crk-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2022


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

Commission File No. 001-03262

COMSTOCK RESOURCES, INC.

(Exact name of registrant as specified in its charter)


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

5300 Town and Country Blvd., Suite 500, Frisco, Texas 75034

(Address of principal executive offices)

Telephone No.: (972) 668-8800

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.50 (per share)	CRK	New York Stock Exchange

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

Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐

Emerging growth company ☐

Accelerated filer x

Non-accelerated ☐

Smaller reporting company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

The number of shares outstanding of the registrant's common stock, par value $0.50, as of May 4, 2022 was 232,905,868.

COMSTOCK RESOURCES, INC.

QUARTERLY REPORT

For the Quarter Ended March 31, 2022

INDEX


			Page
PART I. Financial Information

Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021			4
Consolidated Statements of Operations – for the three months ended March 31, 2022 and 2021			5
Consolidated Statements of Stockholders' Equity – for the three months ended March 31, 2022 and 2021			6
Consolidated Statements of Cash Flows – for the three months ended March 31, 2022 and 2021			7
Notes to Consolidated Financial Statements			8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			18

Item 3. Quantitative and Qualitative Disclosure About Market Risk			22

Item 4. Controls and Procedures			23

PART II. Other Information

Item 6. Exhibits			23

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	As of
	March 31, 2022		December 31, 2021
	(Unaudited)
	(In thousands)
ASSETS
Cash and cash equivalents	$	12,137	$	30,663
Accounts receivable:
Oil and gas sales	198,261		217,149
Joint interest operations	34,694		29,755
From affiliates	6,658		20,834
Derivative financial instruments	2,601		5,258

Other current assets	13,671		15,077
Total current assets	268,022		318,736
Property and equipment:
Oil and natural gas properties, successful efforts method:
Proved	4,988,567		4,756,394
Unproved	298,091		302,129
Other	6,602		6,690
Accumulated depreciation, depletion and amortization	(1,164,366)		(1,058,067)
Net property and equipment	4,128,894		4,007,146
Goodwill	335,897		335,897

Derivative financial instruments	10,008		—
Operating lease right-of-use assets	6,879		6,450

	$	4,749,700	$	4,668,229

LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	318,736	$	314,569
Accrued costs	103,322		135,026
Operating leases	2,784		2,444
Derivative financial instruments	513,645		181,945
Total current liabilities	938,487		633,984
Long-term debt	2,534,460		2,615,235
Deferred income taxes	172,629		197,417
Derivative financial instruments	—		4,042
Long-term operating leases	4,167		4,075
Reserve for future abandonment costs	26,416		25,673
Other non-current liabilities	24		24
Total liabilities	3,676,183		3,480,450
Commitments and contingencies
Mezzanine equity:
Series B Convertible Preferred stock — 5,000,000 shares authorized, 175,000 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	175,000		175,000
Stockholders' equity:
Common stock—$0.50 par, 400,000,000 shares authorized, 232,919,869 and 232,924,646 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	116,460		116,462
Additional paid-in capital	1,101,838		1,100,359
Accumulated deficit	(319,781)		(204,042)
Total stockholders' equity	898,517		1,012,779
	$	4,749,700	$	4,668,229

The accompanying notes are an integral part of these statements.

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2022		2021
	(In thousands, except per share amounts)
Revenues:
Natural gas sales	$	522,957	$	323,960
Oil sales	1,884		16,525
Total oil and gas sales	524,841		340,485
Operating expenses:
Production and ad valorem taxes	13,820		9,652
Gathering and transportation	32,093		29,458
Lease operating	26,186		24,563
Depreciation, depletion and amortization	106,728		109,128
General and administrative	8,223		8,028
Exploration	1,021		—
Gain on sale of assets	(2)		(70)
Total operating expenses	188,069		180,759

Operating income	336,772		159,726
Other income (expenses):
Loss from derivative financial instruments	(437,493)		(21,749)
Other income	4,166		281

Interest expense	(46,491)		(63,811)
Loss on early retirement of debt	—		(238,539)
Total other expenses	(479,818)		(323,818)
Loss before income taxes	(143,046)		(164,092)
Benefit from income taxes	31,622		29,967
Net loss	(111,424)		(134,125)
Preferred stock dividends	(4,315)		(4,315)
Net loss available to common stockholders	$	(115,739)	$	(138,440)

Net loss per share:
Basic	$	(0.50)	$	(0.60)
Diluted	$	(0.50)	$	(0.60)
Weighted average shares outstanding:
Basic	231,976		231,377
Diluted	231,976		231,377

The accompanying notes are an integral part of these statements.

