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10-Q: CNX RESOURCES CORP

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(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, 2021, which we filed with the SEC on February 10, 2022. CNX does not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

General

CNX continually monitors factors that could cause actual results of operations to differ from historical results or current expectations. Examples include the conflict between Russia and Ukraine that has had an impact on global commodity prices. 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.

COVID-19 Pandemic:

Although CNX did not incur significant disruptions to operations during the three or six months ended June 30, 2022 or 2021 as a direct result of the COVID-19 pandemic, CNX is unable to predict the full extent of the future impact that the COVID-19 pandemic could have on the Company, including our financial position, operating results, liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties outside of the Company's control.

Inflation

Heightened levels of inflation, primarily related to steel, diesel fuel and labor, continue to present risk for CNX and the broader natural gas industry. CNX experienced higher capital costs from inflation in the first half of 2022, if inflation continues to increase, and CNX is unable to successfully mitigate the impact, our costs could increase further, having a greater impact on our financial position. Rising interest rates could also increase our borrowing costs on new debt and could affect the fair value of our investments. CNX remains committed to our ongoing efforts to increase the efficiency of our operations and improve costs, which may, in part, offset cost increases from inflation.

Hedging Update:

Total hedged natural gas production in the third quarter of 2022 is 118.6(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. For further information see Item 3 Quantitative and Qualitative Disclosures About Market Risk.

Results of Operations - Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021

Net Income (Loss)

CNX reported net income of $33 million, or earnings per diluted share of $0.15, for the three months ended June 30, 2022, compared to a net loss of $354 million, or a loss per diluted share of $1.61, for the three months ended June 30, 2021.

Included in the earnings for the three months ended June 30, 2022 was an unrealized loss on commodity derivative instruments of $122 million. Included in the loss for the three months ended June 30, 2021 was an unrealized loss on commodity derivative instruments of $529 million.

Non-GAAP Financial Measures

CNX's management uses certain non-GAAP financial measures for planning, forecasting and evaluating business and financial performance, and believes that they are useful for investors in analyzing the company. Although these are not measures of performance calculated in accordance with generally accepted accounting principles (GAAP), management believes that these financial measures are useful to an investor in evaluating CNX because these metrics are widely used to evaluate a natural gas company's operating performance. Sales of Natural Gas, NGL and Oil, including cash settlements excludes the impacts of changes in the fair value of commodity derivative instruments prior to settlement, which are often volatile, and only includes the impact of settled commodity derivative instruments. Sales of Natural Gas, NGL and Oil, including cash settlements also excludes purchased gas revenue and other revenue and operating income, which are not directly related to CNX's natural gas producing activities. Natural Gas, NGL and Oil Production Costs excludes certain expenses that are not directly related to CNX's natural gas producing activities and are managed outside our production operations (See Note 13 - Segment Information in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information). These expenses include, but are not limited to, interest expense, other operating expense and other corporate expenses such as selling, general and administrative costs. We believe that Sales of Natural Gas, NGL and Oil, including cash settlements, Natural Gas, NGL and Oil Production Costs and Natural Gas, NGL and Oil Production Margin (which is derived by subtracting Natural Gas, NGL and Oil Production Costs from Sales of Natural Gas, NGL and Oil, including cash settlements) provide useful information to investors for evaluating period-to-period comparisons of earnings trends. These metrics should not be viewed as a substitute for measures of performance that are calculated in accordance with GAAP. In addition, because all companies do not calculate these measures identically, these measures may not be comparable to similarly titled measures of other companies.







        Non-GAAP Financial Measures Reconciliation
                                                                               For the Three Months Ended June
                                                                                             30,
        (Dollars in millions)                                                          2022            2021
        Total Revenue and Other Operating Income (Loss)                        $       420          $   (127)
        Add (Deduct):
        Purchased Gas Revenue                                                          (46)              (17)
        Loss on Commodity Derivative Instruments                                       122               529
        Other Revenue and Operating Income                                             (23)              (26)
        Sales of Natural Gas, NGL and Oil, including Cash Settlements, a
        Non-GAAP Financial Measure                                             $       473          $    359
        Total Operating Expense                                                $       330          $    281
        Add (Deduct):
        Depreciation, Depletion and Amortization (DD&A) - Corporate                     (2)               (3)
          Exploration and Production Related Other Costs                                (5)               (3)
        Purchased Gas Costs                                                            (46)              (15)
        Selling, General and Administrative Costs                                      (30)              (24)
        Other Operating Expense                                                        (21)              (15)
        Natural Gas, NGL and Oil Production Costs, a Non-GAAP Financial
        Measure1                                                               $       226          $    221
        


1 Natural Gas, NGL and Oil production costs consists primarily of lease operating expense, production ad valorem and other fees, transportation, gathering and compression and production related depreciation, depletion and amortization.







