CNX Resources Corp. — Filing Summary
Important entity discrepancy: The supplied filing is CONSOL Energy Inc.’s Form 10-Q, not a filing by CNX Resources Corp. It covers the quarter and six months ended June 30, 2014. Verify that this is the intended issuer and filing before relying on the figures.
Business context and reporting period
CONSOL Energy reported two principal businesses: natural gas exploration and production (E&P), including Marcellus and coalbed methane, and coal mining and marketing. The company had sold its five West Virginia longwall mines in December 2013; those results are presented as discontinued operations in the comparative periods.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue and other income | $937.4 million | $828.2 million | $1,906.5 million | $1,671.1 million |
| Income (loss) from continuing operations | $(24.9) million | $8.6 million | $96.8 million | $4.8 million |
| Net income (loss) attributable to shareholders | $(24.9) million | $(12.5) million | $91.1 million | $(14.1) million |
| Diluted earnings (loss) per share | $(0.11) | $(0.05) | $0.39 | $(0.06) |
| Operating cash flow | Not presented here by quarter | $557.1 million | $393.4 million |
- Second-quarter E&P pre-tax earnings were $23 million, versus a $5 million loss a year earlier; production rose to 51.9 Bcfe from 38.6 Bcfe. E&P average sales price was $4.44/Mcfe and average costs were $3.44/Mcfe.
- Second-quarter coal pre-tax earnings increased to $120 million from $106 million. Coal sales rose to 8.5 million tons from 7.1 million, but average selling price fell 10.7% to $62.43 per ton; average cost fell 7.0% to $47.63 per ton.
- Six-month capital expenditures were $819.3 million, compared with operating cash flow of $557.1 million. Investing cash use was $725.2 million. Cash declined to $147.4 million from $327.4 million at year-end 2013.
- At June 30, total liabilities were $6.51 billion and stockholders’ equity was $5.06 billion. Long-term debt was $3.215 billion, with $44.5 million of long-term capital lease obligations and $12.1 million current debt.
- The new $2.0 billion secured revolving facility had no borrowings and $260.5 million of letters of credit outstanding, leaving $1.740 billion unused. Covenant interest coverage was 4.15x and the facility’s minimum-current-ratio test was 2.59x. The separate receivables facility had no borrowings and $62 million of letters of credit.
Changes versus comparable periods
- Q2 revenue increased about 13%, but the company moved from continuing-operations income to a continuing-operations loss. The quarter’s results included a $74.3 million debt-extinguishment loss and $20.7 million pension-settlement expense; these materially affected the comparison.
- Six-month shareholder earnings improved to $91.1 million from a $14.1 million loss. Revenue growth reflected higher gas volumes and prices and increased thermal coal tonnage, while coal prices and metallurgical coal performance remained pressured.
- Gas sales growth was led by Marcellus: Q2 Marcellus sales volumes rose 129% year over year. Liquids sales volume was nearly five times the year-earlier quarter. Gas hedging reduced reported average prices versus the prior-year periods.
- Metallurgical coal markets were weak. Low-volatile met coal’s Q2 average price fell 27% to $71.02 per ton; its six-month pre-tax contribution declined to $21 million from $85 million.
Outlook, commentary, risks and unusual items
- Management raised 2014 net gas-production guidance to 225–235 Bcfe from 215–235 Bcfe, and expected 2015 and 2016 annual production growth of 30%. Q3 gas production guidance was 59–61 Bcfe.
- Gas hedges as of June 17 covered 159.9 Bcf for 2014, 82.6 Bcf for 2015 and 75.3 Bcf for 2016, at average prices of $4.58, $4.07 and $4.17/Mcf, respectively. Management said it did not expect to hedge more than 80% of estimated annual production.
- 2014 coal-sales guidance was 31–33 million tons, including 3.4–3.8 million low-volatile metallurgical tons and 26.1–27.7 million thermal tons. Management lowered 2014 low-volatile guidance amid deteriorating prices, while citing a strong thermal start. It expected about 5 million tons of metallurgical sales in 2014, one million below its prior projection.
- Management cited gas-price and Appalachian basis pressure, while describing firm transport capacity of 1.3 Bcf/day as adequate for the rest of 2014 and supportive of much of its three-year growth plan. Processing commitments were expected to cover projected needs for the next two years.
- Unusual income items included a $30 million coal-contract buyout settlement and increased rental income. The company also reported a $74.3 million loss on retiring its 8% notes due 2017; it issued $1.6 billion of 5.875% notes due 2022 to fund the repurchase. On July 29, after quarter-end, it issued a further $250 million of 2022 notes, intending to repurchase some 8.25% notes due 2020 and use the remainder for general purposes.
- Principal risks include natural-gas and coal price volatility, weak metallurgical coal demand, transport and processing constraints, operational and geological issues, environmental and greenhouse-gas regulation, reserve and title uncertainty, employee-benefit liabilities, and counterparty or customer credit risk. The company reported roughly $1.53 billion of letters of credit, surety bonds and guarantees, plus $1.67 billion of unconditional purchase obligations.
- Legal matters include certified class actions concerning Virginia coalbed-methane ownership and royalties, with appeals and trial-court proceedings ongoing; management said it would defend the cases. The filing says quantified claims in pending matters exceeded recorded accruals by approximately $390.1 million, while aggregate potential losses could not be reasonably estimated.
- Management stated that operating cash, asset-sale proceeds and borrowing capacity should fund working capital, planned capital expenditures, debt service and dividends, while emphasizing dependence on future operating performance and industry conditions. Disclosure controls were deemed effective; no material change in internal control was reported.
Important facts for investors to verify
- Confirm the issuer mismatch: CONSOL Energy Inc. is the registrant in the supplied 10-Q, whereas the request names CNX Resources Corp.
- Reconcile reported earnings with the debt-extinguishment loss, pension settlement charge, coal-contract settlement, tax benefits and other nonrecurring items.
- Assess whether projected gas growth, transport and processing capacity, hedging coverage, and the stated coal sales outlook are achievable under changing prices and market conditions.
- Review debt maturities, refinancing plans, covenant headroom, dividend restrictions and the effect of continuing high capital spending on cash and liquidity.
- Evaluate metallurgical coal exposure, customer concentration, mine performance, environmental and regulatory risks, and the status and potential exposure of royalty and land-right litigation.