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)


	Common Shares	Common Stock- Par Value		Additional Paid-in Capital		Accumulated Earnings (Deficit)		Total
	(In thousands)

Balance at January 1, 2021	232,415	$	116,206	$	1,095,384	$	55,183	$	1,266,773
Stock-based compensation	(4)	—		1,690		—		1,690

Stock issuance costs	—	—		(30)		—		(30)
Net loss	—	—		—		(134,125)		(134,125)
Payment of preferred dividends	—	—		—		(4,315)		(4,315)
Balance at March 31, 2021	232,411	$	116,206	$	1,097,044	$	(83,257)	$	1,129,993













Balance at January 1, 2022	232,925	$	116,462	$	1,100,359	$	(204,042)	$	1,012,779
Stock-based compensation	(5)	(2)		1,479		—		1,477


Net loss	—	—		—		(111,424)		(111,424)
Payment of preferred dividends	—	—		—		(4,315)		(4,315)
Balance at March 31, 2022	232,920	$	116,460	$	1,101,838	$	(319,781)	$	898,517

The accompanying notes are an integral part of these statements.

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2022		2021
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(111,424)	$	(134,125)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred income taxes	(24,788)		(30,150)

Gain on sale of assets	(2)		(70)
Depreciation, depletion and amortization	106,728		109,128
Loss on derivative financial instruments	437,493		21,749
Cash settlements of derivative financial instruments	(117,186)		(8,677)
Amortization of debt discount and issuance costs	4,225		8,489
Stock-based compensation	1,495		1,690
Loss on early retirement of debt	—		238,539
(Increase) decrease in accounts receivable	28,125		(7,032)
Decrease in other current assets	1,406		4,778
Decrease in accounts payable and accrued expenses	(42,033)		(11,047)
Net cash provided by operating activities	284,039		193,272
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(213,277)		(165,751)

Proceeds from sales of assets	45		200
Net cash used for investing activities	(213,232)		(165,551)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on bank credit facility	95,000		145,000
Repayments on bank credit facility	(180,000)		(95,000)
Issuance of Senior Notes	—		1,257,500
Retirement of Senior Notes	—		(1,263,651)


Preferred stock dividends paid	(4,315)		(4,315)
Debt and stock issuance costs	—		(20,092)
Income tax withholdings on equity awards	(18)		—
Net cash provided by (used for) financing activities	(89,333)		19,442
Net increase (decrease) in cash and cash equivalents	(18,526)		47,163
Cash and cash equivalents, beginning of period	30,663		30,272
Cash and cash equivalents, end of period	$	12,137	$	77,435

The accompanying notes are an integral part of these statements.

COMSTOCK RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –

Basis of Presentation

These unaudited consolidated financial statements include the accounts of Comstock Resources, Inc. and its wholly-owned subsidiaries (collectively, "Comstock" or the "Company"). In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Comstock as of March 31, 2022, and the related results of operations and cash flows for the periods being presented. Net income and comprehensive income 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, 2021.

The results of operations for the period through March 31, 2022 are not necessarily an indication of the results expected for the full year.

Property and Equipment

The Company follows the successful efforts method of accounting for its oil and natural gas properties. Costs incurred to acquire oil and gas leasehold are capitalized.

The Company assesses the need for an impairment of the capitalized costs for its proved oil and gas properties on a property basis. No impairments were recognized to adjust the carrying value of the Company's proved oil and gas properties during any of the periods presented. Unproved oil and gas properties are also periodically assessed and any impairment in value is charged to expense. The costs related to unproved properties are transferred to proved oil and gas properties and amortized on an equivalent unit-of-production basis when they are reflected in proved oil and natural gas reserves. Exploratory drilling costs are initially capitalized as proved 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 determines the fair values of its oil and gas properties using a discounted cash flow model and proved and risk-adjusted probable oil and natural gas 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 oil and gas reserves and risk-adjusted probable oil and natural gas 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, there may be future impairments in the carrying values of these or other properties.

