CNX Resources Corporation — Q3 2023 Form 10-Q
Business context and period: Unaudited quarterly report for the three and nine months ended September 30, 2023. CNX produces natural gas, NGLs and oil and reports Shale and Coalbed Methane segments. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue and other operating income | $350.5 million | $117.1 million | $2,466.2 million | $(375.6) million |
| Net income (loss) | $21.4 million | $(427.1) million | $1,206.7 million | $(1,316.7) million |
| Diluted EPS | $0.12 | $(2.28) | $6.24 | $(6.80) |
| Cash provided by operating activities | — | $653.5 million | $792.7 million | |
| Capital expenditures | — | $571.7 million | $392.5 million |
Production was 143.4 Bcfe in Q3 and 413.4 Bcfe for the first nine months. The company’s non-GAAP production margin, including cash settlements on commodity hedges, was $128 million ($0.89/Mcfe) in Q3 and $427 million ($1.03/Mcfe) year to date, compared with $236 million ($1.61/Mcfe) and $728 million ($1.65/Mcfe), respectively.
At September 30, cash was $8.7 million and current assets were $300.6 million. Total debt, excluding debt issuance costs, was about $2.181 billion, including $325.6 million of convertible notes classified as current because holders could convert during Q4. CNX had $25 million drawn on its revolver and $1.230 billion of unused capacity; CNXM had $88.1 million drawn and $512.0 million of unused capacity. Both entities were in compliance with their financial covenants. Total stockholders’ equity was $3.957 billion.
Changes versus comparable periods
- Q3 natural gas, NGL and oil revenue fell to $255.1 million from $1.127 billion, principally reflecting sharply lower realized commodity prices and 3.0 Bcfe lower sales volumes. Q3 natural gas sales price was $1.64/Mcf versus $7.82/Mcf a year earlier; hedge cash settlements improved by $753 million year over year.
- Q3 earnings improved from the prior-year loss, but the comparison reflects a major change in derivative accounting results: commodity derivatives produced a $47.8 million gain in Q3 2023 versus a $1.062 billion loss in Q3 2022. For the first nine months, the reported $1.207 billion net income included a $1.352 billion commodity-derivative gain, including a $1.232 billion unrealized gain.
- Operating cash flow declined $139.3 million year over year, while capital expenditures rose $179.1 million. Higher asset-sale proceeds partly offset increased investment spending.
- Nine-month production fell 26.2 Bcfe to 413.4 Bcfe. Management cited normal declines and the timing of wells being turned in line; Q3 volumes were also affected by the sale of non-operated assets.
Outlook, commentary and risks
- 2023 outlook: Production guidance is 545–555 Bcfe and capital expenditures are expected to be $625–675 million. Management said operating cash flow, asset-sale proceeds and borrowing capacity are expected to fund working capital, planned capital spending and scheduled debt service, while noting results depend on operating performance and market conditions.
- Hedging: As of October 5, 2023, Q4 2023 gas hedges totaled 114.4 Bcf at a weighted-average price of $2.53/Mcf; 2024 hedges totaled 421.6 Bcf at $2.51/Mcf. Commodity prices remain volatile. Open derivatives were a net liability of $571 million at quarter-end; a hypothetical 10% increase in future gas prices would reduce their fair value by $640 million.
- Environmental attributes and new projects: Sales of environmental attributes were $23 million year to date. CNX expects 2024 sales, net of related fees, of $75–100 million, but notes that markets, qualification and pricing are uncertain. The Adams Fork clean ammonia project is part of ARCH2, selected for potential federal support of up to $925 million; the project remains contingent on approvals and other factors, and CNX cannot yet predict its financial impact.
- Debt, capital returns and costs: Convertible noteholders were eligible to convert during Q4; CNX stated its current intent is to pay the principal in cash. The company repurchased $208 million of shares in the first nine months and had $1.240 billion remaining under its authorization. It has not paid common dividends since 2016. Management cited inflation in steel, diesel and labor, as well as potentially higher borrowing costs.
- Contingencies: CNX faces ordinary-course claims, including a Coal Act retiree-benefit lawsuit. The company says a loss in that matter is possible but not probable and has recorded no accrual; CONSOL agreed to indemnify CNX for coal-related liabilities, but CNX notes there is no assurance the indemnity will be satisfied. The filing says aggregate future losses from pending claims could be material but cannot be reasonably estimated.
- Other stated risks include commodity-price and hedging exposure, pipeline and midstream dependence, operational and reserve uncertainty, environmental and regulatory matters, and volatile environmental-attribute markets. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate cash-settled hedge economics and underlying production performance from large unrealized derivative mark-to-market gains or losses when assessing earnings and cash generation.
- Check progress against full-year production and capital-spending guidance, and the timing and economics of new wells and asset dispositions.
- Review the convertible notes’ conversion activity, cash repayment capacity, and possible share dilution; confirm revolver availability and covenant compliance.
- Assess whether environmental-attribute revenue and the Adams Fork/ARCH2 opportunity materialize, including required approvals, qualification and market pricing.
- Monitor commodity prices, hedge positions and derivative valuation sensitivity, inflation and operating costs, and developments in material legal or indemnity matters.