CNX Resources Corporation

Good day and welcome to the CNX Resources fourth quarter 2022 earnings conference call. All participants will be in a 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, and please note that 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, everybody. Welcome to CNX's fourth quarter conference call. We have in the room today Nick Deulius, our president and CEO, Alan Shepard, our chief financial officer, and Navneet Beale, our chief operating officer. Today, we will be discussing our fourth quarter results. This morning, we posted an updated slide presentation to our website. Also, detailed fourth 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 4Q 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, followed by Alan, and then we will open the call up for Q&A where Nav will participate as well. With that, let me turn the call over to you, Nick.

Good morning, everybody. 2022, it marked the best year ever for CNX as a public company with respect to free cash flow generation. The fourth quarter marked 12 consecutive quarters of significant free cash flow generation. which helped produce the annual record of $707 million. We utilized the free cash flow to reinvest into the asset base. We used it to reduce debt, and we used it to acquire our discounted shares. Cumulatively, you add all this up, we've retired nearly 25% of the outstanding shares of the company since the inception of the share repurchase program in 2020. And to put this in a perspective in terms of the total impact, the cumulative results of acquiring nearly a quarter of our company in this short period of time, it's been matched or bested by only four other companies in the S&P 500 and only by 22 companies in the S&P 1500. So when you consider the steep discounts in price that we enjoyed when acquiring our shares relative to the low-risk long-term free cash flow yield and the intrinsic per share value, CNX may very well be one of one in the S&P 1500 universe of public companies. We're basically doing two things at the same time, material share count reduction and at the same time at a substantial discounted price. And by the way, while we typically reference share repurchases since the midstream acquisition, that's our most recent share count high, we've been consistently repurchasing shares since 2017. And we're potentially just getting started because if we continue to see substantially undervalued shares, we're going to continue to opportunistically acquire ourselves to grow for share value for owners. Stepping back for a moment to assess the results of the past few years, it's clear that at the halfway point of our initial seven-year plan that we provided in 2020, we've exceeded our initial expectations. The long-termism that wraps around our sustainable business model and that's embedded in our decision-making, it's beginning to add up to incredible achievements on our key objectives of long-term, low-risk free cash flow per share, and more importantly, allocating that free cash flow thoughtfully to produce, in the end, a drastically reduced share count and reduced debt level. This underpins our ability to grow long-term free cash flow per share in multiple different macro environments, and those macro environments could play out over the next decade plus, and these results, they're symptomatic of our consistent strategic thinking as well as our execution. Now, turning back to the shorter-term outlook, despite the important success of 2022 and the continuing march of our long-term strategy, we find ourselves amid very chaotic times. There are broader macro challenges, I'll call them, that the industry has to contend with moving forward. In particular, we've got increased inflationary pressures in the second half of 2022. You couple that with the rapid deterioration of pricing through this winter, you're seeing the near-term challenges throughout the industry. In CNX, we're not immune to either challenge, albeit I will say we are better positioned than most due to our midstream ownership, our focused activity set, and due to our programmatic hedging strategy. So although these two issues are going to impact near-term free cash flow generation, we're still able to execute the core tenets of our sustainable business model, basically just as we've consistently done year after year across all phases of the macro and commodity cycles. Despite the challenges we see out there today, the company's next seven years is going to set up to be vastly improved when compared to the original seven-year look that we laid out, again, back in 2020. Now, while we can consistently generate substantial free cash flow per share, it goes back to the foundations of our competitive moat. Much of that is captured in our Appalachia First vision. I encourage you to review it if you haven't seen it already or to revisit it if it's been a while and you want to take another look at this. But many of the competitive advantages that CNX brings to bear, they are tied effectively to the strengths of the Appalachian region itself. So allow me to summarize the three largest contributors to the CNX competitive moat. First advantage we got, unique stack pay position in Appalachia with the Marcellus and the Utica. Presents an unparalleled opportunity to lead the development of what we think is going to represent one of the world's top two most prolific natural gas basins. Second major strategic advantage that we've got, integrated upstream-midstream structure that allows us to make long-term investments that generate high rates of return by basically creating the lowest cost all-in operating costs in the basin. And then the third strategic advantage, it's our opportunity set that we're seeing with our new technologies business segment, in the arenas of things like methane capture and abatement, with respect to transportation fuel market development, with respect to just overall general technology deployment. They continue to differentiate us and create a growth outlet for CNX as the world continues to focus on lower emission and lower risk energy solutions. Now, all three of these pillars or strategic advantages, they support a sustainable business model that generates that significant free cash flow to simultaneously reinvest into the business, to reinvest into reducing debt, and to reinvest into acquiring our discounted shares year after year. It's basically a long-term recipe for success when anchored by that Appalachia First vision at the core or at the root. In 2023, each of these themes or these advantages are playing out in different ways when you look at our capital