CNX Resources Corporation

Good day and welcome to CNX Resources' first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, Today's event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good morning to everybody. Welcome to CNX's first quarter conference call. We have on the call today Nick Deolius, our President and CEO, Don Rush, our Executive Vice President and Chief Financial Officer, and Chad Griffith, our Executive Vice President and Chief Operating Officer. Today we will be discussing our first quarter results, and we have posted an updated slide presentation to our website. To remind everyone, CNX consolidates its results, which includes 100% of the results from CNX, CNX Gathering LLC, and CNX Midstream Partners LP. Earlier this morning, CNX Midstream Partners, ticker CNXM, issued a separate press release, and as a reminder, they will have an earnings call at 11 a.m. Eastern today, which will require us to end our call no later than 1050 a.m. The dial-in number for the CNXM call is 1-888-349-0097. As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our press release today, as well as in our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Chad and then Don, and then we will open the call up for Q&A. With that, let me turn the call over to you, Nick.

Thanks, Tyler. Good morning, everyone. Thank you for joining us. Hope that your families and institutions are doing well managing the virus and all the challenges that come with it. And speaking of the virus, as we sit here at the end of April, it's hard not to think back to where we were at the end of January on our last quarterly call and consider just how much the world's changed in three short months. We've learned a lot, confirmed a lot, that we already believed about our team, our company, and our industry during this time. The way in which our team has responded to these unprecedented times, I think it's nothing short of remarkable. They're resilient, creative, they're driven. Our frontline field team welcomed the monikers of essential and life-sustaining, and they never missed a beat. They keep producing and flowing the natural gas that our society and economy relies on in times like these. Similarly, our corporate team transitioned seamlessly to the remote work scenario, and they continue to provide top-notch support to the operations team. I'm tremendously proud of how we've taken our game to another level and answered the call on behalf of our fellow citizens during this time. And I wanted to take just a few minutes at the outset to thank our team and also say a word of thanks to all the other essential employees and businesses out there who are on the front lines doing their best to keep us all safe and healthy through the crisis. So thank you. We start going through some of the key highlights. I'm going to refer to the slide deck. I'm going to start with slide four in the deck that we posted this morning. I think slide four highlights important points that much of the additional items we're going to discuss will flow from. Those points on slide four, they're simple, but they're crucial. CNX is about optimizing the long-term NAV per share, and the single biggest financial tool that we have at our disposal to do that is to generate free cash flow across our companies on a consolidated basis. And then we place that cash flow that we generate in the right places at the right times. So if we do those three things, focus on NAV per share, generate free cash flow, and then allocate that cash flow at the places and during the right times to count, we're going to have our owners placed in a position to succeed. And this morning, we're providing a multi-year, seven-year plan that demonstrates CNX and CNX Midstream are going to generate free cash flow year in and year out. Slide five, that's another important piece of the puzzle because it shows the CNX approach is not just talk, but it is a functioning business model. There's a pretty extensive data set of accomplishments or actions standing behind it to back it up. Slide five shows that CNX has been in front of and leading on a lot of issues surrounding EMP for some time now. We executed a number of strategic transactions where we streamlined our business lines, divesting what was non-core and investing in what was core. We have been programmatically hedging for years. That has paid off. We, from day one, were very wary of committing to long-term take-or-pay onerous FT that would hobble cash flows and balance sheet. We reduced our overhead spend significantly before it was a necessity or too late. We were the first in Basin to adopt technology like electric frac fleets. We've been obsessing on being a low-cost producer for a number of years now. We realize the strategic importance of retaining control of our midstream assets. And last but not least, we've been reducing debt and deleveraging for some time now. Slide five, it shows how active Q1 and early Q2 have been on keeping our approach in action. There are a lot of items on slide five for Q1 and Q2. Don and Chad are going to discuss many of them in a few minutes, but I just wanted to mention a couple now. First