CNX Resources Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CNX produces natural gas and operates midstream gathering assets; reported results include consolidated CNX Midstream Partners (CNXM). Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue and other operating income | $148.8 | $605.0 | $565.2 | $883.5 |
| Net income (loss) attributable to CNX shareholders | $(145.7) | $162.5 | $(474.8) | $75.1 |
| Diluted earnings (loss) per share | $(0.78) | $0.84 | $(2.54) | $0.38 |
| Cash provided by operating activities | Not provided quarterly | $411.2 | $560.7 | |
| Capital expenditures | $134.9 | $329.2 | $286.9 | $628.4 |
- Q2 natural gas, NGL and oil revenue was $175.8 million, down from $342.9 million. Total reported revenue was especially affected by commodity derivatives: a $63.3 million loss in Q2 2020 versus a $221.6 million gain in Q2 2019. Six-month derivative results were a $51.8 million gain versus $26.2 million.
- Q2 production was 114.5 Bcfe, down 14.9% year over year. Average realized sales price including settled hedges, excluding monetizations, was $2.52/Mcfe versus $2.63/Mcfe; average production costs were $1.92/Mcfe versus $2.07/Mcfe. Average margin was $0.60/Mcfe versus $0.56/Mcfe.
- Six-month results included non-cash impairments of $473.0 million for midstream goodwill and $61.8 million for E&P properties. The goodwill charge drove a substantial portion of the reported loss.
- Operating cash flow declined by $149.5 million year over year. Investing cash outflow narrowed to $260.8 million, mainly reflecting lower capital spending. Financing cash outflow was $140.8 million, compared with $76.0 million of inflow in the prior-year period.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $19.6 million; restricted cash was $6.3 million. Current assets were $430.7 million and current liabilities $476.5 million.
- Debt was $2.578 billion excluding debt issuance costs, versus $2.763 billion at year-end 2019. CNX had $550 million drawn on its revolving facility, with $1.145 billion of unused capacity after letters of credit; CNXM had $319 million drawn and $281 million of unused capacity.
- CNX reported compliance with its debt covenants. Its credit agreement maximum net leverage covenant was 4.00x; reported net leverage was 2.38x. Management said operating cash generation, asset sales and borrowing capacity were expected to cover working capital, planned capital expenditures and scheduled debt payments for the next fiscal year, subject to market and operating conditions.
- CNX issued $345 million principal amount of 2.25% convertible senior notes due 2026, receiving $334.7 million net proceeds, and purchased $481 million principal amount of its 5.875% notes due 2022 for $468.9 million. The company also entered non-recourse subsidiary credit facilities. CNX’s quarterly dividend remained suspended; no CNX dividend was declared.
Material changes, outlook and risks
- Lower gas and NGL prices and reduced volumes weighed on revenue. CNX temporarily shut in liquids-rich production in response to low NGL prices and shut in two new dry-gas pads amid low gas prices. Midstream gathering revenue also reflected curtailed wet-gas volumes.
- Management cited COVID-19, economic weakness, low commodity prices, OPEC-related market disruption and uncertain demand as risks. CNX reported no significant direct COVID-related operating disruption through June 30, but stated future effects on demand, operations, liquidity and financing were uncertain. No formal earnings or production guidance is provided in the filing.
- Hedging materially affected results and cash flow. CNX reported $293.4 million of cash receipts from commodity derivative settlements for the first half, including hedge monetizations; $55.0 million of proceeds from repricing longer-dated hedges was used to reduce debt. Hedging can also limit benefits from price increases, and reported fair value is sensitive to commodity prices.
- On July 26, 2020, CNX agreed to acquire the remaining publicly held CNXM units in a stock merger at a fixed exchange ratio of 0.88 CNX shares per CNXM unit, subject to conditions; closing was expected in Q4 2020. In July, CNX also announced a $50 million redemption of 2022 notes for August 14.
- CNX disclosed a May 2020 lawsuit by the UMWA 1992 Benefit Plan alleging Coal Act obligations relating to former coal subsidiaries. CNX disputes the claims and intends to defend itself; CONSOL Energy agreed to indemnify CNX for coal-related liabilities under the separation agreement. The filing says potential aggregate losses from pending claims cannot be reasonably estimated.
- Other items to monitor include the estimated $175 million of guarantees related to liabilities assumed by CONSOL Energy, $2.036 billion of unconditional purchase obligations, and goodwill impairment assumptions that depend on forecast cash flows and market inputs. CNX said existing claims accruals were immaterial, while noting future losses could be material.
Important facts for investors to verify
- How much of the reported loss and revenue volatility reflects non-cash impairments and derivative mark-to-market movements versus underlying operating performance.
- Whether commodity prices, production volumes and the temporary shut-ins improve, and how the hedge book affects realized prices and cash flows.
- Capital spending plans, free cash flow, debt maturities and revolver availability under continued weak-market conditions.
- Completion terms, timing and expected financial effects of the proposed CNXM merger, including the fixed exchange ratio and required approvals.
- Developments in the UMWA Coal Act lawsuit and the ability of CONSOL Energy to meet its indemnification obligations.