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 endedDecember 31, 2019 , which we filed with theSEC onFebruary 10, 2020 . CNX does not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. General CNX is closely monitoring 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 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 economic downturn, the historically low natural gas and natural gas liquids prices and ramifications of the crude oil price war between theOrganization of Petroleum Exporting Countries ("OPEC") /Saudi Arabia andRussia that occurred in March. WhileOPEC agreed in April to cut production, downward pressure on prices has continued and could continue for the foreseeable future, particularly given concerns over available storage capacity for refined products such as crude, and refinery inputs including condensate, c5+ and butane. 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 months endedMarch 31, 2020 as a 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 severity of the virus, the duration of the outbreak, 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 and the current oil price wars have on the demand for natural gas and natural gas liquids. The health of our employees, contractors and vendors, and our ability to meet staffing needs in our operations and certain critical functions cannot be predicted and is vital to our operations. Further, the 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.
For further information regarding the impact of COVID-19 see Risk factors in Item 1A of this Form 10-Q.
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Marketing Update:
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 ofOPEC , and global events, such as the ongoing COVID-19 outbreak. Since the beginning of 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 ofOPEC . This oversupply of oil has caused historically low oil prices, which has compounded the impact of the domestic oversupply of NGLs as well as current export constraints and has driven NGL prices to historic lows. WhileOPEC agreed in April to cut production, downward pressure on prices has continued and could continue for the foreseeable future, particularly given concerns over available storage capacity for refined products such as crude, and refinery inputs including condensate, c5+ and butane, that could result in temporary reductions in CNX's wet gas production. During the three months endedMarch 31, 2020 , liquids comprised seven 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 ofthe United States , accounted for relatively higher inventory levels. Despite anApril 12 agreement by theOPEC and it's allies to reduce global production by approximately 10%, the economic slowdown and stay-at-home orders has continued to decrease demand for natural gas.The U.S. Energy Information Administration's ("EIA") Short-Term Energy Outlook forApril 2020 forecasts are subject to heightened uncertainty because of the economic slowdown and significant changes in energy markets recently. For the first quarter of 2020 and 2019, CNX's average sales price for natural gas, natural gas liquids (NGL), oil, and condensate was$2.59 per Mcfe and$2.97 per Mcfe, respectively. The average realized price for all liquids for the first quarter of 2020 was$15.14 per barrel compared to$27.41 per barrel in 2019 quarter. CNX's weighted average differential from NYMEX in the first quarter of 2020 was negative$0.26 per MMBtu. CNX's average sales price for natural gas before hedging decreased 14.5% to$1.83 per Mcf compared with the average sales price of$2.14 per Mcf in the fourth quarter of 2019. This decrease results from a lowerHenry Hub price offset in part by improved basis pricing. Including the impact of cash settlements from hedging and excluding cash from hedge monetization, CNX's average sales price for natural gas was$0.13 per Mcf, or 5.0%, higher than the three months endedDecember 31, 2019 , and$0.28 per Mcf, or 9.7%, lower than the three months endedMarch 31, 2019 . During the first quarter of 2020, CNX sold 134.4 Bcfe of produced natural gas, an increase of 1.1% from the 133.0 Bcfe sold in the year-earlier quarter, primarily due to an increase inMarcellus Shale volumes. The increase was offset, in part, by a decrease inUtica Shale volumes. Total quarterly production costs decreased to$1.98 per Mcfe, compared to the year-earlier quarter of$1.99 per Mcfe, driven primarily by a decrease in lease operating expenses offset, in part, by an increase in transportation, gathering and compression. Capital expenditures decreased to$152 million in the first quarter of 2020, compared to$299 million of spend in the first quarter of 2019.
CNX Guidance:
Total hedged natural gas production in the 2020 second quarter is 113.5 Bcf. The annual gas hedge position is shown in the table below:
2020 2021
Volumes Hedged (Bcf), as of 4/21/20* 451.1 433.5
*Includes actual settlements of 155.5 Bcf.