        Selected Natural Gas, NGL and Oil Production Financial Data
        The following table presents a summary of our total sales volumes, sales of
        natural gas, NGL and oil including cash settlements, natural gas, NGL and oil
        production costs and natural gas, NGL and oil production margin related to our
        production operations on a total company basis (See Non-GAAP Financial Measures
        Reconciliation for the reconciliation to the most directly comparable financial
        measures calculated and presented in accordance with GAAP):
                                                                                            For the Three Months Ended June 30,
                                                                   2022                                     2021                                   Variance
                                                      in Millions           Per Mcfe           in Millions           Per Mcfe           in Millions           Per Mcfe
        Total Sales Volumes (Bcfe)*                                          142.3                                    137.9                                       4.4
        Natural Gas, NGL and Oil Revenue            $      1,003          $    7.30          $        369          $    2.68          $        634          $    4.62
        Loss on Commodity Derivative Instruments -
        Cash Settlement - Gas                               (530)             (3.98)                  (10)             (0.08)                 (520)             (3.90)
        Sales of Natural Gas, NGL and Oil,
        including Cash Settlements, a Non-GAAP
        Financial Measure                                    473               3.32                   359               2.60                   114               0.72
        Lease Operating Expense                               14               0.10                    10               0.07                     4               0.03
        Production, Ad Valorem, and Other Fees                10               0.07                     7               0.05                     3               0.02
        Transportation, Gathering and Compression             88               0.62                    84               0.61                     4               0.01
        Depreciation, Depletion and Amortization
        (DD&A)                                               114               0.79                   120               0.87                    (6)             (0.08)
        Natural Gas, NGL and Oil Production Costs,
        a Non-GAAP Financial Measure                         226               1.58                   221               1.60                     5              (0.02)
        Natural Gas, NGL and Oil Production Margin,
        a Non-GAAP Financial Measure                $        247          $    1.74          $        138          $    1.00          $        109          $    0.74
        


*NGLs and Oil/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 NGL, condensate, and natural gas prices.

The 4.4 Bcfe increase in total sales volumes in the period-to-period comparison was primarily due to the turn-in-line of new wells throughout 2021 and in the second quarter of 2022, offset in part by normal production declines.

Changes in the average costs per Mcfe were primarily related to the following items:

Lease operating expense increased on a per unit basis primarily as a result of an increase in repairs and maintenance expense, including both routine and water impoundment maintenance, as well as an increase in water disposal costs.







        Average Realized Price Reconciliation
        The following table presents a breakout of liquids 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:
                                                                                        For the Three Months Ended June 30,
         in thousands (unless noted)                                 2022                   2021             Variance              Percent Change
        LIQUIDS
        NGL:
        Sales Volume (MMcfe)                                         8,845                  9,469                (624)                         (6.6) %
        Sales Volume (Mbbls)                                         1,474                  1,578                (104)                         (6.6) %
        Gross Price ($/Bbl)                                  $       43.26              $   26.28          $    16.98                          64.6  %
        Gross NGL Revenue                                    $      63,774              $  41,521          $   22,253                          53.6  %
        Oil/Condensate:
        Sales Volume (MMcfe)                                           343                    785                (442)                        (56.3) %
        Sales Volume (Mbbls)                                            57                    131                 (74)                        (56.5) %
        Gross Price ($/Bbl)                                  $       96.24              $   53.11          $    43.13                          81.2  %
        Gross Oil/Condensate Revenue                         $       5,505              $   6,946          $   (1,441)                        (20.7) %
        NATURAL GAS
        Sales Volume (MMcf)                                        133,143                127,666               5,477                           4.3  %
        Sales Price ($/Mcf)                                  $        7.02              $    2.51          $     4.51                         179.7  %
         Gross Natural Gas Revenue                           $     934,127              $ 320,982          $  613,145                         191.0  %
        Hedging Impact ($/Mcf)                               $       (3.98)             $   (0.08)         $    (3.90)                     (4,875.0) %
        Loss on Commodity Derivative Instruments -
        Cash Settlement                                      $    (530,391)             $ (10,359)         $ (520,032)                      5,020.1  %
        


The increase in gross revenue was primarily the result of the $4.51 per Mcf increase in natural gas prices, when excluding the impact of hedging, the $16.98 per Bbl increase in NGL prices and the 4.4 Bcfe increase in sales volumes. These increases were offset, in-part, by the impact of the change in the realized loss on commodity derivative instruments related to the Company's hedging program.

