ITEM 1.Business
General
CNX Resources Corporation (“CNX”, the “Company,” or “we,” “us,” or “our”) is an independent oil and natural gas company engaged in the exploration, development, production and acquisition of natural gas properties primarily in the Appalachian Basin. The majority of our operations are centered on unconventional shale formations, primarily the Marcellus Shale and Utica Shale, in Pennsylvania, Ohio and West Virginia. Additionally, we operate and develop Coal Bed Methane (“CBM”) properties in Virginia. We believe that our extensive held-by-production acreage position and development inventory combined with our regional operating expertise, extensive data set from development and non-op participation wells, midstream infrastructure ownership, low-cost operations and legacy surface acreage position provide us with significant competitive advantages that position us for long-term value creation.
CNX's Strategy and Corporate Values
CNX's strategy is to increase shareholder value through the development and growth of our existing natural gas assets and the selective acquisition of natural gas acreage leases within our operating footprint. Our mission is to empower our team to embrace and drive innovative change that creates long-term per share value for our investors, enhances our communities and delivers energy solutions for today and tomorrow.
CNX defines itself through its corporate values that serve as our road map and guide every aspect of our business as we strive to achieve our corporate mission:
•Responsibility: Be a safe and compliant operator; be a trusted community partner and respected corporate citizen; act with pride and integrity;
•Ownership: Be accountable for our actions and learn from our outcomes, both positive and negative; be calculated risk-takers and seek creative ways to solve problems; and
•Excellence: Be prudent capital allocators; be a lean, efficient, nimble organization; be a disciplined, reliable, performance-driven company.
These values are the foundation of CNX's identity and are the basis for how management defines continued success. We believe CNX's rich resource base, coupled with these core values, allows management to create long-term per share value. CNX believes that natural gas is central to a low-cost, reliable, secure, lower-carbon energy future. Widespread and immediate fuel switching to natural gas is the fastest and most cost-effective means to addressing climate concerns, improving air quality in the developing world and meeting the increasing demand for cleaner forms of energy. Natural gas is more than a short-term “bridge” fuel that is useful in the transition from more carbon-intensive energy sources to renewables, it is inextricably linked to the long-term success of renewable energy.
2020 Operational Highlights and Outlook
•Over the past ten years, CNX's natural gas production has grown by approximately 300% to a total of 511.1 net Bcfe in 2020.
•Total average production of 1,396,371 Mcfe per day;
•94% Natural Gas, 6% Liquids; and
•90% Shale, 10% coalbed methane.
At December 31, 2020, our proved natural gas, NGL, condensate and oil reserves (collectively, "natural gas reserves") had the following characteristics:
•9.5 Tcfe of proved reserves;
•94.6% natural gas;
•54.4% proved developed;
•98.7% operated; and
•A reserve life ratio of 18.69 years (based on 2020 production).
In 2021, CNX expects capital expenditures of approximately $430 million to $470 million. The Company continuously evaluates multiple factors to determine activity throughout the year, and as such, may update guidance accordingly.
DETAIL OF OPERATIONS
Our operations include the following plays:
Shale
Our Shale properties represent our primary operating and growth area in terms of reserves, production, and capital investment. We have the rights to extract natural gas from Shale formations in Pennsylvania, West Virginia, and Ohio from approximately 524,000 net Marcellus Shale acres and approximately 610,000 net Utica Shale acres at December 31, 2020. Approximately 349,000 Utica Shale acres coincide with Marcellus Shale acreage in Pennsylvania, West Virginia, and Ohio.
The Upper Devonian Shale formation, which includes both the Burkett Shale and Rhinestreet Shale, lies above the Marcellus Shale formation in southwestern Pennsylvania and northern West Virginia. The Company holds approximately 52,000 acres of incremental Upper Devonian acres; however, these acres have historically not been disclosed separately as they generally coincide with our Marcellus acreage and we have no current drilling program targeting this formation.
Coalbed Methane (CBM)
We have the rights to extract CBM in Virginia from approximately 283,000 net CBM acres in Central Appalachia. We produce CBM natural gas primarily from the Pocahontas #3 seam and still have a nominal drilling program. The CBM natural gas we extract would otherwise be vented into the atmosphere during normal mining operations.
We also have the rights to extract CBM from approximately 1,896,000 net CBM acres in other states including West Virginia, Pennsylvania, Ohio, Illinois, Indiana, and New Mexico with no current plans to drill CBM wells in these areas.
Other Gas
We have the rights to extract natural gas from other shale and shallow oil and gas positions primarily in Illinois, Indiana, New York, Ohio, Pennsylvania, Virginia, and West Virginia from approximately 1,017,000 net acres at December 31, 2020. The majority of our shallow oil and gas leasehold position is held by third-party production and all of it is extensively overlain by existing third-party natural gas gathering and transmission infrastructure.
Summary of Properties as of December 31, 2020
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Shale
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CBM
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Other Gas
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Segment
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Segment
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Segment
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Total
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Estimated Net Proved Reserves (MMcfe)
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8,443,926
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1,099,627
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6,205
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9,549,758
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Percent Developed (1)
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52
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%
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71
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%
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100
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%
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54
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%
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Net Producing Wells (including oil and gob wells)
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491
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3,852
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57
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4,400
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Net Acreage Position:
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Net Proved Developed Acres
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77,369
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235,388
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38,780
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351,537
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Net Proved Undeveloped Acres
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43,713
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—
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—
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43,713
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Net Unproved Acres(2)
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716,581
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1,943,671
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977,730
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3,637,982
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Total Net Acres(3)
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837,663
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2,179,059
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1,016,510
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4,033,232
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_________
(1) Percent developed is calculated as net proved developed reserves divided by net proved reserves, measured in MMcfe.
(2) Net acres include acreage attributable to our working interests in the properties. Additional adjustments (either increases or decreases) may be required as we further develop title to and further confirm our rights with respect to our various properties in anticipation of development. We believe that our assumptions and methodology in this regard are reasonable.
(3) Acreage amounts are only included under the target strata CNX expects to produce with the exception of certain CBM acres governed by separate leases.
