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spk01: Good morning and welcome to the CNX Resources first quarter 2024 Q&A 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, excuse me, just after this introduction, 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 would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.
spk03: Thanks, and good morning, everybody. Welcome to CNX's first quarter Q&A conference call. Today, we will be answering questions related to our first quarter results. This morning, we posted to our Investor Relations website an updated slide presentation. and detailed first quarter earnings release data, such as quarterly E&P data, financial statements, and non-GAAP reconciliations, which can be found in a document titled 1Q-2024 Earnings Results and Supplemental Information of CNX Resources. Also, we posted to our investor relations website our prepared remarks for the quarter, which we hope everyone had a chance to read before the call, as the call today will be used exclusively for Q&A. With me today for Q&A are Nick Deulius, our President and CEO, Alan Shepard, our Chief Financial Officer, Avneet Deel, our Chief Operating Officer, and Ravi Srivastava, President of our New Technologies Group. Please note that the company's remarks made during this call, including answers to questions, include forward-looking statements, which are subject to various risks and uncertainties. These statements are not guarantees of future performance. and our actual results may differ materially as a result of many factors. A discussion of risks and uncertainties related to those factors in TNX's business is contained in its filings with the Securities and Exchange Commission and in the release issued today. With that, thank you for joining us this morning, and operator, can you please open the call for Q&A at this time?
spk01: We will now begin the question and answer session. Again, to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question is from Zach Parham with J.P. Morgan. Please go ahead.
spk04: Hey, thanks for taking my question. First, I just wanted to ask on new tech. Earlier this week, you announced two new ventures in that business, one in OFS and one in Alternative Fuels. Could you just quantify the potential cash flow generation potential of these two ventures and give us some detail on the timing of these two ventures generating some cash flow?
spk02: Hey, Zach, this is Ravi. So our guidance for 2024 is unchanged. Our free cash flow guidance for 2024 remains at $75 million a year from for the new tech business unit. And as far as the future potential, these commercial opportunities are still taking concrete form. I think we'll be able to talk more about these opportunities more in greater detail in the coming quarters. But we expect them to start taking form towards the end of 24 and have a more meaningful impact in 25 and 26. So stay tuned.
spk04: Got it. Thanks, Robbie. And then shifting gears a little bit, you were aggressive with the buyback again in the first quarter. And over the last three quarters, you've been really aggressive, bought back at about double the level of free cash flow generation. It does seem like the buyback pace slowed a little bit in April. Can you just give us your latest thoughts on how you're thinking about allocating free cash flow between buybacks and debt reduction going forward?
spk00: Yeah, like we talked about in the prepared commentary, our unsecured maturity runway and kind of low secured debt gives us a lot of flexibility on a quarter-to-quarter basis. We're always evaluating the pace and timing of buybacks. In Q1, we saw a real opportunity when the stock was trading in the 20s to grab a lot there, modulated a little bit later in the quarter as the stock kind of ran up. I think if you look at $50 million over the projected $300 million, there's still a lot of room to buy back shares for the remainder of the year. So, you know, consistent with always, we're going to be flexible, try to maintain flat to declining debt, but no real changes to the strategy.
spk04: Thanks. I appreciate the call.
spk01: The next, excuse me, the next question is from Leo Mariani with Roth MKM. Please go ahead.
spk08: I just wanted to continue to focus a bit on the new tech, you know, businesses here, obviously kind of a, A lot going on with the new kind of CNG LNG business as well as the OFS business. I was hoping you could speak a little bit more to kind of you know, what the physical, you know, mechanism here is, you know, on these businesses. I mean, it sounds like from the press releases, there could be some type of proprietary devices that allow you guys to, you know, really capture the CNG without, you know, the aid of additional mechanical compression and just also on the Well, Flowback as well, presumably there's some kind of proprietary, you know, device that you guys are using here. So maybe can you just kind of speak to that and give us a little bit more color on exactly kind of what this product, you know, is that you're going to be rolling out to folks?
