operations and business depending upon the character of the acquired properties, which may be substantially different in operating and geologic characteristics or geographic location than our existing properties |
| While our current operations are focused in the East Texas/North Louisiana, Southeast Texas, South Texas, Mississippi, the Mid-Continent and other regions, as well as the Gulf of Mexico through our 48prca ownership interest in Bois d’Arc Energy we may pursue acquisitions or properties located in other geographic areas |
| Our future production and revenues depend on our ability to replace our reserves |
| Our future production and revenues depend upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable |
| Our proved reserves will generally decline as reserves are depleted, except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, or both |
| To increase reserves and production, we must continue our acquisition and drilling activities |
| We cannot assure you, however, that our acquisition and drilling activities will result in significant additional reserves or that we will have continuing success drilling productive wells at low finding 24 _________________________________________________________________ [78]Table of Contents and development costs |
| Furthermore, while our revenues may increase if prevailing oil and natural gas prices increase significantly, our finding costs for additional reserves could also increase |
| Prospects that we decide to drill may not yield oil or natural gas in commercially viable quantities or quantities sufficient to meet our targeted rate of return |
| A prospect is a property in which we own an interest or have operating rights and has what our geoscientists believe, based on available seismic and geological information, to be an indication of potential oil or natural gas |
| Our prospects are in various stages of evaluation, ranging from a prospect that is ready to be drilled to a prospect that will require substantial additional evaluation and interpretation |
| There is no way to predict in advance of drilling and testing whether any particular prospect will yield oil or natural gas in sufficient quantities to recover drilling or completion costs or to be economically viable |
| The use of seismic data and other technologies and the study of producing fields in the same area will not enable us to know conclusively prior to drilling whether oil or natural gas will be present or, if present, whether oil or natural gas will be present in commercial quantities |
| The analysis that we perform using data from other wells, more fully explored prospects and/or producing fields may not be useful in predicting the characteristics and potential reserves associated with our drilling prospects |
| If we drill additional unsuccessful wells, our drilling success rate may decline and we may not achieve our targeted rate of return |
| Our debt service requirements could adversely affect our operations and limit our growth |
| We had dlra243dtta0 million in debt as of December 31, 2005, and our ratio of total debt to total capitalization was approximately 29prca |
| Our outstanding debt will have important consequences, including, without limitation: • a portion of our cash flow from operations will be required to make debt service payments; • our ability to borrow additional amounts for working capital, capital expenditures (including acquisitions) or other purposes will be limited; and • our debt could limit our ability to capitalize on significant business opportunities, our flexibility in planning for or reacting to changes in market conditions and our ability to withstand competitive pressures and economic downturns |
| In addition, future acquisition or development activities may require us to alter our capitalization significantly |
| These changes in capitalization may significantly increase our debt |
| Moreover, our ability to meet our debt service obligations and to reduce our total debt will be dependent upon our future performance, which will be subject to general economic conditions and financial, business and other factors affecting our operations, many of which are beyond our control |
| If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or seeking to raise additional debt or equity capital |
| We cannot assure you that any of these actions could be effected on a timely basis or on satisfactory terms or that these actions would enable us to continue to satisfy our capital requirements |
| Our bank credit facility contains a number of significant covenants |
| These covenants will limit our ability to, among other things: • borrow additional money; • merge, consolidate or dispose of assets; • make certain types of investments; • enter into transactions with our affiliates; and • pay dividends |
| Our failure to comply with any of these covenants would cause a default under our bank credit facility and the indenture governing our 67/8prca senior notes due 2012 |
| A default, if not waived, could result in acceleration of our indebtedness, in which case the debt would become immediately due and payable |
| If this occurs, we may not be able 25 _________________________________________________________________ [79]Table of Contents to repay our debt or borrow sufficient funds to refinance it |
| Complying with these covenants may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take |
| Our business involves many uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses |
| Our future success will depend on the success of our exploration and development activities |
| Exploration activities involve numerous risks, including the risk that no commercially productive natural gas or oil reserves will be discovered |
| In addition, these activities may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties |
| Moreover, the successful drilling of a natural gas or oil well does not ensure we will realize a profit on our investment |
| A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical |
| In addition to their costs, unsuccessful wells can hurt our efforts to replace production and reserves |
| Our business involves a variety of operating risks, including: • unusual or unexpected geological formations; • fires; • explosions; • blow-outs and surface cratering; • uncontrollable flows of natural gas, oil and formation water; • natural disasters, such as hurricanes, tropical storms and other adverse weather conditions; • pipe, cement or pipeline failures; • casing collapses; • mechanical difficulties, such as lost or stuck oil field drilling and service tools; • abnormally pressured formations; and • environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures and discharges of toxic gases |
| If we experience any of these problems, well bores, gathering systems and processing facilities could be affected, which could adversely affect our ability to conduct operations |
