CNX Resources Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Amounts below are in U.S. dollars. Financial statement figures are generally in millions unless noted.
Business context and key financial results
CNX produces natural gas, NGLs and oil, principally through its Shale and Coalbed Methane segments. Results are substantially affected by commodity prices and natural gas hedging. The quarter’s large GAAP loss primarily reflected mark-to-market losses on commodity derivatives, rather than a comparable cash loss from current-period production.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Natural gas, NGL and oil revenue | $586 | $182 | $1,337 | $609 |
| Loss on commodity derivatives | $(1,507) | $(169) | $(2,013) | $(117) |
| Net loss attributable to CNX shareholders | $(873) | $(205) | $(1,129) | $(680) |
| Diluted loss per share | $(4.05) | $(1.03) | $(5.17) | $(3.56) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $673 | $634 |
| Capital expenditures | $97 | $108 | $349 | $395 |
Q3 sales volume was 153.5 Bcfe, up from 115.7 Bcfe. Natural gas, NGL and oil sales including cash settlements, a company-defined non-GAAP measure, were $455 million, versus $272 million; production costs were $238 million versus $197 million, yielding production margin of $217 million, or $1.41/Mcfe, versus $75 million, or $0.65/Mcfe. For the first nine months, these measures were $1.198 billion in sales including settlements, $679 million in production costs, and $519 million in production margin ($1.20/Mcfe). These non-GAAP figures exclude unrealized derivative fair-value changes and should not be treated as GAAP results.
Material changes, balance sheet and financing
- Q3 natural gas, NGL and oil revenue increased with higher realized commodity prices and production volumes. Q3 total sales volume rose about 33%; Shale volume increased 37.6%, while CBM volume declined 6.2%. Management attributed growth mainly to new wells brought online in 2020 and 2021.
- The derivative loss included $1.376 billion of unrealized losses in Q3 and $1.874 billion in the first nine months. Cash settlements on commodity derivatives were a $131 million outflow in Q3 and a $139 million outflow year to date; the comparable 2020 nine-month period had $384 million of receipts. The derivative portfolio’s net fair value shifted from a $118 million asset at December 31, 2020 to a $1.756 billion liability at September 30, 2021.
- At September 30, cash and cash equivalents were $0.4 million, with $220.4 million of restricted cash held to fund redemption of CNXM notes. Current assets were $584 million and current liabilities $1.767 billion; derivative liabilities accounted for a substantial portion of current liabilities.
- Total debt was approximately $2.454 billion, excluding issuance costs; shareholders’ equity was $3.187 billion, down from $4.422 billion at year-end 2020. CNX reported a 2.02x net leverage ratio and compliance with debt covenants. It had $1.361 billion of unused capacity under its CNX revolver at quarter-end; CNXM had $454 million under its separate facility.
- CNXM issued $400 million of 4.75% notes due 2030 and repurchased $165.8 million principal of its 6.50% notes due 2026 during Q3, recording a $10.5 million loss on extinguishment. CNX subsidiaries also repaid and terminated two non-revolving credit facilities. On October 15, 2021, after quarter-end, CNXM redeemed the remaining $234.2 million principal of its 2026 notes for $246.9 million including premiums and interest.
- On October 6, 2021, CNX and CNXM entered into amended and restated revolvers maturing in 2026. The CNX facility has $1.3 billion of elected commitments within a $2.0 billion borrowing base; the CNXM facility has $600 million of commitments.
- CNX repurchased 9.8 million shares for $121.6 million during the first nine months. The board increased the repurchase authorization to $1.9 billion on October 25, 2021; the program is discretionary and has no expiration date.
Outlook, risks and unusual items
- Management said operating cash flow, asset-sale proceeds and borrowing capacity were expected to cover working capital, planned capital spending, scheduled debt payments and required letters of credit for the current fiscal year. This outlook is conditional on operating performance and market conditions; no specific earnings or production guidance is provided in the filing excerpt.
- As of October 7, 2021, management reported 130.6 Bcf of Q4 2021 hedged gas production and 470.8 Bcf hedged for 2022. The 2022 weighted average hedge price was $2.45/Mcf. Hedging can limit gains from higher prices and create mark-to-market earnings volatility. A hypothetical 10% rise in future gas prices would have reduced derivative fair value by $720 million at September 30; a 10% decline would have increased it by $706 million.
- Key risks include volatile natural gas and NGL prices, hedge exposure, reserve and impairment estimates, drilling and operating risks, pipeline and midstream access, environmental and climate regulation, financing and borrowing-base changes, and COVID-19 uncertainty. CNX reported no significant direct operational disruption from COVID-19 through the reported periods but could not predict future effects.
- CNX disclosed lawsuits and claims arising in the ordinary course of business. The UMWA 1992 Benefit Plan Coal Act case is contested; CNX said loss was possible but not probable and recorded no accrual, noting a CONSOL indemnity. A separate UMWA pension plan inquiry indicated potential withdrawal-liability litigation was reasonably foreseeable; no liability had been assessed, and CNX cited the same indemnity. The filing cautions that indemnification may not be collectible.
- Other unusual items include a $19 million debt-extinguishment loss in the first nine months and an $11.5 million deferred tax expense from state apportionment changes. The prior-year comparison included $473 million of goodwill impairment and $62 million of E&P property impairment, neither recorded in 2021.
Investor verification points
- Assess the scale, timing and cash settlement profile of the $1.756 billion net derivative liability, and how hedges affect realized prices and future cash flows.
- Reconcile reported GAAP losses with production-margin measures and review the assumptions behind management’s liquidity and covenant outlook.
- Confirm the post-quarter CNXM note redemption and the terms, availability and covenants of the October 2021 revolving credit agreements.
- Review debt maturity and interest obligations, including CNXM debt for which CNX is not a guarantor, and the effect of restricted cash on available liquidity.
- Track the UMWA litigation and pension inquiry, potential Coal Act or withdrawal liabilities, and the scope and creditworthiness of CONSOL’s indemnification.
- Monitor share repurchases against liquidity, leverage and capital needs; the expanded authorization does not obligate CNX to repurchase shares.