and most important, slide seven I think shows this. CNX was free cash flow positive. to the tune of $129 million in Q1, and we anticipate that's going to be prelude for great things to come in the next few years. Now, what drove the free cash flow for Q1? A lot of things, many of which I just mentioned, all of which manifest into our approach and action. Another key accomplishment in the quarter was our ability to tap capital markets at very attractive rates. That's evidenced on slide eight with the Cardinal States Gathering project financing where we raised $175 million at a 6.5% interest rate. We talked about project financing in our prior earnings call, and you saw this deal secured despite a really challenging environment overall. I think that shows the depth of our asset base and the strong position it occupies in the competitive commodity business that we operate within. Q1 also gave us a chance to show our capital allocation of free cash flow abilities. That's summarized on Slide 9. We retired almost $80 million in 2022 notes at a significant bargain discount to par. This shows how powerful free cash flow can be in down cycles or chaotic times when short-term market pricing and market valuations disconnect from intrinsic value. Before I turn things over to Don and Chad, I did want to hit on two items. For the first, I'm going to ask you to flip back to Slide 5. and specifically take a look at the three items that are listed at the bottom half of the slide. Today we roll out a seven-year business plan that shows the power of this company and its approach and action. The key result to focus on of this plan is consolidated free cash flow across both CNX and CNX Midstream. That is the essence of how we drive our NAV per share and how we're able to effectively allocate capital. And just a couple of cliff notes on the seven-year look before the team goes deeper into it. First, CNX and CNX Midstream, they are substantial free cash flow generators each and every year of the seven-year plan. That's true for the front year, 2020, where we expect to generate $300 million of free cash flow. That's true for next year, 2021, where we expect to generate $400 million of free cash flow. And that's true for 2022 and beyond, where we expect to generate, on average, $500 million per year of free cash flow. And that is certainly true cumulatively when we look to generate over $3 billion of free cash flow across the two companies in the next seven years. Another point, this plan substantially delevers our balance sheet. That has already been in progress, as you know, but it's only going to continue through the rest of 20, 21 and onward. This plan over seven years has a very manageable and very modest activity pace tied to it. It's a maintenance of production plan for 22 and beyond, requires about 25 tills and $300 million and consolidated CapEx each year to achieve. Another key point, this plan and that modest pace, it leaves plenty of inventory in our Southwest PA Marcellus and leaves virtually untouched our Central Pennsylvania Utica inventory. So the core inventory is going to be extensive at the end of this seven-year plan. And last, the plan is based on the reality of the forward strip when it comes to natural gas pricing. If gas prices rally in the interim, the ability to throttle up is there if and when we choose. So, again, these are sort of the cliff notes of the seven-year plan, and the team's going to go into much more detail in a few minutes, and the slide deck holds much of that information in it. The second and last thing I wanted to touch upon is summarized in the deck towards the back end of the slides. It starts on slide 29 and beyond, and that's basically the chapter on how CNX is uniquely positioned and different. And I think the differentiation pops out across all kinds of different metrics. First, we're the most hedged and the most protected in this down cycle. You can see that summarized on slide 31. If you go to slide 32, the next one, our cash costs, they're base and leading, especially when you recognize that we control our midstream business, again, as summarized on slide 32. The balance sheet, I mentioned its strength. It's very strong, particularly when counting not just debt, but also debt-like and onerous FT obligations. We illustrate that in slides 33 and 34. That balance sheet is only going to get stronger with over $3 billion of free cash flow projected over the next seven years. And then the last point, that free cash flow generation year in and year out, it delivers very impressive free cash flow yields for CNX, and we highlight that on slide 37. Impressive not just within Appalachian EMP and impressive not just for all of EMP, but But I think impressive when you compare us to other industries such as industrials, utilities, and consumer staples. I think those cash yields show how CNX is more of a capital allocation firm than an E&P firm in some ways, and that CNX is a great investment opportunity for investors beyond traditional energy investors. Now, with that, I'm going to turn things over to Chad, who's going to go over some of the operational details.

