CNX Resources Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

CNX Resources Corporation is a Pittsburgh-based natural gas exploration and production company focused on unconventional resources in the Appalachian Basin.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: CNX Resources Corporation is an independent natural gas company engaged in the exploration, development, and production of natural gas, natural gas liquids (NGLs), and crude oil primarily from unconventional resources in the Appalachian Basin, spanning Pennsylvania, Ohio, and West Virginia. Their operations focus on maximizing value from their established assets and utilizing technological advancements to enhance production and efficiency. CNX also operates a midstream business including a gathering system, processing capabilities and water-handling services.

Revenue Streams

Revenue is derived primarily from the sale of natural gas, NGLs, and oil production. The company’s revenue is generally dependent on the price and volume of these commodities and is also subject to fluctuations in global energy markets. The main drivers of value are production levels, realized prices, and costs of production.

CNX segments their revenue into the following categories

  • Natural gas revenues (most volume)
  • NGL & Oil Revenues
  • Purchased Gas Revenues (from customers, for resale)
  • Other revenues

Industry Trends & Competitive Landscape

The natural gas market is characterized by fluctuating prices and intense competition. Key trends include a growing demand for natural gas, especially as a cleaner alternative to coal, as well as a focus on sustainable production practices. Competitively, CNX faces competition from numerous exploration and production companies with the major focus for them being to increase production and improve efficiency and returns. The market is fragmented, with a few large players and many small ones. The company has the below advantages that give them their competitive edge:

  • Low-Cost Production: Using their in-house team they have a great understanding of the shale. They have been able to continuously lower their drilling costs by using innovative methods.
    • They continue to upgrade their technology and utilize new ways to drill wells.
  • Operational efficiency: The use of technology has given the company an upper edge in operational efficiency and lowered costs significantly.
  • Local Markets: They have a good transportation infrastructure with various pipelines that supply their resources into key areas in the US.
  • Hedging Program: they have a significant hedging program to reduce cash flow volatility and make sure they have more stable cash flows.
  • Focus on Natural Gas: The company has made a strategic decision to focus on the high-return natural gas production, which removes the exposure to the unpredictable volatility of oil prices.

What makes CNX different?

  • Geographic Focus: Their concentration in the Appalachian Basin provides them with specialized expertise and knowledge of the geology of this area. They are very effective in lowering costs.
  • Technological Innovation: The company prides itself on its utilization of advanced technologies to improve well performance and maximize efficiencies. They are constantly testing new and creative techniques to bring costs lower.
  • Vertical Integration: CNX is a midstream producer, which means that it has a gathering system and processing capabilities to provide flexibility, and capture more value.
  • Responsible Development: CNX places a significant emphasis on safety, environmental performance, and community engagement. They have set a goal to be a net-zero greenhouse gas emissions company by 2040.

Financials Deep Dive:

CNX’s financial performance is primarily driven by the price of natural gas and its production volumes. In recent periods, the company has focused on deleveraging and improving capital structure, rather than increasing production volume. Here’s a more in-depth review of their recent financials.

Recent Financial Performance:

  • For the three months ended September 30, 2023, CNX reported a net loss of $13 million or $0.05 per share, compared to a net income of $713 million or $3.31 per share for the same period in 2022. *The decrease in Net income was primarily attributable to a reduction in commodity prices as well as lower production during the quarter.
  • Total revenues came at $384M for the latest quarter compared to $602M last year. The decrease comes from decreased wellhead pricing for both gas and oil. *The production in the quarter for natural gas declined 8% and 5% sequentially. *The company continues to focus on using their free cash flow to deleverage and they are using their operations to reduce costs. *CNX continues to see a big demand for gas because it’s essential to the power generation segment and for heating. The company continues to pursue new technologies to bring down costs and increase efficiency in production while being a good environmental steward.
  • They have continued to repurchase debt and also buy back their own stock.

    • A strong balance sheet and the company is focused on having a long runway of strong cash flow.

    • Liquidity: CNX has a strong financial position and has significant liquidity to take care of future opportunities and obligations. The Company is planning to allocate a larger portion of their free cash flow towards debt repayment rather than capital investment.

  • Debt: CNX has been focused on reducing debt, a process that has seen a reduction in debt from $3.1 billion in 2019 to $1.9 billion in 2023. The company has a net debt to adjusted EBITDA ratio of ~1.7 which they plan to take down further in the near future. They continue to meet debt payments comfortably.

