CNX Resources Corporation

Good day, and welcome to the CNX Resources first quarter 2022 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 telephone keypad. Which are your questions, please press star then two. Please note, this event is being recorded. I'll now turn the conference over to Mr. Tyler Lewis, Mr. Lewis, please go ahead.

Thank you, and good morning to everybody. Welcome to CNX's first quarter conference call. We have in the room today Nick Deulius, our President and CEO, Don Rush, our Chief Financial Officer, Chad Griffith, our Chief Operating Officer, and Yemi Akinkube, our Chief Excellence Officer. Today, we will be discussing our first quarter results. This morning, we posted an updated slide presentation to our website. Also, detailed first quarter earnings release data, such as quarterly E&P data, financial statements, and non-GAAP reconciliations, are posted to our website in a document titled 1Q-2022 Earnings Results and Supplemental Information of CNX Resources. 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, and then we will open the call up for Q&A where Don, Chad, and Yemi will participate as well. With that, let me turn the call over to you, Nick.

Thanks, Tyler. Hi, everybody. I'm going to handle the commentary today, as Tyler just said. I'm going to break it into two parts. First, let's have a review of our results for the first quarter and talk about some updated guidance looking forward, and then I'll wrap with a couple of comments and maybe observations is actually a better term, about our industry, the nation, and the world today. But starting first with our quarter and our outlook into the future, the CMX I think has been sounding like a broken record for at least two years and eight plus quarters running. And today that broken record repeats itself yet again. Fortunately, repetitive music sounds great for ownership. That's because like the string of recent quarters the past few years, we had yet another clean and easy to understand quarter. I'm going to review the quarter by running down the key components of the CNX Sustainable Business Model, or the SBM as we refer to it. You can read more about our Sustainable Business Model in our proxy and our soon-to-be released Corporate Responsibility Report. I encourage you, of course, to do so. The Sustainable Business Model, it starts with having a compelling why. What motivates us to do what we do? CNX and our employees, we bring quality of life and security to society. Without us, everything stops and realization of our purpose or that why, it's grown tremendously the past year and the world sees what happens if things like domestic natural gas is taken for granted or worse yet, if it's marginalized. I'll have more to say on this in a couple of minutes when we get to those observations that I spoke about. The next step of that sustainable business model is building a non-replicable and a resilient competitively advantaged business to deliver on that why. And in the first quarter, we delivered another quarter of smooth, safe, and compliant operational execution across what is basically our stack pay, our upstream, midstream integrated, and our low cost, actually lowest cost footprint, and what's become the most prolific natural gas basin in the world. So you take these attributes and you couple them with our programmatic hedge book, you see CNX was able to land our production costs and margins right where we wanted them in the first quarter. That third step, of the sustainable business model, that's to generate steady and substantial free cash flow. First quarter saw its post over $234 million in free cash flow. More importantly, we produced $1.20 of free cash flow per share in the first quarter using the quarter end share account, just over 195 million shares. And then the next steps of the sustainable business model, they start to look to astutely allocate our free cash flow to the right places and at the right times to generate those value-creating rates of return and long-term per share value. So, suit capital allocation, it perpetuates our why. We start with investing in our most important asset, which of course is our team. I'm happy to report that CNX, which was the public company regional leader, when you look at all-in average employee comp in 2020, it achieved even higher all-in compensation for employees in 2021 at over $180,000 per team member. We've got some exciting efforts in the works when it comes to human capital in 2022, so please stay tuned as the year unfolds. We're going to have much more to say about that. The next free cash flow allocation avenue that we consider is investing in our regional communities. CNX was very active during the first quarter on its front. The CNX Foundation is up and running with its governance. It's already committed millions of dollars to what I think are going to be hugely impactful investments across communities in need of our Appalachian footprint. And the CNX Mentorship Academy, it's rounding the bend to conclude its first inaugural class year in early June, hard to believe. And I'm beyond excited about what that is all about and how it's ready to welcome these young men and women into the local workforce, and particularly the CNX workforce. And employees across the company, they're catching the fever to identify and personally participate in and drive a portfolio of investments that we're making across Appalachia. CNX has broken the mold and set