Okay, thanks, Nick. I'm going to start on the 2020 plan update section. Lot 11 highlights that following the end of the first quarter, we completed our spring redetermination of the revolving credit facility at $1.9 billion, with bank commitments at the same level. The reduction from the prior $2.1 billion commitment was driven by the Cardinal Estates project financing and the Q1 hedge monetization of $55 million that Nick discussed during his remarks. The RBL was favorably redetermined at this level despite lower bank price decks in the two transactions, maintaining plenty of liquidity for the company. As we worked through the final days of the redetermination, the oil and gas space was being hit simultaneously by two generational shocks. First, OPEC and Russia began a price war, flooding the market with oil, and then secondly, COVID-19 became a global pandemic. I'll provide some additional detail as to how we're adjusting our day-to-day business as a result of those two major events. First, we took the health and safety of our workers very seriously. We were one of the first businesses in the region to send its office staff to work from home. Then we quickly developed a response protocol in line with CDC recommendations to ensure our field employees could continue to perform their essential roles while minimizing contagion risk and worked very closely with our service providers to ensure broad adoption of similar protocols. We will continue to monitor the situation and recommendations closely and hopefully soon we can all begin working our way back to normal. As always, we are keeping a very close eye on the commodity markets. The flood of oil into the market and sudden collapse in demand for many types of refined fuels has put tremendous pressure on oil prices. Rig activity and track crews on the oil patch are dropping rapidly, and with that drop in activity, associated gas will also decline, which is clearly good for natural gas prices. And we've seen a lot of strength return to prices for this coming winter and into 2021. But to us, the biggest question is how much oil will be shut in as we work our way out of this crisis. If oil and associated gas continue to flow during the summer, we expect gas prices to remain low but rally strong in the winter as existing wells decline and not replace due to much lower rig activity. On the other hand, if oil storage is full and oil producers are forced to shut in now, we would expect associated gas to immediately disappear from the system and gas prices to be stronger over the next few months but then be pressured again when these oil wells are turned back online as we come out of the crisis. Regardless of which way it plays out, we have plans to maximize our cash flow and our NAV. Slide 12 illustrates one extreme of that plan. Ordinarily, we would turn a well on as soon as it is ready to flow. The typical volatility in gas prices or the spread between summer and winter just aren't enough to justify waiting. But the current dynamics are so extreme and the price curve so steep, that with certain wells we would expect to make more cash flow and increase present value by shaping their near-term production profile in order to flow more of their production during the dramatically higher prices in winter in 2021. Wet production with the current pricing of NGLs and condensates and its higher operating costs due to processing are prime candidates for this opportunity. But it could also apply to any brand new shale well due to how front loaded their production profiles are. We believe the CNX's ability to do this is unique amongst its peer group. Slide 13 illustrates the range of potential outcomes as we continually assess the changing market. If we shape our production into winter in 2021, we would expect 2020 production to be lower, and we've reflected that in the low end of our guidance range. The low case assumes delaying the turn in line of three new pads and delaying production from our wet gas Shirley-Pennsboro field, both until late fall. But on the other hand, if summer prices were to improve materially, we retain full flexibility to reaccelerate that production back into 2020, and that is captured in the high end of our production guidance range. However, even in that high case, we are assuming some partially delayed production from our wet production areas for two to three months as we work through the worst of the NGO and condensate market conditions. Slide 14 highlights some of the impacts of the oil situation on NGOs. The issues for oil have also impaired the price for NGLs and condensate. While we're optimistic that this will resolve itself quickly, the storage overhang and rate of demand recovery are huge wildcards. We've taken a very conservative approach in our guidance and assumed rock bottom prices for the remainder of summer with very modest recovery in the Q4. But please note that CNX is less impacted by this current dynamic because we have very low percentage of wet production and the ability to blend the portion of that wet production. Overall, we are assuming around 5% of our 2020 production by revenue is wet gas. 516 provides more details on our updated 2020 guidance. As already discussed, we are optimizing our production profile in 2020 and expect to fluctuate within this updated range as commodity markets evolve over the remainder of the year. We are also slightly reducing our capital budget, primarily as a result of improved service costs. CNX Midstream announced a reduction to their distribution this morning, which results in a reduction to our standalone EBITDAX of $50 million during the year. Despite our EBITDAX going down, we expect free cash flow to increase by $50 million. I will wrap my remarks up on slide 17. Our midstream company, CNXM Midstream Partners, is a strategic and very valuable part of the CNX enterprise. The company has completed a massive build-out in the Southwest PA operating region to support CNX's future development. Now that that build-out is complete, the go-forward capital intensity of the company will be significantly lower, and they will maintain stable free cash flow from their fixed fee commercial agreements. CNXM follows a similar philosophy as CNX and is focused on capital allocation and strong balance sheet. As I mentioned, this morning they announced the reduction to its distribution which increases cash retained to the company by $30 million each quarter. This will benefit their already best-in-class balance sheet and their financial position moving forward. With that, I'll hand it over to Don.