spk02: Hey, thanks, Leo. And thanks for the question. I haven't heard the rest of the questions, but this might be my favorite question for this hour because we want to talk about the technology that we have developed. We were pretty excited about it. It's been in the works for a few years now. We've teased in the past earnings calls, and we're very happy that we've reached this milestone where we've engaged in these partnerships where we can start to bring these technologies to market. So to talk more about the technology, what I would do is I would break the technology into two segments. And the first step involves combining various discrete functions that are performed in a conventional flowback, like pressure management, solids and sand removal, and high rate flow back, fluid removal. So these are discrete steps in a conventional flow back. What our technology does is combines all this into one equipment, into one step, and we can implement all this from a highly automated piece of equipment. And we can perform all this at a very high pressure and rate. And because our solution does this in a materially smaller footprint, It reduces environmental impact and the footprint that's required to deploy this technology. It can be deployed much faster than a conventional flowback spread, which results in a lower cost and reduced cycle times for operators. It's a sealed system, and because of that, it eliminates any fugitive methane emissions. And it's highly automated, which results in the reduced manpower required to operate this. which results in improved safety performances and reduced costs. For this particular technology, for this particular application, our estimate shows that there's 20,000 wells that are flowed back in the U.S. and 60,000 wells internationally. All of these wells which require flow back can be a potential application for this technology. Operators are looking to reduce CapEx. They're looking to reduce emissions. And that's exactly what our solution does. And we've partnered with Deepwell Services to deliver the solution within the United States. And Deepwell brings a strong domain expertise and is a trusted name in the oil field service industry. And we're excited to partner with them to bring this solution to market. And then the second part of our technology involves harnessing what we call geomeric energy, which is derived from high-pressure oil and gas reservoirs like the Utica Shale, Hainesville, Eagleford. These are formations within the US, and then Motney Shale in Canada. And there's various international formations and offshore applications for this technology as well. So geomeric energy, like geothermal energy, is a renewable energy source, but has typically been wasted by oil and gas industry while developing these high pressure formations. I mean, not only is this renewable energy source wasted, operations end up expending time, energy, and resources destroying this energy. So what our technology does is it allows us to harness this energy to manufacture CNG, LNG, and potentially electricity and hydrogen right on our well pads. You know, if you look at a typical CNG value chain, gas is produced on a well pad, energy is spent depressurizing the gas, which is then recompressed and transported to a compressor station, but additional energy is spent to compress it further and then fill in CNG trailer set, CNG specifications, and then it's transported to a customer. Our solution allows us to manufacture CNG utilizing geometric energy and without any mechanical compression right on our Utica well pads, fill in the CNG trailers, and deliver it to customers by passing several cost and energy intensive steps. So again, the solution that lowers costs and emissions for customers, which is what industry is looking for, and we have partnered with NewBlue Energy to bring this technology to the U.S. market. NewBlue has a track record of developing CNG and LNG solutions, and we are excited to partner with them.
