(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-Q. The information provided below supplements, but does not form part of, CNX's financial statements. This discussion contains forward-looking statements that are based on the current views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from any such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact future operating performance or financial condition, please see "Part II. Item 1A. Risk Factors" and the section entitled "Forward-Looking Statements" and the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2019, which we filed with the SEC on February 10, 2020. CNX does not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
CNX continues to monitor the current and potential impacts of the coronavirus COVID-19 ("COVID-19") pandemic on all aspects of our business and geographies, including how it has impacted, and may in the future, impact our operations, financial results, liquidity, contractors, customers, employees and vendors. The Company also continues to monitor a number of factors that may cause actual results of operations to differ from our historical results or current expectations. These factors include: the impact of the COVID-19 pandemic and the related global economic downturn, the historically low natural gas and natural gas liquids prices and ramifications of the crude oil price war between the Organization of Petroleum Exporting Countries ("OPEC")/Saudi Arabia and Russia that began in the first quarter of 2020. These and other factors could affect the Company's operations, earnings and cash flows for any period and could cause such results to not be comparable to those of the same period in previous years. The results presented in this Form 10-Q are not necessarily indicative of future operating results.
While CNX did not incur significant disruptions to operations during the three or six months ended June 30, 2020 as a direct result of the COVID-19 pandemic, CNX is unable to predict the impact that the COVID-19 pandemic will have on us, including our financial position, operating results, liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties. These uncertainties include the volatility and severity of the virus, the duration of the outbreak, the availability of a vaccine, governmental or other actions taken to combat the virus (which could include limitations on our operations or the operations of our customers and vendors), and the effect that the COVID-19 pandemic will have on the demand for natural gas and natural gas liquids. The continued health of our employees, contractors and vendors, and our ability to meet staffing needs in our operations and certain critical functions is vital to our operations and cannot currently be predicted. Further, the continuing impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets as well as other unanticipated consequences remain unknown. In addition, CNX cannot predict the impact that COVID-19 will have on our customers, vendors and contractors; however, any material effect on these parties could adversely impact CNX. For instance, in the short term, CNX is starting to see a reduction in overall service and materials costs, due to oversupply of those services and costs, since industrial production has waned. However, if services providers to our industry are forced into bankruptcy or otherwise consolidate due to weakening economic conditions, demand could outpace supply in the long-term and cause these costs to increase. The situation surrounding COVID-19 remains fluid and unpredictable, and CNX is actively managing our response in collaboration with our contractors, customers, employees and vendors and assessing potential impacts to our financial position and operating results, as well as any adverse developments that could impact our business.
CNX has also taken, and is continuing to take, proactive steps to manage any disruption in our business caused by COVID-19. For instance, even though our operations were not required to close, CNX was an early adopter in employing a work-from-home system, even before any government mandate on non-essential businesses was enacted. CNX increased its technology platform, infrastructure and security to allow for a work-from-home environment ahead of the actual need, and therefore, once the hypothetical became a reality, we believe CNX was ahead of many companies in this respect. CNX has also deployed additional safety protocols at our field sites in order to keep our employees and contractors safe and to keep our operations running without material disruption. As CNX office employees begin to return to work, CNX has implemented certain additional safety measures and protocols in order to maintain the safety of those employees as well.
For further information regarding the impact of COVID-19 see Risk factors in Item 1A of this Form 10-Q.
The markets for natural gas, NGL, and crude oil remain volatile, and prices may continue to fluctuate in response to, among other things: Geopolitical factors, such as events that may reduce or increase production from particular oil-producing regions and/or from members of OPEC, and global events, such as the ongoing COVID-19 pandemic. Overall, 2020 NYMEX oil prices have moved downward due in part to concerns about COVID-19 and its impact on near-term worldwide oil demand and due to the increase in oil production by certain members of OPEC. This oversupply of oil and weak demand have caused a domestic oversupply of NGLs and, when combined with current export constraints, NGL prices have been driven to historic lows, although some improvement was seen in the second quarter of 2020 at Mont Belvieu. While OPEC agreed in April of 2020 to cut production, downward pressure on liquids prices has continued and could continue for the foreseeable future, particularly given concerns over available storage capacity for crude oil and other refinery inputs including condensate, C5+ and butane, that could again result in temporary reductions in CNX's wet gas production. During the six months ended June 30, 2020, sales of natural gas liquids comprised six percent of CNX's revenue from external customers.