SEGMENT ANALYSIS for the three months ended June 30, 2022 compared to the three months ended June 30, 2021:







                                                                    For the Three Months Ended                                    Difference to Three Months Ended
                                                                          June 30, 2022                                                    June 30, 2021
         (in millions)                                 Shale             CBM           Other           Total             Shale             CBM          Other          Total
        Natural Gas, NGLs and Oil Revenue          $   923             $ 79          $    1          $ 1,003          $     591          $ 43          $   -          $ 634
        Loss on Commodity Derivative Instruments      (489)             (41)           (122)            (652)              (480)          (40)           407           (113)
        Purchased Gas Revenue                            -                -              46               46                  -             -             29             29
        Other Revenue and Operating Income              18                -               5               23                 (1)            -             (2)            (3)
        Total Revenue and Other Operating Income
        (Loss)                                         452               38             (70)             420                110             3            434            547
        Lease Operating Expense                         10                4               -               14                  3             1              -              4
        Production, Ad Valorem, and Other Fees           8                2               -               10                  1             1              1              3
        Transportation, Gathering and Compression       76               12               -               88                  2             2              -              4
        Depreciation, Depletion and Amortization        96               13               7              116                 (8)           (1)             2             (7)
        Exploration and Production Related Other
        Costs                                            -                -               5                5                  -             -              2              2
        Purchased Gas Costs                              -                -              46               46                  -             -             31             31
        Selling, General and Administrative Costs        -                -              30               30                  -             -              6              6
        Other Operating Expense                          -                -              21               21                  -             -              6              6
        Total Operating Expense                        190               31             109              330                 (2)            3             48             49
        Other Expense                                    -                -               5                5                  -             -             (1)            (1)
        Gain on Asset Sales and Abandonments, net        -                -              (6)              (6)                 -             -              1              1
        Loss on Debt Extinguishment                      -                -              13               13                  -             -             13             13
        Interest Expense                                 -                -              31               31                  -             -             (8)            (8)
        Total Other Expense                              -                -              43               43                  -             -              5              5
        Total Costs and Expenses                       190               31             152              373                 (2)            3             53             54
        Earnings (Loss) Before Income Tax          $   262             $  7          $ (222)         $    47          $     112          $  -          $ 381          $ 493
        








            SHALE SEGMENT
        The Shale segment had earnings before income tax of $262 million for the three
        months ended June 30, 2022 compared to earnings before income tax of $150
        million for the three months ended June 30, 2021.
                                                                                           For the Three Months Ended June 30,
                                                                                                                                     Percent
                                                                            2022                2021           Variance               Change
        Shale Gas Sales Volumes (Bcf)                                         122.1            115.0               7.1                      6.2  %
        NGLs Sales Volumes (Bcfe)*                                              8.8              9.5              (0.7)                    (7.4) %
        Oil/Condensate Sales Volumes (Bcfe)*                                    0.3              0.7              (0.4)                   (57.1) %
        Total Shale Sales Volumes (Bcfe)*                                     131.2            125.2               6.0                      4.8  %
        Average Sales Price - Natural Gas (per Mcf)                    $       7.00          $  2.47          $   4.53                    183.4  %
        Loss on Commodity Derivative Instruments - Cash Settlement -
        Gas (per Mcf)                                                  $      (4.01)         $ (0.08)         $  (3.93)                (4,912.5) %
        Average Sales Price - NGLs (per Mcfe)*                         $       7.21          $  4.38          $   2.83                     64.6  %
        Average Sales Price - Oil/Condensate (per Mcfe)*               $      16.03          $  8.84          $   7.19                     81.3  %
        Total Average Shale Sales Price (per Mcfe)                     $       3.31          $  2.58          $   0.73                     28.3  %
        Average Shale Lease Operating Expenses (per Mcfe)                      0.08             0.06              0.02                     33.3  %
        Average Shale Production, Ad Valorem and Other Fees (per Mcfe)         0.05             0.05                 -                        -  %
        Average Shale Transportation, Gathering and Compression Costs
        (per Mcfe)                                                             0.58             0.59             (0.01)                    (1.7) %
        Average Shale Depreciation, Depletion and Amortization Costs
        (per Mcfe)                                                             0.74             0.83             (0.09)                   (10.8) %
          Total Average Shale Production Costs (per Mcfe)              $       1.45          $  1.53          $  (0.08)                    (5.2) %
          Total Average Shale Production Margin (per Mcfe)             $       1.86          $  1.05          $   0.81                     77.1  %
        


