CNX Resources Corporation — Q3 2019 Form 10-Q
Business context and period. CNX produces natural gas and operates gathering infrastructure through its Exploration & Production (E&P) and Midstream divisions. This unaudited filing covers the three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Results include CNX Midstream Partners (CNXM), consolidated since January 3, 2018.
Financial performance
- Q3 revenue and earnings: Total revenue and other operating income was $530.0 million, up from $397.1 million. The increase was driven largely by commodity-derivative gains of $213.9 million versus $18.0 million. Natural gas, NGL and oil revenue declined to $265.1 million from $344.7 million. Net income attributable to CNX shareholders was $115.5 million, down from $125.0 million; diluted EPS was $0.61 versus $0.59.
- Nine-month results: Total revenue and other operating income was $1.413 billion versus $1.295 billion; net income attributable to CNX shareholders was $190.7 million versus $694.6 million, and diluted EPS was $1.01 versus $3.18. The comparison is heavily affected by 2018 one-time items, including a $623.7 million gain on a previously held equity interest and $148.9 million of gains on asset sales and abandonments.
- Operating performance: Q3 produced sales volume of 128.3 Bcfe, up 7.8%; the average sales price, including settled hedges, was $2.51/Mcfe versus $2.92. Average E&P costs were $1.99/Mcfe versus $1.97, leaving an E&P average margin of $0.52/Mcfe versus $0.95. For the nine months, sales volume increased 6.7% to 395.8 Bcfe, while E&P average margin declined to $0.69/Mcfe from $0.91.
- Cash flow and investment: Nine-month operating cash flow was $866.1 million, compared with $690.2 million. Capital expenditures were $964.5 million, up from $794.1 million; operating cash flow less capital expenditures was therefore negative $98.4 million. Investing cash outflow was $949.2 million, and financing cash inflow was $71.4 million. Cash declined to $5.5 million from $17.2 million at year-end 2018.
- Debt and liquidity: Long-term debt, excluding issuance costs, was approximately $2.650 billion at September 30, 2019, versus $2.387 billion at year-end 2018. CNX had $613.2 million drawn on its revolver and $1.288 billion of unused capacity; CNXM had $246.0 million drawn and $354.0 million available. CNX reported a 2.45x net leverage ratio and compliance with its financial covenants. Current assets were $345.7 million and current liabilities $621.6 million; the filing’s covenant current-ratio calculation also includes revolver availability.
- Other financial items: CNX issued $500 million of 7.25% senior notes due 2027 and repurchased $400 million principal of 5.875% notes due 2022, recording a $7.6 million extinguishment loss. It repurchased 12.9 million shares during the first nine months for $115.5 million. No CNX dividend was declared.
Changes, outlook and management commentary
- Management raised 2019 production guidance to 530–540 Bcfe from 510–530 Bcfe, while lowering 2020 guidance to 535–565 Bcfe from 570–595 Bcfe. The updated 2020 midpoint represents approximately 3% growth over the updated 2019 midpoint.
- Management reduced full-year capital guidance for both 2019 and 2020. Across the two years, it expects approximately $80 million less capital spending than previously announced and 17.5 Bcfe less 2020 production, after shifting 15 Bcfe of production from 2020 into 2019.
- As of October 9, 2019, hedged natural gas volumes were 405.2 Bcf for 2019, including actual settlements, and 489.6 Bcf for 2020. The filing reports open gas derivatives at a net asset fair value of $313 million; changes in commodity prices can materially change reported gains and losses.
- Q3 E&P performance reflected higher Marcellus volumes and lower prices, including a sharp decline in NGL prices. Transportation, gathering and compression costs rose, partly due to increased Marcellus production and new firm-transportation contracts. Utica earnings also fell with lower volumes following the 2018 Ohio Utica asset sale.
Risks, contingencies and unusual items
- Commodity-price volatility, reserve-estimation and drilling risks, dependence on gathering and transportation capacity, debt and borrowing-base exposure, regulatory and environmental requirements, water sourcing and disposal, and potential impairment of oil-and-gas properties or goodwill are among the identified risks. Hedging may limit benefits from rising prices; derivative fair values are sensitive to market movements.
- CNX reported $2.268 billion of long-term purchase obligations, principally for firm transportation and processing, in addition to debt, lease obligations and other contractual commitments. It also reported $303.2 million of letters of credit, surety bonds and financial guarantees. Management expects these commitments and guarantees to expire without funding, but that outcome is not assured.
- Pending lawsuits and claims include personal injury, royalty, property, environmental, employment and contract matters. Recorded accruals were described as immaterial; the company said potential aggregate future losses could be material but could not be reasonably estimated.
- CNX recorded $19.7 million of additional long-term equity-compensation expense for the nine months after an investor’s ownership crossed the change-in-control threshold in certain employee agreements, accelerating vesting of prior awards. CNX also reported a $7 million CNXM loss from abandoning a compressor-station project.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- How much reported earnings and revenue depend on non-cash derivative mark-to-market gains, versus realized hedge settlements and underlying production economics.
- Whether revised production and capital-spending guidance is achieved, including the timing and effect of production shifted from 2020 into 2019.
- Whether lower natural gas and NGL prices, transportation costs and firm-capacity commitments affect margins and cash generation.
- Debt repayment and refinancing needs, covenant headroom, revolver availability, and the effect of variable rates and borrowing-base redeterminations on liquidity.
- Whether contractual obligations, contingent claims, environmental requirements or potential asset impairments result in material cash costs or charges.