Producing Wells and Acreage
Most of our development wells and proved acreage are located in Virginia, West Virginia, Ohio and Pennsylvania. Some leases are beyond their primary term, but these leases are extended in accordance with their terms as long as certain drilling commitments or other term commitments are satisfied.
The following table sets forth, at December 31, 2020, the number of producing wells, developed acreage and undeveloped acreage:
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Gross(1)
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Net(2)
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Producing Gas Wells (including gob wells) - Working Interest
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4,712
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4,401
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Producing Oil Wells - Working Interest
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—
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—
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Producing Gas Wells - Royalty Interest
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1,810
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—
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Producing Oil Wells - Royalty Interest
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152
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—
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Net Acreage Position:
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Proved Developed Acreage
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351,537
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351,537
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Proved Undeveloped Acreage
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43,713
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43,713
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Unproved Acreage
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4,986,196
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3,637,982
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Total Acreage
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5,381,446
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4,033,232
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_________
(1) All of our acreage identified as proved developed and undeveloped is controlled fully by CNX through ownership of a 100% working interest.
(2) Net acres include acreage attributable to our working interests in the properties. Additional adjustments (either increases or decreases) may be required as we further develop title to and further confirm our rights with respect to our various properties in anticipation of development. We believe that our assumptions and methodology in this regard are reasonable.
The following table represents the terms under which we hold these acres:
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Gross Unproved Acres
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Net Unproved Acres
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Gross Proved Undeveloped Acres
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Net Proved Undeveloped Acres
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Held by Production/Fee
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4,889,527
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3,578,943
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30,594
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30,594
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Expiration Within 2 Years
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55,298
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30,429
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4,732
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4,732
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Expiration Beyond 2 Years
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41,370
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28,610
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8,387
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8,387
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Total Acreage
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4,986,195
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3,637,982
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43,713
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43,713
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The leases reflected above as Gross and Net Unproved Acres with expiration dates are included in our current drill plan or active land program. Leases with expiration dates within two years represent approximately 1% of our total net unproved acres and leases with expiration dates beyond two years represent approximately 1% of our total net unproved acres. In each case, we deemed this acreage to not be material to our overall acreage position. Additionally, based on our current drill plans and lease management we do not anticipate any material impact to our consolidated financial statements from the expiration of such leases.
Development Wells (Net)
During the years ended December 31, 2020, 2019 and 2018, we drilled 29.0, 75.7 and 83.9 net development wells, respectively. Gob wells and wells drilled by operators other than our primary joint venture partners at that time are excluded from net development wells and represents less than 0.5 net wells for each year. In 2020, there were 17.0 net development wells and no exploratory wells drilled but uncompleted. The Company includes drilled and uncompleted net development wells in proved undeveloped reserves and the Company intends to complete and turn-in-line the wells within five years of the initial disclosure. There were no net dry development wells in 2020 or 2018 and 1.0 net dry development well in 2019. As of December 31, 2020, there are 24.0 gross completed developmental wells ready to be turned in-line.
The following table illustrates the net wells drilled by well classification type:
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For the Year
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Ended December 31,
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2020
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2019
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2018
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Shale Segment
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25.0
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64.7
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77.9
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CBM Segment
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4.0
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11.0
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6.0
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Other Gas Segment
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—
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—
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—
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Total Development Wells (Net)
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29.0
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75.7
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83.9
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Exploratory Wells (Net)
There were 2.0 and 5.0 net exploratory wells drilled during the years ended December 31, 2020 and 2019, respectively. There were no net exploratory wells drilled during the year ended December 31, 2018. As of December 31, 2020, there is 1.0 net exploratory well in process. The following table illustrates the exploratory wells drilled by well classification type:
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For the Year Ended December 31,
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2020
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2019
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2018
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Producing
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Dry
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Still Eval*.
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Producing
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Dry
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Still Eval.
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Producing
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Dry
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Still Eval.
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Shale Segment
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—
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—
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2.0
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4.0
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—
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1.0
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—
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—
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—
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CBM Segment
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—
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—
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—
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—
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—
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—
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—
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—
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—
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Other Gas Segment
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—
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—
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—
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—
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—
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—
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—
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—
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—
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Total Exploratory Wells (Net)
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—
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—
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2.0
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4.0
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—
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1.0
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—
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—
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—
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_________
* Still evaluating in 2020 includes two wells that were drilled, completed, and were in process of being connected to production facilities at the end of the year and were turned in-line in early 2021. The company is still currently evaluating the partially constructed 2019 well to determine the most economic approach to access the natural gas reserves. The company expects to make a determination in 2021 to either finalize the well or to access the natural gas reserves from an alternative location.
Reserves
The following table shows our estimated proved developed and proved undeveloped reserves. Reserve information is net of royalty interest. Proved developed and proved undeveloped reserves are reserves that could be commercially recovered under current economic conditions, operating methods and government regulations. Proved developed and proved undeveloped reserves are defined by the Securities and Exchange Commission (SEC).
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Net Reserves (Million of Cubic Feet Equivalent)
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As of December 31,
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2020
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2019
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2018
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Proved Developed Reserves
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5,199,748
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4,838,858
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4,494,878
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Proved Undeveloped Reserves
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4,350,010
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3,586,809
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3,386,457
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Total Proved Developed and Undeveloped Reserves (1)
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9,549,758
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8,425,667
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7,881,335
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___________
(1) For additional information on our reserves, see Other Supplemental Information–Supplemental Gas Data (unaudited) to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Discounted Future Net Cash Flows
The following table shows our estimated future net cash flows and total standardized measure of discounted future net cash flows at 10%:
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As of December 31,
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2020
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2019
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2018
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(Dollars in millions)
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Future Net Cash Flows
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$
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6,313
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$
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7,744
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$
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13,132
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Total PV-10 Measure of Pre-Tax Discounted Future Net Cash Flows (1)
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$
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3,603
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$
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4,176
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$
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6,172
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Total Standardized Measure of After-Tax Discounted Future Net Cash Flows
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$
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2,636
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$
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3,070
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$
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4,655
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____________
(1) We calculate our present value at 10% (PV-10) in accordance with the following table. Management believes that the presentation of the non-Generally Accepted Accounting Principles (GAAP) financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. Because many factors that are unique to each individual company impact the amount of future income taxes estimated to be paid, the use of a pre-tax measure is valuable when comparing companies based on reserves. PV-10 is not a measure of the financial or operating performance under GAAP. PV-10 should not be considered as an alternative to the standardized measure as defined under GAAP. We have included a reconciliation of the most directly comparable GAAP measure-after-tax discounted future net cash flows.
