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spk03: Good morning and welcome to the CNX Resources first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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.
spk09: 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, Alan Shepard, our chief financial officer, Navneet Beale, our chief operating officer, and Ravi Srivastava, president of our new technologies group. 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 1Q2023, Earnings Results and Supplemental Information of CNX Resources. As a reminder, any forward-looking statements we make or comments about future expectations or subject to business risks, which we have laid out for you in our press release today, as well as on our previous Security 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 and Ravi will participate as well. With that, let me turn the call over to you, Nick.
spk04: Thanks, Tyler. Good morning, everybody. First, let me give you a warning at the start. This is Take Your Kids to Work Day for us. We've got over 80 Kids throughout the hallways in the office at the headquarters today, and we lost contain about 45 minutes ago. So if you hear any yelling or screaming, that's what that's all about. I apologize in advance. But it is one of my favorite days actually of the year. First quarter of 2023, it marked 13 consecutive quarters of significant free cash flow generation. That's going back to early 2020. And we've continued to utilize that free cash flow to reinvest into the asset base and to acquire a significant amount of our shares. at prices that we believe represent a substantial discount to their intrinsic value. During the quarter, we repurchased an additional 3% of our outstanding shares, and that's resulting in the cumulative retirement of approximately 28% of the outstanding shares of the company since 2020. And as we discussed on our previous call, this magnitude and the pace of the buybacks has not only been bested by a small handful, a very small handful, actually, of other companies across the S&P 1500 over the same period of time. And you get a sense of the magnitude of our share repurchase program when you look at slide three in the deck, which shows the top 30 largest gas producers, at least as measured by production. And more specifically, when you look at the last 12 months cash returned to shareholders, which is comprised of share buybacks and any dividends paid, divided over each producer's market cap, you can see that CNX is at the top of that list. And a key takeaway from this slide is that scale doesn't necessarily equate to larger shareholder returns. In fact, despite CNX being at the top of the list for largest shareholder return as a percentage of market cap, our 2022 annual gas production, it ranks somewhere in the middle of this group. And returning capital to our shareholders, of course, that's a crucial component of our capital allocation strategy. And we're going to continue to evaluate the most efficient and effective ways to do so. And this will ultimately drive long-term free cash flow per share growth over an extended period, which is going to result in meaningful shareholder value creation. And in addition to our best-in-class shareholder return strategy, we've maintained a prudent financial position by keeping a strong balance sheet, managing our debt levels, and maintaining adequate liquidity to weather economic headwinds. And Alan will have more on this shortly. Meanwhile, our industry has been smacked with a collapsed NYMEX. Beginning late fourth quarter of last year and throughout the first quarter of this year, the industry experienced an extraordinary decline in natural gas prices over a very short period of time. And specifically, we saw NYMEX natural gas prices decline by approximately 74% when comparing March 2023 to September 2022 prices. In this rapid deterioration of pricing over the past two quarters, when you couple it with the much discussed inflationary pressures on every imaginable input to the sector, That duo will pose near-term challenges throughout the industry. CNX might be the only player in Basin that will be free cash flow positive for the remainder of 2023 at the current strip and will likely be the only one returning significant capital to owners for the remainder of 2023. And many in the industry are increasing debt leverage and outspending cash flow as we speak. We believe the industry is going to struggle to continue to execute the shale 3.0 business model of returning capital to shareholders in this phase of the commodity cycle, where you've got prices that are low and costs that are remaining high. But on the other hand, CNX remains well positioned to navigate this type of environment as a low cost producer in Appalachia with one of the most robust hedge books in the industry. So given our targeted activity set and integrated midstream and water infrastructure ownership, we've got more flexibility than most producers to adapt our activity set. And that flexibility in volatile times like these becomes incredibly impactful when you combine it with how Nav and his operations team are focused on driving efficient execution optimization throughout the natural gas manufacturing process. Things are going quite well operationally across drilling and completions activities as well as all the ancillary activities that support both. And assuming we don't make any adjustments to our activity set related to the broader macro environment, We expect to be around the 1.6 BCFE per day run rate near mid-year as discussed on the last call. And this will position us to finish the year within our stated annual production guidance range. Now, solid, steady operational performance, that creates optionality to optimize per share returns. And we're starting to see that as we speak. And our decision points for 2024, I think that's a great