Goodwill

The Company had goodwill of $335.9 million as of March 31, 2022 that was recorded in 2018. The Company is not required to amortize goodwill as a charge to earnings; however, the Company is required to conduct an annual review of goodwill for impairment. The Company performs an annual assessment of goodwill on October 1 of each year and performs interim assessments if indicators of impairment are present. If the carrying value of goodwill exceeds the fair value, an impairment charge would be recorded for the difference between fair value and carrying value.

Leases

The Company has right-of-use lease assets of $6.9 million related to its corporate office lease, certain office equipment and leased vehicles used in oil and gas operations with corresponding short-term and long-term liabilities. The value of the lease assets and liabilities are determined based upon discounted future minimum cash flows contained within each of the respective contracts. The Company determines if contracts contain a lease at inception of the contract. To the extent that contract terms representing a lease are identified, leases are identified as being either an operating lease or a finance-type lease. Comstock currently has no finance-type leases. Right-of-use lease assets representing the Company's right to use an underlying asset for the lease term and the related lease liabilities represent our obligation to make lease payments under the terms of the contracts. Short-term leases that have an initial term of one year or less are not capitalized; however, amounts paid for those leases are included as part of its lease cost disclosures. Short-term lease costs exclude expenses related to leases with a lease term of one month or less. Leases for the right to explore for and develop oil and natural gas reserves and the related rights to use the land associated with those leases are reflected as oil and gas properties.

Comstock contracts for a variety of equipment used in its oil and natural gas exploration and development activities. Contract terms for this equipment vary broadly, including the contract duration, pricing, scope of services included along with the equipment, cancellation terms, and rights of substitution, among others. The Company's drilling and completion operations routinely change due to changes in commodity prices, demand for oil and natural gas, and the overall operating and economic environment. Accordingly, Comstock manages the terms of its contracts for drilling rigs and completions equipment so as to allow for maximum flexibility in responding to these changing conditions. The Company's completion contracts do not qualify as leases. The Company's rig contracts are presently either for periods of less than one year, or they are on terms that provide for cancellation with 45 days advance notice without a specified expiration date. Accordingly, the Company has elected not to recognize right-of-use lease assets for these rig contracts. The costs associated with drilling rig operations are accounted for under the successful efforts method, which generally require that these costs be capitalized as part of our proved oil and natural gas properties on our balance sheet unless they are incurred on exploration wells that are unsuccessful, in which case they are charged to exploration expense.

Lease costs recognized during the three months ended March 31, 2022 and 2021 were as follows:


	Three Months Ended March 31,
	2022		2021
	(In thousands)
Operating lease cost included in general and administrative expense	$	435	$	429
Operating lease cost included in lease operating expense	270		232
Short-term lease cost (drilling rig costs included in proved oil and gas properties)	11,035		11,458
	$	11,740	$	12,119

Cash payments for operating leases associated with right-of-use assets included in cash provided by operating activities were $0.7 million for the three months ended March 31, 2022 and 2021.

As of March 31, 2022 and December 31, 2021, the operating leases had a weighted-average term of 2.5 years and 2.7 years, respectively, and the weighted-average discount rate used to determine the present value of future operating lease payments was 2.7%. As of March 31, 2022, the Company also had expected future payments for contracted drilling services of $11.6 million.

