CNX Resources Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This filing reports annual results; standalone fourth-quarter figures are not provided in the supplied text. CNX is an Appalachian natural gas and midstream company, with operations primarily in the Marcellus and Utica shale formations and coalbed methane properties in Virginia.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| GAAP revenue and other operating income | $756.8 million | $1,258.0 million |
| Natural gas, NGL and oil revenue | $2,183.9 million | $896.7 million |
| Net loss attributable to CNX shareholders | $498.6 million; $2.31 diluted loss per share | $483.8 million; $2.43 diluted loss per share |
| Cash provided by operating activities | $926.4 million | $795.1 million |
| Capital expenditures | $465.9 million | $487.3 million |
| Cash used in investing activities | $420.6 million | $439.0 million |
| Cash used in financing activities | $523.8 million | $350.8 million |
| Cash and cash equivalents at year-end | $3.6 million | $15.6 million |
| Long-term debt, including current portion | $2,214.1 million carrying amount | $2,424.0 million |
- Production and pricing: Sales volume increased 15.5% to 590.2 Bcfe. Average realized sales price excluding derivative settlements was $3.70/Mcfe, versus $1.75; including cash derivative settlements it was $2.79/Mcfe, versus $2.49. Settled gas hedges produced a $539.0 million cash loss in 2021, compared with a $377.2 million cash gain in 2020.
- Production costs and margin: Management’s non-GAAP production costs were $928 million, or $1.57/Mcfe, versus $842 million, or $1.64/Mcfe. Non-GAAP production margin rose to $717 million, or $1.22/Mcfe, from $432 million, or $0.85/Mcfe. These measures exclude specified corporate and other expenses and are not GAAP measures.
- Cash generation: Operating cash flow less capital expenditures was approximately $460.5 million. This is a simple calculation, not a company-reported free-cash-flow measure.
- Reserves: Proved reserves totaled 9.63 Tcfe, up slightly from 9.55 Tcfe; proved developed reserves increased 13.5% to 5.91 Tcfe. The standardized after-tax discounted measure was $5.88 billion, versus $2.64 billion. The filing cautions this standardized measure is not current market value.
- Liquidity and debt: CNX reported $923.9 million of unused capacity under its credit facility and CNX Midstream reported $415.0 million under its separate facility. The facilities have different borrowers and guarantees. CNX said it complied with debt covenants at year-end. Cash was low relative to debt and current liabilities.
Material changes versus FY2020
- GAAP revenue and other operating income fell 39.9%, principally because the company recorded a $1.094 billion unrealized commodity-derivative loss in 2021, compared with a $288 million loss in 2020. This mark-to-market loss was a major earnings item and should be distinguished from realized hedge cash settlements.
- Natural gas, NGL and oil revenue increased substantially as production volumes and commodity prices rose. Production volume increased 79.1 Bcfe, mainly from wells brought online during 2020 and 2021.
- Net loss attributable to CNX shareholders increased by $14.9 million. The prior year included $473.0 million of goodwill impairment and $61.8 million of E&P property impairment; neither was recorded in 2021.
- Operating cash flow increased $131.3 million. Capital expenditures declined $21.4 million.
- Long-term debt carrying value declined approximately $187 million. CNX repurchased 18.3 million shares for $241.2 million, and reported year-end equity of $3.70 billion versus $4.42 billion.
Outlook, risks and unusual items
- 2022 outlook: Expected production of 575–605 Bcfe and E&P capital expenditures of $470–$500 million. Management said activity and guidance may be adjusted as conditions change.
- Hedging: As of January 6, 2022, disclosed hedged volumes included 470.8 Bcf for 2022 at an average $2.45/Mcf, with additional hedges extending through 2027. Hedging can limit gains if market prices rise. The year-end fair value of open derivatives was a net liability of $976.2 million, compared with a net asset of $117.5 million in 2020; changes in fair value can materially affect reported earnings.
- Debt and commitments: Debt maturities include $722 million in 2026 and $1.60 billion thereafter. Contractual obligations include approximately $1.98 billion of gas transportation and processing commitments. The company also disclosed $289.2 million of letters of credit, surety bonds and other commitments, and $129 million estimated value of guarantees relating to liabilities assumed by CONSOL Energy.
- Contingencies: CNX faces royalty-related lawsuits, climate litigation and other claims. Management said recorded accruals for pending claims were immaterial, but aggregate future losses could be material and could not be reasonably estimated. A UMWA 1992 Benefit Plan Coal Act lawsuit is contested; CNX said loss was possible but not probable and recorded no accrual. CONSOL agreed to indemnify CNX for coal-related liabilities, but CNX warns that indemnification may not be fully collectible.
- Principal risks: Commodity-price and regional basis volatility; pipeline, processing and transportation constraints; reserve estimation and development risks; environmental, climate and pipeline regulation; rising service and materials costs; debt, borrowing-base and refinancing risks; and cyber, litigation and counterparty exposures. Management reported no significant direct operating disruption from COVID-19 in 2021, but future effects remained uncertain.
- Other notable items: The 2021 loss included a $34 million loss on debt extinguishment. The company has not paid common dividends since 2016. The auditor issued unqualified opinions on the financial statements and internal controls; goodwill valuation and DD&A were identified as critical audit matters.
Investor verification priorities
- Reconcile GAAP revenue and net loss with the large unrealized derivative loss, cash hedge settlements, and management’s non-GAAP production measures.
- Review the timing, pricing and volume coverage of hedges against expected production, including sensitivity to higher and lower natural gas prices.
- Assess liquidity beyond the reported $3.6 million cash balance: facility availability, letters of credit, covenant calculations, debt maturities and the separate CNX/CNX Midstream credit structures.
- Test the assumptions behind reserve additions, proved undeveloped development timing, and the standardized reserve value; note that proved undeveloped reserves declined to 3.72 Tcfe.
- Track execution of 2022 production and capital guidance, and the effect of transportation commitments, inflation, and infrastructure availability on costs and cash flows.
- Monitor litigation and environmental liabilities, including Coal Act and climate cases, and the ability of CONSOL Energy to meet its indemnification obligations.