Thanks, Chad, and good morning, everyone. I would like to start by giving an update on our near-term maturity management plan. As you heard from Nick and Chad earlier, and as you can see on slide 19, we have made a tremendous amount of progress in just one quarter. In Q1 alone, we generated $300 million to use towards the 2022 bonds, and we expect to generate another $200 million in 2020 to effectively reduce our near-term maturity by over $500 million within this calendar year. And, as mentioned previously, we have already bought back approximately 10% of our outstanding 22 bonds this year. Slide 20 shows how much our E&P net deposition changes by year-end 2020. And as you can see, the remaining $350 million of near-term maturities can easily be managed using free cash flow that is expected to be generated by CNX, protected by our hedge book prior to their maturity date. Looking forward, our liquidity, looking forward to 2020, our liquidity remains strong and our next bond maturity isn't until 2027, once the 2022 bonds are behind us. Those facts, coupled with our significant expected consolidated free cash flow generation capability, really are anticipated to set the company up with an ironclad balance sheet and significant free cash flow allocation optionality going forward. Slide 21 shows E&P debt and E&P leverage ratios improving in 2020. And we expect both to continue to improve materially with cash flow generated from the business as we move forward. using the current NYMEX gas strip. This is a unique place to be in the E&P space. Slide 22 highlights that the debt markets are starting to recognize our balance sheet strengths. As you can see on the slide, our 2022 bonds are trading very well, indicating that the market anticipates we can easily address them. Starting on slide 24, I will begin discussing our seven-year outlook. and the excitement of our go-forward business plan. And it is important to note that this plan is dependable, since it is based on the forward gas prices as they exist today and on CapEx costs that we are already achieving, anchoring the numbers in reality and leaving plenty of upside as we move forward. But before I get into the numbers, I want to explain the rationale of the seven-year plan and really break it down into two pieces, as you can see on slide 24. We've said for a while now that our hedge book not only protects us from downturns, but it also acts as a bridge and provides us the wherewithal to reposition the business for a lower for longer commodity strip, if that's what the future would hold. With the benefit of hindsight, that plan was clearly very effective. The $700 million of consolidated free cash flow generated across 2020 and 2021, backstopped by our hedge book, coupled with our cost structure, prior infrastructure investments, project financing, our midstream control, and our team, has set us up to thrive in the near term and sets us up to thrive and produce significant free cash flow in the years 2022 and beyond in the current lower than $2.50 gas strip that is out there today. None of our peers can make that claim. We are one of one in that regard. Chad has already laid out 2020, so I wanted to spend some time on 2021. As you can see on slide 25, slide 2021 is setting up extremely well, and the moves we are making in 2020 are making it that much better. There's a lot of optimism out there on 2021 gas prices, and I can tell you that if it ends up being reality, we can easily increase our volumes to 600 BCFE that year. and produce more than the $400 million of consolidated free cash flow that we show. And unique to us, if 2021 gas prices are not higher, we can have a more conservative production profile and still produce the $400 million of free cash flow that we've laid out and get ready for any price movement in 2022. Now that the business has matured into our current production profile, we will always maintain the ability to produce significant free cash flow in an up gas price cycle or down gas price cycle. That type of optionality will serve us well going forward. Now, looking out to 2022 and beyond. Our business really becomes a very simple story, as you can begin to see on slides 26 and 27. Our capital intensity and cost structure drop, we don't have any FT or other fixed cost obligations to grow into, we don't have large debt burdens to tackle, and we don't have expiring acres or inventory issues dictating our development pace. Basically, we methodically harvest our core areas at a pace of around 25 wells a year on average and produce significant free cash flow under the strip. And as you can see on slide 28, we average $500 million a year with this plan. And I'm going to say it again as it's worth repeating. These projections are based on the go-forward gas forwards as they exist today. And as the slide shows, if gas prices get back to $2.75 to $3 range, the free cash flow numbers will grow even larger. And we do feel that over the long term, $3 gas prices make more sense than $2.40 gas prices do. Most companies in the E&P space are struggling to create business models that are free cash flow neutral at the current strip. Cash flow neutral under the strip is not a business strategy. It's more smoke and mirrors, which is why the debt equity and private equity markets are skittish to say the least about our industry. They've been burned too many times in the past. A goal of hoping to break even, refinance debt, and then continuing to break even is not a strategy. If you're only running to pay leaseholders, GP&T companies, service companies, and pay debt holders' interest, you've already lost, which is why we feel that over the long term, if E&P companies are forced to use their own money to fund their own cash needs, prices will rise to support that. In conclusion, I would like to expand on some points that Nick touched on earlier today. CNX's go-forward business plan is unique and is very difficult to try and replicate. Our journey to get where we are was long, methodical, and against the grain. We're proud of that, what we've accomplished and how we accomplished it. But we're not done, and the best is yet to come. While all of our peers are trying to survive a $2.50-type NYMEX gas price trip, CNX planned for it and now is built to excel in it. And the reasons we are are due to the attributes you will find on slide 30. Simply put, to be successful, you need high NRI Tier 1 acres. You need a best-in-class cost structure. You need a strong balance sheet and a nimble business model with low fixed costs that can adapt to changing commodity prices. You need well-thought-out and capitalized infrastructure. You need to control your own midstream destiny. You need substantial revenue protection. and you need a forward-thinking, proactive team from top to bottom, which CNX has. These attributes are what allow us to have a rock-solid foundation case that generates substantial free cash flow, even in the low parts of the commodity cycle. And while we look good at the current strip, we will look even better in a higher gas price environment, with even more free cash flow generation and a world-class inventory position to accelerate development and production when the time is right. Our large inventory of Tier 1 Southwest PA Marcellus acreage and our phenomenal CPA Utica acreage will allow us to capture any upside for a long time to come. These characteristics are what allow us to have the seven-year plan that we do. And in our mind, it is the only way you can be a successful E&P company over the long haul. All of this was built through years and years of hard work, and it ensures we are by far the best position to be the leader in this basin for years to come. And I am personally looking forward to a future where capital markets remain picky and where the private equity energy model is becoming extinct. A world where our peers in the E&P space can only spend money that their businesses generate is a world in which CNX will dominate in. Slide 27 translates our annual free cash flow projections for 2021 into a free cash flow yield. As you can see, it is by far the best free cash flow yield among our Appalachian peer group and the best free cash flow yield in the mid-cap E&P space period. And remember, the 2021 cash flow yield shown here is protected by our best-in-class hedge book. Going forward in 2022 and beyond, our free cash flow yield climbs even higher into the mid-20% range at our current share price. Bottom line, When you couple our free cash flow yield with our strong balance sheet, it makes for a truly exceptional investment in any industry, let alone relative to our peers. And remember, CNX's guidance is based off of the current NYMEX gas strip. The takeaway box on slide 38 sums it up perfectly. CNX is by far the best combination of a downside-protected company with an enormous amount of upside. And from a relative investment standpoint, it is hard to find a better opportunity right now in any industry. With that, I will turn it back over to Tyler.

