CONSOL Energy Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; comparative period is the three months ended March 31, 2016. The filing identifies the registrant as CONSOL Energy Inc., not CNX Resources Corp. Unless noted, amounts below are in U.S. dollars.
Business context and financial performance
CONSOL Energy operated two principal divisions: Exploration and Production (E&P), producing natural gas and liquids, and Pennsylvania (PA) Mining Operations, producing coal. The company reported a consolidated net loss attributable to shareholders of $39.0 million, or $0.17 per diluted share, compared with a $97.6 million loss, or $0.43 per diluted share, in Q1 2016.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue and other income | $698.7 million | $532.8 million |
| Loss from continuing operations | $33.5 million | $43.3 million |
| Net loss attributable to CONSOL shareholders | $39.0 million | $97.6 million |
| Cash provided by operating activities | $205.1 million | $130.0 million |
| Capital expenditures | $113.0 million | $77.7 million |
| Cash and cash equivalents at period-end | $61.3 million | $60.5 million at Dec. 31, 2016 |
Revenue and other income increased 31%, reflecting higher gas and coal sales and prices, partly offset by an unfavorable swing in commodity derivatives: a $22.5 million loss in Q1 2017 versus a $55.1 million gain in Q1 2016. Q1 2017 continuing-operations loss before tax included a $137.9 million noncash impairment of Knox Energy assets held for sale. The prior-year net loss included $53.2 million of discontinued-operations losses, including a sale-related loss.
Operating results and material changes
- E&P: Sold 95.0 Bcfe, down 2.6% year over year. Average sales price, including derivative effects, was $2.85 per Mcfe versus $2.73; average costs fell to $2.32 per Mcfe from $2.41, lifting average margin to $0.53 from $0.32. E&P recorded a $93 million pretax loss, versus a $23 million loss, primarily because of the Knox impairment.
- PA Mining: Sold 6.8 million tons versus 5.3 million. Average sales price rose to $46.80 per ton from $42.99, while costs increased to $34.52 from $33.16 per ton. Pretax earnings improved to $61 million from $23 million.
- Balance sheet and debt: Total assets were $9.06 billion and total equity was $3.91 billion at March 31. Long-term debt and capital lease obligations totaled approximately $2.70 billion, including $197 million borrowed by CNX Coal Resources LP (CNXC). CONSOL’s own $2.0 billion revolving facility had no borrowings, $333 million of letters of credit, and approximately $1.67 billion of unused capacity.
- Liquidity and covenants: The reported interest coverage ratio was 3.94x against a 2.50x minimum; the current ratio was 2.41x against a 1.00x minimum. CONSOL repurchased approximately $100 million principal amount of 2022 notes during the quarter. Its total leverage ratio was 4.01x; the filing notes dividend restrictions tied to leverage and other conditions. No CONSOL dividend was declared for Q1 2017, compared with $0.01 per share in Q1 2016.
Cash flow, outlook, risks, and unusual items
- Operating cash flow rose to $205.1 million. Investing activities used $87.6 million, compared with $321.0 million provided in Q1 2016, when asset-sale proceeds included the Buchanan transaction. Financing activities used $116.7 million, including note repurchases.
- Management expected E&P production of approximately 420–440 Bcfe in 2017 and 490–520 Bcfe in 2018. It forecast 2017 PA Mining sales of approximately 25.6–27.6 million tons and PA Mining capital expenditures of $120–$136 million.
- As of April 18, 2017, disclosed gas hedge volumes totaled 312.4 Bcf for 2017 and 283.2 Bcf for 2018. Management described new East Tennessee Pipeline customer sales as supporting basis protection and using customer-provided transportation capacity. It also reported directly marketed ethane volumes of 367,000 barrels in Q1.
- Subsequent asset sales: Knox subsidiaries sold April 3 for net cash proceeds of $18.9 million, with an estimated gain of about $0.5 million. Approximately 6,300 net undeveloped Utica acres sold May 1 for $76.7 million, with an estimated gain of about $72 million.
- Risks and contingencies: Commodity prices, hedge outcomes, production declines, transportation costs and availability, customer credit, environmental and mine-closure obligations, and access to capital are significant risks. Derivatives were a net liability of $164 million at March 31; a hypothetical 10% rise in future gas prices would reduce future earnings related to derivatives by $273 million. The filing says expressly stated or estimated claims in lawsuits exceed recorded accruals by approximately $549.8 million, while aggregate future losses cannot be reasonably estimated. It also disclosed $1.02 billion of letters of credit, surety bonds, and guarantees, plus $1.33 billion of unconditional purchase obligations.
- Management stated that disclosure controls were effective at quarter-end and that there were no material changes to internal control over financial reporting. The filing cautions that interim results are not necessarily indicative of future results.
Important facts for investors to verify
- Confirm the registrant and security being analyzed: this supplied filing is for CONSOL Energy Inc., despite the CNX Resources Corp. request metadata.
- Assess the underlying E&P performance separately from the $137.9 million Knox impairment, and track whether asset-sale proceeds and estimated gains were realized as expected.
- Review production, realized prices, hedge settlements and fair values, and the potential effects of hedge exposure on cash flow and earnings.
- Monitor coal sales volumes, per-ton margins, and cost trends against the 2017 guidance.
- Track debt, covenant headroom, letters of credit, dividend restrictions, and the material claims and long-term reclamation and benefit obligations.