Reconciliation of PV-10 to Standardized Measure
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As of December 31,
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2020
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2019
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2018
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(Dollars in millions)
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NYMEX Natural Gas Prices (MMbtu)
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$
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1.985
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$
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2.578
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$
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3.100
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Future Cash Inflows
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$
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16,578
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$
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19,490
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$
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26,610
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Future Production Costs
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(6,072)
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(7,903)
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(7,730)
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Future Development Costs (including Abandonments)*
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(1,958)
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(1,121)
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(1,600)
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Future Net Cash Flows (pre-tax)
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8,548
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10,466
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17,280
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10% Discount Factor
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(4,945)
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(6,290)
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(11,108)
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PV-10 (Non-GAAP Measure)
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3,603
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4,176
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6,172
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Undiscounted Income Taxes
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(2,235)
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(2,721)
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(4,147)
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10% Discount Factor
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1,268
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1,615
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2,630
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Discounted Income Taxes
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(967)
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(1,106)
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(1,517)
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Standardized GAAP Measure
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$
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2,636
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$
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3,070
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$
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4,655
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*Future development costs for 2020 include $402 million of plugging and abandonment costs and $287 million of Midstream capital on an undiscounted pre-tax basis. On a PV-10 pre-tax discounted basis, these amounts equate to $18 million and $232 million, respectively. The addition of Midstream capital is the result of the Merger that occurred on September 28, 2020 (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K).
Gas Production
The following table sets forth net sales volumes produced for the periods indicated:
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For the Year
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Ended December 31,
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2020
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2019
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2018
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Natural Gas
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Sales Volume (MMcf)
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Shale
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428,679
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449,669
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403,244
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CBM
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52,609
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55,445
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60,268
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Other
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138
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241
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4,714
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Total
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481,426
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505,355
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468,226
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NGL
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Sales Volume (Mbbls)
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Shale
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4,675
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5,428
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6,080
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Other
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2
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—
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1
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Total
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4,677
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5,428
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6,081
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Oil and Condensate
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Sales Volume (Mbbls)
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Shale
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250
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195
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364
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Other
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14
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8
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35
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Total
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264
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203
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399
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Total Sales Volume (MMcfe)
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Shale
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458,231
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483,413
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|
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441,907
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CBM
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52,609
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|
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55,445
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|
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60,268
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Other
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232
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|
|
291
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4,929
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Total
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511,072
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539,149
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507,104
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*Oil, NGLs, and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas.
Note: 2018 production includes approximately 27 Bcfe of production related to assets that were sold during that year. For additional information, see Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K, which is incorporated herein by reference.
CNX expects 2021 annual natural gas production volumes to be approximately 540-570 Bcfe.
Average Sales Price and Average Lifting Cost
The following table sets forth the total average sales price and the total average lifting cost for all of our natural gas and NGL production for the periods indicated. Total lifting cost is the cost of raising gas to the gathering system and does not include depreciation, depletion or amortization. See Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K for a breakdown by segment.
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For the Year
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Ended December 31,
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2020
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2019
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2018
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Average Sales Price - Gas (Mcf)
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$
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1.71
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$
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2.48
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$
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2.97
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Gain (Loss) on Commodity Derivative Instruments - Cash Settlement- Gas (Mcf)*
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$
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0.78
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$
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0.14
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$
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(0.15)
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Average Sales Price - NGLs (Mcfe)**
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$
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2.29
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$
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3.20
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|
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$
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4.55
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Average Sales Price - Oil (Mcfe)**
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$
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6.55
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|
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$
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8.13
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|
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$
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9.89
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Average Sales Price - Condensate (Mcfe)**
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$
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5.85
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$
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7.47
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$
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8.43
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Total Average Sales Price (per Mcfe) Including Effect of Derivative Instruments*
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$
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2.49
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$
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2.66
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$
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2.97
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Total Average Sales Price (per Mcfe) Excluding Effect of Derivative Instruments
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$
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1.75
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$
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2.53
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$
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3.11
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Average Lifting Costs Excluding Ad Valorem and Severance Taxes (per Mcfe)
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$
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0.08
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$
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0.12
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|
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$
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0.19
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Average Sales Price - NGLs (Bbl)
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$
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13.74
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$
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19.20
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$
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27.30
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Average Sales Price - Oil (Bbl)
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$
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39.30
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$
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48.78
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$
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59.34
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Average Sales Price - Condensate (Bbl)
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$
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35.10
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$
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44.82
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$
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50.58
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*Excludes the effect of hedge monetizations.
**Oil, NGLs, and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas.
Sales of NGLs, condensates and oil enhance our reported natural gas equivalent sales price. Across all volumes, when excluding the impact of hedging, sales of liquids added $0.04 per Mcfe, $0.05 per Mcfe, and $0.14 per Mcfe for 2020, 2019, and 2018, respectively, to average gas sales prices. CNX expects to continue to realize a liquids uplift benefit as additional wells are turned-in-line, primarily in the liquid-rich areas of the Marcellus Shale. We continue to sell the majority of our NGLs through the large midstream companies that process our natural gas. This approach allows us to take advantage of the processors’ transportation efficiencies and diversified markets. Certain of CNX’s processing contracts provide for the ability to take our NGLs “in-kind” and market them directly if desired. The processed purity products are ultimately sold to industrial, commercial and petrochemical markets.
