CNX Resources Corporation — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019. CNX is an Appalachian natural gas exploration and production company, with a consolidated midstream business. This is an annual filing; the figures below are full-year results, not Q4-only results.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue and other operating income | $1.922 billion | $1.730 billion |
| Natural gas, NGL and oil revenue, before derivative gains | $1.364 billion | $1.578 billion |
| Net income from continuing operations | $31.9 million | $883.1 million |
| Net income (loss) attributable to CNX shareholders | $(80.7) million; $(0.42) per diluted share | $796.5 million; $3.71 per diluted share |
| Cash from operating activities | $980.6 million | $885.8 million |
| Capital expenditures | $1.193 billion | $1.116 billion |
| Total assets | $9.061 billion | $8.592 billion |
| Long-term debt, including current portion | $2.769 billion | $2.399 billion |
- Record production was 539.1 Bcfe, up 6.3%; Marcellus production rose 28.3% to 369.7 Bcfe. Proved reserves increased 6.9% to 8.4 Tcfe.
- Average realized sales price including cash derivative settlements fell to $2.66/Mcfe from $2.97; average production cost was $2.00/Mcfe versus $1.98, reducing average margin to $0.66/Mcfe from $0.99.
- Commodity derivative gains were $376.1 million, including a $306.3 million unrealized gain. The year-end derivative position was a net asset of approximately $405.8 million.
- Cash used in investing activities was $1.147 billion; cash provided by financing activities was $166.0 million. Operating cash flow less capital expenditures was approximately negative $212 million. Year-end cash was $16.3 million.
- Reported debt includes CNXM obligations: CNX had $661 million drawn on its credit facility and CNXM had about $312 million drawn on its revolver, in addition to senior notes. CNX reported a 2.64-to-1 net leverage ratio and $1.234 billion of unused CNX facility capacity; CNXM reported $288 million available under its revolver. The facilities were in covenant compliance.
Material changes versus 2018
- Revenue increased 11.1%, but this reflected derivative results: commodity and other operating revenue included a $376.1 million derivative gain in 2019, compared with a $30.2 million derivative loss in 2018. Hydrocarbon revenue excluding derivatives fell about 13.5%, as lower gas and NGL prices more than offset higher production.
- Shareholder results reversed from substantial profit to loss. 2019 included $327.4 million of proved-property impairment and $119.4 million of unproved-property impairment and expirations. Conversely, 2018 benefited from a $623.7 million gain on remeasurement of the previously held midstream interest and larger asset-sale gains.
- Cash from operations rose $94.7 million, while capital expenditures increased $76.2 million and asset-sale proceeds declined substantially from 2018. Financing included issuance of $500 million of 7.25% notes due 2027 and repurchase of $400 million face value of 5.875% notes due 2022.
- Midstream earnings before tax increased to $166.7 million from $133.8 million; comparisons reflect full-year consolidation in both periods, while CNX began consolidating the business in January 2018.
Outlook, commentary and risks
- For 2020, CNX expected production of 525–555 Bcfe and capital expenditures of approximately $530–$610 million. The budget included $360–$410 million for drilling and completions, approximately $95 million for land, midstream and water infrastructure, and $80–$100 million for CNXM.
- Management cited capital discipline, development of Marcellus and Utica acreage, and monetization of non-core assets as strategic priorities. The company had hedged approximately 497.5 Bcf of expected 2020 production at an average price of $2.55/Mcf as of January 8, 2020; hedges reduce downside exposure but limit participation in price increases.
- Major risks include volatile natural gas and NGL prices, Appalachian basis discounts, reliance on gathering and pipeline capacity (including Texas Eastern), minimum-volume and firm-transportation commitments, drilling and reserve-estimation uncertainty, and environmental, water, pipeline-safety and climate regulation.
- The 2019 impairment charges related to Central Pennsylvania Marcellus properties: $327 million for proved properties and $119 million for unproved properties. The midstream reporting unit passed its goodwill impairment test, but estimated fair value exceeded carrying value by less than 10%, leaving limited cushion.
- CNX disclosed pending legal matters, including royalty-accounting class actions. Accrued amounts were described as immaterial, but potential aggregate losses could be material and could not be reasonably estimated. The filing also notes indemnification obligations connected with the 2017 coal-business separation.
- On January 29, 2020, CNX and CNXM completed an IDR elimination transaction. CNX received 26 million CNXM common units, 3 million Class B units that convert in 2022, and $135 million payable in installments through 2022.
Investor verification priorities
- Reconcile the $31.9 million consolidated continuing-operations profit with the $80.7 million loss attributable to CNX shareholders, including the $112.7 million allocated to noncontrolling interests.
- Assess the sustainability and cash realization of derivative gains, the $405.8 million net derivative asset, hedge volumes and prices, and exposure to regional basis differentials.
- Review impairment assumptions for the Central Pennsylvania assets and the small goodwill valuation cushion for midstream, including sensitivity to commodity prices and gathering volumes.
- Verify liquidity and leverage across CNX and CNXM separately, including debt maturities, borrowing-base redeterminations, facility availability, and substantial firm-transportation commitments.
- Track whether the 2020 production and capital-spending outlook was achieved, and the effect of the IDR transaction, legal proceedings and separation-related indemnities.