Great. Operator, if you could open the line up, please, for Q&A at this time.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If your question has been answered and you wish to withdraw your question... Please press star then two. We will pause for one moment to assemble our roster. Our first question today will come from Wells Fitzpatrick of SunTrust. Please go ahead with your question.

Hey, good morning and thanks for the, I love the aggressively worded prepared remarks. It's a good guide. It's a good multi-year guide. On page 25, you guys talked obviously to accelerating. Is that more a function of gas prices or is it a function of sort of the opportunity cost, whether that be your bond prices or other items getting less attractive?

Yeah, you know, this is Don. I appreciate it. Well, I think it's a combination of both. You know, as you roll forward, you would assume that bond yields and those sorts of things would be better, right, if gas prices are better. So, you know, right now we're thinking along the lines of really the dispatch incremental cruise to kind of accelerate some production. So that's very well within our control to do. As Chad laid out, predicting the future right now is as hard and as cloudy as ever, and the volatility of what it could be on the high side or the low side is pretty meaningful. So as we sit here today, we're kind of a wait-and-see mode. We have the ability to quickly move up or down depending on how really the summer shakes out, and I think as we're sitting here in September or October, we'll have a pretty clear indication of how the winter in 2021 is going to play out and If it's on the bullish side of the thesis, which would be great, we have a really great opportunity to take advantage of that. And if it doesn't turn out to be that world, we have the ability to still produce a significant amount of free cash flow and sort of save some of that production and just stay steady state for longer.

Okay. And then on the production profile you talk about on 13 and the potential to choke back some wells in Shirley Pinsbrook, Am I correct in assuming that if there are any sort of midstream or processing penalties related to that, they'll be relatively de minimis?

Well, there are some well commitments and volume commitments in that area. They are factored into the guidance numbers that we've provided. We're certainly trying to work with those service providers to find ways to You know, to modify those where we both benefit, sort of find win-win solutions there, but there are minimum volume commitments in the Shirley-Pensborough area. So those are out there. They're not huge, but they are out there.

And you can see in the appendix where we go through some of our other operating expenses, there is a slight uptick in that. And like Chad said, it's factored into the all-in economics of these decisions and still including those from a just purely free cash near term, free cash flow standpoint over the next couple of years, it's a, it's a more creative decision to go ahead and, and, uh, you know, wait on some of this production again, as a strip exists today, if, if conditions change or processing things change, then, you know, maybe, maybe we change, but right now, um, using the four numbers, it makes just logical, rational sense. It's, it's difficult to, I guess, swim upstream and enforce some of this, uh, you know, production and products in the places right now that, uh, aren't great prices. So if you have the ability and the capital structure to wait a little bit, it's a prudent choice.

Okay, perfect. That makes sense. Thank you for the update.

Our next question comes from Samir Panjwani of TPH. Please go ahead with your question.