a new standard when it comes to ESG performance and things like stakeholder capitalism and what it truly means to focus local. The company's success and the local region's success, they've always been linked, and that's a responsibility that we continue to lead on and embrace. Next, we look to pay down debt under our sustainable business model, and in the first quarter, we paid down $74 million in net debt. Our balance sheet I describe it as stellar at this point. It's going to be getting even better as 2022 unfolds. And the optionality that this strength creates, it can be a really powerful thing in an industry such as ours, which I'm also going to expand upon when I talk about those observations. And then the last step of the sustainable business model, but not the least, right, is calling for returning capital to our owners. And we've got two ways of doing that, through dividends or share repurchases. Which one we pick? It's going to follow the clinical math of risk-adjusted rate of returns in the context of long-term per share value. And that approach dictated that we continue to repurchase shares in the first quarter. We invested over $150 million of free cash flow in share repurchases, buying in over 9 million shares of just under 5% of the company in the quarter at an average price of $16.55. We are thrilled with that result. So that's the CNX Sustainable Business Model in action. Yeah, it tends to be repetitive, but we love that kind of repetition. And before I forget, today we also raised 2022 guidance to approximately $700 million in free cash flow or $3.59 per share using the updated shares outstanding as of April 20th. Okay, now that we've covered the quarter and our guidance outlook, let me shift and offer up a few observations about our great industry, nation, and the state of the world. These observations go to the heart of that why that I spoke about. And they impact not just CNX and Appalachia in profound ways, but they also deserve, I think, far more discussion than the limited time we've got today. But with the time we've got, let's hit on a couple of these observations. I think 2022 is turning out to be quite the proving ground that's verifying certain realities and exposing certain flawed beliefs. And first, let's talk about natural gas supply. and how that might be able to grow to respond to increasing energy demand needs both domestically as well as in places like Europe. There's been a lot of talk about LNG and how U.S. natural gas can save the EU by replacing Russian natural gas and providing much needed energy security during a time of crisis. At the same time, we cannot lose sight of the energy supply challenges that we still have to overcome domestically. Certainly, I think the industry is doing what it can to increase supply. CNX is a great example, where we expect production and capital expenditures for the year to be toward the higher end of our guidance range. Every little bit of this is going to help. But there are also some harsh realities that are quite ironic, unfortunately. The domestic natural gas, oil, and pipeline industries in the nation, they can't ramp up production to anything close to the levels that the U.S. and the E.U. is clamoring for anytime soon. And that's not because of industry unwillingness. We are an industry or industries of doers after all, and it's not because of corporate greed or profiteering, as some might allege. No, instead it's simply and starkly because a policy is consciously and methodically looked to strangle infrastructure investments in the pipes and in the processing and the power generation and, yes, in the LNG infrastructure, all of which are needed to meet the world's energy demand. They're everywhere, these policies I'm talking about that one looks today. global policies via things like the Paris Accord and the UN IPCC climate roadmap. You see them in national policies via a weaponized regulatory regime in the administrative state. You see it in regional policies like RGGI and some of these dysfunctional regional transmission organizations that are manipulating energy and electricity markets that are leading to really bad outcomes and consequences like those that we've seen in Texas and California. You also see them in state and local policies such as de facto natural gas development or transmission or end-use bans in places like New York and Boston. And unfortunately, these policies have been extremely effective in achieving exactly what they were designed to do, which is to create energy scarcity, run up prices, and not allow the most sensible supplies of natural gas and oil to reach the obvious demand centers. That's why Boston has to import LNG from thousands of miles afar, including Russia at times, instead of taking molecules from Pennsylvania 400 miles away via a pipeline. That's why U.S. politicians end up pleading with dictators in Venezuela and OPEC to increase output, and most tragically, that's why the EU is energy dependent on Russia. Now, for our industry to solve problems and provide solutions, it unfortunately is going to take years. The domestic energy industry has been under attack and penned in for over a decade by these policies, and now it will take nearly as long to correct that. That's assuming policymakers wake up to the reality, which is a big assumption, as crazy as it sounds considering times like these where common sense tells us domestic energy has never been more vital and the policies