CNX Resources Corporation

Good day and welcome to the CNX Resources Second 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 touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning to everybody. Welcome to CNX's second quarter conference call. We have in the room today Nick Delius, our President and CEO, Don Rush, our Chief Financial Officer, and Chad Griffith, our Chief Operating Officer. Today we will be discussing our second quarter results, and we have posted an updated slide presentation to our website. Also, in conjunction with Monday's announced transaction of CNX acquiring all of the outstanding common units of CNXM, we released a prerecorded video where Nick and Don review the investment thesis of CNX and why we believe we are a non-replicable, best-in-class E&P company. If you haven't had a chance to see the video, please feel free to access it on the homepage of the cnx.com website as well as on the investor relations portion of the company 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, in light of the recently announced transaction, CNXM has canceled its previously announced earnings call, which was originally scheduled for 11 a.m. Eastern today. 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.

Hey, thanks, Tyler, and good morning, everybody. I'm going to start with my comments on slide three of our slide deck. Slide three highlights the philosophy and approach of how we go about managing the company. Intrinsic value per share, that's the true north that we employ. It's the metric that our decision-making looks to optimize. And to really do a good job of optimizing intrinsic value per share, you have to do a couple of other things. You have to be a sound capital allocator to be able to do that. You have to be applying reality, I'll say, to assumptions to do this. And the assumptions and the reality that needs to be affixed to them are in two broad buckets. One are external assumptions. The most obvious example of that is gas prices. So we apply the 9x forward strip, not a different or an inflated gas price. Even though we may desire that price, we're always using the forward strip on external assumptions for gas pricing. And then there's the bucket of internal assumptions. A good example there would be things like capital efficiency and making sure that that our capital efficiency assumptions are basically anchored in fact and reality versus something that's more aspirational that we want to get to but haven't yet demonstrated in the future. You also need to be able to build a flexible and strong balance sheet, and particularly you need to do that at the bottom parts of the cycle to really have this approach work well. So we think that we've obviously done that as well. And we do all these things at CNX, and that's not just what drives our decision-making. but it's also what drove the seven-year free cash flow plan that we laid out last quarter and updated on Monday. We feel CNX is non-replicable. The way to sum this up, perhaps, is across a range of items that peers in the basin can't do that we enjoy. So peers can't copy the upstream-midstream strategic combination that CNX now levers. The peers can't shed liability commitments like substantial unused FT that CNX is not as heavily burdened with. The peers can't repeatedly execute in a field at maintenance production levels, at the low capital intensity levels that CNX brings to bear. The peers can't decide today to hedge where our hedge book sits for the coming years. And the peers can't apply the water infrastructure that we employ to optimize activity pace and reduce costs. Last but not least, the peers can't protect the cash flows and the balance sheet to the extent that we can if lower gas prices brought on by a week start the winter and start to materialize going into 2021. All this means that it's going to be tough for others to post CNX's cash costs, certainly our cash margins, our free cash flow, and of course the opportunity that our intrinsic value per share presents to investors. We believe the company's best in class. When you look at those cash costs and those capital efficiencies and those cash margins largely driven by our costs and the hedge book that I mentioned and our free cash flow profile, And last but not least, best in class when you look at our lowest risk to delivering and executing on those metrics. Let's jump over to slide four. Slide four, it's one I think that's crucial to what we really unveiled and discussed in depth on Monday. Tyler mentioned the video that dives deep into the investment thesis for CNX across six investment reasons that are shown on the slide. That is on our website, as he's mentioned. It's also on our YouTube, Twitter, and LinkedIn company accounts. I encourage you to view it and follow up with a call or email to go over any areas of interest that you want to explore more in depth. We're happy to do that. These are the six that matter. And although these six are important and drive the future of the company, I want to point out that they're not just aspirational. These six are steeped in data. They're quantitative so that they can be tracked, managed, and evaluated robustly over the coming years. We try to deliver tangibly to the capital markets on those often overused – you'll hear them a lot – yet rarely backed up terms of transparency and following the math, being IR-driven, and being a low-cost producer. If we say it, we feel a duty to prove it. That's something that excites us and we run toward. Now, all six of the reasons, of course, they work in concert. One builds off the other and vice versa. Today, I just want to focus on two of the six, one that's misunderstood and one that's not on the radar of the markets but should be. I'm going to start with reason number two, which is the low capital intensity. That's the one I think that's understood by many in the market. Now, there's a lot of historical reasons from accounting rules to the rapid rate of improvement that we've enjoyed that make our low capital intensity today and in the coming years an easy thing to miss. But this is a crucial point to the investment opportunity that CNX represents. And the good news is that to accurately understand how efficient we have become and will be on capital today, you need to look at really only three drivers. The first driver is our current and future capital efficiency on drill and complete activity. It's much lower than what our history has been. So the current and future capital efficiency on drill and complete is evidenced by our finding and development costs, which as we show in the core Marcellus is about $0.35 today and drop into $0.30 for 2021 and beyond. And the CPA Utica should be as low, if not lower, due to