CNX Resources Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a quarterly filing; fourth-quarter figures are included where disclosed. CNX is an Appalachian Basin natural gas exploration and production company focused on the Marcellus, Utica and coalbed methane formations.
Business context and reporting changes
CNX completed the tax-free spin-off of its coal business on November 28, 2017. The coal business is reported as discontinued operations for all periods presented, so comparisons reflect a materially different continuing business. CNX’s principal continuing operations are natural gas production and related activities.
Key financial and operating metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue and other operating income, continuing operations | $1.455 billion | $760 million |
| Income (loss) from continuing operations | $295 million | $(551) million |
| Net income (loss), including discontinued operations | $381 million | $(848) million |
| Diluted earnings (loss) per share | $1.65 | $(3.70) |
| Operating cash flow, consolidated | $649 million | $464 million |
| Capital expenditures | $633 million | $173 million |
| Cash and cash equivalents at year-end | $509 million | $46 million |
| Long-term debt, including current portion | $2.214 billion | $2.456 billion |
FY 2017 continuing-operations revenue included a $207 million net gain on commodity derivatives; this comprised a $248 million unrealized gain and $41 million of cash settlements paid. Income before tax was $119 million, with a $176 million income tax benefit. Results also included a $188 million gain on asset sales, a $138 million impairment associated with Knox Energy, and a $279 million favorable tax-reform benefit. These items materially affect reported earnings and comparability.
Natural gas, NGL and oil sales were $1.125 billion, up from $793 million. Total production rose 3.2% to 407.2 Bcfe; Marcellus production increased 12.7% to 239.4 Bcfe. Average realized sales price including derivatives was $2.66/Mcfe versus $2.63; average costs declined 3.9% to $2.23/Mcfe, and the reported average margin increased to $0.43/Mcfe from $0.31. Proved reserves rose 20.6% to 7.6 Tcfe; 58.2% were proved developed.
Fourth-quarter 2017 supplemental figures show sales, as defined in the filing, of $460 million, continuing-operations income of $282 million and net income of $277 million. Quarterly earnings included discontinued operations and should not be read as a stand-alone run rate.
Material changes versus prior period
- Continuing-operations income swung to $295 million from a $551 million loss. The improvement reflected higher commodity sales, a reversal in derivative mark-to-market results, asset-sale gains and tax benefits; it was not solely operating growth.
- Operating cash flow increased to $649 million, while capital expenditures rose substantially to $633 million as drilling and completions activity increased. Consolidated cash flow includes discontinued operations; continuing-operations cash provided was $433 million.
- CNX reduced debt through redemptions and repurchases of notes, and repurchased $103 million of common stock. Year-end equity was approximately $3.900 billion.
- The coal spin-off reduced total reported assets from $9.180 billion to $6.932 billion and removed the coal business from continuing operations.
- Proved reserves increased, mainly reflecting extensions and discoveries, while partner plan changes reduced proved undeveloped reserves in the Ohio Utica area.
Liquidity, debt and capital allocation
At year-end, CNX had $509 million of cash, no borrowings under its $1.5 billion revolving facility, and $239 million of letters of credit, leaving about $1.261 billion of stated unused capacity. Its borrowing base was $2.0 billion. The covenant interest-coverage ratio was 4.01x against a 2.50x minimum; the current ratio was 4.78x against a 1.00x minimum. Total leverage ratio was 4.08x. Principal debt was approximately $1.706 billion of 5.875% notes due 2022 and $500 million of 8.00% notes due 2023, plus capital leases.
CNX paid no common dividend in 2017; the quarterly dividend had been suspended in 2016. The board authorized a repurchase program and CNX bought back $103 million of shares during 2017. In January 2018, CNX repurchased $385 million principal amount of its 2022 notes at a weighted-average price of 103.78%.
Outlook, management commentary and risks
- Management forecast 2018 production of 520–550 Bcfe, approximately 31% growth at the midpoint, and capital expenditures of $790–$880 million: $515–$580 million for drilling and completions and $275–$300 million for land, midstream and water infrastructure.
- As of January 15, 2018, gas swaps covered 388.6 Bcf of estimated 2018 production at an average $2.77/Mcf. Hedging can reduce downside exposure but also limit participation in price increases.
- On January 3, 2018, CNX acquired Noble Energy’s 50% interest in CNX Gathering for $305 million in cash. CNX expected to consolidate the gathering entity beginning in Q1 2018, changing future reported results and midstream exposure.
- Key risks include volatile gas and liquids prices, Appalachian basis discounts and takeaway capacity, reliance on third-party gathering and processing, firm transportation commitments, drilling and reserve-estimation uncertainty, and environmental, water and pipeline-safety regulation.
- CNX disclosed royalty class actions, including matters with settlements in principle subject to court approval. Accrued amounts were described as immaterial, but aggregate future losses could be material and were not reasonably estimable. CNX also retained guarantees related to coal-business liabilities; stated guarantees to CONSOL Energy totaled about $192 million, with indemnification risk if CONSOL cannot perform.
- The tax-reform accounting was provisional at filing, and the company said further analysis or regulations could change estimates. It recorded a $279 million favorable benefit in 2017, including the effects of the lower federal rate and refundable alternative minimum tax credits.
Investor verification priorities
- Separate recurring production economics and cash generation from the derivative mark-to-market gain, asset-sale gains, impairment and tax-reform benefit; confirm the continuing-operations cash-flow and capex detail.
- Check the 2018 production and capital-spending plan against actual results, including whether growth is funded without increasing leverage materially.
- Review debt covenants, borrowing-base redeterminations, the January 2018 debt repurchase and the cash cost and integration effects of the CNX Gathering acquisition.
- Assess realized pricing, hedging volumes and prices, regional basis differentials, and pipeline capacity and minimum-volume obligations.
- Track reserve revisions, especially Ohio Utica proved undeveloped reserves, and the assumptions underlying reserve values and future development needs.
- Monitor resolution of royalty litigation, coal-spin-off indemnities and guarantees, and finalization of tax-reform accounting.