example of this at work. One option is to keep activity steady at the one frac crew plan through 2023 and early 2024, which will result in increased production to approximately 590 bees in 2024 without increasing activity beyond the single frac crew. That's the scenario that's been and is currently reflected in the guidance for 2023 free cash flow and capital, the one frac crew plan, so to speak. Now, an alternative option would be to slow some select activity in capital in 2023 Hold 2024 production closer to flat from 2023 levels, and then build duck inventory to bring on at the right time and build incremental free cash flow in the nearer term. Now, ultimately, as we've mentioned on previous calls, and as we'll continue to reiterate, production, it's a result and not an objective within our strategy and business model and our decision-making is going to be focused on long-term per share value as opposed to quarter-to-quarter production. or year-to-year optics. We'll clinically follow the math as NYMEX takes its twists and turns, but the key to understand for now is CNX has reset operational efficiencies to a new higher level of performance. In addition to the core business of the company, the new technologies group, let's talk a minute about that. It's delivering tangible results and developing exciting projects. One project that we recently announced is a collaboration with Adams Fork Energy. who's constructing a multibillion-dollar clean ammonia manufacturing facility in Mingo County, West Virginia. And CNX has entered into a strategic partnership to provide natural gas, wastewater disposal, and carbon sequestration services to that project. CNX is also leading the engagement with the Appalachian Regional Clean Hydrogen Hub, better known as ARCH2, to hopefully attract DOE hub designation and funding for the project. This project fits squarely with CNX's focus on tangible, impactful, and local functional ESG solutions, and it also supports our Appalachia First vision that will catalyze a new vibrant middle class in the region, especially in some of the most underserved parts of the region, such as Mingo County, West Virginia. So stay tuned for future updates on this exciting project. And by the way, I mentioned the tangible financial results being delivered by the new technologies team at CNX. Happy to report that new technologies will be firmly free cash flow positive in 2023. That didn't take long. And more importantly, it will be a growing contributor to our free cash flow in 2024 and beyond. I'd like to mention that we expect to release our 2022 Corporate Sustainability Report shortly. I'd encourage every owner to read this document. It probably is the single best product that reflects the summation of this company's strategy and philosophy and values and business model. To us, it's not a compliance document or a check-the-box activity, but instead it's a cataloging of a focused and deliberate investment of company resources into everything we're doing to embrace and advance our Appalachia First vision. In many ways, it is our clinical math of how we go about making resource investment decisions combined with a labor of love. And there are many good takeaways you'll see in the report on what we're doing across all three categories of E, S, and G. Many of these include updates on investments we're making within the communities we operate in and our new technologies initiatives to revolutionize the energy and transportation industries. Slide eight, if you give that a look, it highlights some of the corporate sustainability report metrics. And as you can see, Appalachia is the lowest methane intensity basin across the United States. And CNX screens even better than the Appalachian Basin average. Our methane intensity is expected to decline rapidly. is illustrated in the top right of the graph as we continue to focus on driving results, again, that are tangible and impactful and local. I'd like to wrap up my remarks by discussing the G that I just mentioned or governance side of the equation of ESG. Specifically, if you are a shareholder of CNX, then you've probably heard from the company either directly or indirectly through a proxy statement mailer asking you to vote in accordance with our board of directors recommendations at our annual shareholders meeting, which includes voting against a climate lobbying shareholder proposal. On the surface, the shareholder proposal seems immaterial and perfunctory, at least to a degree, but of course we all know optics can be deceiving. So we decided to take an objective and a vocal approach in stating a public opinion in support of owner value. Frankly, we see these types of shareholder proposals fueled by a cottage industry of self-serving activist firms that are more interested in placing proposals for attention than genuinely improving the business of the underlying company or the industry or the environment for that matter. They don't look to create value or even want to engage with the company, but instead they're designed to manufacture attention for attention's sake. And worse yet, they end up eroding sound governance in the long term and they frustrate our duty to shareholders solely so these firms can appropriate value for themselves. As such, these proposals, they're spam-like in nature and they're immaterial and not only add zero value, but they often destroy value. We hope that the industry and the capital markets will follow our lead and push back against these types of proposals because we see them as a much bigger issue that ultimately needs to be stopped by shareholders and proxy advisory companies. And by the way, as such, we were happy to see Glass-Lewis' recent recommendation to vote against this proposal. And we will continue to do our part to see this through to the right outcome. So with that, let me turn it over to Alan to review the details of the quarter.