allocations. So some allocation decisions, such as our core DNC program, you know, they're very familiar to all of us. Other capital allocation decisions, such as those in the new technology segment, they were discussed. We talk about them in 2022, but now they're becoming tangible decisions in 2023. So allow me to touch on each of these broad buckets of capital investment for 23, at least in summary form. Alan's going to cover these in much more detail shortly. So the first sort of category or bucket, it's that core of our 2023 capital investment, and it's the continuation of a one and a half rig plus one frack crude DNC program to continue the development of our core Southwest Pennsylvania assets. This is the bulk of 2023 capital spend as expected, and it's subject to the inflationary pressures that I alluded to earlier. However, today's higher capital costs, I will point out they're more than offset by the increased pricing outlook that we continue to programmatically hedge. So in other words, our project level returns, they remain robust in this environment, thanks to our consistent de-risking approach. And some out there, you know, they're saying inflation is waning, and who knows, maybe they're right. But we assume in our 23 guidance, current inflationary pressures are going to continue through 2023's entire activity set. If inflationary pressures drop in 23, we can adjust capital guidance accordingly at that time. What's not going to change, it's our desire to use the highest quality crews and products to make the best long-term focus decisions for those inputs and to de-risk our plan. Now the second sort of component of our capital investment plan for 23, we continue to invest in our fully integrated midstream and water infrastructure. So similar to last year in 22, we invest capital dollars in 23 to enjoy the returns and the benefits over the next, call it, 30 years. And while the core projects that underpin our long-term plan, they vary little, the magnitude of these investments, it's going to vary from year to year with those inflationary pressures that I discussed, as well as with shifts in plan timing, as we're always looking, constantly evaluating how to best de-risk and delineate and profitably develop our stacked pay fields. And then additionally, many of these highly accretive life of field investments They not only solidify us as the region's low-cost operator, but they also raise the level of our ESG performance. I'll give you a great example of that this year. It's a significant one as well, I think. And that's the construction of a centralized above-ground water storage tank facility in our southwest Pennsylvania field that not only provides life-of-field, low-cost, low-risk water supply, but that will also start the phase-out of in-ground impoundments without adding trucks to the road. And that's a really good outcome from our perspective. And then last, when it comes to the different major components of the capital program in 2023, we've targeted several discretionary capital allocation opportunities whose risk-adjusted returns, they compete for investment and they reinforce our Appalachia First vision. For example, in 23, we will be participating as a major non-op partner in a pad related to the Pittsburgh International Airport project. The continued development of our Pittsburgh Airport project, it's critical to CNX and our Appalachia First vision. It's critical to the airport as it continues with the terminal modernization program, and it is critical to the wider region, given the key role that the airport plays as an economic development engine for the area. Now, this project, along with several other emission reduction business opportunities in that new technologies business unit, they're laying the cornerstone to once again support that Appalachia First vision. So now I want to pivot to some comments on our 2023 production outlook. Production, as you know, it's a result for us, not an objective within our strategy and business model. And while our focused activity set results in lower overall operational risk and long-term certainty of execution, any short-term delays or disruptions to that program is going to create noise when looking at production on a quarter-to-quarter or year-to-year basis. For example, as we discussed on the Q3 call last year, we experienced delays associated with an abandoned Utica wellbore. And while we initially expected to be able to make schedule adjustments to offset those delays and basically hold production levels flat year over year, weather related and other operational delays in last year's fourth quarter completion schedule, they further impacted production levels in early 2023. And as such, we're now expecting production in 23. to be modestly lower rather than flat compared to 2022. And we expect production levels to be their lowest in the first quarter, build throughout the year as tills accelerate. Most importantly, we're expecting to return to our 2022 production level run rate around mid-year 2023, plus or minus, and from there return to more elevated annual levels in 2024 and beyond. So a short-term issue. Now, when you take all this into account, the plan for 2023, Pretty simple, to continue the march of our sustainable business model. And before I do hand it over to Alan to discuss the quarter in a little more detail, I do want to introduce our new chief operating officer that you heard from Tyler with the intros, Nav Beal. It's no overstatement to say that Nav has seen and done it all. His view of this incredible potential of our asset base that drove his decision to join us, it just, I can tell you, contributes to our collective excitement about the future. So from overseeing North American operations for a Fortune 500 oil and gas producer, to his proven track record of building effective teams and successfully developing new shale plays, to working offshore basically across the globe, his diverse set of experiences and NAV's impressive technical expertise, I can tell you they're already proven invaluable as we continue our efforts to pioneer the benefits of the deep Utica here in the Appalachian Basin. And of course, right, remain focused. on the daily safe and compliant execution of our operational plan. In the end, this is a highly competitive business. We aim to win on behalf of our owners, so whenever we see an opportunity to improve the team, we're not going to hesitate to act. That's what we were lucky enough to be able to do with NAV, and you should expect to see and hear much more from NAV in the future. With that, I'm going to turn things over now to Alan.