In order to manage the market risk exposure of volatile natural gas prices in the future, CNX enters into various physical natural gas supply transactions with both gas marketers and end users for terms varying in length. Reserves and production estimates are believed to be sufficient to satisfy these obligations. In the past, we have delivered quantities required under these contracts. CNX also enters into various financial natural gas swap transactions to manage the market risk exposure to in-basin and out-of-basin pricing. These transactions exist parallel to the underlying physical transactions and represented approximately 461.1 Bcf of our produced gas sales volumes for the year ended December 31, 2020 at an average price of $2.57 per Mcf. The notional volumes associated with these gas swaps represented approximately 389.2 Bcf of our produced natural gas sales volumes for the year ended December 31, 2019 at an average price of $2.70 per Mcf. As of January 7, 2021, these physical and swap transactions represent approximately 472.1 Bcf of our estimated 2021 production at an average price of $2.50 per Mcf, 391.3 Bcf of our estimated 2022 production at an average price of $2.34 per Mcf, 284.8 Bcf of our estimated 2023 production at an average price of $2.22 per Mcf, approximately 263.1 Bcf of our estimated 2024 production at an average price of $2.28 per Mcf, and approximately 103.0 Bcf of our estimated 2025 production at an average price of $2.10 per Mcf.
CNX's hedging strategy and information regarding derivative instruments used are outlined in Part II. Item 7A. "Qualitative and Quantitative Disclosures About Market Risk" and in Note 19 - Derivative Instruments in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K.
Midstream Gas Services
CNX designs, builds and operates natural gas gathering systems to move gas from the wellhead to interstate pipelines or other local sales points. In addition, over time CNX has acquired extensive gathering assets through acquisitions. CNX now owns or operates approximately 2,600 miles of natural gas gathering pipelines as well as a number of natural gas processing facilities.
As a result of the Merger that occurred on September 28, 2020 (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K), CNX owns substantially all of its Shale gathering
systems in Pennsylvania and West Virginia. With respect to CNX's Shale wells in Ohio, CNX primarily contracts with third-party gathering services. CNX also provides natural gas gathering services to third-parties.
CNX has developed a diversified portfolio of firm transportation capacity options to support its production. CNX plans to selectively acquire firm capacity on an as-needed basis, while minimizing transportation costs and long-term financial obligations. Optimization of our firm transportation portfolio may also include, from time to time and as appropriate, releasing firm transportation to others. CNX also benefits from the strategic location of our primary production areas in southwestern Pennsylvania, northern West Virginia and eastern Ohio. These areas are currently served by a large concentration of major pipelines that provide us with access to major gas markets without the necessity of transporting our natural gas out of the region, and it is expected that recently-approved and pending pipeline projects will increase the take-away capacity from our region. In addition to firm transportation capacity, CNX has developed a processing portfolio to support produced volumes from its wet gas production areas and has the operational and contractual flexibility to potentially convert a portion of currently processed wet gas volumes to be marketed as dry gas volumes, or vice-versa, as economically appropriate.
CNX has the advantage of having natural gas production from lower Btu wells in close proximity to higher Btu wells. Separately, the low Btu natural gas and the high Btu natural gas may need processing in order to meet downstream pipeline specifications. The geographic proximity and interconnected gathering system servicing these wells, allow CNX to blend this gas together and in some cases eliminate the need for the costly processing of natural gas that does not meet pipeline specification. This allow us more flexibility in bringing wells online at qualities that meet interstate pipeline specifications.
Marketing
Substantially all of our natural gas is sold at market prices primarily under short-term sales contracts and is subject to seasonal price swings. The principal markets for our natural gas are in the Appalachian Basin where we sell natural gas to industrial customers, local distribution companies, gas marketers and power generation facilities. Our extensive hedge position mitigates unpredictability in pricing on hedged volumes.
We also incur gathering, processing and transportation expenses to move our natural gas production from the wellhead to our principal markets in the United States. Although we own midstream facilities, we also gather, process and transport our natural gas to market by utilizing pipelines and facilities owned by others where we have long-term contractual capacity arrangements or use purchaser-owned capacity under both long-term and short-term sales contracts.
To date, we have not experienced significant difficulty in transporting or marketing our natural gas production as it becomes available; however, there is no assurance that we will always be able to transport and market all of our production.
CNX expects natural gas to continue to be a significant contributor to the domestic electric generation mix in the long term, as well as to fuel industrial growth in the U.S. economy. Continued demand for CNX's natural gas and the prices that CNX obtains are affected by natural gas use in the production of electricity, pipeline capacity, weather, U.S. manufacturing and the overall strength of the economy, environmental and government regulation, technological developments, the availability and price of competing alternative fuel supplies, and national and regional supply and demand dynamics.
Natural Gas Competition
CNX gas operations are primarily located in the eastern United States, specifically the Appalachian Basin, which is highly fragmented and not dominated by any single producer. We believe that competition among producers is based primarily on acreage position, drilling and operating costs as well as pipeline transportation availability to the various markets. CNX competes with other large producers, as well as a myriad of smaller producers and marketers. CNX also competes for pipeline capacity and other services to deliver its products to customers.
Non-Core Mineral Assets and Surface Properties
CNX owns significant natural gas assets that are not in our short-term or medium-term development plans. We continually explore the monetization of these non-core assets by means of sale, lease, contribution to joint ventures or a combination of the foregoing in order to bring the value of these assets forward for the benefit of our shareholders. We also control a significant amount of surface acreage. This surface acreage is valuable to us in the development of the gathering system for our Shale production. We also derive value from this surface control by granting rights of way or development rights to third-parties when we are able to derive appropriate value for our shareholders.
Water Division
CNX also supplies turn-key solutions for water sourcing, delivery and disposal for our natural gas operations and supplies solutions for water sourcing as well as delivery and disposal for third parties. In coordination with our midstream operations, CNX works to develop solutions that coincide with our midstream operations to offer gas natural gathering and water delivery solutions in one package to third parties.
Human Capital Management
At December 31, 2020, CNX had 451 employees, none of whom are subject to a collective bargaining agreement. CNX recognizes that our future success depends on the services of our key employees. CNX, is emphatic about the health and safety of not only our employees and service providers, but also the communities in which we operate.