* NGLs and Oil/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.

The Shale segment had natural gas, NGLs and oil/condensate revenue of $923 million for the three months ended June 30, 2022 compared to $332 million for the three months ended June 30, 2021. The $591 million increase was due primarily to a 183.4% increase in the average sales price for natural gas, a 4.8% increase in total Shale sales volumes, and a 64.6% increase in the average sales price of NGLs. The increase in total Shale volumes was primarily due to the turn-in-line of new wells throughout 2021 and the first half of 2022, offset in part by normal production declines.

The increase in total average Shale sales price was primarily due to a $4.53 per Mcf increase in average gas sales price and a $2.83 per Mcfe increase in the average NGL sales price. These increases were offset in part by a $3.93 per Mcf change in the realized loss on commodity derivative instruments. The notional amounts associated with these financial hedges represented approximately 104.6 Bcf of the Company's produced Shale gas sales volumes for the three months ended June 30, 2022 at an average loss of $4.68 per Mcf hedged. For the three months ended June 30, 2021, these financial hedges represented approximately 99.1 Bcf at an average loss of $0.09 per Mcf hedged.

Total operating costs and expenses for the Shale segment were $190 million for the three months ended June 30, 2022 compared to $192 million for the three months ended June 30, 2021. The decrease in total dollars and decrease in unit costs for the Shale segment were due to the following items:

Shale lease operating expenses were $10 million for the three months ended June 30, 2022 compared to $7 million for the three months ended June 30, 2021. The increases in total dollars and unit costs were primarily related to an increase in repairs and maintenance expense, including both routine and water impoundment maintenance, as well as an increase in water disposal costs.

Shale production, ad valorem and other fees were $8 million for the three months ended June 30, 2022 compared to $7 million for the three months ended June 30, 2021. The increases in total dollars was primarily due to increased realized prices on natural gas and natural gas liquids.

Shale transportation, gathering and compression costs were $76 million for the three months ended June 30, 2022 compared to $74 million for the three months ended June 30, 2021. The increase in total dollars was primarily related to an increase in total volumes as well as an increase in gathering systems repairs and maintenance expense.

Depreciation, depletion and amortization costs attributable to the Shale segment were $96 million for the three months ended June 30, 2022 compared to $104 million for the three months ended June 30, 2021. These amounts included depletion on a units of production basis of $0.62 per Mcfe and $0.72 per Mcfe, respectively. The decrease in the units of production depreciation, depletion and amortization rate in the current period is primarily the result of a lower annual depletion rate related to low-cost reserve additions from development in the 2021 period. The remaining depreciation, depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.

Total Shale other revenue and operating income relates to natural gas gathering services provided to third-parties. The Shale segment had other revenue and operating income of $18 million for the three months ended June 30, 2022 compared to $19 million for the three months ended June 30, 2021. The decrease in the period-to-period comparison was primarily due to lower third-party gathering volumes due to normal production declines.







        COALBED METHANE (CBM) SEGMENT
        The CBM segment had earnings before income tax of $7 million for both the three
        months ended June 30, 2022 and June 30, 2021.
                                                                                           For the Three Months Ended June 30,
                                                                                                                                     Percent
                                                                            2022                2021           Variance               Change
        CBM Gas Sales Volumes (Bcf)                                            11.0             12.6              (1.6)                   (12.7) %
        Average Sales Price - Gas (per Mcf)                            $       7.23          $  2.91          $   4.32                    148.5  %
        Loss on Commodity Derivative Instruments - Cash Settlement -
        Gas (per Mcf)                                                  $      (3.75)         $ (0.08)         $  (3.67)                (4,587.5) %
        . . .
        


Jul 28, 2022

COMTEX_411165387/2041/2022-07-28T11:34:18

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