CNX Resources Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request references 2018 Q4, this filing reports full-year results; unaudited fourth-quarter figures are also summarized below. CNX is an Appalachian-focused natural gas producer, with Marcellus, Utica and coalbed methane operations, and began consolidating its midstream business in January 2018.
Key financial and operating metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue and other operating income | $1.730 billion | $1.455 billion |
| Income from continuing operations | $883.1 million | $295.0 million |
| Net income attributable to CNX shareholders | $796.5 million; diluted EPS $3.71 | $380.7 million; diluted EPS $1.65 |
| Cash provided by operating activities | $885.8 million | $648.7 million |
| Capital expenditures | $1.116 billion | $632.8 million |
| Production | 507.1 Bcfe | 407.2 Bcfe |
| Average sales price, including derivative settlements | $2.97/Mcfe | $2.66/Mcfe |
| Average production cost | $1.98/Mcfe | $2.23/Mcfe |
| Proved reserves at year-end | 7.881 Tcfe | 7.582 Tcfe |
Production cost per Mcfe includes $0.89 of depreciation, depletion and amortization in 2018. The reported average unit margin rose to $0.99/Mcfe from $0.43/Mcfe. Operating cash flow less capital expenditures was approximately negative $230.6 million before asset-sale proceeds and other investing activity.
At December 31, 2018, cash was $17.2 million. Consolidated debt and capital lease obligations totaled approximately $2.407 billion; CNX reported $612 million drawn on its revolver and $1.290 billion of unused capacity. CNXM had separate borrowings and facilities; CNX is not a guarantor of CNXM’s debt. CNX reported a 2.26-to-1.00 total leverage ratio and compliance with its financial covenants.
Proved reserves increased about 4% despite approximately 825 Bcfe of reserves sold. The filing reports a $6.172 billion PV-10 and a $4.655 billion standardized after-tax measure for proved reserves; these are reserve valuation measures, not estimates of current market value.
Fourth-quarter snapshot
Unaudited Q4 2018 net income attributable to CNX shareholders was $101.9 million, or diluted EPS of $0.50, compared with Q4 2017 net income of $276.6 million and diluted EPS of $1.21. The quarterly table’s “Sales” measure was $431.7 million in Q4 2018 versus $460.3 million in Q4 2017; it excludes certain reported revenue items, so it is not directly equivalent to annual consolidated revenue.
Material changes versus the prior year
- Full-year production increased 24.5%, driven primarily by Marcellus and Utica wells brought online. The 2018 total includes about 27 Bcfe from assets sold during the year.
- Revenue increased 18.9%, reflecting higher volumes and a higher average sales price. Unit production costs fell 11.2%.
- Reported earnings benefited substantially from the $623.7 million noncash gain on remeasurement of CNX’s previously held midstream interest when it acquired control. The midstream acquisition also brought $796.4 million of goodwill onto the balance sheet.
- CNX sold substantially all of its shallow oil and gas assets and certain CBM assets in Pennsylvania and West Virginia, and sold substantially all of its Ohio wet-gas Utica joint venture assets. Asset-sale gains were $157.0 million, including a $130.7 million gain on the Ohio Utica sale.
- Commodity derivatives produced a $30.2 million net loss in reported revenue in 2018, versus a $206.9 million gain in 2017. Cash settlements were a net $69.7 million paid in 2018.
- CNX repurchased about $383.8 million of common stock, retiring 25.9 million shares, and repurchased $411.4 million of its 5.875% notes due 2022. It also called the remaining $500 million of 8% notes due 2023. Debt extinguishment losses totaled $54.1 million.
- Cash declined by $492.0 million during the year, to $17.2 million, amid increased capital spending, the midstream acquisition, debt repayments and share repurchases.
Outlook, risks and unusual items
- 2019 outlook: Minimum-base annual gas production guidance of 495–515 Bcfe, approximately 5% growth at the midpoint excluding production from sold assets. The stated 2019 capital budget is approximately $1.000–$1.080 billion, including $575–$625 million for drilling and completion, about $175 million for land, midstream and water infrastructure, and $250–$280 million for CNXM. Management may update activity and guidance during the year.
- Hedges: As of January 18, 2019, disclosed fixed-price transactions covered approximately 376.0 Bcf of estimated 2019 production at an average $2.71/Mcf, with additional volumes hedged through 2023. Hedges limit exposure to price declines but can also constrain gains from price increases.
- Price, transport and liquidity risks: CNX is concentrated in the Appalachian Basin and is exposed to regional basis discounts, commodity-price volatility, pipeline and processing capacity, and minimum-volume commitments. The borrowing base is reserve-dependent and was reduced to $2.1 billion in 2018 following asset sales.
- Operational event after year-end: A January 25, 2019 pressure anomaly occurred during fracturing at the Shaw 1G Utica well, with pressure increases also observed at nearby third-party shallow wells. CNX suspended fracturing on the four-well pad and reported remediating the well on February 5; it reported no injuries or environmental impact and said monitoring and investigation continued.
- Other unusual items: CNX recorded an $18.7 million impairment of acquired customer-relationship intangible assets. It expected adoption of the new lease standard in 2019 to add $200–$225 million of right-of-use assets and corresponding lease liabilities. Pending legal matters include purported royalty-accounting class actions; the company said current accruals were immaterial, while aggregate future losses could not be reasonably estimated.
- Other key risks include environmental and pipeline regulation, water sourcing and disposal, drilling and reserve-estimation uncertainty, counterparty credit, and indemnification and potential tax liabilities related to the 2017 coal-business separation.
Most important facts for investors to verify
- How much of 2018 earnings and earnings growth is attributable to the one-time $623.7 million midstream remeasurement gain, asset-sale gains, and tax effects rather than recurring operations.
- Whether 2019 production and capital-spending guidance is achieved, and how the drilling program is funded given 2018 capital expenditures above operating cash flow and low year-end cash.
- Current borrowing-base availability, debt maturities and covenant headroom, including the separate obligations and distribution economics of CNXM.
- Actual realized gas prices, regional basis differentials, hedge settlements and transportation commitments versus the disclosed hedge assumptions.
- Findings and any costs, restrictions or third-party claims arising from the Shaw 1G pressure anomaly and the status of suspended pad operations.
- Reserve additions and revisions, reserve development spending, and the sensitivity of reserve valuations to commodity prices and operating assumptions.