CNX Resources Corporation — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; this is an annual report, not a quarterly filing. CNX is an Appalachian Basin natural gas producer and midstream operator, with shale operations mainly in Pennsylvania, West Virginia and Ohio and coalbed methane operations in Virginia.
Financial and operating performance
- Revenue: Total revenue and other operating income was $3.435 billion, compared with $1.261 billion in 2022. The increase primarily reflects a $1.766 billion unrealized commodity-derivative gain, versus an $851 million unrealized loss in 2022. Natural gas, NGL and oil revenue itself fell to $1.302 billion from $3.652 billion.
- Profit: Net income was $1.721 billion, or $8.99 diluted EPS, versus a $142 million net loss, or $0.75 loss per diluted share, in 2022. The 2023 result included the unrealized derivative gain and a $132 million net gain on asset sales and abandonments.
- Cash flow and investment: Operating cash flow was $815 million, down from $1.235 billion. Investing cash use was $509 million, including $679 million of capital expenditures, partly offset by $170 million of asset-sale proceeds. Financing cash use was $326 million, including approximately $320 million of share repurchases.
- Production and realized economics: Sales volumes were 560.4 Bcfe, down 3.4% from 580.2 Bcfe. Average sales price including cash hedge settlements was $2.61/Mcfe versus $3.17/Mcfe. Production costs were $1.59/Mcfe versus $1.60/Mcfe, while production margin, a company-defined non-GAAP measure, declined to $1.02/Mcfe from $1.57/Mcfe.
- Segment results: Shale pretax earnings were $642 million, down from $940 million; CBM pretax earnings were $1 million, down from $44 million. The Other segment reported $1.580 billion pretax earnings, driven principally by the unrealized derivative gain.
- Reserves: Proved reserves were 8.74 Tcfe, down from 9.81 Tcfe; 69% were proved developed. The decline included price-related and development-plan revisions and reserve sales. Year-end PV-10 was $4.201 billion versus $14.501 billion in 2022; the GAAP standardized after-tax measure was $3.110 billion versus $10.763 billion. These reserve-value measures are sensitive to price assumptions and are not current market valuations.
- Debt and liquidity: Long-term debt was approximately $2.226 billion, including $326 million classified as current because the 2.25% convertible notes were eligible for holder conversion. Cash was $0.4 million, compared with $21.3 million a year earlier. CNX reported $1.254 billion of unused capacity under its revolving facility and CNX Midstream reported $495 million under its separate facility. The company said it was in covenant compliance at year-end.
- Shareholder returns: CNX repurchased 17.6 million shares for $322 million during 2023. Approximately $1.128 billion remained under the repurchase authorization at year-end. CNX has not paid common dividends since 2016.
Changes from 2022
- Reported earnings swung from a loss to substantial profit, but the comparison is dominated by the change in unrealized derivative valuation: a $1.766 billion gain in 2023 versus an $851 million loss in 2022.
- Underlying commodity conditions weakened: natural gas revenue fell as the average gas sales price declined 64.9%, and total sales volumes decreased 3.4%. Cash hedge settlements improved by $1.976 billion year over year, from a loss to a gain.
- Operating cash flow fell by $420 million, while capital expenditures increased to $679 million from $566 million. The derivative portfolio’s net fair-value liability narrowed to $56 million from $1.905 billion.
- CNX sold non-operated producing oil and gas assets, receiving $125 million net proceeds and recognizing a $100 million gain on that transaction. Total net gains on asset sales and abandonments were $132 million.
Outlook, commentary and risks
- 2024 outlook: Expected sales volumes are 570–590 Bcfe, including approximately 15–18 Bcfe of coal mine methane; expected capital expenditures are $575–$625 million. CNX expects approximately $75 million of environmental-attribute sales net of related fees, subject to market and program risks. New Technologies and emissions-reduction capital spending is expected to be $5–$10 million.
- Hedging: As of January 5, 2024, hedged volumes were 434.2 Bcf for 2024 at an average $2.53/Mcf, 375.1 Bcf for 2025 at $2.41/Mcf, 339.0 Bcf for 2026 at $2.53/Mcf and 216.2 Bcf for 2027 at $3.35/Mcf. Hedges reduce downside exposure but may limit benefits from higher prices and can cause earnings volatility.
- Projects and technology: CNX ended coordination with the Adams Fork hydrogen project in December 2023, citing uncertainty over hydrogen tax-credit rules and inability to agree final commercial terms. It continues to assess alternative sites and says a final investment decision depends on supportive tax-credit guidance. Proprietary technology efforts have not yet generated revenue.
- Key risks: Commodity-price and Appalachian basis volatility; reliance on third-party pipelines, processing and transportation capacity; operating, water-management and reserve-estimation risks; inflation and service availability; and evolving environmental, methane, climate and pipeline-safety regulation. Environmental-attribute markets are volatile and eligibility or pricing is uncertain.
- Contingencies: CNX faces ordinary-course claims, including climate-related litigation and a UMWA 1992 Benefit Plan Coal Act lawsuit. The company said current accruals for pending claims are immaterial; the Coal Act loss is considered possible but not probable, so no accrual was recorded. CONSOL Energy agreed to indemnify CNX for certain coal-related liabilities, but CNX warns that recovery is not assured. The filing also identifies approximately $114 million of estimated guarantees on certain liabilities assumed by CONSOL.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified DD&A and proved-reserve estimates as a critical audit matter; no material cybersecurity incidents were reported.
Important facts for investors to verify
- How much of 2023 reported earnings reflects non-cash derivative remeasurement and asset-sale gains, versus recurring production economics and cash generation.
- Whether 2024 volume, capital-spending and environmental-attribute targets are achieved, and how commodity prices, basis differentials and hedge settlements affect realized returns.
- The treatment and potential cash or dilution consequences of the $331 million convertible notes, which were convertible at year-end and classified as current.
- The causes and sustainability of the reserve decline and the sharp year-over-year decrease in PV-10 and standardized reserve value.
- Available revolver capacity, debt maturities, covenant headroom and the balance between share repurchases, investment and liquidity needs.
- Developments in environmental-attribute eligibility and hydrogen tax-credit rules, pipeline capacity and regulatory matters, and the outcome or potential exposure from pending legal claims.