Business context and reporting period
This is CONSOL Energy Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015, covering its Exploration and Production (E&P) and Coal divisions. The request identifies CNX Resources Corp.; the supplied filing is for CONSOL Energy Inc., so confirm the issuer before relying on this summary.
Financial and operating performance
Second quarter: Revenue and other income was $648.9 million, down from $937.4 million in Q2 2014. Net loss was $603.3 million, or $2.64 per diluted share, versus a $24.9 million loss, or $0.11 per diluted share. The quarter included an $828.9 million E&P property impairment. Income-tax benefit was $291.9 million.
First six months: Revenue and other income was $1.539 billion, versus $1.907 billion in 2014. Net loss was $524.3 million, or $2.29 per diluted share, compared with net income of $91.1 million, or $0.39 per diluted share. The impairment charge drove the E&P division to an $815 million pretax loss; Coal generated $161 million of pretax earnings.
Cash flow and investment: Six-month operating cash flow was $294.2 million, down from $557.1 million. Investing cash outflow was $672.6 million, including $635.8 million of capital expenditures. Financing provided $211.4 million; cash fell from $177.0 million at year-end to $10.0 million at June 30.
Balance sheet and liquidity: Total assets were $11.00 billion and stockholders’ equity $4.68 billion at June 30. Debt included $1.058 billion of revolver borrowings, $38.7 million under the receivables facility, $2.559 billion of long-term debt, $13.4 million of current long-term debt, and $38.8 million of long-term capital leases. The reported covenant interest-coverage ratio was 4.65x and current ratio 1.38x; revolver availability was $704.5 million after letters of credit. The receivables facility was terminated July 7.
Operating indicators: E&P production was 75.5 Bcfe in Q2, up from 51.9 Bcfe. E&P average sales price was $2.68/Mcfe and average costs $2.90/Mcfe, yielding a negative $0.22/Mcfe margin. Coal sold 7.3 million tons; average sales price was $56.78/ton and cost $45.69/ton, a margin of $11.09/ton. Coal pretax earnings declined to $55 million from $122 million.
Material changes versus comparable periods
- Natural-gas and coal market weakness reduced realized prices: Q2 E&P average sales price fell 39.6% year over year, while coal average selling price fell 9.1% per ton.
- The $828.9 million gas-property impairment, prompted by lower natural-gas prices and forward curves, accounted for most of the sharp deterioration in reported earnings. Management said further impairment was possible if gas prices declined further.
- Production growth partially offset lower prices: Q2 E&P production rose about 45%; liquids were 12% of gas-equivalent volumes versus 5% a year earlier.
- Six-month operating cash flow declined by $263 million. Capital expenditures were lower year over year, but cash balances also fell sharply and the company drew $1.058 billion on its revolver.
- In March 2015, CONSOL issued $500 million of 8% notes due 2023 and used proceeds and revolver borrowings to repurchase portions of its 2020 and 2021 notes, recording a $67.8 million debt-extinguishment loss in the first half.
Outlook, management commentary, risks and unusual items
- Management forecast 2015 gas production of 300–310 Bcfe, about 30% growth from 2014, and 20% growth in 2016. Q3 2015 production guidance was 75–79 Bcfe. It reduced expected 2015 E&P capital investment to about $800 million and projected $400–$500 million for 2016.
- As of July 2015, reported gas hedges covered 140.8 Bcf for 2015 at an average $3.94/Mcf and 110.9 Bcf for 2016 at $3.97/Mcf; 2015 volume includes settled hedges. Management targeted further E&P unit-cost reductions through 2016.
- Coal sales guidance was 28.4–29.9 million tons for 2015 and 30.6–33.4 million for 2016. Pennsylvania operations moved to a four-day schedule to align production with sales and preserve margins. Management put the planned metallurgical-coal IPO on hold amid weak prices.
- Management expected about $100 million of 2015 administrative and overhead cost reductions versus 2014. It also disclosed a planned reduction in the quarterly dividend from $0.0625 to $0.01 per share beginning in Q3 2015.
- After quarter-end, CNX Coal Resources LP completed its IPO and related unit sale; $342.8 million of net proceeds were distributed to CONSOL and used to pay down the parent credit facility. This is a subsequent event, not June 30 liquidity.
- OPEB plan amendments eliminated coverage after December 31, 2015 and reduced the liability. Management expected to recognize $235.5 million of income in 2015 from amortization of prior-service credit and actuarial losses.
- Key risks include commodity-price declines and further impairments, coal demand and environmental regulation, transportation and processing capacity, reserve replacement, leverage and covenant restrictions, and litigation. The filing describes pending royalty and environmental matters; specified claims exceed recorded accruals by about $539.2 million, but the aggregate potential loss is not reasonably estimable. It also lists $1.139 billion of guarantees and similar commitments and $1.317 billion of unconditional purchase obligations.
Most important facts to verify
- Confirm whether the intended issuer is CONSOL Energy Inc. or CNX Resources Corp.; the supplied filing identifies CONSOL Energy.
- Review the impairment assumptions and the possibility of additional charges, especially under lower gas-price scenarios.
- Assess liquidity after quarter-end transactions, revolver repayments, termination of the receivables facility, and the reduced dividend.
- Check debt, covenant headroom, hedge volumes and pricing, and the timing and costs of committed transportation and capital spending.
- Monitor coal contract coverage, operating schedules, regulatory developments, and material legal and guarantee exposures.