Continued strength in natural gas production, along with reduced heating demand for natural gas as a result of relatively mild winter temperatures throughout most of the United States, accounted for relatively higher inventory levels. Despite an April 12 agreement by the OPEC and its allies to reduce global production by approximately 10%, the economic slowdown and global stay-at-home orders continue to suppress demand for natural gas. The U.S. Energy Information Administration's ("EIA") Short-Term Energy Outlook for April 2020 as well as July's Outlook cite heightened uncertainty because of the economic slowdown, particularly industrial gas demand and changes in energy markets' supply and demand dynamics.
For the second quarter of 2020 and 2019, CNX's average sales price for natural gas, NGLs, oil, and condensate, including the impact of cash settlements from hedging, was $2.52 per Mcfe and $2.63 per Mcfe, respectively. The average realized price for all liquids for the second quarter of 2020 was $8.73 per barrel compared to $19.14 per barrel in the 2019 quarter.
CNX's weighted average differential from NYMEX in the second quarter of 2020 was negative $0.29 per MMBtu. CNX's average sales price for natural gas before hedging decreased 15.8% to $1.54 per Mcf compared with the average sales price of $1.83 per Mcf in the first quarter of 2020. This decrease results from a lower Henry Hub price offset in part by improved basis pricing. Including the impact of cash settlements from hedging and excluding cash from the April 2020 hedge monetization, CNX's average sales price for natural gas was $0.03 per Mcf, or 1.2%, lower than the three months ended March 31, 2020, and $0.02 per Mcf, or 0.8%, lower than the three months ended June 30, 2019.
During the second quarter of 2020, CNX sold 114.5 Bcfe of produced natural gas, a decrease of 14.9% from the 134.5 Bcfe sold in the year-earlier quarter, primarily due to decreases in Marcellus Shale and Utica Shale volumes. The decrease in volumes was due to the temporary shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of 2020 in response to low NGL prices. Additionally, two new pads of dry gas turn-in-lines from April and May were temporarily shut-in May and June due to low natural gas prices. Total quarterly production costs decreased to $1.92 per Mcfe, compared to the year-earlier quarter of $2.07 per Mcfe, driven primarily by decreases in lease operating expenses and transportation, gathering and compression. Capital expenditures decreased to $135 million in the second quarter of 2020, compared to $329 million of spend in the second quarter of 2019.
Total hedged natural gas production in the 2020 third quarter is 88.9(1) Bcf. The annual gas hedge position is shown in the table below:
1Net of purchased swaps.
CNX's hedged gas volumes include a combination of NYMEX financial hedges, index (NYMEX and basis) financial hedges, and physical fixed price sales. In addition, to protect the NYMEX hedge volumes from basis exposure, CNX enters into basis-only financial hedges and physical sales with fixed basis at certain sales points.
In March 2020, CNX monetized and repriced a portion of its 2022, 2023, and 2024 NYMEX natural gas hedge portfolio generating $55.0 million of net proceeds, which were included in (Loss) Gain on Commodity Derivative Instruments in the Consolidated Statements of Income for the six months ended June 30, 2020. Notional quantities were not affected by the restructuring. The remaining 2022 swap contracts with a notional quantity of 113.2 million MMBtus and a weighted average
price of $2.80 per MMBtu were repriced to a contract price of $2.40 per MMBtu, 2023 swap contracts with a notional quantity of 51.1 million MMBtus and a weighted average price of $2.69 per MMBtu were repriced to a contract price of $2.48 per MMBtu, and 2024 swap contracts with a notional quantity of 19.2 million MMBtus and a weighted average price of $2.62 per MMBtu were repriced to a contract price of $2.54 per MMBtu. The net proceeds from the monetization were used to reduce the Company's absolute debt.
In April 2020, CNX monetized and terminated approximately 39 million MMBtus of NYMEX natural gas hedges and a similar quantity of financial basis hedges that were to settle at various times from May through November of 2020. In connection with these monetizations, CNX received $29 million of net proceeds, which are included in (Loss) Gain on Commodity Derivative Instruments in the Consolidated Statements of Income for the three and six months ended June 30, 2020. In addition, during the second quarter of 2020, CNX purchased financial swaps for May through November of 2020 under which CNX will pay a fixed price to and receive a floating price from its hedge counterparties. These transactions provided CNX with additional flexibility to move production to higher price periods while immediately taking the monetization proceeds.
