Why CNX Resources Stock Is Slumping Today

What happened

Shares of CNX Resources (CNX -11.32%) tumbled more than 11% by 10:45 a.m. ET on Thursday. Weighing on the natural gas stock were its second-quarter results and outlook for capital spending. 

So what

CNX Resources posted fairly solid results for the second quarter. The natural gas producer generated $62 million of free cash flow, its 10th straight quarter of producing free cash. That pushed its total to $1.2 billion in cumulative free cash flow during that period. Meanwhile, the gas producer remains on track to deliver on its guidance for $700 million in free cash flow this year.

The company used $59 million of that money to repurchase another 3.2 million shares during the quarter. It bought back an additional $37 million in stock during the early part of the third quarter. CNX has repurchased 16% of its outstanding shares in the last seven quarters. The company is also using its free cash to continue strengthening its balance sheet. It repurchased $14 million of convertible notes due in 2026 and has now reduced its total debt by $315 million since the third quarter of 2020. It has years before its nearest bond maturity, giving it lots of financial flexibility in the interim.

However, the one concerning number for the quarter was capital expenditures. CNX Resources boosted its capex budget to a range of $550 million-$590 million, up from its prior view of $470 million-$500 million. That’s due to inflationary pressures, increased spending toward its innovation and emission reduction efforts, and an acceleration of its drilling program. Despite spending more money, CNX Resources’ production forecast remains the same. On a more positive note, the company maintained its free cash flow forecast as higher prices are helping offset the increase in capital spending.

Now what

While the market wasn’t thrilled with CNX Resources’ decision to boost capital spending, the company is becoming a free cash flow machine. It’s using those funds to repurchase its stock, which has it on track to grow its free cash flow per share at a more than 30% compound annual rate through 2026, given its current forecast for commodity prices. With shares tumbling today, it can buy more at a lower price, further boosting its per-share growth rate in the future. That makes today’s sell-off look like a potential overreaction to a slight increase in capital spending that won’t impact free cash flow.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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