CNX Resources Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with Q1 2018 unless noted. CNX operates Exploration and Production (E&P) and Midstream businesses, primarily in the Appalachian region.
Financial performance and liquidity
- Revenue and derivatives: Total revenue and other operating income was $278.4 million, down from $495.7 million. Natural gas, NGL and oil revenue increased to $435.9 million from $405.6 million, but commodity derivatives produced a $195.4 million loss versus a $35.1 million gain a year earlier.
- Earnings: Consolidated net loss was $64.7 million; the loss attributable to CNX shareholders was $87.3 million, or $0.44 per diluted share. Q1 2018 included $623.7 million in non-cash gain from remeasuring a previously held midstream equity interest, contributing to prior-period attributable income of $527.6 million, or $2.35 per diluted share.
- Production and unit economics: Sales volumes rose 2.7% to 133.0 Bcfe. Average realized sales price, including settled hedges, was $2.97/Mcfe versus $3.00. Average E&P costs declined to $1.99/Mcfe from $2.10, and average E&P margin increased to $0.98/Mcfe from $0.90.
- Cash flow and investment: Operating cash flow was $308.7 million, compared with $259.3 million. Capital expenditures were $299.1 million versus $232.5 million; investing cash outflow was $293.3 million. Financing cash outflow was $8.5 million. Cash increased $6.8 million to $24.0 million.
- Debt and liquidity: Long-term debt, excluding issuance costs, was approximately $2.44 billion, versus $2.39 billion at year-end. CNX had $514 million drawn on its revolver and $1.393 billion of unused capacity after letters of credit; CNXM had $136.7 million drawn and $463.4 million available. CNX reported a 2.22x total leverage ratio and compliance with financial covenants. The April 2019 amendment extended the CNX and CNXM revolvers to April 2024.
- Balance sheet and capital returns: Total assets were $8.78 billion and total equity $4.97 billion. The company repurchased 3.12 million shares for approximately $33.5 million. CNX declared no dividend; its quarterly dividend remained suspended.
Material changes and management outlook
- Marcellus sales volumes grew 34.6%; Utica volumes fell 29.7%, primarily reflecting the 2018 sale of Ohio Utica joint-venture assets and declines in remaining wells. CBM volumes decreased 13.8%.
- CNX issued $500 million of 7.25% senior notes due 2027 and repurchased $400 million principal of 5.875% notes due 2022, recognizing a $7.5 million extinguishment loss.
- CNX reaffirmed 2019 production guidance of 495–515 Bcfe, approximately 5% growth at the midpoint versus 2018 retained-asset volumes. It raised guidance for drilling and completions capital to $695–$745 million and land, midstream and water infrastructure capital to approximately $200 million. Total capital guidance increased to $1.205–$1.275 billion, including $310–$330 million for CNXM; management said it would continue evaluating incremental activity.
- As of April 11, 2019, disclosed gas hedges included 377.0 Bcf for 2019 (including actual settlements) and 471.3 Bcf for 2020. The filing notes hedging can limit participation in price increases.
Risks, contingencies and unusual items
- A pressure anomaly occurred during hydraulic fracturing at the Shaw 1G Utica well, with pressure increases observed at nearby shallow wells not owned by CNX. CNX said it remediated its well on February 5, completed root-cause and independent-expert reviews, and applied revised practices across operations.
- CNXM recorded a $7 million loss after abandoning a planned compressor station. The company cited changing customer development plans and continued project evaluation.
- Commodity derivatives shifted from a net fair-value asset of $99 million at year-end to a net liability of $55 million at March 31. A hypothetical 10% gas-price increase would reduce derivative fair value by $467 million; a 10% decrease would increase it by $462 million.
- Commitments included $2.28 billion of unconditional purchase obligations and $297.6 million of letters of credit, surety bonds and financial guarantees. Management expected the guarantees to expire without funding. Pending claims were accrued as immaterial, though the filing says future aggregate losses could be material and cannot be reasonably estimated.
- Management cited exposure to volatile commodity prices, hedging outcomes, operating and environmental risks, midstream access and capital needs, debt and borrowing-base risk, and reserve-estimation uncertainty. No material changes to the risk factors in the 2018 Form 10-K were reported.
Key investor verification points
- Separate recurring operating performance from derivative mark-to-market impacts and the prior-year $623.7 million acquisition remeasurement gain.
- Track delivery against production and increased capital guidance, and assess resulting cash flow, borrowing needs and leverage.
- Review realized hedge settlements, open derivative exposures and the effect of changing gas prices on reported earnings and liquidity.
- Monitor the Shaw 1G follow-up, revised operating practices and any related claims or regulatory developments.
- Assess midstream project returns and CNXM obligations, including the abandoned compressor project and disclosed purchase commitments.