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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2020

Summary of Unaudited Pro Forma Financial Information

	Pro Forma		Pro Forma
	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
	(In thousands, except per share amount)
Revenues:	$	295,547	$	610,850
Net Income	$	102,506	$	164,583

Net income per share:
Basic	$	0.50	$	0.79
Diluted	$	0.36	$	0.59

Summary of Lease Cost Recognized

Lease costs recognized during the three months and six months ended June 30, 2020 were as follows:

	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
	(In thousands)
Operating lease cost included in general and administrative expense	$	416	$	827
Operating lease cost included in lease operating expense		212		349
Short-term lease cost (drilling rig costs included in proved oil and gas properties)		7,580		19,281
	$	8,208	$	20,457

Summary of Liabilities Under Contract Contain Operating Leases

As of June 30, 2020, Comstock had the following liabilities under contracts that contain operating leases:

	(In thousands)
July 1 to December 31, 2020	$	1,278
2021		2,274
2022		473
2023		136
Total lease payments		4,161
Imputed interest		(169	)
Total lease liability	$	3,992

Summary of Accrued Costs

Accrued costs at June 30, 2020 and December 31, 2019 consisted of the following:


	As of June 30, 2020		As of December 31, 2019
	(In thousands)
Accrued interest payable	$	39,096	$	39,501
Accrued capital expenditures		13,115		42,193
Accrued transportation costs		27,707		28,307
Accrued transaction costs		3,364		10,830
Accrued employee compensation		7,552		8,653
Accrued lease operating expenses		8,695		4,990
Other		3,930		2,692
	$	103,459	$	137,166

Summary of Changes in Reserve for Future Abandonment Costs

The following table summarizes the changes in Comstock's total estimated liability for such obligations during the periods presented:

	Six Months Ended June 30,
	2020			2019
	(In thousands)
Reserve for future abandonment costs at beginning of period	$	18,151		$	5,136
New wells placed on production		289			156
Liabilities settled and assets disposed of		(27	)		(29	)
Accretion expense		581			193
Reserve for future abandonment costs at end of period	$	18,994		$	5,456

Schedule of Gas Derivative Contracts Volume and Prices

The Company had the following oil and natural gas price derivative financial instruments, excluding basis swaps which are discussed separately below, at June 30, 2020:

	Future Production Period
	Six Months Ending December 31, 2020			Year Ending December 31, 2021			Year Ending December 31, 2022			Total
Natural Gas Swap Contracts:
Volume (MMBtu)		94,011,612	⁽¹⁾		142,633,140	⁽²⁾		10,950,000			247,594,752
Average Price per MMBtu		$2.63	⁽¹⁾		$2.55	⁽²⁾		$2.53			$2.58
Natural Gas 2-Way Collar Contracts:
Volume (MMBtu)		8,700,000			98,550,000			—			107,250,000
Price per MMBtu:
Average Ceiling		$2.92			$2.88			—			$2.89
Average Floor		$2.43			$2.45			—			$2.45
Natural Gas 3-Way Collar Contracts:
Volume (MMBtu)		9,200,000		—			—				9,200,000
Price per MMBtu:
Average Ceiling		$2.99		—			—				$2.99
Average Floor		$2.63		—			—				$2.63
Average Put		$2.32		—			—				$2.32
Natural Gas Swaptions Call Contracts:
Volume (MMBtu)	—				71,250,000	⁽³⁾		49,200,000	⁽⁴⁾		120,450,000
Average Price per MMBtu	—				$2.52	⁽³⁾		$2.51	⁽⁴⁾		$2.52
Crude Oil Collar Contracts:
Volume (Barrels)		532,100		—			—				532,100
Price per Barrel:
Average Ceiling		$63.89		—			—				$63.89
Average Floor		$49.25		—			—				$49.25

(1)

For the six months ending December 31, 2020, natural gas price swap contracts include 38,640,000 MMBtu at an average price of $2.52 that are part of certain natural gas price swaption contracts which include a call to extend the price swap by the counterparty as described in (3) below.

(2)

For the year ending December 31, 2021, natural gas price swap contracts include 23,650,000 MMBtu at an average price of $2.52 that are part of certain natural gas price swaption contracts which include a call to extend the price swap by the counterparty as described in (4) below.