Training and Education. CNX has a variety of programs dedicated to ensuring our employee and contractor workforce are appropriately trained and aligned on expectations regarding safety and environmental performance. These programs utilize behavior-based techniques which embrace a partnership among management, employees and the service provider workforce to continually focus attention and actions on daily safety behavior. This is accomplished through an evergreen approach with constant evaluation and adaptation for employee, safety and business needs. Fundamentally, the daily safety meetings, job safety analyses (JSA) and empowerment to stop work foster a culture of Health, Safety, and Environmental (HSE) awareness and accountability embraced at all levels of CNX; from individual contributors and service providers to management and executive leadership. In addition to our culture of continual assessment, CNX expects all employees and service providers to meet HSE expectations and CNX empowers our employees to make adjustments or stop work as needed in order to correct, or prevent, adverse safety or environmental conditions. CNX expects all of our service providers to meet the training requirements outlined by OSHA and other governing agencies. The safety training content is published on the corporate website to allow service providers constant access to CNX’s message of empowerment and accountability.
Diversity and Inclusion. CNX values diversity throughout the organization. We recognize that a diverse, extensive talent pool provides the best opportunity to acquire unique perspectives, experiences, ideas and solutions that help drive our business forward. Though no significant hiring occurred during an extraordinary 2020, we replaced a departing Section 16 officer with a diverse candidate, maintaining 30 percent diversity within our executive management team, the highest proportion among our peer group. Of the limited new hires in 2020, 38 percent were diverse.
Employee Attraction and Retention. CNX recognizes the importance of attracting and retaining the best employees to make the most of its assets. While there is great talent in the current pool of industry workers, CNX sees the value in tapping into the potential of recent graduates within the region as well. In recent years, CNX has gone to great lengths to establish relationships with local colleges and universities, increasing interest in our organization and industry amongst upcoming graduates. The continued success of CNX is not only contingent upon seeking out the best possible candidates, but retaining and developing the talent that lies within the organization as well. CNX is proud to offer opportunities for employees to improve their skills to achieve their career goals, including continuing education assistance for employees pursuing advanced education, certifications, or skill building. Goal attainment and outstanding achievements contribute to the year-end discretionary incentive pay awarded to employees that perform above expectations. Additionally, our Human Resources department retains personalized career development plans for every CNX employee aimed at outlining career goals and paths to reach those goals, as well as career ladders to outline growth paths for each role in the organization.
Quality Management Systems. CNX is committed to fostering a culture of accountability and continuous improvement. In 2019, CNX began the implementation of a new Quality Management System (QMS), which strengthens accountability across the enterprise, and reinforces our core values of Responsibility, Ownership, and Excellence. The QMS provides all employees, visitors, contractors and subcontractors who operate on our behalf with a practical, easily accessible system that defines clear expectations, responsibilities and standards of accountability for quality and excellence in all aspects of our business. The Quality Management System allows for continual identification, development of documentation control, and standardization of all processes and procedures throughout the organization. The QMS includes CNX’s robust ISO (International Organization of Standardization) conforming Health and Safety, and Environmental Management Systems. The elements of health, safety, environmental and quality control are housed in a unified system that allows for widespread utilization and measurement. By taking ownership of our actions, CNX has formalized our approach in these areas to deliver results that are consistently safe, predictable and environmentally responsible. CNX will conduct regular internal and external audits to ensure compliance, adherence to best-in-class processes and continuous improvement, as we relentlessly strive to be the most responsible and
efficient operator in the industry. CNX’s management expectation is that the QMS will serve as the platform through which the senior leadership manages and measures excellence in all operational aspects.
Health and Safety. No job or activity is considered a success if we compromise the safety of our employees. Everyone working at CNX locations is empowered to stop work if they feel their safety or that of a coworker is at risk. CNX’s approach to employee stop work empowerment, while reactive when necessary, includes proactive measures such as procedural enhancements and communication. We promote empowerment through new employee on-boarding, CNX Hazard Training and reinforcement, including an employee recognition program. Our safety professionals provide support throughout all phases of operation with education, training, policy development, audits and emergency preparedness and response. The evaluation of our health and safety performance is an ongoing, daily discussion. Key performance indicators are constantly monitored and analyzed for trends across operations. As trends are identified, CNX utilizes the information to amend policies, training and company-wide communication. The safety department, referred to as Operational Excellence, falls under the direction of the Chief Excellence Officer. The team takes a hybrid approach where a traditional safety group has been merged with an operation field compliance team to form the Operational Excellence department. The Vice President Operational Excellence briefs the Chief Excellence Officer on safety related issues, policy updates and performance trends regularly. Additionally, Operations executive management is kept up to date on safety-related items during weekly scheduled meetings. The HSE Committee of the Board of Directors is kept apprised of safety related matters as needed and with monthly updates and quarterly meetings. CNX employs safety and health professionals with a variety of safety certifications such as occupational health nurses, emergency medical technicians and emergency medical responders.
Emergency Preparedness and Response. Emergency response plans are developed for all CNX locations and operations. The plans are reviewed for effectiveness biannually and are communicated to affected employees through safety meetings and training. Drills and emergency exercises are conducted to ensure all employees understand their roles and responsibilities during an actual event. These exercises range from tabletop exercises to internal drills, up to and including events involving external resources. CNX works hand-in-hand with local municipalities and emergency responders to ensure they are fluent in our plan and procedures. CNX provides emergency responder training to volunteer fire departments, and county emergency management, including tours of various phases of operation they may encounter during an event. This helps to familiarize emergency response resources with CNX personnel, facilities and operations. This proactive approach gives emergency responders the opportunity to ask questions and understand CNX protocols so they are prepared in the case of an emergency.
Industry Segments
Financial information concerning industry segments, as defined by GAAP, for the years ended December 31, 2020, 2019 and 2018 is included in Note 21 - Segment Information in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K and is incorporated herein by reference.
Laws and Regulations
General
Our operations are subject to various federal, state and local (including county and municipal level) laws and regulations, with a heavy emphasis placed on compliance with environmental laws and regulations as a result of the nature of our business. These laws and regulations cover virtually every aspect of our operations including, among other things: transportation and use of public roads; construction of well pads, impoundments, tanks and roads; pooling and unitizations; water withdrawal and procurement for well stimulation purposes; well drilling, casing and hydraulic fracturing; stormwater management; well production; well plugging; venting or flaring of natural gas; pipeline construction and the compression and transmission of natural gas and liquids; reclamation and restoration of properties after natural gas operations are completed; handling, storage, transportation and disposal of materials used or generated by natural gas operations; the calculation, reporting and payment of taxes on gas production; gathering of natural gas production. In addition to a variety of laws and regulations governing our natural gas operations, we are also subject to laws and regulations with respect to our employees, including health and safety regulations, and various financial and regulatory laws and regulations relating to our status as a public company, and our participation in derivative markets.
