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CNX Midstream: The Party Is Over


  • CNX Resources got a "top dollar" fair deal to eliminate IDRs.
  • The payments to CNX Resources destroyed the dividend coverage despite the distributable cash flow calculation.
  • The current situation demonstrates the weakness of the distributable cash flow calculation.
  • Long-term (and short-term) debt due to a related party needs to be included in the financial leverage calculations for the midstream.
  • The IDR elimination agreement significantly weakened the balance sheet.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »

CNX Midstream (NYSE:CNXM) is a "captive" division of CNX Resources (CNX). The attraction to investors was the low leverage and the well-covered dividend. Unfortunately, for the shareholders of CNX Midstream, CNX Resources management made a grab for both in the process of raising badly needed cash. They obviously succeeded at the expense of CNX Midstream shareholders.

Source: CNX Midstream Fourth Quarter 2019, Conference Call Slide Presentation

CNX Resources management badly dented the distribution coverage by negotiating a cash payment as well as 3 million shares of Class B units that would not receive any distribution until January of 2022. Any time an investor sees the distribution of a Class B type situation, that investor can be sure that the parent company (in this case CNX Resources) got the better deal and the conflicts committee was sleeping through the review of the fairness of the deal.

This deal also raised the debt roughly 20%. Interestingly, management did not include these payments in the debt ratio calculation. However, for shareholders of CNX Midstream, that $135 million represents money owed to someone, and it is properly part of short-term and long-term debt. It should, therefore, be included in the debt ratio.

Balance Sheet Effect

This is also the kind of agreement that makes lenders "put their foot down" and refuse to finance.

Source: CNX Midstream First Quarter, 2020 Earnings Press Release

In order to satisfy both the capital budget and the distribution, management needed to borrow significantly as shown above. For most lenders, this is okay as long as proportionate growth does not send the ratios skyward. Profitable growth that prevents the ratios from growing larger is an expected discipline by lenders.

This management tread upon some very sacred lending ground with the agreement shown above. Borrowing would have meant some key ratio deterioration. Lenders

I analyze oil and gas companies and related companies like CNX Midstream in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies - the balance sheet, competitive position, and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that are not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by

Long Player profile picture

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA.

He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

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Comments (62)

bagger10 profile picture
Nearest comp to CNXM is probably AM (my core holding). Have to wonder if CNXM and AM share price ever crosses. I have already dipped a toe into CNXM at $1 difference, and plan on more buys if share diff (CNXM - AM price) goes to $.50 and $0.00.

Might be a couple of years, but when CNXM gets CNX paid off CNXM will be a solid Marcellus midstream.
Long Player profile picture
That is at least a year. Plus unlike AR, CNX does have cash flow issues. That is the main problem here.
Plenty of good quality midstreams now trade at stable or rising yields of 10-15%. So why invest in CNXM at 5%?

Maybe CNXM is a "buy" at $2-$3, and maybe that is the trading range to which it is headed.

If it goes there, look for CNX to announce that, unfortunately, the "market has rejected the MLP business model", followed by a takeover at a modest "premium" to market.
You do realize that they could very well put the dividend back to the previous rate next quarter (or anywhere in between).
Long Player profile picture
Here we go again!!
Long Player profile picture
@komokazi One of the things demonstrated is that they cannot put the dividend back up. The leverage as shown in the article climbed too much and the payment to CNX is far too much to have more than a nominal amount of cash available for CNXM holders. Major damage was done to the balance sheet and available cash.
CNX/CNXM and AR/AM are interesting comparisons. CNX/CNXM are as conservative as AR/AM are aggressive. CNXM could have maintained the dividend but chose to be conservative and retain $30 million in free cash flow which reduces the $135 million liability to $105 million based on conservative assumptions of NGL shut-ins in Appalachia. The rest will be covered if they keep the dividend low this year. AR/AM are being aggressive growing production, buying back shares, and maintaining the dividend. Both paths will likely work out with AR/AM being riskier but with a higher return.
Long Player profile picture
Actually CNXM is riskier than AM as it has more leverage. Same with CNX which has really no cash flow to speak of right now and therefore far higher leverage at the E&P level. AR had better margins going into this and a better hedging program and therefore has the money to grow. CNX ran out of money. It is that easy. You have to ask why a lot of companies ran fro the dry "low cost" Marcellus to the rich "high cost" liquids Marcellus and Utica Shale to understand why the AR strategy is not that risky.
Not exactly sure what data you're looking at - CNX Resources had $129 million in free cash flow in Q1 20.
CNX conslidated guidance for 2021 has CNX CAPEX at $400 million and consolidated CAPEX at $440 million - CNXM 2021 CAPEX of $40 million. 2022-2026 guidance has CNXM CAPEX of $30 million. Production is relatively flat at 550 Bcfe.
Isn't Ichan's team a major shareholder of the CNX sponsor/parent - with a BoD seat? If so, it explains a lot.
Then there is a question at what price CNXM becomes a buy. I think it is already a buy below 7, but sell above 10. After reading your articles about CNXM I sold almost my entire holding when it started trading with a double digit handle. But with all the bad things considered, it should still make 20-25 cents a share every quarter or just under a $1 a year in EPS and even better when the debt is lower. This is considering that CNXM has nothing to do with oil and it will benefit from shutting down the oil fracking that result in wells with natural gas as a by-product. Also remember that we are facing a major currency (and debt in US dollars) debasement, but the value of the gas storage and transport facilities is not being debased. Of course, it makes sense to hold more than one pure gas midstreams, so CNXM goes well with AT for example.
Long Player profile picture
This management will take you to the cleaners any time it can. You have your notice and that needs to be in any forecast you make. You will not be treated well here even if it meets the definition of fair. Best thing is to avoid poor management like this crew.
Then it is even worse than bad management, it is management effectively stealing from the shareholders. Ok, I will heed your advise and not invest in this stock. Moreover, I will sell my entire position. I think, AM is a much better bet on growing natural gas consumption in the NE US (chemical industry, electric vehicles and shortage of nuclear plants) and the Marcellus and Utica shale. Thank you for heads up.
Long Player profile picture
Compare what AM did to what happened here. AM did pay $300 million to AR. But they were able to loan it while increasing the distribution as a result of the buyout. The result is the public was not hurt. Compare that to here and you can easily see significant differences.
bagger10 profile picture
With your $135 mil addition to CNXM "debt" - which is certainly correct - CNXM loses the lowest Debt/EBITDA crown to AM (of the 12 midstreams I follow)...
Long Player profile picture
The biggest problem by far is that it needs to be paid so fast. Evidently CNX needed it badly enough to elevate it past the distribution received by unit holders.
Long Player profile picture
Just for the record I follow 2 with less leverage. RTLR being one of those two.
ofirm profile picture
RTLR would have a gp that is also in a cash crunch. that would be
jumping from one fire to another.
CapVandal profile picture
The current distribution of 33 cents is a rate of 4.5%. I think the current unit price is likely to decrease further as a number of reasonably conservative midstreams are yielding over 10%.

