CNX Resources Corporation

Good day, and welcome to the CMX Resources second quarter 2022 earnings conference call. All participants will be in listen-only mode. If you show any new assistance, please signal a conference specialist or press 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. To withdraw your question, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Mr. Tyler Lewis.

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 Deulius, our President and CEO, Alan Shepard, our Chief Financial Officer, Chad Griffith, our Chief Operating Officer, Don Rush, our Chief Strategy Officer, and Robby Surastava, President of New Technologies. Today we'll be discussing our second quarter results. This morning we posted an updated slide presentation to our website. Also, detailed second 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 2Q2022, 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 on our press release today, as well as on our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Alan, and then we will open the call for Q&A, where Chad, Don, and Robbie will participate as well. With that, let me turn the call over to you, Nick.

Hey, thanks, Tyler. Good morning, everybody. Thanks for joining us today. Before I get into the specifics of my comments, I think it's important to first highlight three themes that are core to the CNX investment thesis. And we think of these three in sequence, so I'll put them in order. So first, we built and now we manage a low-risk $700 million per year free cash flow annuity that works year after year. And this helps to largely insulate us from the macro events that are out of our control. It creates confidence and conviction in our business, and it's sustainable and works in any business environment. After that, second, We then apply clinical math, and when the math dictates it, we allocate a significant portion of the free cash flow to reduce our share count at highly accretive rates of return, which is going to continue to deliver unprecedented free cash flow per share growth. That's a tremendous opportunity for any value investor. And then the third theme, the last one, is in addition to our organic free cash flow annuity and our growing free cash flow per share, We're creating, demonstrating, and deploying new technologies which will create incremental free cash flow and free cash flow per share beyond that base business and plan. The new technologies opportunities, they are here now. They offer a meaningful avenue for incremental per share value for our shareholders, and they also are the next chapter of Appalachia's energy legacy. So we're beyond excited by the opportunities in front of us. They're impressive. They're outside the box, and they are unique to CNX. So with that bigger picture in mind, let's start talking some specifics. And I want to start with some policy discussion and then move to what's going on with our new technologies effort. So during our first quarter call a couple months back, we covered and discussed how there's these destructive yet predictable consequences that we're seeing of current national and global energy policies. And these policies have unfortunately been extremely effective in manufacturing energy scarcity and stoking inflation by preventing the most sensible supplies of natural gas and oil from reaching demand centers and by relying too quickly on renewable energy that's not yet at scale. So the consequences that we've seen, they're higher energy prices, the energy scarcity that I just mentioned, and inflation, economic turmoil, and geopolitical instability. And unfortunately, they're becoming painfully clear to all. So this morning, I'd like to build on that discussion and talk about what CNX is doing to improve the current situation. So perhaps it goes without saying, but I'll say it anyway, CNX is going to continue to advocate for natural gas and the Appalachian region. The standard of living that we all enjoy, it's owed in large part to the great men and women doing the hard work to provide our energy, and we're obviously proud to be part of that. At CNX, we focus on the near-term tangible actions rather than hypothesizing as to what may or may not occur decades into the future. And the good news is opportunities exist here now to advance environmental and socioeconomic goals. And once again, we're proud to be leading that charge with the recent announcements that we made, like our work with the Pittsburgh International Airport and with New Light Technologies. And I'll talk a little bit more about those two in a minute. So we've been hard at work driving these and other key initiatives forward to advance our view of a legitimate and an actionable sustainable energy revolution. Improper planning and an inconsistent push toward the so-called energy transition, which is pinned to an irrational ideology that demands an immediate transition away from natural gas to renewable energy that's going to struggle to deliver at scale, that's creating turmoil. A realistic and achievable sustainable energy revolution demands a more thoughtful, more common sense, more practical approach, which means creating fact-based solutions that are grounded in math and science today. not what potentially might happen 20 or 30 years from now, and