Additionally, the electric power generation industry, which consumes significant quantities of natural gas, remains subject to extensive regulation regarding the environmental impact of its power generation activities, which could impact demand for our natural gas.
In 2010, Congress adopted comprehensive financial reform legislation that established federal oversight and regulation of the OTC derivative market and entities, such as the Company, that participate in that market. The legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), required the CFTC, the SEC and other regulatory agencies to promulgate rules and regulations implementing this legislation. The CFTC has adopted and implemented final rules that impose regulatory obligations on all market participants, including the Company, such as recordkeeping, certain reporting obligations and other regulations relevant to natural gas hedging activities. However, it is still not possible at this time to predict the full extent of the impact of the regulations on the Company's hedging program or regulatory compliance obligations.
We endeavor to conduct our natural gas and midstream operations in compliance with all applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements against a backdrop of variable geologic and seasonal conditions, exceedances and violations of permits and other regulatory requirements during operations can and do occur. Such exceedances and violations generally result in fines or penalties but could make it more difficult for us to obtain necessary permits in the future. The possibility exists that new legislation or regulations may be adopted which would have a significant impact on our operations or on our customers' ability to use our natural gas and may require us or our customers to change our or their operations significantly or incur substantial costs. See “Risk Factors -- Existing and future governmental laws, regulations and other legal requirements and judicial decisions that govern our business may increase our costs of doing business and may restrict our operations” for additional discussion regarding additional laws and regulations affecting our business, operations and industry.
The Company anticipates that compliance with existing laws and regulations governing the Company and its current operations will not have a material adverse effect upon its capital expenditures, earnings or competitive position. Additional proposals that affect the oil and natural gas industry are regularly considered by Congress, the states, regulatory agencies and the courts. The Company cannot predict when or whether any such proposals may become effective or the effect that such proposals may have on the Company.
Environmental Laws
Many of the laws and regulations referred to above are state-level environmental laws and regulations, which vary according to the state where we are operating. Our natural gas and midstream operations are also subject to numerous federal level environmental laws and regulations.
In addition to routine reviews and inspections by regulators to confirm compliance with applicable regulatory requirements, CNX has established protocols for ongoing assessments to identify potential environmental exposures. These assessments take into account industry and internal best management practices and evaluate compliance with laws and regulations and include reviews of our third-party service providers, including, for instance, waste management transporters and facilities.
Hydraulic Fracturing Activities. Hydraulic fracturing is typically regulated by state oil and natural gas commissions and similar agencies, but the U.S. Environmental Protection Agency (“EPA”) has asserted certain regulatory authority over hydraulic fracturing and has moved forward with various regulatory actions, including the issuance of regulations requiring green completions for hydraulically fractured wells, and has disclosed its intent to develop regulations to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Some states, including states in which we operate, have adopted regulations that could impose more stringent disclosure and/or well construction requirements on hydraulic fracturing operations, or otherwise seek to ban some or all of these activities. Additionally, these and other federal requirements and proposals may be subject to further review and revision by the EPA.
Scrutiny of hydraulic fracturing activities also continues in other ways at the federal and local levels. For example, in June 2015, the EPA issued its draft report on the potential impacts of hydraulic fracturing on drinking water and groundwater. The draft report found no systemic negative impacts from hydraulic fracturing. In December 2016, the EPA released its final report on the impacts of hydraulic fracturing on drinking water. While the language was changed and included the possibility of negative impacts from hydraulic fracturing, it also included the guidance to industry and regulators on how the process can be performed safely. We cannot predict whether any other legislation or regulations will be enacted and, if so, what its provisions will be.
Clean Air Act. The federal Clean Air Act and corresponding state laws and regulations regulate air emissions primarily through permitting and/or emissions control requirements. This affects natural gas production and processing operations. Various activities in our operations are subject to air quality regulation, including pipeline compression, venting and flaring of
natural gas and hydraulic fracturing and completion processes, as well as fugitive emissions from operations. We obtain permits, typically from state or local authorities, to conduct these activities. Additionally, we are required to obtain pre-approval for construction or modification of certain facilities, to meet stringent air permit requirements, or to use specific equipment, technologies or best management practices to control emissions. Further, some states and the federal government have proposed that emissions from certain proximate and related sources should be aggregated to provide for regulation and permitting of a single, major source. Federal and state governmental agencies continue to investigate the potential for emissions from oil and natural gas activities and further regulation could increase our cost or temporarily restrict our ability to produce. For example, the EPA sets National Ambient Air Quality Standards for certain pollutants and changes to such standards could cause us to make additional capital expenditures or alter our business operations in some manner. See “Risk Factors - Climate change legislation, litigation and regulation of greenhouse gas emissions at the federal or state level may increase our operating costs and reduce the value of our natural gas assets and such regulation, as well as uncertainty concerning such regulation and public policy pressures that may arise, could adversely impact the market for natural gas, as well as for our securities” for additional discussion regarding certain laws and regulations related to air emissions and related matters.
Clean Water Act. The federal Clean Water Act (“CWA”) and corresponding state laws affect our natural gas operations by regulating storm water or other regulated substance discharges, including pollutants, sediment and spills and releases of oil, brine and other substances, into surface waters (and under some state statutory schemes groundwater) and in certain instances imposing requirements to dispose of produced wastes and other oil and natural gas wastes at approved disposal facilities. The discharge of pollutants into jurisdictional waters is prohibited, except in accordance with the terms of a permit issued by the EPA, the U.S. Army Corps of Engineers, or a delegated state agency. These permits require regular monitoring and compliance with effluent limitations and reporting requirements and govern the discharge of pollutants into regulated waters. Federal and state regulatory agencies can impose administrative, civil and/or criminal penalties for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations. See “Risk Factors -Environmental regulations can increase costs and introduce uncertainty that could adversely impact the market for natural gas with potential short and long-term liabilities” for additional discussion regarding certain laws and regulations related to clean water, the disposal or use of water and related matters.