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. InMarch 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 are included in Gain (Loss) on Commodity Derivative Instruments in the Consolidated Statements of Income for the three months endedMarch 31, 2020 . Notional quantities were not affected by the restructuring. 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 31 --------------------------------------------------------------------------------
repriced to a contract price of
InApril 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 through May to November of 2020. In connection with these monetizations, CNX received$29 million of net proceeds.
Results of Operations - Three Months Ended
Net Loss Attributable to CNX Resources Shareholders
CNX reported a net loss attributable to
For the Three Months Ended March 31, (Dollars in thousands) 2020 2019 Variance Net Loss$ (305,222) $ (64,651) $ (240,571) Less: Net Income Attributable to Noncontrolling Interest 23,864 22,686 1,178 Net Loss Attributable to CNX Resources Shareholders $
(329,086)
CNX consists of two principal business divisions: Exploration and Production (E&P) and Midstream. The operating results of the Company's reportable segments were as follows for the three months endedMarch 31, 2020 and 2019: For
the Three Months Ended
Midstream Intercompany (Dollars in millions) E&P Division Division Eliminations Consolidated Natural Gas, NGL and Oil Revenue$ 251 $ - $ -$ 251 Gain on Commodity Derivative Instruments 115 - - 115 Purchased Gas Revenue 26 - - 26 Midstream Revenue - Related Party - 62 (62) - Midstream Revenue - Third Party - 18 - 18 Other Operating Income 6 - - 6 Total Revenue and Other Operating Income 398 80 (62) 416
Operating Expense:
Lease Operating Expense 10 - - 10 Transportation, Gathering and Compression 133 12 (62) 83 Production, Ad Valorem, and Other Fees 6 - - 6 Depreciation, Depletion and Amortization 119 10 - 129 Impairment of Exploration and Production Properties 62 - - 62 Impairment of Goodwill - 473 - 473 Exploration and Production Related Other Costs 4 - - 4 Purchased Gas Costs 25 - - 25 Other Operating Expense 21 - - 21 Selling, General and Administrative Costs 25 5 - 30 Total Operating Costs and Expenses 405 500 (62) 843 Interest Expense 40 9 - 49 Total Division Costs 445 509 (62) 892 Loss Before Income Tax$ (47) $ (429) $ -$ (476) 32
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For the Three Months Ended
Intercompany (Dollars in millions) E&P Division Midstream Division Eliminations Consolidated Natural Gas, NGL and Oil Revenue$ 436 $ - $ -$ 436 Loss on Commodity Derivative Instruments (195) - - (195) Purchased Gas Revenue 16 - - 16 Midstream Revenue - Related Party - 54 (54) - Midstream Revenue - Third Party - 19 - 19 Other Operating Income 3 - - 3 Total Revenue and Other Operating Income 260 73 (54) 279
Operating Expense:
Lease Operating Expense 19 - - 19 Transportation, Gathering and Compression 122 12 (54) 80 Production, Ad Valorem, and Other Fees 7 - - 7 Depreciation, Depletion and Amortization 117 8 - 125 Exploration and Production Related Other Costs 3 - - 3 Purchased Gas Costs 16 - - 16 Other Operating Expense 23 - - 23 Selling, General and Administrative Costs 31 6 - 37 Total Operating Costs and Expenses 338 26 (54) 310 Interest Expense 28 7 - 35 Loss on Asset Sales and Abandonments, net - 7 - 7 Total Division Costs 366 40 (54) 352 (Loss) Earnings Before Income Tax$ (106) $ 33 $ -$ (73)
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