by taking tangible steps to meaningfully reduce global carbon footprints in the most efficient manner. So natural gas and Appalachia and CNX, all three are going to have to play a pivotal role in accelerating and enabling that progress. Natural gas, it's not a bridge fuel, and I want to repeat that. Natural gas is not a bridge fuel. Instead, it's a catalyst fuel. which is the basis of the sustainable energy revolution by helping industries across sectors lower costs and emissions immediately. It will also fast track the implementation of new technologies, and that will allow companies and industries to focus on driving efficiencies to eliminate waste, to stop egregious labor and human rights practices, to grow the value proposition for their ownership, and to provide a viable path to achieve carbon reduction targets. Look, the concept of solar and wind powering the quality of life to which we've become accustomed to, that sounds fantastic in theory. It's romantic as advertised. But the ability of these technologies to satisfy the world's energy needs is, to be kind, a highly, highly questionable proposition. And it's one that's only practically achievable decades into the future. And it's highly dependent on major advancements in technology. and a massive increase in rare earth element and battery production capacity. And here we're talking around an order of magnitude increase more than currently exists today. So I'm going to reference in the next minute or so slide three that we put in the slide deck this morning. And if you want to give a look at that while I'm going through some of these numbers, I think that'll help for reference. So looking at slide three, for perspective, the world currently produces roughly 600 exajoules of energy annually. And that includes approximately 39 exajoules from renewable related to wind, solar, and geothermal. Said differently, about 6% of current energy production is derived from renewable energy despite decades of policy incentives and subsidies that cost nations, economies, and societies trillions of dollars. 2021 is a good example of this. It was a record year for renewable energy installation, yet it resulted in only five exajoules of renewable energy added to the overall global energy production mix. Now, when you look at the consumption side, forecasts indicate the world energy demand is going to grow on average of about 2% per year, and that works out to 10 to 12 exajoules per year. Renewable energy is unable to keep pace with that type of global energy demand growth, let alone have the ability to displace fossil fuels anytime soon. During the past 20 years, world energy demand has grown by roughly 200 exajoules, and over the same time, about 35 exajoules of renewable energy capacity have been added. So renewables, they've got a long way to go to simply meet new demand before they have any hope of displacing oil and coal in a meaningful way. More low cost and environmentally friendly Appalachian natural gas, that can help meet this growing demand and make progress now on environmental goals. Also, the 600 exajoules of world energy production, fossil fuels account for 490 plus exajoules of that total. And then you've got hydro at around 40. Nuclear adds about 25 exajoules. And then you've got that 39 exajoules of wind and solar renewables to get to the approximate total of 600. So a majority of fossil fuel production, of course, is oil and coal. Appalachian natural gas only accounts for about 12 exajoules or 2% of the total global energy production mix. And it represents the cleanest, lowest greenhouse gas intensive fossil fuel that's out there. And within Appalachia, CNX accounts for about a half an exajoule, and it's got the lowest greenhouse gas intensity and cost structure within the Appalachian Basin. So we, the Appalachian Basin and CNX, we're not the problem. Math and science show that we are the solution, and CNX serves as a needed ally as the world seeks to reduce the other 490 exajoules of much higher greenhouse gas-intensive fossil fuels and help keep pace with the new energy demand. Now there's also, while we're talking about this, the issue of supply chain realities to consider because that's an important one. And CNX and Appalachia are closest to the major U.S. demand centers for energy and for goods and for services. And that would allow our local energy to be even more greenhouse gas efficient from an all-in scopes one through three life cycle perspective, which is the way you should look at things. Reducing unnecessary shipping logistics, that's the elephant in the room when it comes to emissions. And Appalachia Natural Gas has a big benefit with respect to that. Investment in and utilization of our low greenhouse gas-intensive natural gas and its derivative products, it will rely on infrastructure that works with green and new technologies when and if they're ready and able to be deployed to meet future demand. So that means that engines and factories, they can run off 100% compressed natural gas, 100% hydrogen, or related blends between the two. Same logic applies to additional electric vehicle EV deployments. natural gas turbines on the grid are going to allow electrification to play a more meaningful role sooner. Of course, that's a good thing. BNX, what