CNX Resources Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted. CNX produces natural gas, NGLs and oil and reports Shale, Coalbed Methane (CBM) and Other segments.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue and other operating income, including commodity derivative gains/losses | $840 million | $420 million | $2,116 million | $(493) million |
| Natural gas, NGL and oil revenue | $257 million | $1,003 million | $713 million | $1,748 million |
| Net income (loss) | $475 million | $33 million | $1,185 million | $(890) million |
| Diluted EPS | $2.47 | $0.15 | $6.09 | $(4.52) |
| Net cash from operating activities | Not stated separately for quarter | Not stated separately for quarter | $447 million | $528 million |
| Capital expenditures | Not stated separately for quarter | Not stated separately for quarter | $366 million | $259 million |
- Q2 commodity derivative instruments generated a $542 million gain, including $463 million unrealized; first-half gain was $1,305 million, including $1,286 million unrealized. The filing’s GAAP revenue and earnings therefore reflect substantial mark-to-market effects.
- Q2 production sales volume was 134.2 Bcfe, down from 142.3 Bcfe. Management’s non-GAAP production margin was $130 million ($0.97/Mcfe), versus $247 million ($1.74/Mcfe) a year earlier. First-half production margin was $298 million ($1.11/Mcfe), versus $492 million ($1.68/Mcfe).
- At June 30, cash was $22.8 million and current assets were $399.8 million, compared with current liabilities of $692.0 million. Long-term debt carrying value was $2,154 million; debt excluding unamortized issuance costs was approximately $2,167 million.
- CNX’s revolving facility had no borrowings and $1,255 million of unused capacity; CNXM’s facility had $100 million drawn and $501 million unused capacity. Both entities were in compliance with their financial covenants.
- First-half cash used in investing was $223 million, while cash used in financing was $223 million. The company repurchased approximately 9.75 million shares for $157 million during the first half.
Material changes versus prior comparable periods
- Q2 net income rose to $475 million from $33 million, while natural gas, NGL and oil revenue fell to $257 million from $1,003 million. The result was strongly affected by the reversal from derivative losses to gains and by asset-sale gains.
- Q2 natural gas sales price was $1.80/Mcf versus $7.02/Mcf a year earlier. Cash-settled hedges provided a $80 million gain in Q2, compared with a $530 million loss in Q2 2022, partly offsetting lower commodity prices.
- First-half net income of $1,185 million compared with a loss of $890 million. The main swing included a $1,286 million unrealized derivative gain in 2023 versus a $1,578 million unrealized loss in 2022.
- First-half operating cash flow fell by $81 million to $447 million despite the earnings improvement; cash flows were affected by derivative settlements, deferred taxes and working-capital movements. Capital expenditures increased by $107 million year over year.
- CNX sold non-operated producing oil and gas assets on June 29 for net cash proceeds of $120 million and recorded a $102 million gain. Total Q2 net gains on asset sales and abandonments were $106 million.
Outlook, management commentary and risks
- Management expects 2023 production of 545–555 Bcfe and capital expenditures of $625–675 million. First-half production was 270 Bcfe and capital expenditures were $366 million.
- As of July 6, 2023, hedged natural gas volumes included 114.3 Bcf for Q3 2023; full-year 2023 hedged volumes were 432.6 Bcf, including 211.7 Bcf of actual settlements. Management cautions that commodity prices remain volatile.
- Management said cash from operations, asset sales and borrowing capacity are expected to fund working capital, planned capital expenditures and debt service for the current fiscal year. A significant decline in commodity prices or higher operating costs could reduce cash flow and liquidity. Inflation in steel, diesel and labor contributed to higher capital costs.
- The company recorded an approximately $16 million discrete income tax benefit related to a West Virginia tax law change. Its effective tax rate was 25.4% for Q2 and 24.2% for the first half.
- Uncertain tax positions totaled $89 million at June 30. CNX disclosed $1.689 billion of future purchase obligations and $275 million of letters of credit and surety-bond commitments; management expects the latter commitments to expire without funding.
- Pending claims include a Coal Act retiree-benefits lawsuit. CNX states a loss is possible but not probable and has not accrued a liability; CONSOL agreed to indemnify CNX for coal-related liabilities, though the filing notes no assurance it will meet its obligations. The company says aggregate future losses on other claims could be material but cannot be reasonably estimated.
- CNX’s net derivative liability was $524 million at June 30, down from $1,905 million at year-end. A hypothetical 10% increase in future natural gas prices would reduce derivative fair value by $678 million, according to the filing’s sensitivity analysis.
- On July 25, after quarter-end, the board authorized a further $1 billion increase to the share repurchase program. The company also amended its bylaws that day. No material changes to risk factors were reported, and disclosure controls were deemed effective.
Important facts for investors to verify
- How much of reported earnings and equity value depends on unrealized derivative gains, and how hedge settlements and future prices affect cash flows.
- Whether production and capital spending remain within management’s 2023 ranges, including the effects of normal declines, well timing and inflation.
- Available liquidity after letters of credit, covenant headroom, CNXM’s variable-rate borrowings and scheduled debt maturities.
- The sustainability of cash generation and share repurchases, including the effect of the post-quarter $1 billion authorization increase.
- Developments in the Coal Act litigation, other claims, uncertain tax positions and CONSOL’s ability to honor its indemnification commitments.