As of March 31, 2022, expected future payments related to contracts that contain operating leases were as follows:


	(In thousands)
April 1 to December 31, 2022	$	2,135
2023	2,673
2024	2,321
2025	67
2026	1
Total lease payments	7,197
Imputed interest	(246)
Total lease liability	$	6,951

Accrued Costs

Accrued costs at March 31, 2022 and December 31, 2021 consisted of the following:


	As of
	March 31, 2022		December 31, 2021
	(In thousands)
Accrued drilling costs	$	34,494	$	19,995
Accrued interest payable	26,643		60,305
Accrued transportation costs	21,119		22,859
Accrued income and other taxes	12,233		15,655

Accrued employee compensation	4,573		12,320
Accrued lease operating expenses	2,783		2,036
Other	1,477		1,856
	$	103,322	$	135,026

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 periods presented:


	Three Months Ended March 31,
	2022		2021
	(In thousands)
Reserve for future abandonment costs at beginning of period	$	25,673	$	19,290
New wells placed on production	381		328


Accretion expense	362		297
Reserve for future abandonment costs at end of period	$	26,416	$	19,915

Derivative Financial Instruments and Hedging Activities

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. 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. The Company classifies the fair value amounts of derivative financial instruments as net current or noncurrent assets or liabilities, whichever the case may be, by commodity contract. None of the Company's derivative contracts were designated as cash flow hedges. All of Comstock's natural gas derivative financial instruments, except for certain basis swaps, are tied to the Henry Hub-NYMEX price index.

The Company had the following oil and natural gas price derivative financial instruments at March 31, 2022:


	Future Production Period
	Nine Months Ending December 31, 2022		Year Ending December 31, 2023	Total
Natural Gas Swap Contracts:
Volume (MMBtu)	88,000,000		—		88,000,000
Average Price per MMBtu	$2.68				$2.68
Natural Gas Collar Contracts:
Volume (MMBtu)	104,925,000		128,925,000		233,850,000
Average Price per MMBtu:
Average Ceiling	$3.88		$9.85		$7.17
Average Floor	$2.62		$2.98		$2.82









Natural Gas Basis Swap Contracts:
Volume (MMBtu)	8,250,000	(1)	—		8,250,000	(1)
Average Price per MMBtu	($0.16)				($0.16)

_____________________________

(1)Contracts fix the differentials between NYMEX Henry Hub and the Columbia Gulf Mainline indices.

The aggregate fair value of the Company's derivative instruments are presented on a gross basis in the accompanying consolidated balance sheets. The classification of derivative financial instruments between assets and liabilities, consists of the following:


		As of
Type	Consolidated Balance Sheet Location	March 31, 2022		December 31, 2021
		(In thousands)
Asset Derivative Financial Instruments:
Natural gas price derivatives	Derivative Financial Instruments – current	$	2,601	$	4,528
Oil price derivatives	Derivative Financial Instruments – current	—		730
		$	2,601	$	5,258

Natural gas price derivatives	Derivative Financial Instruments – long-term	$	10,008	$	—



Liability Derivative Financial Instruments:
Natural gas price derivatives	Derivative Financial Instruments – current	$	513,645	$	181,215
Oil price derivatives	Derivative Financial Instruments – current	—		730

		$	513,645	$	181,945

Natural gas price derivatives	Derivative Financial Instruments – long-term	$	—	$	4,042

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 to 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) on Derivatives Recognized in Earnings	Three Months Ended March 31,
	2022		2021
	(In thousands)
Natural gas price derivatives	$	(437,493)	$	(18,877)
Oil price derivatives	—		(3,544)
Interest rate derivatives	—		672
	$	(437,493)	$	(21,749)

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 and included in general and administrative expenses for awards of restricted stock and performance stock units ("PSUs") to the Company's employees and directors. The Company recognized $1.5 million and $1.7 million of stock-based compensation expense within general and administrative expenses related to awards of restricted stock and PSUs to its employees and directors during the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, Comstock had 943,386 shares of unvested restricted stock outstanding at a weighted average grant date fair value of $5.74 per share. Total unrecognized compensation cost related to unvested restricted stock grants of $3.1 million as of March 31, 2022 is expected to be recognized over a period of 1.6 years.

As of March 31, 2022, Comstock had 1,049,910 PSUs outstanding at a weighted average grant date fair value of $8.11 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 2,099,820 shares of common stock. Total unrecognized compensation cost related to these grants of $2.7 million as of March 31, 2022 is expected to be recognized over a period of 1.5 years.

