CNX Resources Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Dollar amounts are in millions unless otherwise stated. The filing is unaudited. CNX is primarily a natural gas exploration and production company and, following its January 2018 acquisition, also consolidates its midstream business.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue and other operating income | $402.1 | $371.1 | $897.9 | $691.0 |
| Income from continuing operations | $61.4 | $121.8 | $606.9 | $30.8 |
| Net income attributable to CNX shareholders | $42.0 | $169.5 | $569.6 | $130.5 |
| Diluted EPS | $0.19 | $0.73 | $2.57 | $0.56 |
| Cash from operating activities | — | $450.9 | $300.5 | |
| Capital expenditures | — | $496.7 | $250.0 |
- Q2 production sales were 122.6 Bcfe, up 33% year over year, primarily from Utica growth. Average realized sales price was $2.87/Mcfe and average costs were $2.00/Mcfe, for a reported average margin of $0.87/Mcfe; the comparable 2017 figures were $2.47, $2.20 and $0.27, respectively.
- Q2 natural gas, NGL and oil revenue was $334.5 million, up from $260.3 million. Higher volumes and improved hedge settlements contributed, partly offset by lower unhedged gas prices. The reported Q2 commodity-derivative gain was $25.7 million versus $83.8 million a year earlier.
- Six-month operating cash flow exceeded the prior-year period, but capital spending was also substantially higher. A simple operating-cash-flow-less-capex measure was negative $45.7 million, compared with positive $50.5 million in 2017.
- Cash declined to $54.8 million from $509.2 million at year-end 2017. Total debt and capital lease obligations were approximately $2.365 billion. CNX had $422 million drawn on its revolver and $1.427 billion of unused capacity after letters of credit; it reported compliance with financial covenants. The CNX leverage covenant maximum was 4.00x; reported total leverage was 2.36x.
Material changes and unusual items
- Q2 shareholder-attributable net income fell to $42.0 million from $169.5 million. The comparison also reflects discontinued coal operations in 2017, a $134.6 million 2017 Q2 gain on asset sales, and substantially larger 2017 derivative gains. Q2 2018 also included a $23.4 million loss on debt extinguishment and an $18.7 million intangible-asset impairment.
- Six-month 2018 earnings included a $623.7 million noncash gain from remeasuring CNX’s previously held midstream equity interest when it obtained control. The gain is a major reason six-month income increased sharply; it should not be read as recurring operating earnings. Purchase-price allocation remains preliminary and could change materially.
- CNX repurchased 11.1 million shares for $168.7 million during the first half. It also repurchased portions of its 2022 and 2023 notes, recording $39.0 million of debt-extinguishment losses for the six-month period.
- CNX acquired the remaining 50% interest in CNX Gathering, began consolidating CNX Midstream Partners, and recorded $796.4 million of goodwill. Midstream contributed $125.5 million of revenue and $63.3 million of pretax income from acquisition through June 30.
Outlook, liquidity, and risks
- Management reaffirmed 2018 production guidance of 490–515 Bcfe. As of July 11, 2018, disclosed hedged gas volumes were 370.9 Bcf for 2018, including 206.8 Bcf of actual settlements, and 333.7 Bcf for 2019.
- CNX agreed to sell substantially all Ohio Utica joint-venture assets for approximately $400 million net cash proceeds, with closing expected in Q3 2018 subject to customary conditions. It had received a $40 million deposit. Management said proceeds could be used for debt reduction, share repurchases, drilling and completion, or bolt-on acreage acquisitions.
- Management believes operating cash flow, asset sales and borrowing capacity will support working capital, planned capital expenditures and debt service, while noting results depend on operating performance and industry and financial conditions. CNX’s quarterly dividend remained suspended; the board extended the share-repurchase authorization through December 31, 2018.
- Key risks include volatile gas and NGL prices, dependence on gathering and transportation infrastructure, reserve and drilling uncertainty, regulatory and environmental exposure, leverage and borrowing-base changes, and potential impairment of properties, goodwill or intangible assets. A hypothetical 10% gas-price increase would have reduced the fair value of open derivatives by $307 million at June 30.
- The Hale royalty litigation settlement had preliminary court approval; CNX had paid the settlement into escrow, pending the scheduled final-approval hearing. The company said accrued pending-claim amounts were immaterial, but aggregate future losses could potentially be material and were not reasonably estimable.
Important facts for investors to verify
- Whether the Ohio Utica asset sale closed on expected terms and how proceeds were allocated.
- Underlying operating earnings and cash generation excluding the $623.7 million remeasurement gain and other nonrecurring items.
- Progress toward production guidance, realized prices, hedge settlements and unit costs.
- Final midstream acquisition accounting, including goodwill and customer-relationship asset valuations, and any further impairment.
- Debt, liquidity and covenant headroom after asset-sale proceeds, repurchases, capital spending and scheduled debt payments.
- Final court approval and settlement outcome in the Hale litigation, and any material developments in other contingencies.