that are designed to stymie it, they've never been more harmful. These policy concerns, they lead to my second observation. Despite the clear validation of domestic energy as an attractive and a deserving investment we believe access to the capital markets for our industry is going to continue to be more restricted. Now, it could be something like ESG investing gone awry, or it could be the Federal Reserve climate stress test on banks, or it could be SEC climate disclosures. But to manage this risk, we believe the prudent course under our sustainable business model is to maintain a debt level and a maturity schedule and a liquidity level, whereby we never need to access the debt markets. And fortunately, we reached that point, our guidance to future free cash flow generation, when you couple it with our balance sheet metrics, it means we've got the optionality to organically deliver, to be independent of the debt capital markets. For our industries, the CNX way needs to become the norm until policymakers and capital markets allow themselves to be mugged by the facts. I'll wrap with my third and final observation. The topic is one of sadness. I've been around this industry and company for 32 years now, and I've seen a lot. free market-driven, innovative, and entrepreneurial movement that disrupted the world with the shale revolution. I've seen the establishment of an energy powerhouse with the United States and energy independence if we want it. I've seen vastly improved quality of life and revival of the middle class in an improved environment, including lower carbon intensity for my lifelong home of Appalachia as it retooled itself to take advantage of the shale revolution. And I've been with a company that completely transformed from exclusively coal to now best in breed in natural gas and midstream. And working with people, of course, who care and who excel and who achieve and who are compensated at the very best levels to be found in any industry. So CNX today is strong, vibrant, secure when you look at its future path. The opportunities are mind-boggling from our developing, exciting, emerging technologies to what we should deliver on shareholder per share value. But my emotion in 2022 I have to tell you, as I said, it's that of sadness, because much of what ails this nation and world did not have to be. Putin did not have to be enabled. The Ukraine did not need to be destroyed. Americans didn't need their households to be robbed by that beast known as inflation. And our energy security and our grid reliability, whether it's Texas, California, or Europe, none of them needed to be compromised. Yet all of this happened, and it continues to run rampant, and it's going to get worse, potentially much worse. Why? Because the full potential of the American energy industry to unleash prosperity domestically and abroad, it's been deliberately handcuffed. Energy scarcity has been manufactured by policy design. These industries were not allowed basically to become victims of their own success by providing more supply of our widgets so that not only infrastructure and demand grew, but so that supply and demand would balance, so the prices can moderate, so that dictators don't hold the free world hostage. The current state of our energy industry and economy and our geopolitical standing, they are not healthy. And until the health of those improve, we're all going to pay the price. It's just a question as to what extent. This didn't have to be. How long shall we continue to tolerate it? The good news is the Appalachian region has the resources and the know-how and the work ethic to be the fountainhead or the catalyst of the modern energy and manufacturing industries. We can be a center for skilled labor job creation to help pave a path to middle class access to the region's underserved rural and urban communities. The only thing preventing this from happening is a collective willingness to embrace data and facts over politics and ideology. We should embrace the assets and the workforce and the energy in the Appalachian region to be utilized first in this region and then far beyond. It can make Western Pennsylvania or Western Virginia or West Virginia the true energy capitals of the world. by developing and utilizing homegrown resources to build a local energy ecosystem that will cultivate and sustain the middle class for the next generation. These natural gas-based products, they're more environmentally friendly, lower cost, and will be sourced locally in the Appalachian region instead of faraway lands that have extensive supply chains and carbon footprints. This is a realistic, actionable solution for the Appalachian region that runs counter to other such efforts championed by establishment organizations or by those with ideological goals. Final thought to tie us back to where we started. Despite the challenges noted in my observations, we're going to continue to embrace our tangible, impactful, and local approach to ESG, which is going to help us execute our sustainable business model and deliver long-term for sure value while advocating for our industry and region. The opportunity is now to reframe and redefine the region's energy utilization and economic strategy that will directly and tangibly benefit local citizens the local environment, and the entire region. When the why of what we do is so compelling, our path forward is always clear. I'm going to turn it back over to Tyler now for Q&A.