Recent Business Developments:
Except for the Class B units of CNXM, which will automatically be canceled immediately prior to the effective time of the Merger for no consideration in accordance with CNXM's partnership agreement, the interests in CNXM owned by CNX and its subsidiaries will remain outstanding as limited partner interests in the surviving entity. The General Partner will continue to own the non-economic general partner interest in the surviving entity.
Completion of the Merger is subject to certain customary conditions, including, among others: (i) the receipt of the Written Consent (as defined below); (ii) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement; (iii) the effectiveness of a registration statement on Form S-4 relating to the shares of CNX common stock to be issued pursuant to the Merger Agreement; (iv) approval for listing on the NYSE of the shares of CNX common stock to be issued pursuant to the Merger Agreement; (v) subject to specified materiality standards, the accuracy of certain representations and warranties of the other party; and (vi) compliance by the other party in all material respects with its covenants.
In connection with execution of the Merger Agreement, CNXM and two indirect wholly owned subsidiaries (the "Subsidiaries") of CNX, entered into a Support Agreement, dated as of July 26, 2020 (the "Support Agreement"), pursuant to which the Subsidiaries have agreed to deliver a written consent (the "Written Consent"), covering all of the CNXM common units beneficially owned by them, approving the Merger. The Merger Agreement and any other matters necessary for consummation of the Merger and the other transactions contemplated in the Merger Agreement.
Upon completion of the Merger, CNXM's common units will no longer be publicly traded. Subject to the satisfaction or waiver of the conditions described above, the Merger is expected to close in the fourth quarter of 2020.
Results of Operations - Three Months Ended June 30, 2020 Compared with Three Months Ended June 30, 2019 Net (Loss) Income Attributable to CNX Resources Shareholders CNX reported a net loss attributable to CNX Resources shareholders of $146 million, or a loss per diluted share of $0.78, for the three months ended June 30, 2020, compared to net income attributable to CNX Resources shareholders of $162 million, or earnings per diluted share of $0.84, for the three months ended June 30, 2019. For the Three Months Ended June 30, (Dollars in thousands) 2020 2019 Variance Net (Loss) Income $ (130,486) $ 192,694 $ (323,180) Less: Net Income Attributable to Noncontrolling Interest 15,263 30,217 (14,954) Net (Loss) Income Attributable to CNX Resources Shareholders $ (145,749) $ 162,477 $ (308,226)
CNX consists of two principal business divisions: Exploration and Production (E&P) and Midstream. The operating results of the Company's reportable divisions were as follows for the three months ended June 30, 2020 and 2019:
For the Three Months Ended June 30, 2020 Intercompany (Dollars in millions) E&P Division Midstream Division Eliminations Consolidated Natural Gas, NGL and Oil Revenue $ 176 $ - $ - $ 176 Loss on Commodity Derivative Instruments (63) - - (63) Purchased Gas Revenue 20 - - 20 Midstream Revenue - Related Party - 54 (54) - Midstream Revenue - Third Party - 12 - 12 Other Operating Income 4 - - 4 Total Revenue and Other Operating Income 137 66 (54) 149 Operating Expense: Lease Operating Expense 10 - - 10 Transportation, Gathering and Compression 104 10 (54) 60 Production, Ad Valorem, and Other Fees 5 - - 5 Depreciation, Depletion and Amortization 103 11 - 114 Exploration and Production Related Other Costs 3 - - 3 Purchased Gas Costs 20 - - 20 Other Operating Expense 28 - - 28 Selling, General and Administrative Costs 19 4 - 23 Total Operating Costs and Expenses 292 25 (54) 263 Interest Expense 37 9 - 46 Loss on Asset Sales and Abandonments, net - 2 - 2 Total Division Costs 329 36 (54) 311 (Loss) Earnings Before Income Tax $ (192) $ 30 $ - $ (162)
For the Three Months Ended June 30, 2019 Intercompany (Dollars in millions) E&P Division Midstream Division Eliminations Consolidated Natural Gas, NGL and Oil Revenue $ 343 $ - $ - $ 343 Gain on Commodity Derivative Instruments 221 - - 221 Purchased Gas Revenue 19 - - 19 Midstream Revenue - Related Party - 60 (60) - Midstream Revenue - Third Party - 18 - 18 Other Operating Income 3 - - 3 Total Revenue and Other Operating Income 586 78 (60) 604 Operating Expense: Lease Operating Expense 20 - - 20 Transportation, Gathering and Compression 132 13 (60) 85 Production, Ad Valorem, and Other Fees 7 - - 7 Depreciation, Depletion and Amortization 121 8 - 129 Exploration and Production Related Other Costs 5 - - 5 Purchased Gas Costs 19 - - 19 Other Operating Expense 18 - - 18 Selling, General and Administrative Costs 44 5 - 49 Total Operating Costs and Expenses 366 26 (60) 332 Interest Expense 32 8 - 40 Total Division Costs 398 34 (60) 372 Earnings Before Income Tax $ 188 $ 44 $ - $ 232
The principal activity of the E&P Division is to produce pipeline quality natural gas for sale primarily to gas wholesalers. The E&P Division's reportable segments are Marcellus Shale, Utica Shale, Coalbed Methane, and Other Gas.