Good morning, guys. So when you think about the longer term free cash flow and debt profile, You know, the cumulative 2022 through 2026 free cash flow is expected to be above the cumulative outstanding debt after the 2022 maturity. So should we think about CNX transitioning to a no-debt business, or is there a change in your thought on leverage? And with this transition, would it be fair to see or to think about CNX transitioning to more of a cash distribution model over time?

Yeah, so this is Don. So I'll answer that question in a couple parts. So one, I think, you know, again, talked a little bit about our hedge books historically being not only just call it return protection and near-term cash flow and leverage protection, but really was a bridge to allow us to reposition the business and talked about being able to do that for a low gas price environment. But also, I think it's it was important and I don't think quite understood historically that it allowed us to change our capital structure over the course of those couple years. I mean, I think it's pretty well known and apparent that the goalpost for a healthy balance sheet in the E&P space has changed. So looking forward to where we need to position the business, we do think over 20 and 21, it allows us to get into a more optimal capital structure where our debt would sit there today. So for 2022 going forward, We'll obviously position the business and place the free cash flow in the best buckets that we should at the time. Sitting here today, it's hard to know which part of the puzzle that the free cash flow that we generate will go into. I think the best way to think about it is looking at what we've done historically. We've used free cash flow to pay down debt. We've used free cash flow to grow production. We've used free cash flow for... whether it's infrastructure, land, or acquisitions, we use for cash flow to return capital to shareholders. So, you know, as a capital allocation firm, we're comfortable with taking that cash flow and putting it into the place that makes the most sense at that time. And, you know, to sum it up, we recognize the balance sheet and leverage ratio metrics for healthy companies have changed. Like I mentioned, that's a good term, a good thing for us and for the long-term health of the industry. and we'll be ready and have a substantial amount of cash flow to invest in 2022 and beyond, and we'll stay true to our philosophies and follow the math on where it goes at that time.

That's really helpful, and I'm sorry if I missed it on the prepared remarks, but did you quantify what that leverage profile would look like as you talked about the shifting goalposts here?

Yeah, so we talked – I'm trying to figure out what slide it is. I'm sorry, I don't – slide – Slide 21, we have our leverage ratio going down to 2.1 at the end of the year and sort of dropping below that in 21. And clearly with the free cash flow generating profile, I mean, if so necessary, like you mentioned, we could pay off all of our debt. Or if something more of a call to one time or one and a half time is the right goalpost or, you know, again, maybe by 2022 and you have different capital markets at that time to be more conducive to call it healthier gas prices and being more selective on who they give money to, then maybe that's something that you can be in. So somewhere in that range, I think, is where we're heading and where we exactly land is hard to tell. It's pretty clear for us over the 20 and 21 what the optimal kind of use of incremental dollars are. And as we get beyond that point, hard to know when you know, but we'll react accordingly to the

the metrics and variables as they exist once we get into that call back alpha 21 and into 2022 time frame okay okay got it um and then as you lay out the maintenance program for you know that longer term period how should we think about the trajectory of the base decline over time and also the run rate of non-dnc spending yeah we lay it out a little bit on uh

slide 27 on sort of the non-D&C spending. So, you know, we've talked a lot about the last couple years and tried to be as thorough as we could explaining that some of the upfront investments that we were making in our water systems, in our land positions, in our infrastructure systems were really going to, call it, allow us a step change in cost and capital efficiency going forward. And I think you're starting to see that now that we've given you know, even more transparency and clarity going forward. So, step change meaningfully in non-DNC across consolidating both upstream and midstream going forward. And like you mentioned, the longer you stay in a maintenance production type profile, I guess the lower your base decline gets over time. So, you know, we quoted the mid-30s, you know, that'll drop into around 20, then start to, you know, head into the mid-teens as you move along the curve towards the you know, the later part of the plans we laid out.

Got it. Thank you.

Our next question comes from Jane Trotsenko of Stifel. Please go ahead with your question.

Good morning, and thanks for taking my questions. My first question is on the second quarter. I just wanted to get a little bit more insight how this quarter is going, is looking like, maybe in terms of production, and I looked at slide, I think, 13. If you could also comment on capex and completions.

Sure. So for the current quarter, Q2, that we're currently in, in the production profile, we do not currently have any wells shut in today due to economic reasons, right? So that is something we're still assessing. We look at commodity prices every day, and we are looking at the exact right way to optimize that. But As I mentioned in my prepared remarks, we do assume that we will be curtailing a certain amount of our wet production probably beginning in May and lasting a minimum of two to three months. So, we'll be deferring that production into later into the year to take advantage of the much higher prices that are available then and generating more cash flow and increasing the present value of those wells. If gas prices continue to steep, if the curve continues to steepen, that's where we start looking at deferring more of that production later in the year to even further increase the rates of return and the present value of those wells.