| We could also incur substantial losses as a result of: • injury or loss of life; • severe damage to and destruction of property, natural resources and equipment; • pollution and other environmental damage; • clean-up responsibilities; • regulatory investigation and penalties; • suspension of our operations; and • repairs to resume operations |
| We operate in a highly competitive industry, and our failure to remain competitive with our competitors, many of which have greater resources than we do, could adversely affect our results of operations |
| The oil and natural gas industry is highly competitive in the search for and development and acquisition of reserves |
| Our competitors for the acquisition, development and exploration of oil and natural gas properties and capital to finance such activities, include companies that have greater financial and personnel resources than we do |
| 26 _________________________________________________________________ [80]Table of Contents These resources could allow those competitors to price their products and services more aggressively than we can, which could hurt our profitability |
| Moreover, our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to close transactions in a highly competitive environment |
| Our competitors may use superior technology that we may be unable to afford or which would require costly investment by us in order to compete |
| If our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost |
| In addition, our competitors may have greater financial, technical and personnel resources that allow them to enjoy technological advances and may in the future allow them to implement new technologies before we can |
| We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us |
| One or more of the technologies that we currently use or that we may implement in the future may become obsolete |
| All of these factors may inhibit our ability to acquire additional prospects and compete successfully in the future |
| Substantial exploration and development activities could require significant outside capital, which could dilute the value of our common shares and restrict our activities |
| Also, we may not be able to obtain needed capital or financing on satisfactory terms, which could lead to a limitation of our future business opportunities and a decline in our oil and natural gas reserves |
| We expect to expend substantial capital in the acquisition of, exploration for and development of oil and natural gas reserves |
| In order to finance these activities, we may need to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of non-strategic assets or other means |
| The issuance of additional equity securities could have a dilutive effect on the value of our common shares |
| The issuance of additional debt would require that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions, dividends and general corporate requirements, which could place us at a competitive disadvantage relative to other competitors |
| Additionally, if our revenues decrease as a result of lower oil or natural gas prices, operating difficulties or declines in reserves, our ability to obtain the capital necessary to undertake or complete future exploration and development programs and to pursue other opportunities may be limited, which could result in a curtailment of our operations relating to exploration and development of our prospects, which in turn could result in a decline in our oil and natural gas reserves |
| If oil and natural gas prices decrease, we may be required to write-down the carrying values and/or the estimates of total reserves of our oil and natural gas properties, which would constitute a non-cash charge to earnings and adversely affect our results of operations |
| Accounting rules applicable to us require that we review periodically the carrying value of our oil and natural gas properties for possible impairment |
| Based on specific market factors and circumstances at the time of prospective impairment reviews and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties |
| A write-down constitutes a non-cash charge to earnings |
| We may incur non-cash charges in the future, which could have a material adverse effect on our results of operations in the period taken |
| We may also reduce our estimates of the reserves that may be economically recovered, which could have the effect of reducing the total value of our reserves |
| Such a reduction in carrying value could impact our borrowing ability and may result in accelerating the repayment date of any outstanding debt |
| Our reserve estimates depend on many assumptions that may turn out to be inaccurate |
| Any material inaccuracies in our reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves |
| Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be precisely measured |
| The accuracy of any reserve estimate depends on the quality of available data, production history and engineering and geological interpretation and judgment |
| Because all reserve 27 _________________________________________________________________ [81]Table of Contents estimates are to some degree imprecise, the quantities of oil and natural gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and natural gas prices may all differ materially from those assumed in these estimates |
| The information regarding present value of the future net cash flows attributable to our proved oil and natural gas reserves is only estimated and should not be construed as the current market value of the oil and natural gas reserves attributable to our properties |
| Thus, such information includes revisions of certain reserve estimates attributable to proved properties included in the preceding year’s estimates |
| Such revisions reflect additional information from subsequent activities, production history of the properties involved and any adjustments in the projected economic life of such properties resulting from changes in product prices |
| Any future downward revisions could adversely affect our financial condition, our borrowing ability, our future prospects and the value of our common stock |
| As of December 31, 2005, 41prca of our total proved reserves are undeveloped and 10prca are developed non-producing |
| These reserves may not ultimately be developed or produced |
| Furthermore, not all of our undeveloped or developed non-producing reserves may be ultimately produced at the time periods we have planned, at the costs we have budgeted, or at all |
| As a result, we may not find commercially viable quantities of oil and natural gas, which in turn may result in a material adverse effect on our results of operations |
| If we are unsuccessful at marketing our oil and gas at commercially acceptable prices, our profitability will decline |
| Our ability to market oil and gas at commercially acceptable prices depends on, among other factors, the following: • the availability and capacity of gathering systems and pipelines; • federal and state regulation of production and transportation; • changes in supply and demand; and • general economic conditions |