spk01: Thanks, Nick, and good morning to everyone. As Nick mentioned, this quarter represents the 13th consecutive quarter of free cash flow generation through the execution of our sustainable business model and long-term strategic plan. In the quarter, we generated approximately $89 million in free cash flow. Since we initially laid out our free cash flow plan in the first quarter of 2020, this brings our cumulative total to approximately $1.7 billion, We're roughly 65% of our current market cap. Let's first turn to the capital allocation side of the business as highlighted on slide six. As you can see, we continued our market leading shareholder return initiatives by repurchasing approximately 6 million shares in the quarter and another 500,000 shares after the close of the quarter through April 13th. In total, we bought back approximately 3% of our shares outstanding over that timeframe. And since Q3 of 2020, we have repurchased approximately 28% of the outstanding shares of the company. Due to what we see as a significant disconnect between the current share price and its intrinsic value, repurchasing our shares continues to be a remarkable low-risk capital allocation opportunity, which will dramatically reduce our denominator and thereby meaningfully grow our long-term free cash flow per share. On the balance sheet side, total debt levels remained essentially flat with the previous quarter, while net debt slightly increased as we used cash from the balance sheet towards share repurchases during the quarter. Our net debt to trailing 12-month EBITDA is 1.8 times, and we expect it to continue to adjust throughout the year to reflect fluctuations in EBITDA driven by commodity pricing. More broadly, as part of executing our sustainable business model, we expect to continue to pay down absolute debt levels over time to further bolster our balance sheet. And as always, the magnitude and pace of that deleveraging will be a function of our capital allocation process. As seen on slide five, the balance sheet management activities that we've undertaken during the last several years have positioned us with substantial liquidity and an enviable debt maturity runway. These two attributes amongst others differentiate us and allow us to confidently continue our market-leading shareholder return initiatives, even during downturns in the commodity cycle. Additionally, they position us to take advantage of any deepening valuation disconnects that might occur in either the equity or debt markets. Let's now shift to our updated 2023 outlook on slide seven. As Nick already discussed, due to the mild winter weather and increased year-over-year national production levels, we have seen a rapid and remarkable natural gas price decline that started in the first quarter of 2022 and continued through the first quarter of 2023. Additionally, even though we have approximately 80% of our 2023 gas production volumes fully hedged for NIMEX and basis differentials, this leaves roughly 100 BCF of natural gas volumes that are open and exposed to pricing fluctuations. Roughly half of those open volumes were sold in the first quarter, and the remaining half are spread across the remaining three quarters of the year. Therefore, as a result of the declining Q1 price environment and the over $1 per MM BTU decline in 9 minutes prices for the remainder of the calendar year since our last quarterly call, we are updating our annual EBITDAX range to be between $950 million and $1.05 billion, and our full year free cash flow guidance to approximately $250 million. Despite the significant drop in gas prices for 2023, Our operational plan and capital guidance for the year remains unchanged as the current long-term strip prices continue to reflect a bullish long-term gas outlook. As such, we continue to expect annual production volumes to be between 555 and 575 BCFE and to return to around a 1.6 BCFE per day run rate around mid-year. During the quarter, we ran two full rigs, a top-full rig and a continuous frac crew. We expect to release the second rig towards the end of the second quarter. And as such, we expect the cadence of capital spending to reflect that decline in activity and move sequentially lower in the third and fourth quarters. As we touched on last quarter and as we've highlighted again on slide seven, our activity set and corresponding capital expenditures this year represent a growth plan rather than merely a maintenance or production plan. This year's capital spend makes critical investments in key long-term infrastructure projects that maintain