CNX RESOURCES CORPORATION
Fitch Ratings has assigned a 'BB+'/'RR4' rating to
Proceeds will be used to pay for the tender and redemption of all of the outstanding 7.25% senior unsecured notes due 2027 as well as a portion of revolver borrowing. The Long-Term Issuer Default Rating is 'BB+' and the Rating Outlook is Stable.
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&A); 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 80% 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 20 years. There are questions as to the remaining amount of high-quality inventory, which could provide for some uncertainty in future cash flows. Fitch believes 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 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 1.6 billion cubic feet equivalent per day (bcfed) in 2022 is below Appalachian peers, such as
Consolidated leverage of 1.7x is slightly worse than 'BB' category-rated peers, such as Chesapeake at 0.7x and Southwestern at 1.3x. Fitch-calculated unhedged cash netback margin, as of YE 2022, of 80% was the highest of peers, including Chesapeake at 79%, EQT at 78% and Southwestern at 78%, due to the company's material lower gathering and transportation costs. CNX hedges approximately 80% of expected 2024 production compared with Southwestern at roughly 84% and EQT at 65%. 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.
Key Assumptions
Floating rate debt using the three-month SOFR forward curve;
West Texas Intermediate oil prices of
Flat to low-single digit production growth throughout the forecast;
Capex between
FCF used for debt repayment and share repurchases.
RATING SENSITIVITIES
Factor 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.
Factor 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 allocation of FCF to shareholder-friendly actions;
Deviation from stated financial policy, including material reduction in hedging;
Weakening of unit cost profile or capital returns.
Liquidity and Debt Structure
Adequate Liquidity Position: CNX has
Issuer Profile
Date of Relevant Committee
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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