  • Operating Cash flow Net cash from operating activities was $394 million for the last quarter, compared to $780 million for the same period last year.

Shareholder Returns: *CNX’s management has been trying to increase shareholder returns through various methods such as share buybacks, debt repurchases, and dividend payments. The current share buyback plan is for 300 Million worth of shares, and at the end of Q3 2023, they have repurchased $216 million worth of shares.

Moat Rating: 2/5

CNX possesses a narrow economic moat. While the company benefits from its established asset base, local markets, and operational efficiency, these advantages don’t make them insulated against competition for very long periods. They have developed a low-cost production method through their advanced technology; however, such technology can be copied or improved over time. Their relationships with customers and infrastructure can act as a barrier to entry but may not be robust long-term.

  • Positive factors to moat: * Efficient operational scale and processes lead to low-cost production. * Favorable regulatory framework for the natural gas industry. * Strong balance sheet. * They can create significant volumes of fuel at low prices to their target markets, a good margin of safety. * A solid management team that is implementing a successful long-term plan.
  • Risks to moat:
    • High volatile natural gas market and prices. They don’t have a lot of pricing power.
    • Competitors can copy many of their technologies.
    • The regulatory risks, where they can have their permits revoked and other issues. * Environmental risks to a smaller footprint.
    • Market share is relatively low, which gives them less pricing power.
    • Reliance on new technology, that may get leapfrogged, or if their technology doesn’t perform as expected

Balance Sheet Health: 4/5

CNX’s balance sheet is relatively healthy, and there are no serious concerns. They have managed to lower debt significantly over the past few years and have a good capital position. They have a manageable and stable debt and interest burden and their debt-to-adjusted EBITDA ratio is relatively low compared to others in the industry. This makes their financial structure more flexible and they can respond to market pressures with more confidence.

  • Positives:
    • Debt is continuously being reduced, and they prioritize lowering debt obligations over others.
    • Consistent good positive cash flows.
    • Good liquidity of cash and marketable securities.
    • Their debt maturity is well-structured, with no significant maturities in short-term.
    • They have a diverse asset base.
  • Risks:
    • A decline in gas and oil prices will have a significant impact on their revenues, even if their volumes do increase.
    • High reliance on the credit markets. If it is harder or more expensive to borrow, the company’s investment plans could be hampered.
    • They have a good amount of debt that will be a burden to service in the event of market downturns.

Legitimate Risks:

  • Commodity Price Volatility: The most significant risk to CNX is the volatility of natural gas and oil prices, which can significantly affect their revenue, profitability, and cash flow.
  • Regulatory and Environmental Risks: Changes in regulations regarding fracking, pipelines, or greenhouse gas emissions could increase their operating costs and impact their ability to continue production.
  • Operational Risks: Drilling, pipeline construction, and other operations entail risks of accidents, mechanical failures, geological problems, and weather-related incidents, which can disrupt operations and increase costs.
  • Competition: An increase in competitors within the basin or the emergence of new entrants could put downward pressure on prices and affect profitability.
  • Economic Conditions: A recession or other adverse economic conditions could decrease demand for natural gas and reduce prices, affecting the company’s bottom line.
  • Geopolitical Risk: Global events and political pressures could negatively affect the gas industry and the company’s business.

Business Resilience

Despite potential disruptions from external pressures, CNX has shown reasonable resilience by making prudent financial decisions such as having a high credit rating, a good liquidity position, and constantly reducing its debt. The company’s emphasis on operational efficiency will also provide them with financial flexibility during market downturns, allowing them to capitalize when other companies fall behind.

Understandability: 2/5

Although the concept of a natural gas company is easily understood, their specific operations and complex financials as well as the high volatility of gas pricing make CNX’s financials very difficult to follow. In addition, the amount of detail needed to understand the valuation techniques makes this complex.

Key Points from Earnings Calls & News:

  • Focus on Free Cash Flow and Deleveraging: CNX’s management has repeatedly said that the company will prioritize the reduction of debt over production growth. They want to generate and use free cash flow and reduce debt levels. The company expects strong cash flow to allow them to achieve all their strategic objectives.
  • Share Buybacks and Dividends They have been repurchasing stock and distributing to shareholders, which they believe is a more efficient way of returning capital.
  • Operational Flexibility They are emphasizing using innovative and low-cost methods to produce the natural gas, while being good environmental stewards.