that place stunning EURs. But GAAP rules dictate financial statements apply historical look-back DD&A that is about 68 cents per MCF for D&C. That historical D&C, DD&A metric, it's not accurate for current and future D&C capital efficiency because it's a collection of sunk PDP capital under very different and less prolific wealth profiles and capital costs. So the world's changed drastically and in a good way for CNX on drilling complete capital efficiency. And we want to ensure that our stakeholders capture the efficiency of today's and tomorrow's 35 cents and 30 cents finding and development, not the 68 cents per MCF DDNA that is a historical look back. The second driver to understand our capital efficiency is the non-DNC. This is the land and the water and the midstream. It's a fraction today and in the future compared to what it was in the past few years. Now, that build-out is completed and behind us. So what was a $510 million investment in 2019, it dropped to $155 million this year, and it drops to $70 million annually for the six years following this year. $70 million annually, that equates to about 13 cents in MCF. And then the third driver of our capital efficiency, for us to hold production flat at the 560 BCI in the 2022 to 2026 time period, we need about 25 tills on average per year in our core Marcellus and or the CPA Utica fields. That's about $230 million to drill and complete CapEx annually, and that assumes no further improvement in operating efficiencies or well profiles that Chad's gonna talk about in a couple minutes. Now, if you'd like to further discuss these three drivers of our capital efficiencies, again, please give us a ring or an email, and we'll be glad to walk through you with them in more detail. As I said, they are crucial to understanding Not just the capital efficiency, but our investment thesis with CNX. Now, the second investment reason I want to cover today is reason number five on slide four, which is the low-risk business model. This is one that I think isn't even on the radar of most of the capital markets today. So I just want to spend a minute on it. There's a number of drivers of why we're low-risk when it comes to delivering over $3 billion of free cash flow in the coming years. The first driver is we're substantially hedged for the coming years, which is perhaps the one driver of the low risk that most of the market gets today. The second driver is that we apply the 9x forwards on all open volumes that we project into the future. It's a reality-based plan. It's not an inflated gas price deck, which would be a hope-based plan. The driver, you would think, is understood by the markets that I'm talking about, yet everywhere one looks these days, all you see is are 275 and $3 gas price footnotes index applied on projections. And it's not just industry companies doing this. You see the banks, the ratings agencies, and a host of other stakeholders doing the same thing. And what can go up can also go down. We don't get the constant and consistent optimism on pricing being a given when it comes to the next years in this industry. We remain tethered to the forward price curve. When that changes, we'll change with it. Third driver of low risk is the seven-year plan to deliver over $3 billion in free cash flow. It's effectively one frat crew setting up shop in our core fields. We don't venture beyond the core areas to deliver the plan, and we don't need to ramp up to deliver on what is effectively a maintenance production plan. The inventory we enjoy in these core fields extends far beyond seven-year inventory. It's going to be consumed in the activity pace that we've laid out. Fourth driver of low risk, we don't need to access any of the capital markets to execute this plan. We don't need to issue debt. We don't need to issue equity. We don't need to do major asset sales. This is a huge de-risker in a world where E&P's access to capital markets, it's becoming more and more volatile and suspect. In fact, our generation of the $3-plus billion in free cash flow, it not only removes our reliance on capital markets access, it's going to allow us to reduce our exposure to the capital markets. We'll hold substantially less debt into the coming years as we continue on the march of de-levering and we'll likely have less shares outstanding in the coming years if we don't close our intrinsic value per share gap. The fifth last driver of low risk, it's the nature of our cash flows. It's not just upstream E&P, but it's also lower risk midstream. The pro forma CNX after the CNX untaken is a blend of an Appalachian upstream and midstream entity. With midstream cash flows being lower risk and lower cost of capital than upstream, that means on a weighted average basis CNX is a lower risk and will have a lower cost of capital and will enjoy premiums in debt and equity markets versus the upstream peers over the long term. I'm going to wrap up with slide five before we turn the mic over to Chad Griffith. And what this slide tries to communicate is that investors should have confidence in our ability to execute into the future because we've delivered in the past. The most recent example of that is Monday's announcement of the take-in of the remaining interest of CNX Midstream that CNX does not currently own. The transaction, it's a catalyst for the six investment reasons we discussed, and it bolsters each and every one of them. The transaction is also an exemplar of value accretive M&A versus what may become a theme in the basin of desperation M&A to address looming challenges. The simplest way I can articulate the transaction is that CNX acquired about $100 million of annual free cash flow under a conservative set of assumptions for about $357 million in equity. That's a sub-four times multiple on true free cash flow for a business on top of it that we know inside and out and that works hand in glove with our upstream business. And besides picking up free cash flow for less than four times, we also picked up lower risk free cash flow than upstream free cash flow. So pro forma, as I said earlier, our cost of capital and risk profile is declining. And besides picking up free cash flow for under four times its lower risk, Then our upstream free cash flow, we also are now going to enjoy any upside that would be created if and when prices or CNX activity pays and or the basins activity pays increase. Under that scenario, the $100 million of free cash flow will increase along with those metrics. So I'm very pleased that we're able to add that last bullet to the 2020 box that you see on slide five. So with that, now I'm going to turn things over to Chad Griffith, who's going to dive a little more in depth on some of these performance metrics.