have we been doing? We've been quite active making moves and investments consistent with these energy themes and these broader policy realities in mind. So let's talk about those for a couple minutes. Our new technologies team, it's got numerous projects in various phases of development which are going to help the world move to a lower greenhouse gas emitting future. while also maintaining reliable energy resources so that society properly functions. And the new technologies team is commercializing technology that will produce low carbon footprint natural gas and those derivative products and associated environmental attributes. These technologies are a game changer for the natural gas extraction and transportation industries. Technology and assets from CNX can help displace higher carbon intensive fuels in the U.S. energy mix, both on the power grid and in the transportation sector. These displacement opportunities, when you add them all up, they are over 100 BCF per day of natural gas opportunities in the United States alone. That's a big market opportunity. And more products and services could be produced within the Appalachian region if these types of technologies are deployed. And I would think of these emerging technologies to be commercialized that we're working on, sort of categorized or falling into one of three major buckets. The first bucket consists of what we designate as having valuable and monetizable environmental attributes. We're capturing methane through incremental capital investment and deployment of technology, which would have otherwise been vented to the atmosphere. And this ultra-low carbon gas is increasingly valuable in a carbon-constrained world. Our Virginia assets are the foundational piece of that effort when it comes to CNX, and I can tell you coal bed methane is back in a big way, but in a much different world. CBM today has a natural gas pricing base level of value to start things off with, but now today it also enjoys an increasing portion of value tied to its ultra-low carbon characteristics. Recognition of this value, I can tell you, is growing across numerous economies and industries. The second bucket of our new technologies effort, it's proprietary technology that we developed that'll fundamentally change the manufacturing process for the extraction and delivery of natural gas. So the technology here that we're working on will transform drilling and completions and flow back and compression and processing and so on. It'll make these processes more efficient, it'll reduce the risk tied to them, it'll lower the emissions associated with them and it'll increase the margins with them as well. The third bucket, using in-house technology to disrupt various industries currently relying on those other less efficient and higher emitting forms of energy. This technology efficiently transforms the state of natural gas from the gaseous phase into the CNG and the LNG. And that compressed or liquefied natural gas on pad can transform the aviation and the ground transportation industries. So instead of offshore high carbon footprint, high cost gasoline for ground transportation, The ability now exists to use local, low-carbon footprint, low-cost CNG. It's a similar story for aviation with LNG replacing jet fuel. In the business case for this third bucket, it really comes down to common sense when you think it through. If we want to lower global greenhouse gas emissions, you deploy new renewable energy in the sunniest and the windiest places that are still relying on coal and oil to displace them. You don't place renewables at scale in places like Pennsylvania, where the efficiencies are low, the costs at scale are going to be high, the supply chains are thousands of miles in length, and the life cycle carbon footprints are going to be in the wrong direction. So what's better for the planet and for greenhouse gas emissions and for the regional economy and for business models? Making products overseas using coal-fired power and inefficient power plants and factories to utilize poor labor practices and having all that wasted cost and energy transporting these products all the way to the United States to sometimes work, depending on the weather, if it's windy or if it's sunny, or any alternative, simply manufacturing these products here with low-carbon footprint natural gas, more efficient plants and factories, using local well-paid workers, and shipping it within a one-day drive. It's pretty simple. Now, let's talk about the tangible, impactful, and local recent results of the new technologies team across those three buckets that we just summarized. One year so far has been full of accomplishments spanning all three, and we don't expect to pace to lessen anytime soon. A pathway for implementing our proprietary technology to disrupt the old economy fuel supply mix is the announced partnership between ourselves and the Pittsburgh International Airport. This is an exciting partnership for both parties, and we're going to help the airport lower their costs and reduce emissions and create jobs by using low-carbon intensity natural gas to displace those traditional aviation and transportation fuels we just spoke of. and it fits obviously squarely in our tangible, impactful local mantra. The partnership