Endangered Species Act. The Endangered Species Act and related state regulation protect plant and animal species that are threatened or endangered. Some of our operations are located in areas that are or may be designated as protected habitats for endangered or threatened species, including the Northern Long-Eared and Indiana bats, which has a seasonal impact on our construction activities and operations. New or additional species that may be identified as requiring protection or consideration may lead to delays in permits and/or other restrictions on construction and development.
Safety of Gas Transmission and Gathering Pipelines. Natural gas pipelines serving our operations are subject to regulation by the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”) pursuant to the Natural Gas Pipeline Safety Act of 1968, (“NGPSA”), as amended by the Pipeline Safety Act of 1992, the Accountable Pipeline Safety and Partnership Act of 1996, the Pipeline Safety Improvement Act of 2002 (“PSIA”), the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006 and the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (the “2011 Pipeline Safety Act”). The NGPSA regulates safety requirements in the design, construction, operation and maintenance of natural gas pipeline facilities, while the PSIA establishes mandatory inspections for all U.S. oil and natural gas transmission pipelines in high-consequence areas. Additionally, certain states, such as West Virginia, also maintain jurisdiction over intrastate natural gas lines. These statutes and related regulations may be revised or amended which may lead to additional safety requirements. See “Risk Factors -- CNX may incur significant costs and liabilities as a result of pipeline operations and/or increases in the regulation of gas gathering pipelines” for additional discussion regarding gas transmission and gathering pipelines.
Resource Conservation and Recovery Act. The federal Resource Conservation and Recovery Act (RCRA) and corresponding state laws and regulations affect natural gas operations by imposing requirements for the management, treatment, storage and disposal of hazardous and non-hazardous wastes, including wastes generated by natural gas operations. Facilities at which hazardous wastes have been treated, stored or disposed of are subject to corrective action orders issued by the EPA that could adversely affect our financial results, financial condition and cash flows. On December 28, 2016 the EPA entered into a consent order to resolve outstanding litigation brought by environmental and citizen groups regarding the applicability of RCRA to wastes from oil and gas development activities. In April 2019, the EPA issued a report concluding that revisions to the federal regulations for the management of exploration and production wastes under RCRA were not necessary at the time the report was issued. We cannot predict whether the EPA may change its conclusion at some point, or whether any other legislation or regulations will be enacted and if so, what its provisions will be.
Federal Regulation of the Sale and Transportation of Natural Gas
Federal Energy Regulatory Commission. Regulations and orders issued by the Federal Energy Regulatory Commission (FERC) impact our natural gas business to a certain degree. Although the FERC does not currently directly regulate our natural gas production activities, the FERC has stated that it intends for certain of its orders to foster increased competition within all phases of the natural gas industry. Additionally, the FERC has jurisdiction over the transportation of natural gas in interstate commerce, and regulates the terms, conditions of service and rates for the interstate transportation of our natural gas production. The FERC possesses regulatory oversight over natural gas markets, including anti-market manipulation regulation. The FERC has the ability to assess civil penalties, order disgorgement of profits and recommend criminal penalties for violations of the Natural Gas Act or the FERC’s regulations and policies thereunder.
Section 1(b) of the Natural Gas Act exempts natural gas gathering facilities from regulation by the FERC. However, the distinction between federally unregulated gathering facilities and FERC-regulated transmission facilities is a fact-based determination, and the classification of such facilities may be the subject of dispute and, potentially, litigation. We own certain natural gas pipeline facilities that we believe meet the traditional tests which the FERC has used to establish a pipeline's status as a gatherer not subject to the FERC jurisdiction.
Natural gas prices are currently unregulated, but Congress historically has been active in the area of natural gas regulation. We cannot predict whether new legislation to regulate natural gas sales might be enacted in the future or what effect, if any, any such legislation might have on our operations.
Health and Safety Laws
Occupational Safety and Health Act. Our natural gas operations are subject to regulation under the federal Occupational Safety and Health Act (OSHA) and comparable state laws in some states, all of which regulate health and safety of employees at our natural gas operations. Additionally, OSHA's hazardous communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state laws require that information be maintained about hazardous materials used or produced by our natural gas operations and that this information be provided to employees, state and local governments and the public.
Climate Change Laws and Regulations
Climate change continues to be a legislative and regulatory focus. There are a number of proposed and final laws and regulations that limit greenhouse gas emissions, and regulations that restrict emissions could increase our costs should the requirements necessitate the installation new equipment or the purchase of emission allowances. These laws and regulations could also impact our customers, including the electric generation industry, making alternative sources of energy more competitive. Additional regulation could also lead to permitting delays and additional monitoring and administrative requirements, as well as to impacts on electricity generating operations. See “Risk Factors - Regulation of greenhouse gas emissions at the federal or state level may increase our operating costs and reduce the value of our natural gas assets and such regulation, as well as uncertainty concerning such regulation, could adversely impact the market for natural gas, as well as for our securities” for additional discussion regarding certain laws and regulations related to climate change, greenhouse gas and related matters.
Title to Properties
CNX acquires ownership or leasehold rights to oil and natural gas properties prior to conducting operations on those properties. The legal requirements of such ownership or leasehold rights generally are established by state statutory or common law. As is customary in the natural gas industry, we have generally conducted only a summary review of the title to oil and gas rights that are not yet in our development plans, but which we believe we control. This summary review is conducted at the time of acquisition or as part of a review of our land records. Prior to the commencement of development operations on natural gas and CBM properties, we conduct a thorough title examination and perform curative work with respect to significant title defects. Our discovering title defects which we are unable to cure may adversely impact our ability to develop those properties and we may have to reduce our estimated gas reserves including our proved undeveloped reserves. In accordance with the foregoing, we have completed title work on substantially all of our natural gas and CBM properties that are currently producing and believe that we have satisfactory title to our producing properties in accordance with standards generally accepted in the industry. See “Risk Factors - We may incur losses as a result of title defects in the properties in which we invest or the loss of certain leasehold or other rights related to our midstream activities.”
