CNX Resources Corp. — Q2 2021 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2021. CNX produces natural gas through its Shale and Coalbed Methane segments. Unless stated otherwise, figures below are in U.S. dollars; financial statement amounts are in millions, rounded.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Natural gas, NGL and oil revenue | $369.4 | $175.8 | $750.7 | $427.3 |
| Commodity derivative loss (gain) | $(538.9) | $(63.3) | $(505.4) | $51.8 |
| Total revenue and other operating income (loss) | $(127.2) | $148.8 | $345.9 | $565.2 |
| Net loss attributable to CNX shareholders | $(354.1) | $(145.7) | $(256.0) | $(474.8) |
| Loss per diluted share | $(1.61) | $(0.78) | $(1.16) | $(2.54) |
| Cash provided by operating activities | Not presented quarterly | $458.9 | $411.2 | |
| Capital expenditures | Not presented quarterly | $252.4 | $286.9 |
Q2 natural gas, NGL and oil sales volumes were 137.9 Bcfe, up 23.4 Bcfe year over year. The company-reported non-GAAP production margin was $138 million, or $1.00 per Mcfe, versus $103 million, or $0.89 per Mcfe. For the six-month period, this margin was $303 million, or $1.09 per Mcfe, versus $223 million, or $0.90 per Mcfe. These production-margin measures exclude certain expenses and are not GAAP measures.
Q2 results were heavily affected by a $529 million unrealized commodity-derivative loss; the six-month unrealized loss was $497 million. These mark-to-market amounts are distinct from cash settlements and significantly depressed reported revenue and earnings. Cash settlements on commodity derivatives were a net outflow of about $10 million in Q2 2021, compared with a net inflow of about $113 million in Q2 2020; six-month 2021 settlements were a net outflow of about $8 million, compared with a net inflow of about $293 million in 2020.
Balance sheet, liquidity and capital allocation
- At June 30, 2021, cash and cash equivalents were $39.4 million; cash, cash equivalents and restricted cash totaled $44.9 million.
- Total debt principal, including current maturities and before unamortized issuance costs, was approximately $2.314 billion, compared with approximately $2.451 billion at year-end 2020. Stockholders’ equity was $4.137 billion, down from $4.422 billion.
- CNX’s revolving facility had $160 million drawn and $1.426 billion of unused capacity; CNXM’s facility had $160 million drawn and $440 million unused. CNX reported compliance with debt covenants, including a 2.50-to-1.00 net leverage ratio against a 4.00-to-1.00 maximum under its facility.
- Six-month cash from operations less capital expenditures was approximately $206 million. Cash used in financing was $195 million, including $46.7 million of common-stock purchases and net repayments on credit facilities.
- The board’s share-repurchase authorization was increased to $900 million; $214.7 million remained available at June 30. CNX declared no dividends in the periods shown and stated its quarterly dividend had been suspended since 2016.
Changes, outlook and notable items
- Year-over-year production growth and higher realized commodity prices lifted hydrocarbon revenue. Q2 total sales volumes rose primarily due to new wells brought online in 2020 and the first half of 2021, as well as the prior-year temporary shut-in of some liquids-rich production. Normal production declines partly offset growth.
- Higher production and a wetter production mix increased transportation, gathering and compression costs. Interest expense declined year over year, partly reflecting debt repurchases made in 2020.
- For the six months, the net loss improved versus 2020, when CNX recorded $473 million of goodwill impairment and $62 million of exploration and production property impairment. No comparable impairment was recorded in 2021. The 2021 period nevertheless included substantial unrealized hedge losses.
- As of July 7, CNX reported 2021 hedged gas volumes of 490.8 Bcf, net of purchased swaps and including 267.0 Bcf of actual settlements, and 2022 hedged volumes of 471.5 Bcf. The filing does not provide a production or earnings forecast. Management said cash from operations, asset sales and borrowing capacity were expected to cover working capital, anticipated capital spending and scheduled debt payments for the current fiscal year, while noting exposure to commodity prices and other conditions.
- Open gas derivatives were a net liability of $380 million at June 30, versus a net asset of $118 million at December 31, 2020. A hypothetical 10% increase in future gas prices would reduce their fair value by $551 million; a 10% decrease would increase it by $559 million.
- CNX disclosed ongoing litigation over alleged Coal Act retiree health-benefit obligations. The company disputes the claims, considers a loss possible but not probable, and recorded no accrual; it says CONSOL Energy agreed to indemnify it for coal-related liabilities. On July 22, CNX received a separate UMWA pension-plan information request indicating potential withdrawal-liability litigation was reasonably foreseeable; no liability had been assessed, and CNX cited the same indemnity.
- COVID-19 had not caused significant direct operational disruption during the periods reported, but management said future effects remained uncertain. Other principal risks include commodity-price volatility, hedging impacts, pipeline and midstream dependence, environmental and regulatory obligations, litigation, financing and counterparty risks.
Important facts for investors to verify
- Separate GAAP earnings and revenue from cash settlements and non-GAAP production-margin measures; assess how hedge gains and losses may affect future periods.
- Review hedge volumes, prices, maturities and the sensitivity of the substantial net derivative liability to gas prices.
- Check debt maturities, facility availability, covenant calculations and contractual transportation and processing commitments, which totaled approximately $2.145 billion.
- Monitor the Coal Act and potential pension withdrawal-liability matters, including the scope and collectability of CONSOL’s indemnification obligations.
- Consider the pace of production growth, unit transportation costs, capital spending and share repurchases alongside the company’s liquidity and commodity-price outlook.