CNX's E&P Division had a loss before income tax of $192 million for the three months ended June 30, 2020, compared to earnings before income tax of $188 million for the three months ended June 30, 2019. Included in the loss for the three months ended June 30, 2020 was an unrealized loss on commodity derivative instruments of $205 million. Included in the earnings for the three months ended June 30, 2019 was an unrealized gain on commodity derivative instruments of $211 million.
CNX's Midstream Division's principal activity is the ownership, operation, development and acquisition of natural gas gathering and other midstream energy assets, through CNX Gathering and CNXM, which provide natural gas gathering services for the Company's produced gas, as well as for other independent third-parties in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia. Excluded from the Midstream Division are the gathering assets and operations of CNX that have not been contributed to CNX Gathering and CNXM. CNX's Midstream Division had earnings before income tax of $30 million for the three months ended June 30, 2020, compared to earnings before income tax of $44 million for the three months ended June 30, 2019.
E&P Division Summary Sales volumes, average sales prices (including the effects of settled derivative instruments and excluding monetization), and average costs for the E&P Division were as follows: For the Three Months Ended June 30, 2020 2019 Variance Percent Change Sales Volumes (Bcfe) 114.5 134.5 (20.0) (14.9) % Average Sales Price - Gas (per Mcf) $ 1.54 $ 2.51 $ (0.97) (38.6) % Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)* $ 1.03 $ 0.08 $ 0.95 1,187.5 % Average Sales Price - NGL (per Mcfe)** $ 1.31 $ 3.06 $ (1.75) (57.2) % Average Sales Price - Oil (per Mcfe)** $ 5.15 $ 8.42 $ (3.27) (38.8) % Average Sales Price - Condensate (per Mcfe)** $ 4.20 $ 7.56 $ (3.36) (44.4) % Average Sales Price (per Mcfe) $ 2.52 $ 2.63 $ (0.11) (4.2) % Lease Operating Expense (per Mcfe) 0.09 0.15 (0.06) (40.0) % Production, Ad Valorem, and Other Fees (per Mcfe) 0.05 0.05 - - % Transportation, Gathering and Compression (per Mcfe) 0.91 0.98 (0.07) (7.1) % Depreciation, Depletion and Amortization (DD&A) (per Mcfe) 0.87 0.89 (0.02) (2.2) % Average Costs (per Mcfe) $ 1.92 $ 2.07 $ (0.15) (7.2) % Average Margin (per Mcfe) $ 0.60 $ 0.56 $ 0.04 7.1 %
* Excluding $29 million gain from hedge monetization **NGL and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil, NGL, condensate, and natural gas prices.
Natural gas, NGL, and oil revenue was $176 million for the three months ended June 30, 2020, compared to $343 million for the three months ended June 30, 2019. The decrease was primarily due to the 4.2% decrease in the average sales price driven by lower natural gas and NGL prices.
The decrease in average sales price was primarily the result of the $0.97 per Mcf decrease in general natural gas prices, when excluding the impact of hedging, in the markets in which CNX sells its natural gas. There was also a $0.04 per Mcfe decrease in the uplift from NGL and condensate sales volumes when excluding the impact of hedging. Both decreases were offset, in-part, by the $0.95 per Mcf increase in the realized gain on commodity derivative instruments related to the Company's hedging program.
Changes in the average costs per Mcfe were primarily related to the following items:
The following table presents a breakout of net liquid and natural gas sales information and settled derivative information to assist in the understanding of the Company's natural gas production and sales portfolio and information regarding settled commodity derivatives:
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Aug 03, 2020
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