CNX Resources Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
CNX is a natural-gas exploration and production company with Marcellus, Utica, coalbed methane and other gas operations. Following its January 3, 2018 acquisition of Noble’s 50% interest in CNX Gathering, CNX consolidated its midstream business, including CNX Midstream Partners LP (CNXM). The 2017 coal business spin-off is reported as discontinued operations.
Financial and operating results
- Q3 revenue and earnings: Total revenue and other operating income was $397.1, up from $287.2 in Q3 2017. Net income attributable to CNX shareholders was $125.0, or $0.59 diluted EPS, versus a $26.4 net loss, or $0.11 loss per diluted share.
- Nine-month results: Revenue and other operating income was $1,295.0 versus $978.2. Net income attributable to CNX shareholders was $694.6, or $3.18 diluted EPS, versus $104.1, or $0.45, in 2017. The 2017 comparison includes coal discontinued-operations income.
- Revenue mix and production: Q3 natural gas, NGL and oil revenue was $344.7, compared with $234.4 a year earlier. Gas sales volume rose 20.6% to 108.6 Bcf; total E&P sales volume rose 17.8% to 119.0 Bcfe. CNX reported an average E&P sales price of $2.92 per Mcfe and average costs of $1.97 per Mcfe, yielding a $0.95 per Mcfe average margin.
- Profit drivers and unusual items: Q3 included a $130.8 gain on the Ohio Utica asset sale and a $15.4 debt-extinguishment loss. Nine-month income included a $623.7 noncash gain from remeasuring the previously held midstream interest, plus asset-sale gains. These items materially affect comparisons of reported earnings.
- Cash flow and investment: Nine-month operating cash flow was $690.2; capital expenditures were $794.1, or approximately $103.9 more than operating cash flow. Investing cash flow was a $584.8 outflow, including $299.3 net cash paid for the midstream acquisition, partly offset by $500.8 in asset-sale proceeds. Cash declined to $42.7 from $509.2 at year-end 2017.
- Debt and liquidity: At September 30, reported long-term debt was $2,184.5, with $7.0 current debt and capital lease obligations. CNX had $439.0 outstanding on its revolver and $1,409.7 of unused capacity after letters of credit; CNXM had $44.0 outstanding on its separate revolver. CNX reported compliance with financial covenants. Its total leverage ratio was 2.29 to 1.00.
- Shareholder returns: CNX repurchased and retired 19.4 million shares for $296.7 during the first nine months, averaging $15.28 per share. No CNX dividend was declared; the quarterly dividend remained suspended.
Changes, outlook and management commentary
- Q3 earnings improved alongside higher gas volumes and prices and lower average E&P costs per Mcfe. Management attributed lower unit transportation costs in part to higher volumes and a shift toward dry Utica production.
- CNX sold substantially all of its Ohio Utica joint-venture assets on August 31 for net proceeds of $381.2. The company said it had no further development plans for those assets and used proceeds for debt repayment and share repurchases.
- Management narrowed 2018 production guidance to 497.5–507.5 Bcfe, with the midpoint unchanged, and reaffirmed net capital-expenditure guidance of $900–$950. As of October 10, reported 2018 hedged gas volumes were 371.3 Bcf, including 295.9 Bcf of actual settlements; Q4 hedged production was 92.2 Bcf.
- The Ohio Utica disposition and shallow oil and gas asset sales contributed to a reduction in CNX’s borrowing base to $2.1 billion in August, although facility commitments remained $2.1 billion. The revolver’s stated maturity is March 2023, subject to a springing-maturity provision tied to specified debt outstanding.
- Risks include volatile gas and NGL prices, dependence on gathering and transportation capacity, drilling and reserve uncertainty, environmental and regulatory exposure, and potential impairment of proved properties, goodwill or intangibles. The filing says pending claims are accrued at immaterial amounts, but aggregate future losses could be material and cannot be reasonably estimated. Purchase obligations totaled $2,256.6; the company said it expects commitments and letters of credit to expire without funding.
- The midstream acquisition purchase-price allocation remained preliminary and may change materially. CNX also reported a $18.7 impairment of acquired customer-relationship intangibles. A further $300 million share-repurchase authorization was approved on October 26, 2018, after quarter-end.
Important facts for investors to verify
- How much reported earnings and cash generation depend on the noncash midstream remeasurement gain and asset-sale gains, versus recurring operations.
- Whether production and capital spending remain within the revised 2018 guidance, and how the Ohio Utica sale affects future production and the borrowing base.
- Liquidity and leverage after debt repurchases, share buybacks, capital expenditures and the reduction in cash; also review the revolver’s springing-maturity condition and covenant headroom.
- Exposure to gas prices and basis differentials under the hedge portfolio, including the disclosed sensitivity of derivative fair value to a 10% gas-price change.
- Potential changes to preliminary acquisition valuations, impairment exposure, and the scale and timing of contractual obligations and legal contingencies.