After being punished for spending 19% more than expected on new wells in the first quarter, CNX Resources Corp. and CEO Nick DeIuliis were redeemed by an overhauled outlook for 2020 that sparked investor interest after the company's July 30 release.
The Appalachian shale gas producer found the sweet spot that its larger peers have missed this quarter with 2020 guidance that increased gas and liquids production by 12% while chopping the company's drilling budget by 33% year over year. Those early 2019 expenditures allow CNX to roll into 2020 with flattened spending and new gas flowing from completed wells, analysts said.
"CNX expects to generate $135 million of free cash flow in FY:20 on this new plan, which we would note importantly shows a flip from [Wall Street's] consensus of roughly $35 million [in] expected outspend," SunTrust Robinson Humphrey Inc. shale gas analyst Welles Fitzpatrick told his clients before CNX's second-quarter earnings conference call July 30.
CNX said it would produce roughly 1.6 Bcfe/d in 2020, compared to 1.42 Bcfe/d in 2019, and hold production flat in 2021. "A lot can change between now and then, but lower appetite for production growth and stronger emphasis on free cash flow generation is a positive not only for CNX, but also for gas macro," Stifel Nicolaus & Co. shale gas analyst Jane Trotsenko said.
"CNX is one of the most hedged producers in 2020 with 86% of our gas volumes hedged including NYMEX hedges at $2.94/Mcf," DeIuliis said in the second-quarter earnings statement. "The hedge program, coupled with the 2020 development plan and capital program, is positioning the company to generate approximately $135 million in free cash flow in 2020 at forward strip prices on open volumes, while growing production approximately 12%."
CNX shares soared 29% higher on nearly triple the normal volume of trading, gaining $1.77 per share to $7.96 by early afternoon July 30. "We believe the market is looking for gas operators to immediately move to maintenance capex given the negative macro backdrop," analysts at energy investment bank Tudor Pickering Holt & Co. predicted.
DeIuliis and other executives downplayed any suggestion that CNX should cash in its nearly $1 billion stake in affiliate CNX Midstream Partners LP, citing the master limited partnership's ability to contribute increasing free cash to the parent in upcoming quarters as well as weakness in the market for MLP assets.
"The midstream business is really getting an inflection point towards the end of this year. We're transitioning into our ... free cash flow generation mode, which is going to continue to improve the balance sheet, and generally, cash on a go-forward basis. ... [Cash] provides a lot of optionality," CNX COO Chad Griffith told analysts on the earnings call. Griffith is also the COO at CNX Midstream.
CNX's 1.48 Bcfe of second-quarter production was a 10% increase over the same quarter in 2018, but its $2.63/Mcfe average realized price for gas, oil and NGLs was 8% less than the prior-year period.
The increase in production volumes made up for the drop in prices, allowing CNX to beat analysts' estimates on revenue and EBITDA but drove the company's 36.7% drop in adjusted net income between this year's second quarter and 2018's second quarter.
CNX Midstream posted second-quarter adjusted EBITDA of $60.5 million, up from $43.3 million in the prior-year quarter. The S&P Global Market Intelligence consensus estimate of adjusted EBITDA was $52.1 million.
The partnership's distributable cash flow in the second quarter was $46.9 million, rising from $31.6 million in the year-ago period. CNX Midstream reported net income of $46.5 million, an increase from $30.3 million a year earlier.