our basin leading cost position and enable us to grow our production volumes in 2024 to around 590 BCFE, or approximately 5% year over year. Lastly, despite no changes to the current plan at this time, should forward gas prices decline further throughout the year, we have a great deal of built-in optionality and will not hesitate to reduce our capital activity set in accordance with our focus on achieving the best long-term economic results. Regarding service and commodity costs, while we are seeing some positive indications, we are not yet seeing a decline in these costs reflective of the drop in gas prices the industry has experienced. However, should gas prices continue on their current trajectory, we would expect that dynamic to change during the second half of the year, as has typically been experienced in other cycles. We believe that this potential service cost deflation in the second half of the year would have some benefit in 2023. However, given the potential timing of the reductions, its biggest impact would be seen on 2024 capital. This expected change in service costs, in addition to the higher expected production volumes previously mentioned, will help drive higher free cash flow in 2024 and beyond. Touching briefly on fully burdened cash costs per unit, we expect 2023 costs to be lower than 2022, and most important, we continue to expect to drive our cash costs lower moving forward as we optimize all parts of the business. To conclude, we are confident that the sustainable business model we have created will continue to deliver value to our shareholders throughout the cycle. As evidenced by our expectation of being able to continue to generate free cash flow for the remainder of 23, despite where prices are currently at. Our focus for the remainder of the year will be on safe, compliant, and efficient execution to develop our extensive natural gas asset base, on accelerating free cash flow growth from our new technologies business, on consistent and clinical capital allocation to grow our long-term free cash flow per share, and most importantly, as always, on ensuring all of our decisions continue to reflect a long-term owner mindset. With that, I will turn it back over to Tyler for Q&A.
spk09: Thanks, Alan. And operator, if you can please open the lineup for questions at this time, please.
spk03: 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. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Zach Parham from JP Morgan. Please go ahead.
spk08: Hey, guys. Thanks for taking my question. I guess first, just on the balance sheet, over the past several quarters, you've been very aggressive with buyback with less focus on debt reduction. Nick, in your prepared remarks, you mentioned continuing to return cash to shareholders through the remainder of 23. But just how are you thinking about the balance sheet here with gas prices moving lower over the last six months? You're approaching two turns of leverage. Will you consider shifting more free cash flow back to the balance sheet later this year? Just any color there.
spk01: Yeah. Hi, this is Alan. So I think what you're seeing now is the cumulative effect of all of our transactions in the last several years have positioned us to kind of withstand this sort of environment. So, I mean, we've been very clear that we are built to kind of continue to be able to do shareholder returns throughout the cycle. So for the rest of 23, you know, given our maturity runway, given our ample liquidity, and given our hedge book, we're comfortable that we'll be able to consistently return capital and not have to have any sort of issues with debt management in the foreseeable future.
spk08: Got it. Thanks for that color. And then one just on OpEx, you know, operating costs were a bit higher than expected. And I noticed in the slide back that you increased the 2023 fully burdened cash cost guidance by about five cents per year. Can you give us color on what's going on there? Is that just inflation driven? Just any thoughts on that number?
spk01: Yeah, so kind of two primary drivers. The first, kind of the impact in the first quarter of being unable to sell unutilized FT. So there wasn't as much of a spread on some of our pipes as we had initially forecasted. So that was one of the primary drivers. The second is we've added some kind of incremental planned maintenance, major maintenance projects on the compressor side. So we've updated the outlook for that. Got it. Thanks for the color.
spk03: The next question comes from Leo Mariani from Roth MKM. Please go ahead.
