CNX Resources Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
CNX is an oil and gas exploration and production company with a midstream business. Following the November 2017 coal spin-off, prior-period coal results are reported as discontinued operations. Comparisons also reflect a major change in consolidation: CNX acquired Noble’s 50% interest in CNX Gathering on January 3, 2018, gained control of CNX Midstream Partners (CNXM), and began consolidating the midstream business. Consequently, year-over-year comparisons are not fully like-for-like.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue and other operating income | $495.7 million | $319.9 million |
| Income (loss) from continuing operations | $545.5 million | $(91.0) million |
| Net income (loss) attributable to CNX shareholders | $527.6 million | $(39.0) million |
| Diluted earnings (loss) per share | $2.35 | $(0.17) |
| Cash provided by operating activities | $259.3 million | $211.8 million |
| Capital expenditures | $232.5 million | $103.9 million |
- Reported earnings included a $623.7 million non-cash gain from remeasuring CNX’s previously held equity interest in CNX Gathering and CNXM upon obtaining control. This gain was a major driver of the swing to reported profit.
- Natural gas, NGL, and oil revenue increased to $405.6 million from $317.8 million. Production rose 36.3% to 129.5 Bcfe, primarily from Utica growth. The reported average sales price was $3.00/Mcfe versus $2.85/Mcfe; average costs fell to $2.10/Mcfe from $2.32/Mcfe, lifting the average margin to $0.90/Mcfe from $0.53/Mcfe.
- CNX reported a $35.1 million gain on commodity derivatives, compared with a $22.5 million loss a year earlier. Cash settlements were a $17.0 million outflow, versus $47.1 million in Q1 2017.
- Operating cash flow less capital expenditures was approximately $26.9 million, a simple calculation that excludes acquisitions, asset-sale proceeds, and financing flows. Investing activities used $426.3 million, including $299.3 million for the CNX Gathering acquisition, while financing activities used $259.7 million.
- Cash declined to $82.5 million from $509.2 million at year-end 2017. At March 31, CNX had no borrowings on its $2.1 billion revolver, $253.2 million of letters of credit, and $1.847 billion of unused capacity. CNXM separately had $20 million drawn on its $600 million facility.
- Balance-sheet long-term debt was $2.211 billion, with $18.6 million of long-term capital lease obligations and $6.9 million of current debt/lease obligations. CNX repurchased $391.4 million principal amount of its 2022 notes and recorded a $15.6 million extinguishment loss. Interest expense was $38.6 million, down from $41.6 million.
- Income tax expense was $213.7 million and the effective rate was 28.8%. The filing notes that tax-reform estimates remained provisional and could change.
Material changes and notable transactions
- The midstream acquisition added consolidated midstream operations, $796.4 million of preliminary goodwill, and $128.8 million of customer-relationship intangible assets. The previously held equity interest was valued using Level 3 inputs; purchase accounting remained preliminary and could change materially. Acquisition-period midstream revenue was $64.2 million before intercompany eliminations; $26.3 million was reported as consolidated midstream revenue.
- CNX sold substantially all of its shallow oil and gas assets and certain CBM assets for $87.5 million cash and recognized a $4.8 million net gain. The buyer assumed approximately $196.5 million of asset retirement obligations.
- Capital spending increased substantially with higher drilling and completion activity. CNX repurchased 5.8 million shares for $84.0 million in the quarter under its $450 million authorization. No dividend was declared by CNX.
- Compared with Q1 2017, reported results benefited from the absence of the $137.9 million E&P property impairment and from higher production and derivative results. The prior-year period included $52.0 million of income from discontinued coal operations; Q1 2018 did not.
Guidance, outlook, risks, and contingencies
- Management reaffirmed 2018 production guidance of approximately 500–525 Bcfe and CNX-attributable 2018 capital expenditure guidance of approximately $790–$915 million.
- As of the guidance update, disclosed natural gas hedges totaled 374.5 Bcf for 2018 and 335.8 Bcf for 2019. Hedging can reduce downside exposure but may also limit gains from higher prices; the filing reports substantial fair-value sensitivity to gas-price movements.
- Management said operating cash flow, asset sales, and borrowing capacity were expected to meet working-capital needs, planned capital spending, and debt service, while noting that results depend on gas markets and other factors outside CNX’s control. CNX was compliant with its financial covenants at quarter-end.
- Key risks include commodity-price and basis volatility, reserve and drilling uncertainty, dependence on third-party gathering and transportation, environmental and regulatory obligations, water sourcing and disposal, customer and counterparty credit risk, and the possibility of impairment charges. The newly recorded goodwill and intangible assets are particularly sensitive to valuation assumptions.
- Pending matters include the Hale royalty class action, for which a settlement received preliminary court approval and final approval was scheduled for August 23, 2018. The Addison class action was dismissed with prejudice after settlement. Accruals for these matters were described as immaterial, although the company cautioned that aggregate future losses from claims could be material and were not reasonably estimable.
- After quarter-end, CNX closed an asset exchange with HG Energy involving approximately $7 million cash proceeds, acreage, and non-core midstream and acreage interests. The company said the transaction could affect the value of acquired customer-relationship intangibles and might result in an impairment charge in Q2.
Important facts for investors to verify
- How much of reported earnings and cash generation reflects recurring operations versus the $623.7 million remeasurement gain, derivatives, and asset-sale gains.
- Whether 2018 production and capital spending remain within guidance, and how Utica growth, realized prices, and per-unit costs develop.
- Final purchase-price allocation and subsequent impairment testing for the midstream acquisition’s goodwill and customer-relationship intangibles.
- Liquidity after acquisition spending, share repurchases, and planned capital expenditures; confirm debt definitions and maturity terms against the debt disclosures.
- Updates on the HG Energy exchange, potential intangible-asset impairment, and the Hale settlement’s final approval.