CNX Resources Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparative periods ended June 30, 2018. Figures are unaudited. CNX produces natural gas and operates gathering and midstream assets, principally in the Marcellus, Utica and coalbed methane areas.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue and other operating income | $605.0m | $402.1m | $883.5m | $897.9m |
| Net income attributable to CNX shareholders | $162.5m | $42.0m | $75.1m | $569.6m |
| Diluted earnings per share | $0.84 | $0.19 | $0.38 | $2.57 |
| Operating cash flow | — | $560.7m | $450.9m | |
| Capital expenditures | — | $628.4m | $496.7m |
Q2 total revenue included a $221.6m gain on commodity derivatives, compared with $25.7m a year earlier. For the first half, derivative gains were $26.2m versus $60.7m. The filing reports a $210.9m unrealized derivative gain in Q2 2019. First-half 2018 earnings included a $623.7m noncash gain from remeasuring CNX’s previously held midstream interest after the acquisition; that gain did not recur.
- Production and pricing: Q2 sales volume rose 9.7% to 134.5 Bcfe. Average sales price, including settled hedges, fell 8.4% to $2.63/Mcfe; average costs rose 3.5% to $2.07/Mcfe, reducing average margin to $0.56/Mcfe from $0.87/Mcfe.
- First-half revenue mix: Natural gas, NGL and oil revenue increased 5.2% to $778.8m, while lower midstream and other operating income contributed to a 1.6% decline in total revenue and other operating income. First-half net income fell sharply against the prior-year period, principally because of the nonrecurring acquisition remeasurement gain.
- Cash and investment: Operating cash flow was $560.7m; capital spending exceeded it by $67.7m. Cash increased to $32.6m from $17.2m at year-end. Investing activities used $621.3m; financing activities provided $76.0m.
- Liquidity and debt: Current assets were $460.1m and current liabilities $623.2m. Long-term debt was $2.62bn on the balance sheet ($2.63bn excluding issuance costs); total principal debt was approximately $2.63bn. CNX reported $1.27bn of unused capacity under its $2.10bn revolving facility and was in compliance with financial covenants. Net leverage was 2.35x.
- Equity and returns: CNX repurchased 11.9m shares for $107.8m in the first half. The company had no declared common dividend; its quarterly dividend had been suspended in 2016.
Changes, outlook and management commentary
- Management raised 2019 production guidance to 510–530 Bcfe from 495–515 Bcfe, and set 2020 guidance at 570–595 Bcfe, approximately 12% growth at the midpoint.
- As of July 8, 2019, hedged gas volumes were 396.6 Bcf for 2019 (including actual settlements of 205.8 Bcf) and 470.5 Bcf for 2020. Q3 2019 hedged production was 103.9 Bcf.
- Management attributed production growth mainly to increased Marcellus volumes; Utica volumes were lower following the 2018 sale of substantially all Ohio Utica JV assets. Higher Marcellus output also increased gathering and transportation costs. Lower NGL pricing and weaker Utica volumes pressured results.
- CNX issued $500m of 7.25% senior notes due 2027 and repurchased $400m principal amount of 5.875% notes due 2022 during the first half. The CNX and CNXM revolving facilities were extended to April 2024.
- CNX recorded $19.7m of additional noncash stock compensation after a change-in-control provision triggered accelerated vesting of certain awards. CNXM recorded a $7m loss after abandoning a planned compressor station.
Risks, commitments and contingencies
- Results remain exposed to volatile natural gas and NGL prices, production and reserve uncertainty, drilling and operating hazards, transportation and gathering access and costs, and environmental and regulatory requirements. Hedging can limit gains from price increases as well as reduce downside exposure.
- Open gas derivatives were a net asset of $156m at June 30. A hypothetical 10% rise in future gas prices would reduce fair value by $415m; a 10% decline would increase it by $447m. These are sensitivity estimates, not forecasts of cash or earnings outcomes.
- Purchase obligations totaled $2.33bn, including firm transportation and other commitments. Letters of credit and surety bonds totaled approximately $302.7m. Management expected these commitments to expire without funding; the filing notes that future aggregate losses on pending claims cannot be reasonably estimated and could ultimately be material.
- Pending lawsuits and claims include personal injury, royalty, property, environmental, employment and contract matters. Recorded accruals were described as immaterial, but the possible aggregate future loss could be material. CNX reported no material change to the risk factors in its 2018 Form 10-K.
- Management said operating cash, asset sales and borrowing capacity should cover working capital, planned capital expenditures and scheduled debt service, while noting dependence on future operating performance and market conditions. Actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- How much of reported earnings and revenue growth reflects unrealized derivative marks versus production, realized pricing and cash hedge settlements.
- Whether 2019–2020 production guidance and hedge volumes remain current, and how realized prices compare with hedge prices and regional differentials.
- Capital-spending plans, free cash flow, revolver usage and covenant headroom, particularly given the current-liability position and significant contractual commitments.
- The sustainability of Marcellus growth and midstream returns, and the effects of Utica asset sales, reserve revisions, transportation costs and unused capacity.
- Potential cash or earnings impact from legal, environmental and other contingencies, as well as the accelerated equity compensation expense and CNXM project abandonment.