spk07: Hey, guys. I was hoping you could talk a little about these kind of two different scenarios that you're envisaging here that you kind of outlined in the call where there could be some cut in activity depending on what the math sort of tells you. Totally understood it's very focused on what the markets and math are going to tell you here. But Just wanted to get a little better sense of what you're going to be looking at. Obviously, near-term gas prices are very weak, but as you look out into 2024 and 2025, as you mentioned, the strip is materially higher. Is it really more of a drop in that strip as we get into the winter and into 2024 that may cause CNX to pull back a little bit on
spk01: activity you know this year or is there also going to be some impact you know from from spot prices just trying to get a sense of how the dynamic plays out and in terms of spot versus strip affecting your your plans here yeah so a couple of things on that so from a kind of ongoing production perspective our variable costs are incredibly low because the midstream ownership so the way we look at this opportunity is always in terms of kind of when we're going to bring wells on and So think about in terms of till cadence or, you know, deferring a completions activity or something in that realm. I think what you saw in 2020 is kind of the play that we would use if cash prices continue to be weak, where you kind of delay tills from the shoulder season towards the end of the year and you bring those on in the winter. So obviously, you know, we're looking at that continuously and we'll keep an eye on the strip and maybe I'll kick it over to Nav for, you know, how he thinks on kind of shut-ins and other things in that nature.
spk05: Yeah, on shutting in of existing production, what we are trying to do is optimize over the life cycle valuation of the asset. So since we have integrated upstream and midstream, what we are trying to maximize is our sand phase to sales point deliverability of the gas. And so for that, we are doing a lot of analysis on all the wells based on where they are on the lifecycle phase of those, and that will govern the decision. Because, for example, sometimes it's easy to shut those wells in, but it's pretty expensive to lift them up and get back them to sales. So we are trying to solve for two things. One is maximizing production, and two is minimizing the cost.
spk07: Okay, that's helpful for sure here. And then I basically just wanted to be clear, though. It sounds like, though, at this point, you guys reiterated the guidance. Everything is intact, so there hasn't been any kind of material change, of course, and I guess we'll just have to wait to see what happens. Just wanted to clarify that.
spk01: Yeah, that's right. Right now we're the forward strips. We're kind of steady state, and we're keeping an eye on it, and we're always developing plans to react to create the most optimal scenario.
spk04: Yeah, the 24, 25 forwards that you mentioned, those right now are basically – following that math saying keep the one frack crew activity set going in the rhythm that it's in. If those forwards change to your point, those will change the longer term rates of return. That's when we got the ability and the flexibility to adjust when needed.
spk07: Okay, very clear. That's helpful for sure. I just wanted to ask on the Adams Fork deal here for sure. Obviously, a very sizable project there in West Virginia. Can you just provide a little bit more color on what CNX's role there is going to be? Are you folks going to be like an exclusive gas supplier to that clean ammonia plant? And on the carbon capture side, are you guys kind of taking sort of a traditional point source CO2 role where you guys will kind of manage a storage reservoir and drill injection wells and bury that CO2 underground? Just any additional color would be great.
spk00: Leo, this is Ravi. You're right. The strategic partnership that we're discussing with Adam's work at this point in time, we will be the gas supplier. Our gas assets sit pretty close to where this facility will be constructed. And we do have the expertise in drilling these deep wells and sequestering CO2, we have assets in place that allow us to sequester the CO2 in the deformation. So we'll bring those expertise amongst other services that we can offer to this project.
spk06: Okay, thank you.
spk03: Our next question comes from Michael Ficala from Stevens. Please go ahead.
spk02: Yeah, good morning, guys. Alan, you mentioned you've been a bit surprised the industry activity hasn't responded to lower gas prices yet. Thoughts on takeaway capacity from the basin and I guess with or without MVP, how that looks?
spk01: Yeah, so, you know, there haven't really been any changes to takeaway capacity, like, to your point, pending where MVP lands. I don't think we have any unique insight into whether that project's going to come on or not. You know, as a fellow gas producer, I think we'd all like to see that just to help with national kind of production levels. But I think my comment on kind of industry response was more, too, on the supply, the service cost side. We haven't really seen that roll over just yet, but we're expecting it to as we see some folks adjust their schedules moving forward.
