CNX RESOURCES CORPORATION
Fitch Ratings has assigned a 'BB+'/'RR4' rating to
Proceeds will be used to fund the tender of
The rating reflects CNX's material generation of FCF and the expectation that this will continue over the forecast horizon, debt reduction efforts, robust hedging program, lack of near-term maturities and material liquidity. Rating concerns include the risk of operating solely in the
CNX's hedging strategy is important as it provides greater certainty to future FCF generation. Fitch believes CNX's emphasis on further reducing debt, including the potential conversion of convertible debt to equity, will further enhance the credit.
Key Rating Drivers
Proposed Bond Issue: CNX is proposing to issue
Material FCF Generation: CNX has generated positive FCF over the past 10 quarters and Fitch expects the company to generate material FCF under its
Low-Cost Operator: CNX is one of the lowest-cost operators in the
The company generated fully burdened cash costs (operating, SG&A, interest) of
Robust Hedging Program: CNX has one of the strongest hedging positions in the industry, with approximately 79% of expected 2023 gas production hedged at an average of
CNX aims to enter corresponding basis hedges with its NYMEX hedges for all future periods. The company attempts to be fully matched for the next twelve months of production. The company maintains a material portion of hedges through 2024. 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: CNX is significantly smaller in terms of production than other 'BB+' rated issuers, such as
Fitch estimates CNX's reserve to production ratio at 20 years. There has been questions as to the remaining amount of high-quality inventory, which could provide for some uncertainty on future cash flows. Fitch believes that the company's strong credit metrics provides 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 have 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 Appalachia takeaway capacity ever becomes constrained.
Derivation Summary
CNX 2Q22 production profile of 1.6 billion cubic feet equivalent per day (Bcfe/d) is below its Appalachian peers, including
Consolidated leverage of 1.6x is in-line with other 'BB' category-rated peers, such as SWN at 1.8x, and EQT at 1.6x. Fitch-calculated unhedged cash netback margin as of 2Q 2022 of 84% was the among the highest of its peers, due to the company's material lower gathering and transportation costs.
CNX has one of the strongest hedge portfolios of all natural gas companies. Although this has lowered returns in the current high price environment, Fitch recognizes the long-term benefit of locking in prices given the volatile nature of this commodity. CNX also attempts to match its NYMEX hedge with basis hedges, which provides significantly more price protection than its peers. Fitch believes a strong hedge program is important given the volatility of natural gas prices.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
Base case
Base case West Texas Intermediate oil prices of
Mid-single-digit production growth throughout the forecast;
Consolidated capex (including midstream) of
FCF is applied proportionately to debt reduction and share repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Production scale approaching 2.5 bcfe/d and/or proved reserves approaching 20 tcfe;
Increase in diversification of upstream operations;
Mid-cycle stand-alone debt/EBITDA approaching 1.5x, or FFO leverage below 2.0x on a sustained basis.
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 stand-alone debt/EBITDA above 2.5x, or FFO leverage below 3.0x on a sustained basis;
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.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity Position: CNX has
CNXM has its own RCF not guaranteed by CNX. The facility has
Fitch considers CNX's maturity schedule manageable with the next major maturity being the senior unsecured convertible notes in 2026. Excluding the revolver, the next note maturity is not until 2027. Fitch believes near-term liquidity should be sufficient given the company's ability to generate material FCF, which benefits from a high degree of certainty through the company's hedge program and low-cost structure.
Issuer Profile
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