CNX Resources Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars unless stated otherwise.
Business context
CNX explores for, develops and produces natural gas, primarily from the Marcellus and Utica Shales in the Appalachian Basin, and operates coalbed methane properties in Virginia. It also owns and operates gathering and processing infrastructure. On September 28, 2020, CNX acquired the remaining publicly held CNX Midstream Partners (CNXM) units, making CNXM an indirect wholly owned subsidiary and issuing approximately 37.1 million CNX shares.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue and other operating income | $1.258 billion | $1.922 billion |
| Net income (loss) attributable to CNX shareholders | $(483.8) million | $(80.7) million |
| Diluted EPS | $(2.43) | $(0.42) |
| Cash provided by operating activities | $795 million | $981 million |
| Capital expenditures | $487 million | $1.193 billion |
| Production | 511.1 Bcfe | 539.1 Bcfe |
| Proved reserves at year-end | 9.55 Tcfe | 8.43 Tcfe |
- Revenue declined 34.6%, reflecting weaker commodity realizations and lower sales volumes. Natural gas, NGL and oil revenue fell to $897 million from $1.364 billion; cash gains on commodity hedges increased to $461 million from $70 million.
- Average realized sales price including settled derivatives was $2.49/Mcfe, versus $2.66/Mcfe; excluding derivatives it was $1.75/Mcfe, versus $2.53/Mcfe. Average production cost was $1.64/Mcfe versus $1.72/Mcfe, and reported average margin was $0.85/Mcfe versus $0.94/Mcfe.
- Production decreased 5.2%. CNX cited normal declines and temporary well shut-ins to optimize value during low-price periods. Proved reserves increased 13.3%; 54.4% were proved developed.
- Operating cash flow less capital expenditures was approximately $308 million in 2020, compared with approximately $(212) million in 2019. This is a simple calculation from reported cash flow and capital expenditure figures, not a company-defined non-GAAP measure.
- Year-end cash and cash equivalents were $15.6 million, plus $6.0 million of restricted cash. Current assets were $273 million and current liabilities were $441 million.
- Balance-sheet long-term debt, including current portion, was $2.424 billion; the debt note reports $2.451 billion of principal and premium before unamortized issuance costs. CNX reported a 2.45-to-1 net leverage ratio and compliance with debt covenants. Its CNX revolver had $1.429 billion of unused capacity; CNXM’s separate revolver had $309 million unused. CNX is not a guarantor of CNXM’s revolver or 6.50% notes.
- The company reported a $473 million goodwill impairment and a $62 million impairment of Southwest Pennsylvania coalbed methane properties. A $288 million unrealized commodity-derivative loss also weighed on reported earnings, despite substantial cash settlements received.
Q4 detail: For the three months ended December 31, 2020, revenue was $622.1 million, net income attributable to CNX shareholders was $195.8 million, and diluted EPS was $0.87. The filing’s quarterly revenue includes derivative and other revenue items; it should not be read as product sales alone.
Material changes versus the prior period
- The 2020 shareholder loss widened substantially from 2019, while operating cash flow decreased by $186 million. The 2020 loss included the goodwill and CBM impairments and an unrealized derivative loss; 2019 included $327 million of proved-property impairment, $119 million of unproved-property impairment and a $306 million unrealized derivative gain.
- Production and capital spending were lower, while proved reserves rose. CNX drilled 29.0 net development wells in 2020, compared with 75.7 in 2019.
- CNX acquired the remaining CNXM public interest, eliminated noncontrolling interests after the merger and brought substantially all of its Pennsylvania and West Virginia shale gathering systems under its ownership.
- Debt mix changed through repayment of the remaining $894 million of 5.875% notes due 2022 and issuance of $500 million of 6.00% notes due 2029, $200 million of additional 7.25% notes due 2027, and $345 million of 2.25% convertible notes due 2026. Total debt at year-end was lower than in 2019.
Outlook, risks and unusual items
- For 2021, CNX expected production of approximately 540–570 Bcfe and E&P capital expenditures of approximately $430–$470 million. Management said it may update activity and guidance as conditions evolve.
- As of January 7, 2021, the company reported hedged or contracted volumes of 472.1 Bcf for 2021 at an average $2.50/Mcf, 391.3 Bcf for 2022 at $2.34/Mcf, and additional volumes through 2025 at disclosed average prices. Hedges can limit benefits from price increases and create mark-to-market earnings volatility.
- Key risks include natural gas price and Appalachian basis volatility; pipeline capacity, concentration and minimum-volume commitments; reserve estimation and development execution; environmental, climate and pipeline regulation; COVID-19 effects; and financing, interest-rate and counterparty risks.
- CNX disclosed pending royalty-related class actions, two climate-related lawsuits and a UMWA 1992 Benefit Plan lawsuit concerning alleged Coal Act liabilities. It said the UMWA claim was possible but not probable and recorded no accrual; CONSOL Energy agreed to indemnify CNX for coal-related liabilities, but collectability is not assured. Management said aggregate accruals for other pending claims were immaterial, while potential future aggregate losses could be material but could not be reasonably estimated.
- Midstream goodwill remaining at year-end was $323 million. The fourth-quarter valuation exceeded carrying value by less than 10%, leaving it sensitive to weaker gathering volumes or adverse market conditions.
- No dividend was declared in 2020; the quarterly dividend has been suspended since 2016. The board increased the share-repurchase authorization to $900 million in January 2021, with $245 million then available; repurchases are discretionary.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. Goodwill valuation, convertible-note accounting and DD&A/reserve estimates were identified as critical audit matters.
Important facts for investors to verify
- Whether the 2021 production and capital-spending outlook was achieved, and how subsequent realized prices and production compared with the filing’s assumptions.
- The composition, settlement profile and counterparty exposure of hedge positions, including how hedge gains, monetizations and unrealized changes affect reported earnings and cash flow.
- Debt maturities, revolver availability, covenant headroom and obligations at subsidiaries that are not guaranteed by CNX; also assess the effect of convertible-note dilution and cash-settlement provisions.
- Whether gathering volumes and valuation assumptions support the remaining goodwill balance, given the disclosed less-than-10% valuation cushion.
- Reserve estimates and development schedules, including proved undeveloped reserves, price assumptions and the stated plan to develop booked locations within applicable timeframes.
- Potential exposure from the Coal Act, royalty and climate litigation, CONSOL indemnities, and approximately $2.06 billion of disclosed purchase obligations, including firm transportation and processing commitments.