CNX's E&P Division had a loss before income tax of$47 million for the three months endedMarch 31, 2020 , compared to a loss before income tax of$106 million for the three months endedMarch 31, 2019 . Included in the loss for the three months endedMarch 31, 2020 was a$62 million non-cash impairment charge related to exploration and production properties and an unrealized loss on commodity derivative instruments of$36 million . Included in the loss for the three months endedMarch 31, 2019 was an unrealized loss on commodity derivative instruments of$154 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 theMarcellus Shale andUtica Shale inPennsylvania andWest 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 a loss before income tax of$429 million for the three months endedMarch 31, 2020 , compared to earnings before income tax of$33 million for the three months endedMarch 31, 2019 . 33
-------------------------------------------------------------------------------- E&P Division Summary Sales volumes, average sales prices (including the effects of settled derivative instruments and excluding monetization), and average costs for the E&P Division were as follows: For the Three Months Ended March 31, 2020 2019 Variance Percent Change Sales Volumes (Bcfe) 134.4 133.0 1.40 1.1 % Average Sales Price - Gas (per Mcf)$ 1.83 $ 3.21 $ (1.38) (43.0) % Gain (Loss) on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)*$ 0.77 $ (0.33) $ 1.10 333.3 % Average Sales Price - NGL (per Mcfe)**$ 2.34 $ 4.46 $ (2.12) (47.5) % Average Sales Price - Oil (per Mcfe)**$ 7.87 $ -$ 7.87 - % Average Sales Price - Condensate (per Mcfe)**$ 6.28 $ 6.50 $ (0.22) (3.4) % Average Sales Price (per Mcfe)$ 2.59 $ 2.97 $ (0.38) (12.8) % Lease Operating Expense (per Mcfe) 0.07 0.14 (0.07) (50.0) % Production, Ad Valorem, and Other Fees (per Mcfe) 0.05 0.05 - - % Transportation, Gathering and Compression (per Mcfe) 0.99 0.92 0.07 7.6 % Depreciation, Depletion and Amortization (DD&A) (per Mcfe) 0.87 0.88 (0.01) (1.1) % Average Costs (per Mcfe)$ 1.98 $ 1.99 $ (0.01) (0.5) % Average Margin (per Mcfe)$ 0.61 $ 0.98 $ (0.37) (37.8) % * Excluding 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$251 million for the three months endedMarch 31, 2020 , compared to$436 million for the three months endedMarch 31, 2019 . The decrease was primarily due to the 12.8% 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$1.38 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$0.03 per Mcfe decrease in NGL and condensate sales volumes when excluding the impact of hedging. Both decreases were offset, in-part, by the$1.10 per Mcf increase in the realized gain (loss) on commodity derivative instruments related to the Company's hedging program. Changes in the average costs per Mcfe were primarily related to the following items: •Lease operating expense decreased on a per unit basis primarily due to a decrease in water disposal costs in the period-to-period comparison due to an increase in the reuse of produced water in well completions in the current period. •Transportation, gathering, and compression expense increased on a per unit basis primarily due to an increase in CNXM gathering fees related to an increase in our Marcellus production and an increase in firm transportation expense, primarily as a result of new contracts that give CNX the ability to move and sell natural gas outside of the Appalachian basin. The decrease in production from CNX's lower cost dryUtica volumes also contributed to the increase on a per unit basis. 34
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The following table presents a breakout of net liquid and natural gas sales information and settled derivative information to assist in the understanding of the Company's natural gas production and sales portfolio and information regarding settled commodity derivatives:
For the Three Months Ended
in thousands (unless noted) 2020 2019 Variance Percent Change
LIQUIDS
NGL:
Sales Volume (MMcfe) 8,301 6,681 1,620 24.2 % Sales Volume (Mbbls) 1,383 1,113 270 24.3 % Gross Price ($/Bbl)$ 14.04 $ 26.76 $ (12.72) (47.5) % Gross Revenue$ 19,412 $ 29,766 $ (10,354) (34.8) % Oil: Sales Volume (MMcfe) 74 23 51 221.7 % Sales Volume (Mbbls) 12 4 8 200.0 % Gross Price ($/Bbl)$ 47.22 $ 43.56 $ 3.66 8.4 % Gross Revenue$ 582 $ 166 $ 416 250.6 % Condensate: Sales Volume (MMcfe) 303 358 (55) (15.4) % Sales Volume (Mbbls) 50 60 (10) (16.7) % Gross Price ($/Bbl)$ 37.68 $ 39.00 $ (1.32) (3.4) % Gross Revenue$ 1,901 $ 2,327 $ (426) (18.3) % GAS Sales Volume (MMcf) 125,685 125,938 (253) (0.2) % Sales Price ($/Mcf)$ 1.83 $ 3.21 $ (1.38) (43.0) % Gross Revenue$ 229,599 $ 403,687 $ (174,088) (43.1) % Hedging Impact ($/Mcf)$ 0.77 $ (0.33) $ 1.10 (333.3) % Gain (Loss) on Commodity Derivative Instruments - Cash Settlement* 96,179 (41,382) 137,561 (332.4) %
* Excluding gain from hedge monetization
Selling, General and Administrative ("SG&A") -
SG&A costs include costs such as overhead, including employee labor and benefit costs, short-term incentive compensation, costs of maintaining our headquarters, audit and other professional fees, and legal compliance expenses. SG&A costs also include non-cash long-term equity-based compensation expense.
For the Three Months Ended
Percent (in millions) 2020 2019 Variance Change SG&A Long-Term Equity-Based Compensation (Non-Cash)$ 7 $ 11 $ (4) (36.4) % Salaries and Wages 8 11 (3) (27.3) % Short-Term Incentive Compensation 2 4 (2) (50.0) % Other 13 10 3 30.0 % Total SG&A$ 30 $ 36 $ (6) (16.7) % •Long-term equity-based compensation decreased$4 million in the period-to-period comparison due to the acceleration of vesting of certain restricted stock units and performance share units held by certain employees related to a change in control event that occurred in the second quarter of 2019. •Salaries and Wages decreased$3 million due to an overall reduction in employee costs. •Short-term incentive compensation decreased$2 million due to lower projected payouts in the current period. 35
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Unallocated Expense
Certain costs and expenses, such as other expense (income), gain on asset sales related to non-core assets, (gain) loss on debt extinguishment and income taxes are unallocated expenses and therefore are excluded from the per unit costs above as well as segment reporting. Below is a summary of these costs and expenses:
Other Expense (Income)
For the Three Months Ended
Percent (in millions) 2020 2019 Variance Change Other Income Royalty Income $ -$ 3 $ (3) (100.0) % Right of Way Sales - 1 (1) (100.0) % Interest Income - 1 (1) (100.0) % Other 2 - 2 100.0 % Total Other Income$ 2 $ 5 $ (3) (60.0) % Other Expense Professional Services$ 3 $ -$ 3 100.0 % Bank Fees 3 3 - - % Other Corporate Expense 1 1 - - % Total Other Expense$ 7 $ 4 $ 3 75.0 % Total Other Expense (Income)$ 5 $ (1) $ 6 600.0 % Gain on Asset Sales and Abandonments, net A gain on asset sales of$12 million related to non-core assets was recognized in the three months endedMarch 31, 2020 compared to a gain of$4 million in the three months endedMarch 31, 2019 .
Also refer to the discussion of Loss on Asset Sales and Abandonments contained in the section "Total Midstream Division Analysis" of this Form 10-Q for additional items that are not part of Unallocated Expense.
(Gain) Loss on Debt Extinguishment
A gain on debt extinguishment of$11 million was recognized in the three months endedMarch 31, 2020 compared to a loss on debt extinguishment of$8 million in the three months endedMarch 31, 2019 . During the three months endedMarch 31, 2020 , CNX purchased$71 million of its 5.875% Senior notes due inApril 2022 at an average price equal to 83.9% of the principal amount. During the three months endMarch 31, 2019 CNX purchased$400 million of its 5.875% Senior notes due inApril 2022 at an average price equal to 101.5% of the principal amount. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
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