Revenue Recognition

Comstock produces oil and natural gas and reports revenues separately for each of these two primary products in its statements of operations. Revenues are recognized upon the transfer of produced volumes to the Company's customers, who take control of the volumes and receive all the benefits of ownership upon delivery at designated sales points. Payment is reasonably assured upon delivery of production. All sales are subject to contracts that have commercial substance, contain specific pricing terms, and define the enforceable rights and obligations of both parties. These contracts typically provide for cash settlement within 25 days following each production month and are cancellable upon 30 days' notice by either party for oil and vary for natural gas based upon the terms set out in the confirmations between both parties. Prices for sales of oil and natural gas are generally based upon terms that are common in the oil and gas industry, including index or spot prices, location and quality differentials, as well as market supply and demand conditions. As a result, prices for oil and natural gas routinely fluctuate based on changes in these factors. Each unit of production (barrel of crude oil and thousand cubic feet of natural gas) represents a separate performance obligation under the Company's contracts since each unit has economic benefit on its own and each is priced separately according to the terms of the contracts.

Comstock has elected to exclude all taxes from the measurement of transaction prices, and its revenues are reported net of royalties and exclude revenue interests owned by others because the Company acts as an agent when selling crude oil and natural gas, on behalf of royalty owners and working interest owners. Revenue is recorded in the month of production based on an estimate of the Company's share of volumes produced and prices realized. The Company recognizes any differences between estimates and actual amounts received in the month when payment is received. Historically, differences between estimated revenues and actual revenue received have not been significant. 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 March 31, 2022. Sales of oil and natural gas generally occur at or near 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 gathering and transportation expenses. The Company recognized accounts receivable of $198.3 million as of March 31, 2022 from customers for contracts where performance obligations have been satisfied and an unconditional right to consideration exists.

Credit Losses

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. Comstock assesses 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 recorded for the three months ended March 31, 2022 and 2021.

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.

In recording deferred income tax assets, the Company considers whether it is more likely than not that 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. As a result, the Company established valuation allowances for its deferred tax assets and U.S. federal and state net operating loss carryforwards that are not expected to be utilized due to the uncertainty of generating taxable income prior to the expiration of the carryforward periods. The Company will continue to assess the valuation allowances against deferred tax assets considering all available information obtained in future periods.

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


	Three Months Ended March 31,
	2022		2021
	(In thousands)
Current - Federal	$	3,961	$	—
Current - State	2,460		(136)
Deferred - Federal	13,424		34,919
Deferred - State	11,777		(4,816)
	$	31,622	$	29,967

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


	Three Months Ended March 31,
	2022		2021
Tax at statutory rate	21.0	%	21.0	%
Tax effect of:

Valuation allowance on deferred tax assets	(3.6)		0.5
State income taxes, net of federal benefit	4.6		(3.0)
Nondeductible stock-based compensation	0.1		(0.2)

Effective tax rate	22.1	%	18.3	%

The Company's federal income tax returns for the years subsequent to December 31, 2017 remain subject to examination. The Company's income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to December 31, 2018. 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.

Fair Value Measurements

The Company holds or has held certain financial assets and liabilities that are required to be measured at fair value. These include cash and cash equivalents held in bank accounts and derivative financial instruments. 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.

During 2021, the Company had natural gas swaption agreements that were measured at fair value using a third party pricing service, categorized as a Level 3 measurement. The following is a reconciliation of the beginning and ending balances for derivative instruments using Level 3 measurements in the fair value hierarchy:


	Three Months Ended March 31, 2021
	(In thousands)
Balance at beginning of year	$	(22,588)
Total loss included in earnings	9,712
Settlements, net	1,919
Transfers out of Level 3	(6,418)
Balance at end of period	$	(17,375)

Fair Values – Reported

The following presents the carrying amounts and the fair values of the Company's financial instruments as of March 31, 2022 and December 31, 2021:


	As of
	March 31, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:	(In thousands)
Commodity-based derivatives (1)	$	12,609	$	12,609	$	5,258	$	5,258
Liabilities:
Commodity-based derivatives (1)	$	513,645	$	513,645	$	185,987	$	185,987
Bank credit facility (2)	$	150,000	$	150,000	$	235,000	$	235,000
7.50% senior notes due 2025 (3)	$	199,758	$	248,066	$	196,998	$	248,066

6.75% senior notes due 2029 (3)	$	1,256,685	$	1,287,500	$