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are filed with the Securities and Exchange Commission (the SEC). We are subject to the informational requirements of the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC. Such reports and other information we file with the SEC are available free of charge at our website www.cnx.com when such reports are available on the SEC’s website. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. CNX periodically provides other information for investors on corporate website, including press releases and other information about financial performance, information on corporate governance and presentations. Our references to website URLs are intended to be inactive textual references only. The information found on, or that can be accessed from or that is hyperlinked to, our website does not constitute part of, and is not incorporated into, this Form 10-K.
Information About Our Executive Officers
Incorporated by reference into this Part I is the information set forth in Part III. Item 10 under the caption “Information About Our Executive Officers” (included herein pursuant to Item 401(b) of Regulation S-K).
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, operations and financial results. Please refer to Item 1A “Risk Factors” of this Form 10-K below for additional discussion of the risks summarized in this Risk Factors Summary.
Risks Related to Economic Conditions and our Industry
•Prices for natural gas and NGLs are volatile, and an extended decline in the prices we receive for our natural gas and NGLs will adversely affect our business, operating results, financial condition and cash flows.
•If natural gas prices decrease or drilling efforts are unsuccessful, we may be required to record write-downs of our proved natural gas properties.
•Competition and consolidation within the natural gas industry may adversely affect our ability to sell our products and midstream services, or other parts of the business.
•Deterioration in the economic conditions in any of the industries in which our customers operate, a domestic or worldwide financial downturn, or negative credit market conditions may have a material adverse effect on our liquidity, results of operations, business and financial condition that CNX cannot predict.
•Our hedging activities may prevent us from benefiting from price increases and may expose us to other risks.
•Negative public perception regarding our company or industry could have an adverse effect on our operations, financial results or stock price.
•Events beyond our control, including a global or domestic health crisis, may result in unexpected adverse operating and financial results.
Risks Related to our Business Operations
•The disruption of, capacity constraints in, or proximity to pipeline systems could limit sales of our natural gas and NGLs and cash flows from operations.
•Uncertainties exist in the estimation of economical recovery of natural gas and natural gas liquid reserves.
•Developing, producing, and operating natural gas wells is a high-risk activity, and is subject to operating risks and hazards that could increase expenses, decrease our production levels and expose us to losses or liabilities.
•Our identified drilling locations are scheduled over multiple future years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their actual development.
•Our development and exploration projects, as well as our midstream development projects, require substantial capital expenditures and are subject to regulatory, environmental, political, legal and economic risks.
•CNX may not be able to obtain required personnel, services, equipment, parts and raw materials in a timely manner, in sufficient quantities or at reasonable costs to support our operations.
•If CNX cannot find adequate sources of water for our use or we are unable to dispose of or recycle water produced from our operations at a reasonable cost and within applicable environmental rules, our ability to produce natural gas economically and in sufficient quantities could be impaired.
•Failure to successfully replace our current natural gas and natural gas liquid reserves through economic development of our existing or acquired assets or through acquisition of additional producing assets, would lead to a decline in our natural gas and natural gas liquid production levels and reserves.
•We may incur losses as a result of title defects in the properties in which we invest or the loss of certain leasehold or other rights related to our midstream activities.
Legal, Environmental and Regulatory Risks
•Climate change risk, legislation, litigation and regulation of greenhouse gas emissions at the federal or state level may increase our operating costs and reduce the value of our natural gas assets and such regulation, as well as uncertainty concerning such regulation and public policy pressures that may arise, could adversely impact the market for natural gas, as well as for our securities.
•Environmental regulations can increase costs and introduce uncertainty that could adversely impact the market for natural gas with potential short and long-term liabilities.
•Existing and future governmental laws, regulations and other legal requirements and judicial decisions that govern our business may increase our costs of doing business and may restrict our operations.
•CNX may incur significant costs and liabilities as a result of pipeline operations and/or increases in the regulation of natural gas gathering pipelines.
•Changes in federal or state tax laws focused on natural gas exploration and development could cause our financial position and profitability to deteriorate.
•CNX and its subsidiaries are subject to various legal proceedings and investigations, which may have an adverse effect on our business.
Financing, Investment and Indebtedness Risks
•Our current long-term debt obligations, and the terms of the agreements that govern that debt, and the risks associated therewith, could adversely affect our business, financial condition, liquidity and results of operations.
•Our borrowing base under our senior secured credit facility could decrease for a variety of reasons including lower natural gas prices, declines in natural gas proved reserves, asset sales and lending requirements or regulations.
•The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.
•The capped call transactions may affect the value of the Convertible Notes and our common stock.
•We are subject to counterparty performance risk with respect to the capped call transactions.
•Conversion of the Convertible Notes may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
•We may be unable to raise the funds necessary to repurchase the Convertible Notes for cash following a fundamental change, or to pay any cash amounts due upon conversion.
•The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
•Provisions of our Convertible Notes could delay or prevent an otherwise beneficial takeover of us.
Risks Related to Strategic Transactions
•Strategic determinations, including the allocation of capital and other resources to strategic opportunities, are subject to risks and uncertainties.
•We do not completely control the timing of divestitures that we plan to engage in, and they may not provide anticipated benefits.
•There is no guarantee that CNX will continue to repurchase shares of our common stock under our current or any future share repurchase program at levels undertaken previously or at all.
•CNX may operate a portion of our business with one or more joint venture partners or in circumstances where we are not the operator, which may restrict our operational and corporate flexibility.
•In connection with the separation of our coal business, CONSOL Energy has agreed to indemnify us for certain liabilities, and we have agreed to indemnify CONSOL Energy for certain liabilities.
Other General Risks
•Cyber-incidents targeting our systems, oil and natural gas industry systems and infrastructure, or the systems of our third party service providers could materially adversely affect our business, financial condition or results of operations.
•Our success depends on key members of our management and our ability to attract and retain experienced technical and other professional personnel.
•Terrorist activities could materially adversely affect our business and results of operations.