| Our inability to respond appropriately to changes in these factors could negatively effect our profitability |
| Market conditions or operational impediments may hinder our access to oil and natural gas markets or delay our production |
| Market conditions or the unavailability of satisfactory oil and natural gas transportation arrangements may hinder our access to oil and natural gas markets or delay our production |
| The availability of a ready market for our oil and natural gas production depends on a number of factors, including the demand for and supply of oil and natural gas and the proximity of reserves to pipelines and terminal facilities |
| Our ability to market our production depends in a substantial part on the availability and capacity of gathering systems, pipelines and processing facilities, in some cases owned and operated by third parties |
| Our failure to obtain such services on acceptable terms could materially harm our business |
| We may be required to shut in wells for a lack of a market or because of the inadequacy or unavailability of pipelines or gathering system capacity |
| If that were to occur, then we would be unable to realize revenue from those wells until arrangements were made to deliver our production to market |
| We depend on our key personnel and the loss of any of these individuals could have a material adverse effect on our operations |
| We believe that the success of our business strategy and our ability to operate profitably depend on the continued employment of M Jay Allison, our President and Chief Executive Officer, and a limited number of other senior management personnel |
| Allison or any of those other individuals could have a material adverse effect on our operations |
| 28 _________________________________________________________________ [82]Table of Contents Our insurance coverage may not be sufficient or may not be available to cover some liabilities or losses that we may incur |
| If we suffer a significant accident or other loss, our insurance coverage will be net of our deductibles and may not be sufficient to pay the full current market value or current replacement value of our lost investment, which could result in a material adverse impact on our operations and financial condition |
| Our insurance does not protect us against all operational risks |
| We do not carry business interruption insurance |
| For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented |
| Because third party drilling contractors are used to drill our wells, we may not realize the full benefit of workers’ compensation laws in dealing with their employees |
| In addition, some risks, including pollution and environmental risks, generally are not fully insurable |
| We are subject to extensive governmental laws and regulations that may adversely affect the cost, manner or feasibility of doing business |
| Our operations and facilities are subject to extensive federal, state and local laws and regulations relating to the exploration for, and the development, production and transportation of, oil and natural gas, and operating safety |
| Future laws or regulations, any adverse changes in the interpretation of existing laws and regulations or our failure to comply with existing legal requirements may harm our business, results of operations and financial condition |
| We may be required to make large and unanticipated capital expenditures to comply with governmental laws and regulations, such as: • lease permit restrictions; • drilling bonds and other financial responsibility requirements, such as plug and abandonment bonds; • spacing of wells; • unitization and pooling of properties; • safety precautions; • regulatory requirements; and • taxation |
| Under these laws and regulations, we could be liable for: • personal injuries; • property and natural resource damages; • well reclamation costs; and • governmental sanctions, such as fines and penalties |
| Our operations could be significantly delayed or curtailed and our cost of operations could significantly increase as a result of regulatory requirements or restrictions |
| We are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations |
| Our operations may incur substantial liabilities to comply with environmental laws and regulations |
| Our oil and natural gas operations are subject to stringent federal, state and local laws and regulations relating to the release or disposal of materials into the environment and otherwise relating to environmental protection |
| These laws and regulations: • require the acquisition of a permit before drilling commences; • restrict the types, quantities and concentration of substances that can be released into the environment in connection with drilling and production activities; 29 _________________________________________________________________ [83]Table of Contents • limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas; and • impose substantial liabilities for pollution resulting from our operations |
| Failure to comply with these laws and regulations may result in: • the assessment of administrative, civil and criminal penalties; • the incurrence of investigatory or remedial obligations; and • the imposition of injunctive relief |
| Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to reach and maintain compliance and may otherwise have a material adverse effect on our industry in general and on our own results of operations, competitive position or financial condition |
| Under these environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination or if our operations met previous standards in the industry at the time they were performed |
| Provisions of our articles of incorporation, bylaws and Nevada law will make it more difficult to effect a change in control of us, which could adversely affect the price of our common stock |
| Nevada corporate law and our articles of incorporation and bylaws contain provisions that could delay, defer or prevent a change in control of us |
| These provisions include: • allowing for authorized but unissued shares of common and preferred stock; • a classified board of directors; • requiring special stockholder meetings to be called only by our chairman of the board, our chief executive officer, a majority of the board or the holders of at least 10prca of our outstanding stock entitled to vote at a special meeting; • requiring removal of directors by a supermajority stockholder vote; • prohibiting cumulative voting in the election of directors; and • Nevada control share laws that may limit voting rights in shares representing a controlling interest in us |
| We have in place a stockholders’ rights plan |
| The provisions of the stockholders’ rights plan and the above provisions could make an acquisition of us by means of a tender offer or proxy contest or removal of our incumbent directors more difficult |
| As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, which may limit the price that investors are willing to pay in the future for shares of our common stock |