Without overthinking it, it seems like the two entities aren't independent at all and need to be owned as if they are a single entity if owned at all. That is some combination of CNX and CNXM. If that seems too complicated, which it is, then avoid.
Long Player profile picture
The way the E&P is capitalize, the latest events have shown the weakness of this strategy. Granted no one predicts a super warm winter followed by an oil price war and then a coronavirus. However, you never (I hope) run your company so the debt is not where the cash flow is which is the situation currently. that just screws things up so badly as is the case here. Everyone was focusing on the management FCF projections years out on my last article. Problem is management can only get there with a convertible bond offering NOW and then by really raking over the midstream holders.
Darren McCammon profile picture
CNX Midstream Suffers From Management Misalignment
Long Player profile picture
There is a couple of these. MMLP is yet another.
What are the prospects for a class action suit against CNX Resources?
Long Player profile picture
You realize the results of that are probably a toothbrush for everyone if its successful and a brand new house and car for the attorneys?
Long Player profile picture
On the more serious side, one of the points of the article is that there is a wide range of fairness. Therefore, you have to be on guard when the parent company is not in good shape and learn to walk away no matter what the stock does. Here, it did about double from its lows. But when you see abuse like this along with the market reaction, then to me that is a sell and I really don't need to be associated with management like this no matter "how good they are". Too many times, managements like this come back for a second grab at your expense. Others of course can disagree.
@LP......I think the word "abuse" you used above is appropriate. I wish the SEC had the staff , resources and desire to take some of this abuse on, but they dont.....I totally agree you have to look at the health of the parent, regardless of the cash flow, distribution, coverage of the child. Shell the parent cut their divi, yet SHLX has been supported so far to keep their distribution going.
Should have heeded Long Player's warning right after this happened in February. Bought cheap and held for what I expected to be a relatively minor distribution cut.

Excellent, consistent analysis on this one per usual.
Long Player profile picture
Unfortunately, my warning track record about extra risk is generally among the top contributors. Here, it was hard to figure out just where exactly the breaking point would be. The coronavirus unfortunately did the job nicely. After this one and MMLP, I will no longer go near anything where the parent company is in financial hot water. In both cases they milked the LP for all they could get.
@Long Player Well written article. Any thoughts on MMP?
Long Player profile picture
Thanks. Anytime you have something like this where the parent company is in less than stellar shape, you get a money grab. Over at MMLP it was the trucking company drop down which accountants had to record $100 million of that as a distribution to MRMC. Once you saw that, then you know what was up. Here, the e&P company needs to dump all that debt. It can be done but obviously a little cash from the midstream must have been needed.
Long Player profile picture
I honestly have not gotten to MMP yet. I have a handful with what my readers already asked for.
2 potential things going on here:

1. Exactly like you outlined which I think is feasible. The management team over there loves to financially engineer and pass the buck.

2. It is a contrived tank job by CNXM management to destroy value to make it easier to pull it back into CNX (same management).
metameta profile picture
your username should win an award
Long Player profile picture
I would go for number 2 except for that slide on E&P cash flow combined with debt at the E&P level. If those numbers are for real, then the e&P company does not meet conventional lending guidelines and that is big long term trouble.
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