CNX Resources Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. CNX produces natural gas through its Shale and Coalbed Methane segments. Unless otherwise noted, amounts are USD; financial statement figures are converted from thousands to millions.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Natural gas, NGL and oil revenue | $1,003.4m | $369.4m | $1,748.0m | $750.7m |
| Total revenue and other operating income (loss), including commodity derivatives | $420.4m | $(127.2)m | $(492.7)m | $345.9m |
| Net income (loss) | $33.4m | $(354.1)m | $(889.6)m | $(256.0)m |
| Diluted EPS | $0.15 | $(1.61) | $(4.52) | $(1.16) |
| Operating cash flow | Not separately presented for the quarter | $528.4m | $458.9m | |
| Capital expenditures | Not separately presented in cash flow statement | $259.0m | $252.4m |
Q2 production sales volumes were 142.3 Bcfe, up 4.4 Bcfe year over year. Management’s non-GAAP production margin was $247m, or $1.74/Mcfe, versus $138m, or $1.00/Mcfe. For the first half, the comparable margin was $492m, or $1.68/Mcfe, versus $303m, or $1.09/Mcfe. These are company-defined non-GAAP measures, not GAAP operating income.
- Commodity hedges materially affected reported results: derivative losses were $652.6m in Q2 and $2,379.0m for the first half. First-half losses included $801.0m of net cash settlements and $1,577.8m of unrealized losses. In Q2, cash settlements were $530.4m and unrealized losses were $122.3m.
- Cash and debt at June 30: cash was $0.2m. Debt was approximately $2,245.8m before unamortized issuance costs, including $322.6m classified as current; total debt at year-end 2021 was approximately $2,231.5m before issuance costs. The company reported $2,537.0m of equity, down from $3,700.3m.
- Credit access and covenants: unused capacity was $993.4m under CNX’s revolving facility and $411.7m under CNXM’s facility. CNX and CNXM reported compliance with their financial covenants. CNX’s maximum net leverage covenant is 3.50:1; its minimum current ratio is 1.00:1, calculated with specified exclusions.
- Cash generation: first-half operating cash flow less capital expenditures was approximately $269.4m, a simple calculation from reported figures. Financing outflows included $212.0m of common-stock repurchases.
Material changes versus comparable periods
- Q2 returned to net income from a substantial year-earlier loss. The first half remained loss-making, with a larger net loss than in 2021, largely reflecting increased mark-to-market commodity hedge losses.
- Higher realized commodity prices and increased production lifted natural gas, NGL and oil revenue. First-half sales volumes rose 14.7 Bcfe; management attributed growth mainly to new wells, partly offset by normal declines.
- For the first half, cash from operations increased $69m year over year. Financing cash use increased $104m, largely reflecting greater share repurchases and debt-related activity.
- Interest expense declined to $58.1m for the first half from $75.9m. CNX attributed the reduction partly to lower non-cash convertible-note interest after adopting ASU 2020-06 and prior debt transactions.
Outlook, commentary and risks
- Management forecast 2022 production of 575–605 Bcfe and capital expenditures of $550–590m. First-half production was 293.2 Bcfe and capital expenditures were $259.0m.
- As of July 7, 2022, hedged natural gas volumes included 473.9 Bcf for 2022 and 417.2 Bcf for 2023. The filing describes hedges as limiting price exposure, but also notes they can constrain participation in price increases.
- Management said operating cash flow, asset sales and borrowing capacity were expected to meet working-capital needs, planned capital spending and scheduled debt service for the current fiscal year. It cautioned that lower commodity prices or higher operating costs could reduce cash flow and liquidity; inflation in steel, diesel and labor was already raising capital costs.
- Open gas derivatives had a net liability fair value of $2,554m, versus $976m at year-end 2021. A hypothetical 10% rise in future gas prices would reduce derivative fair value by $1,004m; a 10% decline would increase it by $765m. These are sensitivities, not forecasts of cash payments.
- Convertible notes: $330.7m principal remained outstanding at June 30. Because a conversion condition was met, holders could elect conversion during Q3 2022; the notes were classified as current. CNX said it currently intended to settle principal in cash, though the indenture permits cash, shares or a combination.
- Unusual items included a $13.0m loss on repurchasing a portion of the convertible notes and a $59.3m reduction to opening equity from adopting ASU 2020-06. CNX repurchased 12.9m common shares for $221.0m in the first half; $793.7m remained under its authorization.
- Legal and contingent exposures include a Coal Act benefits lawsuit involving retirees attributed to former coal subsidiaries. CNX said a loss was possible but not probable and recorded no accrual; CONSOL agreed to indemnify CNX for coal-related liabilities, but the filing cautions there is no assurance the indemnity will be fulfilled. Other pending claims were described as immaterial in current estimates, though future aggregate losses could be material and cannot be reasonably estimated.
- Other stated risks include commodity-price volatility, hedging outcomes, inflation and interest rates, pipeline and midstream dependence, environmental and regulatory matters, drilling and reserve uncertainty, and potential cyber incidents. The company reported no material change to risk factors since its 2021 Form 10-K.
Important facts for investors to verify
- How much of the $2.379bn first-half derivative loss was unrealized versus settled, and how hedge positions and realized prices develop in later periods.
- Whether 2022 production and capital spending remain within the stated ranges, and how inflation affects costs and project returns.
- The outcome and settlement form of the convertible notes’ Q3 conversion window, including cash requirements and potential dilution.
- Liquidity and covenant headroom under lower-price scenarios, given very low cash, current debt classification and derivative liabilities.
- Progress on the Coal Act litigation and the practical collectability of CONSOL’s indemnification, as well as the pace and funding of future share repurchases.