CNX Resources Corp quarterly report, Q1 FY2016

Business context and reporting period

This is CONSOL Energy Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2016. The filing describes two principal businesses: natural gas exploration and production (E&P), and coal. The request identifies CNX Resources Corp.; the filing itself names CONSOL Energy Inc., so confirm the intended issuer and historical corporate identity.

Key financial metrics

Unless otherwise noted, figures are in U.S. dollars. Financial statement amounts are in thousands; operating guidance and selected MD&A amounts are shown in millions.

• Q1 E&P production reached a record 97.5 Bcfe, up 36% year over year. Average realized price including derivative effects was $2.73/Mcfe, versus $3.56; average E&P costs were $2.41/Mcfe, versus $2.91, leaving a $0.32/Mcfe margin versus $0.65.
• Coal sales from continuing operations were 5.7 million tons, down from 7.0 million. Average sales price was $43.96/ton versus $59.01; average cost was $34.67/ton versus $43.41, reducing the margin to $9.29/ton from $15.60.
• At March 31, cash was $426.7 million. Current assets were $1.146 billion and current liabilities $1.585 billion. Short-term revolver borrowings were $851.5 million; long-term debt, including capital leases, was approximately $2.759 billion. The company reported $862.1 million of unused capacity under its $2.0 billion secured facility, after outstanding letters of credit.
• The facility’s covenant ratios were 4.78x interest coverage (minimum 2.50x) and 2.85x current ratio (minimum 1.00x). The company’s reported total leverage ratio was 4.12x.

Material changes versus the prior comparable period

• Total revenue and other income fell about 30%. Lower gas and coal prices and reduced coal volumes weighed on results; gas production growth and lower unit costs partly offset the pressure.
• Net loss attributable to shareholders was $97.6 million, compared with net income of $79.0 million. The prior-year period included $244.3 million of income from discontinued operations, while Q1 2016 included a $46.2 million discontinued-operations loss, including the Buchanan sale loss. Continuing-operations loss improved by $115.0 million, but Q1 2015 also included a $195.9 million income-tax expense and a $67.7 million debt-extinguishment loss.
• Operating cash flow declined by $100 million. Investing cash flow was $321.0 million provided, versus $319.9 million used in Q1 2015, primarily reflecting $402.8 million of proceeds from the Buchanan asset sale. Capital expenditures fell by $208.8 million.
• Cash rose from $72.6 million at year-end to $426.7 million. The sale proceeds materially contributed to this increase; they should not be treated as recurring operating cash flow.

Outlook, commentary, risks and unusual items

• Management maintained 2016 E&P production growth guidance of approximately 15% versus 2015. 2017 production guidance was not provided and was described as dependent on the second-half 2016 capital program, debottlenecking and the drilled-but-uncompleted well inventory.
• 2016 consolidated Coal Division sales guidance was 23.9–27.4 million tons, including 22.5–25.5 million tons for Pennsylvania Operations. Coal Division capital expenditure guidance was $105–$125 million, including $90–$100 million for Pennsylvania Operations.
• As of April 14, 2016, the filing reports 262.6 Bcf of 2016 gas hedged production in its annual summary; a separate fixed-price volume table reports 200.5 Bcf for 2016. These disclosures use different presentations and should be reconciled before relying on a single hedge-coverage figure.
• On March 31, CONSOL completed the sale of the Buchanan Mine and certain other coal assets for $402.8 million cash proceeds and recorded a $38.4 million sale loss. A contingent royalty may provide upside if specified export coal prices exceed contractual thresholds. The company suspended its quarterly dividend following the sale; Q1’s declared dividend was $0.01 per share.
• In April 2016, the revolving credit facility was amended to require repayment of revolver borrowings when cash exceeds $150 million for two consecutive business days, and to require specified reserve collateral and account-control arrangements. The lending group also reaffirmed the $2.0 billion borrowing base.
• Commodity derivatives were a net asset of approximately $222 million at quarter-end. A hypothetical 10% increase in future natural gas prices would reduce future derivative-related earnings by $156 million. The filing cautions that hedges can limit participation in price increases.
• Potential exposures include lawsuits and claims for which aggregate expressly stated or estimated claims exceed accruals by approximately $664.9 million; the company says the ultimate loss cannot reasonably be estimated. It also disclosed $1.060 billion of letters of credit, surety bonds and guarantees, and $1.383 billion of unconditional purchase obligations. Management expected guarantees to expire without funding, but did not assure that outcome.
• Other risks include commodity-price weakness, coal-market contraction, customer and transportation concentration, reserve and borrowing-base changes, environmental and mine-closure obligations, and outcomes of legal proceedings. Management said operating cash, asset sales and borrowing capacity were expected to fund working capital, planned spending and debt service, subject to business and market conditions.

Important facts for investors to verify

• Confirm that CONSOL Energy Inc. is the intended historical issuer for the request referencing CNX Resources Corp.
• Reconcile the different 2016 hedge-volume disclosures and assess settlement cash flows versus noncash fair-value gains or losses.
• Assess liquidity after the April facility amendment, including mandatory cash-triggered repayments, letters of credit and borrowing-base terms.
• Evaluate the sustainability of operating cash flow and production growth apart from the one-time Buchanan sale proceeds.
• Review coal sales and pricing assumptions behind guidance, the suspended dividend, and the scale and uncertainty of litigation, environmental and closure exposures.