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CNX Q1: 2020 Capex Cut; Plans 'Maintenance Capital' Strategy Through 2026

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CNX Resources Corp. reported its Q1 2020 results. Below are the highlights from its report and conference call.

Q1 Financial Highlights

• Free Cash of $115MM in Q1: CNX reported free cash of $115 million for Q1 2020 (First quarter net cash provided by operating activities was $267 million. Capital expenditures of $152 million, which resulted in free cash flow of $115 million)

• Borrowing Base Lowered 10%: CNX's borrowing base has been redetermined at $1.9 billion - down 10% from $2.1 billion previously.

• Restructured Hedges Save CNX $55MM: Received $55 million from restructuring portion of 2022-2024 NYMEX hedges.

• Project Financing Secured: Completed $175 million project financing for the Cardinal States Gathering (CSG) system at 6.5% interest rate.

• Q1 Production Down 6% from Prior Quarter: CNX logged 134.4 Bcfe in production in 1Q. This is down 6% from Q4 2019 production.

Cuts 2020 Capex, Production; Plans Maintenance Capital into 2026

• Lower Production (Down 24% at Midpoint): CNX is updating 2020 production volumes to 490-530 Bcfe, compared to the previous guidance of 525-555 Bcfe.

• Lower Spending (Down $30MM (8%) at Midpoint): New 2020 capex of $355 million (down 8% at the midpoint from previous plan)

CNX is moving to a "maintenance capital" strategy through 2026 in order to cut debt and preserve capital. Details include:

• 2021 Outlook: CNX is planning a $400 million capital budget for 2021

• Plans $270MM Yearly Budget for 2022-2026: CNX expects total E&P capital expenditures in 2022-2026 to average $270 million and consolidated capital expenditures to average approximately $300 million.

• Starting in 2022, CNX expects to shift to a maintenance of production (MOP) plan in 2022-2026: CNX expects average 560 Bcfe in production and is only looking to turn-in-line 25 wells each year on average.

Q1 2020 Snapshot

Additional Q1 Results

Highlights for the first quarter of 2020:

• Reported a Net loss attributable to CNX shareholders of $329 million, or a loss of $1.76 per diluted share compared to a first quarter 2019 Net loss attributable to CNX shareholders of $87 million, or a loss of $0.44 per diluted share. The first quarter 2020 included non-cash impairment charges of $473 million for goodwill attributable to the midstream reporting unit and $62 million related to Southwestern Pennsylvania coalbed methane operations. First quarter 2020 and 2019 unrealized losses on commodity derivative instruments were $36 million and $154 million, respectively.
• Net cash provided by operating activities was $267 million and capital expenditures were $152 million compared to first quarter 2019 Net cash provided by operating activities of $309 million and capital expenditures of $299 million.
• Proceeds from asset sales were $14 million compared to $6 million for the first quarter of 2019.

First Quarter Highlights

• Consolidated free cash flow (FCF)(a non-GAAP measure)⁽¹⁾ of $129 million, or an increase of 760% from the $15 million in the first quarter of 2019.
• Received $55 million from restructuring portion of 2022-2024 NYMEX hedges.
• Completed $175 million project financing for the Cardinal States Gathering (CSG) system at 6.5% interest rate.
• Repurchased $71 million of senior secured 5.875% notes due in 2022, and following the end of the quarter, repurchased an additional $8 million of notes.
• As of April 7, 2020, the company repurchased a total of $79 million of notes at an average discount to par of 85, which has allowed CNX to further de-lever.
• Accelerated $51 million of our expected 2021 income tax refund into 2020, which the company expects to receive in the second half of 2020. This brings total expected tax refunds in 2020 to $115 million.

Nicholas J. DeIuliis, president and CEO, said: "Although the times may be unprecedented, CNX has remained steadfast in its philosophy and approach. First and foremost, we focus on optimizing the long-term NAV per share of the company. Second, the best way we optimize NAV per share is to generate free cash flow and then allocate that cash into the best risk-adjusted internal rates of return. Currently, paying down debt across our various tranches looks compelling on the risk-reward spectrum when compared to other capital allocation alternatives.

"This approach, over the past few years, during Q1, and today is what differentiates CNX. Our hedging, numerous strategic transactions, focus on being a low cost producer, reining in overhead spend and capital allocation have delivered a business model where CNX is a steady, substantial free cash flow generator over the next seven years, year in and year out. Our owners now enjoy the prospects of CNX generating $300 million in consolidated free cash flow in 2020, $400 million in 2021, and over $3 billion cumulatively over the next seven years. Those cash flows, which are driven by a modest maintenance of production plan, will create a fortress balance sheet and allow for exciting capital allocation opportunities for years to come."

2021 Guidance Update

The decisions we make in 2020 as we manage production will positively impact 2021 results. We project 2021 to deliver the following results: production volumes of approximately 550 Bcfe, E&P stand-alone capital expenditures of approximately $400 million, consolidated capital expenditures of approximately $440 million, consolidated EBITDAX^(a) of approximately $920 million, and consolidated FCF^(a) of approximately $400 million. If 2021 gas prices strengthen, the company could produce approximately 600 Bcfe. The company anticipates that the bulk of the FCF in 2021, like 2020, will be used to reduce the company's absolute debt and leverage ratio.