And from a capital standpoint, it's fairly consistent as you roll through the rest of the year. So the Q1 number is sort of set. And as you think about Q2 to Q4, it's, you know, the difference between our guidance and Q1. It's fairly consistent across the year.

That's perfect. And it seems to me like you guys are not completing any wells in 2Q, right?

Well, we will continue to have a frag crew running consistently over the course of the year. That's a pretty steady state. Where the real opportunity is, if gas prices really do run, we do have an opportunity to bring in a spot crew, and that's where some of the upper range of production opportunities comes in 2021.

And the production management optimization that we're looking at is really after a well is completed and and flushed out on sort of the, you know, the water kind of flow back cycle, saving some of that up front, new boil into later. Yeah. So we're not, we're not changing really the capital program meaningfully. We're keeping a smooth operating system to Nick's earlier comments. We take seriously the essential part of the ecosystem, the business, the gas production is. So we're keeping things rolling. We're just trying to be thoughtful around the production flow management, all these wells and, trying to maximize margins and cash flows and timing the bigger part of the wells and saving some of that for later, pending pricing states, how it's shaped today.

Okay, got it. My follow-up is more like on the medium term. Maybe you guys can talk about the well mix. So, like, let's say you guys are going to complete 25% of Utica wells and 75% of Marcellus wells. like over the medium term, and how does West Virginia development is envisioned in this plan?

Well, the details that we've laid out in the slide deck really is limited to 2020, where we have 34 wells we plan to turn online for the year and 12 Utica wells we plan to turn online for the year. Really beyond that, the mix is – It's really still to be determined as we look at what's the right mix, what's the right mix between sort of wet gas and dry gas and where do we want to be. And really, you know, so as far as giving the details of what that alignment looks like over the long term, you know, it's really still to be determined. We're going to follow the math. We're going to look at what the best rates of return are. We're going to look at the best areas for development. And that's where we're going to focus our DNC investment.

And if you go back, we've talked a bit around just a little bit of the Southwest PA Utica is needed for funding so that – You know, the one pad that we did this year that's basically done and, you know, just one more that we would do into next year to help for blend. Beyond that, the bulk is just in the Southwest PA Marcellus. You know, so the commentary of the 22 to 27 plan, we highlight that that's really just Southwest PA Marcellus with, you know, a little bit of CPA Utica in there. No need for blending there. and Southwest PA Utica into that plan. That's really just, you know, upside Southwest PA Utica at that point or call it inventory extension at the end of the life of the Morsellis, you know, over a decade from now. In near term, we talked on the last call that, you know, the Utica that we show on the till mix on slide 13, we are doing another pad in Ohio in our dry Utica over in Ohio, and the rest is really into the Morsellis here on Southwest PA with a little bit of Shirley Penn's volumes, but as Chad said, some of that is getting shifted to the back half of this year and the next year. So bulk of it, Southwest PA, Marcellus, bulk of it, dry gas, but we have a lot of flexibility to add to the program in some of these other areas if gas prices warrant it.

The last question, if I may, looking at slide 25, what Henry Hub price would you guys need for CNX to accelerate production 10% in 2022?

Yes, we're not going to get into an exact price. So, I mean, there's obviously the plot month, there's the long-term forward strip, there's where you can hedge, there's how the NGLs are reacting or not reacting, and I think one of the questions earlier, there's also the other capital allocation opportunities that exist at the time, so not really a set in stone type exact gas price that we make these decisions on, but there's theses out there that gas goes to $4, so clearly $4 is a pretty attractive opportunity to push more money into DNC sooner, to get more production sooner, so just generally we're able to do it if it makes sense, and Hopefully we're developing a track record of being pretty follow the math on doing what's appropriate.

Thank you so much.

Our next question comes from Holly Stewart of Scotia Howard Wheel. Please go ahead with your question.

Good morning, gentlemen. Maybe first just starting off with a follow-up to Jane's question. Can you quantify the two to three months of assumed production shut-ins?

