CNX Resources Corp. — 2017 Second-Quarter 10-Q Summary
Registrant identification: The supplied filing is for CONSOL Energy Inc., not CNX Resources Corp. This summary reflects the filing as submitted. The quarter ended June 30, 2017; financial statements are unaudited. Dollar figures below are in millions unless otherwise noted.
Business context and reporting period
CONSOL Energy operated two principal divisions: Exploration and Production (E&P), focused on natural gas, and Pennsylvania Mining Operations, focused on thermal coal. Management described a strategy to grow E&P and pursue separation of the coal business. A subsidiary filed a Form 10 regarding a planned spin-off on July 10, 2017.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue and other income | $866.0 | $285.9 | $1,564.7 | $818.8 |
| Income (loss) from continuing operations | $173.8 | $(234.0) | $140.3 | $(277.3) |
| Net income (loss) attributable to CONSOL shareholders | $169.5 | $(469.8) | $130.5 | $(567.4) |
| Diluted earnings (loss) per share | $0.73 | $(2.05) | $0.56 | $(2.47) |
- Revenue mix and unusual contributors: Q2 natural gas, NGL and oil sales were $260.3 million; coal sales were $303.7 million. Reported revenue and other income also included an $83.8 million commodity-derivative gain and a $140.2 million gain on asset sales. Six-month results included a $61.3 million derivative gain, $152.1 million gain on asset sales, and a $137.9 million E&P property impairment.
- Cash flow: Six-month operating cash flow was $293.9 million, capital expenditures were $273.3 million, investing cash flow was positive $96.5 million, and financing cash flow was negative $151.8 million. Cash rose to $299.1 million from $60.5 million at year-end 2016.
- Debt and liquidity: Management reported approximately $2.666 billion of long-term debt and capital lease obligations, including $190 million borrowed by CNX Coal Resources LP. CONSOL’s $2.0 billion secured revolver had no borrowings, $313.8 million of letters of credit, and $1.686 billion of unused capacity. Covenant interest coverage was 5.00x and the covenant current ratio was 3.28x. Balance-sheet current assets were $847.1 million versus current liabilities of $825.7 million.
- Operations and unit metrics: Q2 E&P sales volume declined 7.2% to 92.2 Bcfe; average realized sales price was $2.47/Mcfe and average cost was $2.20/Mcfe. PA Mining sold 6.8 million tons, up 9.7%; average selling price was $44.75/ton and total cost was $34.79/ton.
Material changes versus the prior comparable period
- Shareholder net income swung to $169.5 million in Q2 from a $469.8 million loss a year earlier. The comparison reflects, among other items, large year-over-year changes in derivative marks and asset-sale gains, and a prior-year discontinued-operations loss of $234.6 million in Q2.
- Q2 E&P earnings before tax were $227 million, versus a $294 million loss in Q2 2016. Management attributed much of the change to $116 million of unrealized derivative gains and $134 million of asset-sale gains; the prior-year period included a $280 million unrealized derivative loss.
- Q2 PA Mining earnings before tax rose to $50 million from $23 million. Higher sales volume and a 10.2% increase in average price per ton improved results, partly offset by higher unit costs.
- Six-month capital expenditures increased to $273.3 million from $115.3 million, primarily due to higher E&P drilling activity. Asset-sale proceeds also rose substantially, to $345.2 million from $18.3 million.
Guidance, management commentary, risks and contingencies
- Guidance: Management maintained 2017 E&P production guidance of approximately 420–440 Bcfe and increased 2017 E&P capital spending guidance to approximately $635 million from $555 million. It raised 2018 production guidance to 520–550 Bcfe from 490–520 Bcfe. 2017 PA Mining sales guidance remained 25.6–27.6 million tons, with capital expenditures of $120–$136 million.
- Hedges: As of July 12, 2017, disclosed hedged gas volumes were 315.2 Bcf for 2017 and 329.1 Bcf for 2018. Management said it added hedges on about half of expected incremental 2018 production. Open derivatives had a net liability fair value of $47 million; a hypothetical 10% increase in future gas prices would reduce future derivative-related earnings by $265 million.
- Separation and financing: The planned coal-business separation remained subject to timing, structure, conditions and execution risks. The credit agreement includes financial covenants and restrictions on dividends and other actions. CONSOL reported no defaults at quarter-end and had suspended its quarterly dividend.
- Contingencies: The company disclosed class-action royalty litigation, including the Hale matter, for which it recorded an immaterial estimated accrual; it said other reasonably possible claims could not be estimated. It also reported $997.9 million of letters of credit, surety bonds and guarantees, and $1.291 billion of unconditional purchase obligations. Management expected guarantees to expire without funding, but future aggregate legal losses could be material and were not reasonably estimable.
- Other notable items: Knox Energy and Coalfield Pipeline were sold in Q2 after a $137.9 million impairment. The remaining $74.5 million of 8.25% notes due 2020 and $20.6 million of 6.375% notes due 2021 were redeemed on July 14, 2017. Principal risks include commodity-price volatility, production and transportation disruptions, reserve replacement, environmental and mine-closure obligations, litigation, and separation execution.
Important facts for investors to verify
- Confirm the intended issuer: this document identifies CONSOL Energy Inc., despite the request naming CNX Resources Corp.
- Separate recurring operating performance from derivative fair-value changes, asset-sale gains, impairment charges and other unusual items when assessing earnings and cash generation.
- Track whether the planned coal spin-off proceeds, including its final structure, timing, costs, conditions and effects on debt and liquidity.
- Compare subsequent production, realized prices, capital spending and hedge settlements with the stated 2017–2018 guidance and hedge positions.
- Review updates to royalty litigation, reclamation and closure obligations, guarantees, purchase commitments and covenant headroom.