CNX Resources Corp. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparison with the corresponding 2021 periods. CNX produces natural gas through Shale and Coalbed Methane operations and also reports midstream and other activities. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Natural gas, NGL and oil revenue | $1,127 | $586 | $2,875 | $1,337 |
| Commodity derivative loss | $(1,062) | $(1,507) | $(3,441) | $(2,013) |
| Total revenue and other operating income (loss), including derivatives | $117 | $(880) | $(376) | $(534) |
| Net loss | $(427) | $(873) | $(1,317) | $(1,129) |
| Diluted loss per share | $(2.28) | $(4.05) | $(6.80) | $(5.17) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $793 | $673 |
| Capital expenditures | Not provided quarterly | Not provided quarterly | $393 | $349 |
Q3 production volumes were 146.4 Bcfe, down 7.1 Bcfe year over year; nine-month volumes were 439.6 Bcfe, up 7.5 Bcfe. Management’s non-GAAP production margin, including cash settlements on hedges and excluding specified corporate and other expenses, was $236 million ($1.61/Mcfe) in Q3 versus $217 million ($1.41/Mcfe); for nine months it was $728 million ($1.65/Mcfe) versus $519 million ($1.20/Mcfe). These are non-GAAP measures, not substitutes for GAAP results.
At September 30, 2022, cash was $1.6 million; current assets were $724 million and current liabilities $2,258 million. Debt was $2,258 million excluding unamortized issuance costs, of which $323 million was classified current; the balance sheet reports $2,244 million net of issuance costs. Revolving-credit availability was $1,082 million for CNX and $452 million for CNXM. CNX reported compliance with debt covenants. Derivative liabilities totaled $3,420 million, partly offset by $459 million of derivative assets, for a net liability fair value of $2,965 million. Stockholders’ equity was $1,977 million, down from $3,700 million at year-end 2021.
Changes versus prior comparable periods
- Higher realized commodity prices lifted production revenue: Q3 natural gas revenue increased 107% and nine-month natural gas revenue increased 126%. The average natural gas sales price before hedging rose to $7.82/Mcf in Q3 from $3.61, and to $6.50/Mcf for nine months from $2.93.
- Cash hedge settlements weighed more heavily on realized results: losses were $651 million in Q3 versus $131 million, and $1,452 million for nine months versus $139 million. In contrast, noncash unrealized derivative losses were lower in Q3 ($411 million versus $1,376 million), but higher for nine months ($1,989 million versus $1,874 million). These mark-to-market effects were a major driver of GAAP losses.
- Operating cash flow rose $120 million to $793 million for nine months, despite a larger reported net loss; cash-flow reconciliation includes substantial noncash derivative and tax adjustments. Financing cash use increased to $433 million, including $350 million of common-stock repurchases.
- Interest expense declined to $92 million for nine months from $114 million, partly reflecting lower noncash convertible-note interest after adopting ASU 2020-06. Total debt structure also changed: CNX issued $500 million of 7.375% notes due 2031 and repurchased $350 million of 7.25% notes due 2027.
Outlook, commentary, risks and unusual items
- Management forecast 2022 production of 580–590 Bcfe and capital expenditures of $560–580 million; through September, production was 439.6 Bcfe and capex $392.5 million. The filing states results are not necessarily indicative of future periods.
- As of October 6, 2022, hedged gas volumes were 118.5 Bcf for Q4 2022 at a weighted-average price of $2.41/Mcf, and 421.9 Bcf for 2023 at $2.47/Mcf. Hedges can limit benefits from rising prices and generate earnings volatility; management says hedges are for risk management, not speculation.
- Management identified commodity-price volatility, inflation in steel, diesel and labor, rising interest rates, production declines, water disposal, pipeline capacity/outages and operating costs as risks. A hypothetical 10% rise in future gas prices would have reduced the September 30 derivative fair value by $1,078 million; a 10% decline would have increased it by $711 million.
- Unusual items included a $10 million Q3 loss on extinguishing debt, a $23 million nine-month loss on debt extinguishment, and $2 million of Q3 Virginia flood cleanup and repair expense. A Shale wellbore was plugged and abandoned, with reserves expected to be accessed later.
- Income-tax results were affected by valuation allowances and deferred-tax realizability assessments. The Q3 effective tax rate was (60.1)%; the nine-month rate was 10.3%. Uncertain tax positions were $82 million at September 30.
- CNX faces a Coal Act benefits lawsuit brought by UMWA trustees concerning former coal subsidiaries. The company says loss is possible but not probable, records no accrual, and notes CONSOL agreed to indemnify coal-related liabilities; the filing cautions that indemnification may not be fully collectible. Other claims are accrued when probable and estimable; management says current accruals are immaterial, though ultimate aggregate exposure cannot be reasonably estimated.
- CNX had $1,876 million of disclosed long-term purchase obligations, principally gas transportation and processing. It also had $277 million of letters of credit and surety-bond commitments; management expects these commitments to expire without funding. The company had not paid common dividends since 2016. Its repurchase authorization had $657 million remaining at quarter-end.
Important facts for investors to verify
- How much of reported earnings and operating cash flow reflects realized versus unrealized hedge effects, and how future hedge settlements compare with market prices.
- Whether production and capex finish within management’s 2022 ranges, given volume declines in Q3 and inflationary cost pressures.
- Liquidity and covenant headroom under lower commodity prices, including the impact of derivative liabilities and the $323 million current debt classification.
- Debt refinancing and potential conversion or repurchase of the 2.25% convertible notes: holders could convert during Q4 2022 under the indenture’s price condition.
- Developments in the Coal Act and other legal matters, tax-position reserves, and the ability of CONSOL to meet indemnification obligations.
- Whether stock repurchases remain consistent with liquidity, leverage, capital plans and the company’s stated priorities.