Are you speaking as far as production per day? It's really going to be a function of exactly how the NGLs and condensates play out. As I said, we're looking primarily at Shirley-Pennsboro for this immediate production deferral, which is one of our wet fields and certainly subject to NGL and condensate prices. Now, I don't know if you guys have been paying that close of attention to what's happening there. I'm sure you have been. But NGLs and condensate have really been beaten up lately. You know, there's a lot of, you know, with the demand destruction associated with the virus, you know, fuel backing up into storage, refinery runs being cut. You know, a lot of these NGLs and condensate feed directly into that refinery process. And so the stuff's backing up. storage is filling up. It's really getting hard to flow NGLs, and it's really, even if you can flow them, the prices are really rock bottom. So, fortunately for CNX, it's not a big part of our production portfolio, and to the extent that it is, we're able to blend a lot of the wet gas that we have. Shirley-Pensborough, unfortunately, is one of those places that's on an island. And so, for us, it's sort of one of those things that You know, it's an example to us of what it would be like to be, like, an all-in wet gas producer.

It's a really, really tough place to be right now. Yeah, and you can see on slide 13, Holly, it looks a little bit on, call it the hatched red part of the graph. So for May, you know, you can kind of eyeball it. It's around, like, a 300-a-day type of a production change if you, you know, want to do that.

Okay. Oh, that's helpful, Donnie. And then is there a thought on just NGL or condensate price where you bring that back? Just trying to get a sense for how long. You talk about two to three months, but if prices remain low, then I'm assuming you just leave that volume shut in.

Yeah, that's why we tried to, again, just be thoughtful, transparent, and follow the math on the way we've laid out guidance. I can tell you right now the next several months are more impossible to predict than the next several months of anything. timeframe that I've at least been working at the company. So instead of trying to predict what the next several months are going to hold, we just wanted to make sure folks were going to have transparent information on what it looks like. If things stay not so good, we'll save it for later. If things come back, we go ahead and add it back to the equation. And net-net, the business is still strong. The capital structure is still strong. The leverage resistance is still strong. And in any near-term issues for both CNX or CNXM really just sets up better longer-term fundamentals for the long-term, you know, portfolios of the businesses. You know, a couple months, whenever you're solving for long-term intrinsic value for share, doesn't matter as much as making sure that cash flow is maximized.

Yep. Okay. That's perfect. And then maybe just a little color on 21. So it looks like you have 46 tills in 2020 still planned, and then that long-term seven year guide is 25 in the plan. So you just give us some color maybe on that for 21. And then is that still a one and a half, you know, rig program and a one crew program or how should we think about that plan as it's reshaped here?

Yeah, no, I'd say I guess it'd be a generic answer, but it's in the middle. So I think, you know, it depends on whether we want to try to try to get into, you know, the higher end at 600 B's. We highlighted if gas prices are good, you know, I think you'll be closer to the deal count that we've had in 2020. And likewise, if gas prices are muted or we're just slightly growing, I mean, you're going to be, and I think we, you know, highlighted previously a 30 wall year type program kind of grows us a little bit. So that's the kind of the way to think about it. So. That's a general approach. And, Chad, I mean, you can talk to – it doesn't take much to do either one of those two. It's just really adding this practice.

That's right. You know, we're going to keep a close eye on commodity markets on gas prices. You know, we've got a little bit of a duck inventory. I think what was really sort of a healthy level of ducks, but, you know, prices run. That enables us to bring in a spot crew and complete a number of wells and get them online very quickly to take advantage of those strong gas prices.

Okay. Okay. And then maybe one question on just that longer-term guide. It looks like the fully burdened cash costs that are on slide 27 are $1.04. What is the primary driver for that reduction? I mean, if you look at the first quarter of this year, it looks like a pretty big swing down.

So over the long term, we begin to roll out of some of our legacy FD contracts. There's a number of those that date from really all the way, some of them date all the way back to the Dominion acquisition if you got to remember that. Some of those were higher cost and so As those begin to roll off, that overall GP&T portion of the operating cost begins to decline, and so that's really a big driver of that decreasing operating expense over time.

And you'll see, too, just in the interest expense that's flowing through the business as we de-lever and we've kind of avoid taking out some of the more expensive near-term debt products that folks have had to lean to refi with. So, you know, pushing through called just more efficient operation, Chad and team, you know, we're obviously focused on long-term conversations today, but they've made a tremendous amount of progress in just the day-to-day management of the company and the remote operation capacity that we have here. And like we talked, the capitalized, you know, water systems that we built to really help back to that cost side of it as well. And, you know, net-net, the GP&T light item has always been efficient for us. So it's It's chunky in a couple areas that are just allowing the business to be in a much lower kind of steady state cost structure going forward.

Okay. Helpful. Thanks, guys.

This will conclude our question and answer session. The conference is now concluded. Thank you everybody very much for attending today's presentation. You may now disconnect.