with the airport centers on how CNX has developed that technology to cost-effectively convert on-site dry natural gas into LNG, CNG, and electricity for various uses, including as a hydrogen feedstock. So this ties into the hydrogen economy as well. And these technologies reduce emissions and operating costs at the airport It opens up a new frontier for using lower cost, lower carbon intensity LNG and CNG fueling depots for higher energy intensive businesses. When you look at things like airlines and transit and cargo, fleet, other related businesses. These natural gas derivative products will leverage our local community's workforce as well and create more family sustaining jobs, which is awesome. Now, we also recently announced another exciting partnership that I mentioned earlier between CNX and New Light Technologies. And that is looking to convert air and greenhouse gas into a biomaterial called air carbon. It's a pretty amazing and a pretty cool technology. Air carbon is a carbon negative PHB biomaterial. It's produced by naturally occurring microorganisms that replaces plastic in industrial segments ranging from food to fashion. And under our partnership, CNX and New Light will work together to capture waste methane from third party industrial activity that would typically be vented to the atmosphere. We'll capture, gather, and process that captured methane to remove impurities. We'll compress it and deliver the methane through new and existing natural gas pipeline infrastructure for conversion into air carbon by New Light. The strategic partnership with CNX capturing methane gas to support New Light's manufacturing needs is expected to result in several manufacturing facilities in the Appalachian region and advance critical decarbonization goals while boosting our region's economic activity, and the capital investment going on in the region, and the job growth of the region. So that's obviously awesome metrics to see going in the right direction. And beyond our new technologies team, another sort of point with respect to Appalachia, the Appalachian region, it's got the resources and the know-how and the work ethic to be the epicenter of providing solutions to the challenges brought by poor energy policy and by weakened geopolitical standings. We can be a center for skilled labor job creation to help pave a path to the middle class access for the region's underserved rural and urban communities. And we put into effect a program to do just that. This quarter, we graduated our inaugural class from the CNX Mentorship Academy, consisted of 28 young men and women from this great region's urban and rural communities. And six of these talented individuals recently joined our team at CNX. It's something our entire team and personally, myself, obviously very proud of. And we expect the second year class to be even larger. We're already underway preparing for that because August is coming up on us real quick here. These young men and women, obviously the objective here is to help us build the local energy ecosystem and to cultivate and sustain the middle class for the next generation. Another note related to what's going on with our new technologies effort, we also recently submitted to the SEC comments regarding their proposed rules for climate disclosure. Now, we're supportive of the Commission's efforts, but we also believe the SEC's proposed rules as drafted is going to create inconsistent and highly subjective standards for reporting Scopes 1, 2, and 3 CO2 emissions across different industries and companies. So, we believe in transparency and accuracy. Those are sort of the core tenets. Our position is that the SEC should amend the rules to create greater standardization and better clarity. Fully transparent and honest accounting of carbon emissions that will underscore the importance of things like natural gas and Appalachia as the pathway to a promising future. So I encourage you to read that letter to the SEC, which is posted to our website. And this past quarter, we also announced management changes with Alan Shepard, who you're going to hear from next, taking over CFO. Don Rush moving over to the company's chief strategy officer position. Important steps. Don's new role shows where we see the world heading, and using his words, the ocean of opportunities that it presents to CNX. Now, as to what our new technology efforts add up to when it comes to our metric of choice, free cash flow per share, we'll have more to say about that as 2022 unfolds, so stay tuned. In conclusion, I think it's best to summarize this way. We believe the products and goods that we all use daily should be manufactured in Appalachia and first utilized in the United States to help our local citizens and economies. Similarly, let's first focus on creating new and growing existing markets for our products regionally in Appalachia and nearby markets like the Northeast U.S. via short pipelines. A local-first mentality that will go a long way to solving myriad problems across the socioeconomic and environmental spectrum. It's not protectionism. It's not anti-free trade. Instead, it's common sense, it's rational, and it's free market-based. With that, I'll turn things over now to Alan, who will cover a little more details about the quarter.