Fitch Ratings affirms
The Rating Outlook is Stable. The revolving credit facility was affirmed at 'BBB-'/'RR1' and the senior unsecured notes were affirmed at 'BB+'/'RR4'.
CNX's rating reflects its material generation of FCF and the expectation that this trend will continue over the forecast horizon along with debt reduction efforts, a robust hedging program, lack of near-term maturities and material liquidity.
Key Rating Drivers
Material FCF Generation: CNX's ability to consistently generate positive FCF is supportive of its credit quality. FCF is driven by the company's low operating cost structure, reduced finding and development costs, strong hedging program that locks in future revenues and modest production growth. CNX's strong hedging program increases certainty in projected cash flow despite the volatility of natural gas prices. Fitch anticipates continued positive FCF, which will be applied primarily to stock buybacks over the forecast horizon.
Low-Cost Operator: A low-cost position allows for profitability even in low price environments. CNX is one of the lowest-cost operators in the
Cost position is benefited by a strategy of using significant basis hedging as opposed to locking up significant transportation to move gas out of the basin. The company generated Fitch-calculated fully burdened cash costs, such as operating; selling, general and administrative (SG and interest of
Robust Hedging Program: Fitch views CNX's hedging strategy as a credit positive. The company has one of the strongest hedging positions in the industry, with approximately 87% of expected 2024 gas production hedged at an average of
Fitch believes CNX has a thoughtful hedging program that locks in expected returns and reduces volatility in cash flows, while extensive basis hedging protects from potential disruptions in the
Production Scale and Inventory: Fitch believes scale is important as it can reduce operating and capital costs per unit and provides ability to enhance liquidity. CNX is significantly smaller in terms of production than other 'BB' rated issuers, such as
Fitch estimates reserve to production at 16 years. There are questions as to the remaining amount of high-quality inventory, which could provide for some uncertainty in future cash flows. We believe the company's strong credit metrics provide for opportunities to address these uncertainties over time.
Single Basin Risk: CNX's operations are primarily in Appalachia, which exposes the company to significant basis risk due to takeaway constraints, although differentials improved as new pipeline capacity was installed. CNX resisted signing into long-term, takeaway contracts to avoid entering into firm transportation commitments that could have resulted in expensive long-term obligations. Instead, the company used hedges to mitigate pricing risk.
CNX was able to move production without entering into contracts that would make it inflexible to adjust production during periods of low natural gas prices as it had to meet takeaway commitments. This strategy could be risky if Appalachian takeaway becomes constrained but thus far the avoidance of long-term transportation obligations has benefited the company.
Derivation Summary
CNX's production profile of 1.5 billion cubic feet equivalent per day (bcfed) in 2023 is below Appalachian peers, such as
Consolidated leverage of 2.4x is slightly worse than 'BB' category-rated peers, such as Chesapeake at 0.8x and Southwestern at 1.7x. Fitch-calculated unhedged cash netback margin, as of YE 2023, of 45% was towards the middle of the range, with Antero at 25%, Ascent at 35%, Chesapeake at 54%, EQT at 44% and Southwestern at 43%.
CNX hedges approximately 87% of expected 2024 production compared with Southwestern at roughly 47%, Chesapeake at 45%, and EQT at 43%. CNX attempts to match its NYMEX hedge with basis hedges, which provides significantly more price protection than peers. Fitch believes a strong hedge program is important given the volatility of natural gas prices. CNX. CNX's low cost position and consistent hedging allows for strong stress case performance relative to peers.
Key Assumptions
Floating rate debt using the three-month SOFR forward curve (4.5% for 2024, 3.5% for 2025, 3.5% for 2026 and 3% thereafter);
West Texas Intermediate oil prices of
A decline in production of 2% in 2024, growth flat to mid-single digit thereafter;
Capex between
FCF used for share repurchases.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Production scale approaching 2.5bcfed or proved reserves approaching 20 trillion cubic feet (tcfe);
An increase in diversification of upstream operations;
Mid-cycle EBITDA leverage approaching 1.5x.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Inability to replace reserves or a material reduction in net production;
Mid-cycle EBITDA leverage above 2.5x;
Material reduction in FCF or reduced credit metrics from weakening of unit cost profile or allocation of FCF to shareholder-friendly actions;
Deviation from stated financial policy, including material reduction in hedging.
Liquidity and Debt Structure
Adequate Liquidity Position: CNX has
The revolving credit facility (RCF) includes a springing maturity at any point after
We believe there is a good chance these notes could be converted to equity before the maturity. Fitch believes near-term liquidity should be sufficient, given the ability to generate material FCF, which benefits from a high degree of certainty through the hedge program and low-cost structure.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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