spk02: Got it. And maybe to follow up on the cost side, you said you anticipate 23 costs. I heard you right, below 22. Was that based on further efficiencies on your side and assuming similar OFS costs, or do you actually anticipate decline in OFS costs as well?
spk01: Yeah, so we did last year about $1.20. Right now we're guiding to $1.50 with kind of the current cost environment. So we're going to try and beat that even. So that's the genesis of that comment.
spk02: Okay, thank you.
spk03: Again, if you have a question, please press star, then 1. Our next question comes from Noel Parks from Tuhi Brothers. Please go ahead.
spk06: Hi, good morning. Good morning. You know, going back to the Adams Fork and the ammonia plant project, I'm just curious, could you talk a bit about maybe how long you were in discussions for forming the partnership and how the 45Q carbon capture credit increase played in? I wondered was there a possibility of a deal in the works even before that, you know, became evident? Or was that really a catalyst for making it happen?
spk00: Hey, this is Ravi again. So the strategic partnership discussions with Adam's Fork are still being worked out. There's a lot of details that are going to go into it. And the relationship is going to change over time as some of the other milestones are hit, as the discussions kind of pursue with Adam's Fork. And on the 45Q side of things, that is definitely something that improves the outcome for that project. These incentives, they could provide a pretty steady revenue stream. I think the technology that we're trying to deploy there is going to give us a fairly clean stream of CO2 to be sequestered, and the assets, the midstream assets, the surface assets, and the force-based assets that we have in place kind of make us the ideal partner to to partner with in a project like that. And we expect the 45Q type incentives to continue to make projects like this viable in these disadvantaged communities that are impacted by energy transition type scenarios. So we're excited. There's a lot of things that can make this project sort of very suitable in that West Virginia region. There's access to water. There's access to power. There's access to our midstream assets, gas assets. So there's a lot at play, but still the 45Q type credits play a huge role in making the project viable.
spk06: Great. And just on the macro front, of course, with the volatility we've seen in nat gas over the last quarter plus, much of the industry, understandably, has been looking to the LNG capacity coming online 24, 25, 26. And I detect in those discussions a little bit more of a shift to a more granular perspective as far as, you know, exactly which trains, which projects, how they're running according to schedule, whether, for example, with a higher interest rate environment, some of them might get pushed out a bit. I'm just curious if you've detected anything in the wind that affects your your macro thinking, especially as you're looking ahead to 2024 and 2025, which I know you have an eye on because of your programmatic hedging policy.
spk04: This is Nick. I think macro from a demand perspective for natural gas, and we've been on the record for this for a while, it's sort of a major thrust of the new technologies effort within the company. Things like LNG exports certainly is going to have a role and a time with respect to not just, you know, national energy supply demand and natural gas markets, but also global, of course. But from a sequential thinking perspective, for a lot of reasons, from policy to just straight up economics, the more immediate and more impactful opportunity for demand creation within natural gas in the Appalachian Basin is with vertical integration into transportation, types, manufacturing types of industries. And that's why we're so excited about projects like Adams Fork. Those can be done much quicker. Those basically shrink supply chains from tens of thousands of miles cumulatively to dozens of miles in some instances. And those have immediate sort of economic drivers, benefits, rationale. They also tie quite nicely with policy, whether it's regional, state, or federal. So it's those transportation opportunities, manufacturing opportunities, where we think when you get down to it, the actual capital will be deployed to in the front, let's say, three to five years. LNG export and growth of LNG export will certainly have its time, but that's probably going to come later and then after this first step.
spk06: Great. Thanks for the clarification. That's all for me.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Tyler Lewis. for any closing remarks.
spk09: Great. Thank you, everyone, for joining this morning. Please feel free to reach out if you might have any additional questions. Otherwise, we look forward to speaking with everyone again next quarter.
spk03: Thank you. Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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