CNX Resources Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. CNX produces natural gas and operates gathering and midstream assets, including consolidated CNX Midstream Partners (CNXM). Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance and liquidity
- Revenue and operating income: Total revenue and other operating income was $416.4 million, up from $278.4 million. The change chiefly reflected commodity derivative results: a $115.1 million gain in Q1 2020 versus a $195.4 million loss in Q1 2019. Natural gas, NGL and oil revenue fell 42% to $251.5 million from $435.9 million.
- Profit and margins: Net loss was $305.2 million, compared with a $64.7 million loss; loss attributable to CNX shareholders was $329.1 million, or $1.76 per diluted share, versus $87.3 million, or $0.44. Results included a $473.0 million goodwill impairment and a $61.8 million E&P property impairment. E&P average sales price was $2.59 per Mcfe versus $2.97; average costs were $1.98 versus $1.99, leaving a $0.61 per Mcfe average margin versus $0.98.
- Cash flow and capital spending: Operating cash flow was $267.4 million versus $308.7 million. Capital expenditures were $152.0 million versus $299.1 million; operating cash flow less capital expenditures was approximately $115.3 million, a simple derived measure. Cash used in investing was $138.1 million and cash used in financing was $107.6 million.
- Cash and liquidity: Cash and cash equivalents were $31.8 million and restricted cash was $6.2 million at March 31. CNX reported $1.46 billion of unused capacity under its revolver; CNXM reported $253 million available under its separate revolver. CNX’s net leverage ratio was 2.30x and it reported compliance with debt covenants.
- Debt and equity: Debt totaled approximately $2.68 billion excluding unamortized issuance costs, including $20.5 million due within one year. Total equity was $4.64 billion, down from $4.96 billion at year-end. CNX repurchased and retired $71.3 million principal of 2022 notes during the quarter, generating an $11.3 million extinguishment gain. No common shares were repurchased in Q1.
Material changes versus Q1 2019
- Produced gas sales volumes increased 1.1% to 134.4 Bcfe, but average sales price declined 12.8% to $2.59 per Mcfe. The reported gas price before hedging was $1.83 per Mcf, and cash hedge settlements contributed $0.77 per Mcf.
- Marcellus volumes increased, while Utica and coalbed methane volumes declined. CNX attributed lower prices to weaker natural gas and NGL markets; it cited normal production declines in the Utica and CBM areas.
- Capital spending fell by about half, primarily reflecting reduced drilling and completion activity and lower midstream project spending.
- Midstream results shifted from $32.6 million of pretax earnings to a $429.5 million pretax loss, principally due to the $473.0 million goodwill impairment. The impairment reduced goodwill from $796.4 million to $323.3 million.
Outlook, management commentary and risks
- Outlook: The filing does not provide a clear full-year production, capital-spending or earnings guidance figure. As of April 21, CNX reported 2020 hedged gas volumes of 451.1 Bcf, including actual settlements of 155.5 Bcf, and 2021 hedged volumes of 433.5 Bcf. The filing’s separate hedge schedule gives 337.2 Bcf of fixed-price hedges for the remaining three quarters of 2020 at a weighted average $2.51 per Mcf. CNX reported 113.5 Bcf hedged for Q2.
- In March, CNX monetized and repriced portions of its 2022–2024 gas hedges, receiving approximately $55 million; management said proceeds were expected to reduce debt. In April, it monetized and terminated approximately 39 million MMBtus of 2020 gas hedges and a similar volume of basis hedges, receiving $29 million. These transactions affect liquidity and hedge economics; assess them alongside the remaining hedge book.
- Management said there were no significant COVID-19 operating disruptions in Q1 but could not predict the pandemic’s effect on future results, liquidity or financing access. It highlighted economic uncertainty, low commodity prices, oil-market disruption, storage constraints and possible impacts on customers, suppliers, operations and demand. The company said it expected to remain covenant-compliant, while acknowledging outcomes depend on future conditions.
- The CNX revolving facility’s borrowing base and commitments were reduced to $1.9 billion in April, after quarter-end. CNX also repurchased $7.6 million of 2022 notes in April. These subsequent developments are not reflected in March 31 balances.
- Other items include a $102.5 million CARES Act-related AMT refund recorded as recoverable income taxes; a $135 million payment obligation under the CNXM IDR elimination transaction, payable in installments through 2022; and $2.16 billion of long-term purchase obligations, primarily firm transportation and processing. Management said pending claims were accrued at immaterial amounts, though aggregate future losses could ultimately be material and cannot be reasonably estimated.
Important facts for investors to verify
- How much of Q1 reported revenue and cash flow reflects recurring production economics versus derivative fair-value movements, hedge settlements and the $55 million hedge monetization.
- The assumptions and sensitivity behind the $473 million goodwill impairment and whether further commodity or market deterioration could trigger additional impairments.
- Post-quarter liquidity and covenant headroom after the April borrowing-base reduction, COVID-19 and market developments, and debt repayments or hedge monetizations.
- Realized prices, production volumes, operating costs and capital plans under the company’s current hedge coverage, including the economics of repriced and terminated hedges.
- The timing and amount of the CARES Act refund, CNXM transaction installments and material contractual commitments; also monitor the disclosed legal and environmental contingencies.