CNX Resources Corp. shares bounced 13% higher in morning trading Oct. 29 after the company said it would slow its 2020 drilling and production plans in reaction to low natural gas prices and generate $146 million in free cash flow in 2020.
"We continue to follow the rate of return math when allocating capital," President and CEO Nick DeIuliis said in the company's third-quarter earnings release. "Macro supply and demand concerns certainly lowered the forward strip during the past quarter, and we are adjusting activity accordingly by lowering our capital and production guidance for 2020."
CNX's third-quarter adjusted profits of $31.1 million, or 16 cents per share, handily beat Wall Street's expectations of a loss of 9 cents per share, according to S&P Global Market Intelligence's analyst consensus. But it was the updated 2020 plan calling for one less rig and trimming production growth from 9% to 3% for the year that drew positive responses from analysts.
"We like the downshift in [capital expenditures] and activity to generate more free cash flow in 2020 given the weak gas macro environment as CNX is adjusting both the 2019 (midpoints now 535 Bcfe with $903 million E&P capex vs. 520 Bcfe and $920 million previously) and 2020 (midpoints now 550 Bcfe with $520 million E&P capex vs. 583 Bcfe and $580 million previously) outlooks accordingly," analysts at energy investment bank Tudor Pickering Holt & Co. said.
On heavier-than-normal trading, investors pushed CNX's stock price up nearly $1 per share to $8.48 by midday for a 13% gain.
CNX will probably use the free cash to pay down debt, executives told analysts on the company's Oct. 29 earnings conference call, reasoning that the company gets more return from debt repayment than its current stock buyback program or purchasing more assets.
"I'm sure there's some compelling cases out there," DeIuliis said of any merger or acquisition at a time when deal prices are at a discount. Still, the M&A risk has executives "more comfortable staying focused on our own portfolio."
CNX joins other major Appalachian shale drillers in cutting production guidance in reaction to natural gas futures prices below $2.50/MMBtu next year. Range Resources Corp., Southwestern Energy Co. and Cabot Oil & Gas Corp. all said in their third-quarter announcements that they will drill less and keep production flat until prices improve, with Southwestern considering a complete drilling halt.
Low prices were the primary reason that CNX produced more gas but earned less money in this third quarter compared to the $35 million in adjusted income it posted in the year-ago quarter. The company said its 1.4 Bcfe/d of gas and NGL production was an 8% increase over 2018, but natural gas realizations dropped 8% to $2.51/Mcf, including hedging, and NGL realizations dropped 51% to $2.28/Mcfe. NGLs make up about 6% of CNX's production mix.
Swapping out volume growth for free cash flow generation as the governing factor for planning earned the market's positive reaction, analysts said. "The bigger story is the reduction of 2020 volume guidance in favor of a return and free cash flow approach to the year in a challenging commodity environment," Raymond James & Associates oil and gas analyst John Freeman told clients before the Oct. 29 call.