(3)

The counterparty has the right to exercise a call option to enter into a price swap with the Company on 71,250,000 MMBtu in 2021 at an average price of $2.52. The call option expires for 47,450,000 MMBtu at an average price of $2.53 in October 2020; for 7,300,000 MMBtu at an average price of $2.50 in November 2020 and for 16,500,000 MMBtu at an average price of $2.50 in March 2021.

(4)

The counterparty has the right to exercise a call option to enter into a price swap with the Company on 49,200,000 MMBtu in 2022 at an average price $2.51. The call option expires for 5,400,000 MMBtu at an average price of $2.50 in March 2021; for 36,500,000 MMBtu at an average price of $2.52 in October 2021 and 7,300,000 MMBtu at an average price of $2.50 in November 2021.

Schedule of Derivative Instruments

None of the Company's derivative contracts were designated as cash flow hedges. The aggregate fair value of the Company's derivative instruments reported in the accompanying consolidated balance sheets by type, including the classification between assets and liabilities, consists of the following:

Type	Consolidated Balance Sheet Location	June 30, 2020		December 31, 2019
		(in thousands)
Asset Derivative Financial Instruments:
Natural gas price derivatives	Derivative Financial Instruments – current	$	49,793	$	75,123
Oil price derivatives	Derivative Financial Instruments – current		5,633		181
		$	55,426	$	75,304

Natural gas price derivatives	Derivative Financial Instruments – long-term	$	5,045	$	13,888
Liability Derivative Financial Instruments:
Natural gas price derivatives	Derivative Financial Instruments – current	$	10,849	$	—
Oil price derivatives	Derivative Financial Instruments – current		—		222
Interest rate derivatives	Derivative Financial Instruments – current	916		—
		$	11,765	$	222

Natural gas price derivatives	Derivative Financial Instruments – long-term	$	11,160	$	4,220
Interest rate derivatives	Derivative Financial Instruments – long-term		1,898	—
		$	13,058	$	4,220

Schedule of Gains and Losses from Derivative Financial Instruments Assets (Liabilities)

The Company recognized cash settlements and changes in the fair value of its derivative financial instruments as a single component of other income (expenses). Gains and losses related cash settlements and changes in the fair value recognized on the Company's derivative contracts recognized in the consolidated statement of operations were as follows:


Gain (Loss) Recognized in	Three Months Ended June 30,					Six Months Ended June 30,
Earnings on Derivatives	2020			2019		2020			2019
	(In thousands)
Natural gas price derivatives	$	(5,140	)	$	7,302	$	37,835		$	10,458
Oil price derivatives		(4,406	)		7,442		14,518			(3,371	)
Interest rate derivatives		(2,752	)		—		(2,752	)		—
	$	(12,298	)	$	14,744	$	49,601		$	7,087

Consolidated Income Tax Provision

The following is an analysis of the consolidated income tax provision:

	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
	(In thousands)
Current - Federal	$	—		$	—	$	—		$	—
Current - State		88			24		149			(94	)
Deferred - Federal		(13,520	)		6,834		(2,017	)		10,776
Deferred - State		1,987			244		1,814			654
	$	(11,445	)	$	7,102	$	(54	)	$	11,336

Difference Between Federal Statutory Rate and Effective Tax Rate

The difference between the federal statutory rate of 21% and the effective tax rate is due to the following:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Tax at statutory rate		21	%		21	%		21	%		21	%
Tax effect of:
Valuation allowance on deferred tax assets		(0.8	)		2.4			5.2			1.7
State income taxes, net of federal benefit		(2.5	)		(0.2	)		(30.0	)		0.5
Nondeductible stock-based compensation		0.8			1.2			2.9			0.9
Other		0.2			0.5			1.6			0.3
Effective tax rate		18.7	%		24.9	%		0.7	%		24.4	%

Reconciliation of Beginning and Ending Balances for Derivative Instruments

The Company had no derivative instruments classified as Level 3 as of June 30, 2019. The following is a reconciliation of the beginning and ending balances for derivative instrument assets (liabilities) classified as Level 3 in the fair value hierarchy:

	Six Months Ended June 30, 2020
	(In thousands)
Balance at beginning of year	$	4,351
Total gain (loss) included in earnings		11,454
Settlements, net		(22,585	)
Balance at end of period	$	(6,780	)

Summary of Carrying Amounts and Fair Values of Financial Instruments

The following presents the carrying amounts and the fair values of the Company's financial instruments as of June 30, 2020 and December 31, 2019:


	June 30, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:	(In thousands)
Derivative financial instruments ⁽¹⁾	$	60,471	$	60,471	$	89,192	$	89,192
Liabilities:
Derivative financial instruments ⁽¹⁾	$	24,823	$	24,823	$	4,442	$	4,442
Bank credit facility ⁽²⁾	$	800,000	$	800,000	$	1,250,000	$	1,250,000
7½% senior notes due 2025 ⁽³⁾	$	462,296	$	551,266	$	455,768	$	534,375
9¾% senior notes due 2026 ⁽³⁾	$	1,271,785	$	1,255,500	$	820,057	$	765,000

_____________

(1)

The Company's natural gas price swaps and basis swap agreements, its interest rate swap agreements and its crude oil and natural gas price collars are classified as Level 2 and measured at fair value using a market approach using third party pricing services and other active markets or broker quotes that are readily available in the public markets. The Company's natural gas swaption contracts provide the counterparty the right, but not the obligation, to extend terms of an existing swap on predetermined dates. Due to subjectivity of the inputs used to value the counterparty rights in the contracts, these contracts are classified as Level 3 in the fair value hierarchy.

(2)

The carrying value of our floating rate debt outstanding approximates fair value.

(3)

The fair value of the Company's fixed rate debt was based on quoted prices as of June 30, 2020 and December 31, 2019, respectively, a Level 1 measurement.

Weighted Average Shares of Unvested Restricted Stock

Weighted average shares of unvested restricted stock outstanding were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(in thousands)
Unvested restricted stock		1,184		441		1,135		427

Common Stock and Convertible Stock Dilutive in Weighted average unearned PSUs outstanding

Weighted average unearned PSUs outstanding were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands, except per unit amounts)
Weighted average PSUs		976		335		951		335
Weighted average grant date fair value per unit	$	9.33	$	12.93	$	9.33	$	12.93

Basic and Diluted Income (Loss) Per Share

Basic and diluted income (loss) per share were determined as follows:

	Three Months Ended June 30,
	2020								2019
	Loss			Shares		Per Share			Income			Shares		Per Share
	(In thousands, except per share amounts)
Net income (loss) attributable to common stock	$	(60,002	)						$	21,407
Income allocable to unvested restricted shares		—								(89	)
Basic income (loss) attributable to common stock		(60,002	)		208,904	$	(0.29	)		21,318			105,457	$	0.20
Diluted income (loss) attributable to common stock	$	(60,002	)		208,904	$	(0.29	)	$	21,318			105,457	$	0.20

	Six Months Ended June 30,
	2020								2019
	Loss			Shares		Per Share			Income			Shares		Per Share
	(In thousands, except per share amounts)
Net income (loss) attributable to common stock	$	(30,046	)						$	34,982
Income allocable to unvested restricted shares		—								(141	)
Basic income (loss) attributable to common stock		(30,046	)		198,910	$	(0.15	)		34,841			105,457	$	0.33
Diluted income (loss) attributable to common stock	$	(30,046	)		198,910	$	(0.15	)	$	34,841			105,457	$	0.33

Cash Payments Made for Interest and Income Taxes

Cash payments made for interest and income taxes and other non-cash investing and financing activities for the six months ended June 30, 2020 and 2019, respectively, were as follows:

	Six Months Ended June 30,
	2020			2019
	(In thousands)
Cash payments for:
Interest payments	$	90,824		$	56,430
Income tax payments	$	—		$	2

Non-cash investing activities include:
Decrease in accrued capital expenditures	$	29,078		$	4,209

Non-cash financing activities include:
Retirement of debt in exchange for common stock	$	(4,151	)	$	—
Issuance of common stock in exchange for debt	$	5,012		$	—