CNX Resources Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparable period is Q1 2022. Unaudited consolidated results. Unless noted, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Natural gas, NGL and oil revenue | $455.6 | $744.6 |
| Total revenue and other operating income (loss), including derivative gains/losses | $1,276.0 | $(913.1) |
| Net income (loss) | $710.4 | $(922.9) |
| Diluted EPS | $3.61 | $(4.62) |
| Cash provided by operating activities | $248.7 | $336.4 |
| Capital expenditures | $170.0 | $122.3 |
| Cash used in investing activities | $159.5 | $102.9 |
- Q1 2023 income included a $762.2 million total commodity-derivative gain, including an $823.2 million unrealized gain, versus a $1,726.4 million derivative loss in Q1 2022, including a $1,455.6 million unrealized loss. These non-cash fair-value changes substantially explain the swing in reported earnings.
- On a company-defined non-GAAP basis, sales of natural gas, NGL and oil including cash settlements were $395 million, compared with $474 million; production margin was $169 million, or $1.24/Mcfe, versus $245 million, or $1.62/Mcfe.
- Total sales volumes fell 15.0 Bcfe to 135.9 Bcfe. Management attributed the decline mainly to prior operational delays affecting well turn-in-line timing, with the balance from normal production declines. Natural gas prices and NGL prices also fell year over year.
- Operating cash flow was lower despite the return to net income; reported cash flow includes substantial derivative, deferred-tax and working-capital effects. Operating cash flow less capital expenditures was approximately $78.7 million, compared with $214.1 million in Q1 2022; this is a simple derived comparison, not a company-reported measure.
Balance sheet, debt and liquidity
- At March 31, 2023, cash was $2.8 million, current assets $351.6 million and current liabilities $704.9 million. Cash was $21.3 million at year-end 2022.
- Long-term debt was $2,203.1 million on the balance sheet; aggregate debt excluding issuance costs was approximately $2,216.6 million. Debt was broadly stable versus year-end. CNX and CNXM had $13.8 million and $136.0 million, respectively, outstanding on their revolving facilities.
- Unused capacity was $1,144.3 million under CNX’s facility and $464.0 million under CNXM’s facility. CNX reported compliance with debt covenants at quarter-end. Management said operating cash flow, asset sales and borrowing capacity are expected to meet working-capital, capital-spending and debt-service needs for the current fiscal year, subject to business and market conditions.
- Total stockholders’ equity was $3,567.3 million, up from $2,950.5 million at December 31, 2022. Derivative instruments were a net liability of approximately $1,003 million, down from $1,905 million at year-end.
Material changes and capital allocation
- Natural gas, NGL and oil revenue declined $289.0 million. Management cited lower natural gas and NGL prices and lower volumes; improved cash hedge settlements partly offset the decline.
- Production costs were $226 million, compared with $229 million, but increased to $1.66/Mcfe from $1.52/Mcfe. Transportation, gathering and compression costs rose, reflecting a wetter production mix, higher processing and compression costs, repairs and maintenance, and lower volumes.
- Interest expense increased to $35.7 million from $27.1 million, mainly due to interest-rate-swap fair-value changes and higher interest on debt issued after Q1 2022.
- CNX repurchased 5.84 million shares for $93.5 million during the quarter, at an average price of $15.88. $354.1 million remained under the authorization at quarter-end. The company declared no dividend and says it has not paid common dividends since 2016.
Outlook, risks and unusual items
- 2023 guidance: production of 555–575 Bcfe and capital expenditures of $575–$675 million. Q1 production was 135.9 Bcfe and capital expenditures were $170.0 million.
- As of April 6, 2023, CNX reported 2023 hedged gas volumes of 433.0 Bcf, including 106.8 Bcf of actual settlements, and 2024 hedged volumes of 405.6 Bcf. Quarterly 2023 hedge prices for Q2–Q4 were approximately $2.42, $2.41 and $2.49/Mcf. Hedging can limit benefit from price increases as well as reduce exposure to price declines.
- Management cited volatile commodity prices, inflation in steel, diesel and labor, rising interest rates, production and operating risks, pipeline and midstream dependence, environmental and regulatory requirements, and potential impairment of gas properties or goodwill as risks. Management said inflation had increased capital costs.
- A West Virginia tax-law change produced a discrete income-tax benefit of approximately $16.0 million. The reported effective tax rate was 23.4%, versus 26.1% in Q1 2022.
- CNX faces a Coal Act lawsuit brought by UMWA benefit-plan trustees relating to former coal subsidiaries. The company states loss is possible but not probable, has recorded no accrual, and says CONSOL agreed to indemnify it for coal-related liabilities. Other pending claims are accrued as appropriate; management says current estimated accruals are immaterial, although future aggregate losses could be material and cannot be reasonably estimated.
- Unconditional purchase obligations totaled $1,741.3 million, including commitments extending beyond five years. The company also disclosed $275.1 million in letters of credit, surety bonds and financial guarantees, and stated it expects these commitments to expire without funding and not materially affect financial condition.
Important facts for investors to verify
- Separate underlying operating performance from the large, volatile unrealized commodity-derivative gains and losses when assessing Q1 earnings and cash flow.
- Review realized hedge outcomes, remaining hedge volumes and prices, and the sensitivity of derivative fair value to commodity-price movements.
- Track production volumes, well turn-in-line timing, unit costs and capital spending against 2023 guidance, particularly given inflation and the Q1 volume decline.
- Assess liquidity beyond reported cash, including revolving-facility availability, covenant headroom, debt maturities and CNXM’s separate obligations.
- Monitor the Coal Act and other legal contingencies, the recoverability of CONSOL indemnification, and the company’s substantial contractual and transportation commitments.
- Consider share repurchases alongside capital requirements, leverage, cash generation and the remaining authorization; repurchases are discretionary and dividends are not currently being paid.