spk07: Hey, Leo. This is Nick. Maybe, too, it'll be helpful because, to your point, there's specific questions about technology and market for these announcements we've made. But also, these announcements are sort of additional developments, I call them, in a much bigger thing that we've been working on now with NewTek for a couple of years. And it ties to a couple of realities, facts out there in the world today in our industry. One is that you've got this global demand for energy that keeps growing. And you see it in advanced economies like ours with AI and data centers. You see it in a developing world where they're looking for and insisting on better quality of life for their people and citizens. So the world wants all these additional BTUs, horsepowers, kilowatt hours, and they want lower emissions to go along with it. But there's other truths that we're seeing as well. Wind and solar at scale. When you couple that with electrifying everything, that is a recipe for grid disaster. And the degree of subsidy probably doesn't change the physics of the matter. So that exclusively is going to have some challenges. We see ideas or opportunities to export more Appalachian gas and LNG in it to places like India, China, Europe, wherever. And that sounds great, and it's got a certain degree, I guess, of logical merit to it, but the reality there is that you're going to have to build extensive pipelines and LNG facilities to do it, and in this lifetime, that's going to be really challenging. So in terms of the near-intermediate term, that's sort of DOA as an option. And really, it's sort of inefficient when you think about it, because in the grand scheme, you're importing, on one hand, BTUs from thousands of miles away away to here via things like gasoline and mid-East oil, and then you're exporting our BTUs thousands of miles away, right, to the other nations that I've mentioned or examples like that with LNG. So it's not the most efficient sort of supply chain net-net. You got hydrogen. Hey, the hydrogen economy, you know, it's got some really interesting attributes, specifically with blue hydrogen, which means natural gas is going to play a role in that. Green hydrogen at scale, that's going to be effectively from a technical perspective and able to scale it a non-starter, as well as having some economic challenges. So we think we found a better way with this new tech approach, and it's one that checks all those boxes. It sort of was captured within our Appalachia First vision that we laid out a while ago, which is basically make the natural gas responsibly here and then use it here. through things like Robbie said, CNG, LNG, these technologies. And it basically leads to an onshoring of manufacturing of goods that we currently also import. So when you do this, like we're basically shrinking supply chains, you're dropping emissions, you're declining costs, you're growing GDP and you're expanding jobs, family sustaining wages with respect to those jobs as well. And our friends in labor and the trade, they love that component of it. So this is real. This proprietary technology, right, it's showing now that we can commercialize this. It is true, and Ravi called it renewable. I call it a true alternative energy with regard to the geobaric that he mentioned in the shale formations. And when we're able to harness that, it really allows for efficient and cost-effective conversion of the energy in these high-pressure shale horizons, like the Utica and Hainesville and the CNG and LNG, and then on the flowback technologies across all the shale horizons. So when you think about this, our markets, instead of trying to expand existing markets and horizontally expanding, what we're really proposing here is to vertically expand into market opportunities for natural gas. Vertically expanding into electricity generation, whether it's the microgrids or meeting demand during power crises, which we've seen recently, or feeding that growing appetite for things like AI data centers. Ground transportation is another huge market opportunity that we see, the CNG-LNG, right? This is the displacing of these gasoline and diesel products with supply chains that are tens of thousands of miles cumulatively. The air industry and fueling it, that's another big opportunity with the sustainable aviation fuel. And then an onshoring of manufacturing, keeping it close to the CNG-LNG, and frankly, our environmental attributes with our waste mine methane capture industry. is a big one. So this past week we saw two more tangible examples of this with those press releases. Our environmental attributes with waste methane capture is another big example of that. They penetrate those four markets that I talked about. They're all individually, those four, massive in terms of potential. They all are going to generate free cash flow and they're all going to positively impact our view of NAV per share of the company. But these technologies, they come from similar opportunities with that harness energy in geobaric form, and they both sort of are rooted in the same vision. So sorry for the extensive one-two explanation, but it's something that has been front and center with us for a while, and we wanted to take the opportunity to sort of not just address your question, but take a step back and look at the bigger picture.
spk08: Well, that's certainly helpful. Certainly appreciate all of the detail here. I think many, many folks are sort of wondering about a lot of this. I think that's very helpful. Then just a quick follow up to that. So if I kind of read you correctly, it sounds like that you may be kind of starting to roll this out to third party customers later this year and start to see some revenue end of this year and into 2025. Can you maybe just talk to the capital side? Do you expect any meaningful capital associated with any of these new businesses that you've announced, or is it a fairly kind of low capital intensity endeavor for the company?
spk02: Hey, Leo, this is Ravi again. So the capital needs for these solutions are very, very low, especially compared to our E&P program. And there's no, at this stage, no incremental capitalist plan for 2024.
spk03: Okay, that's great. Thanks.
spk01: The next question is from Bertrand Don with Truist. Please go ahead.
spk05: Hey, good morning, guys. Just wanted to shift gears real quick onto the activity curtailments. Maybe just get your thoughts on why you kind of stopped at 11 wells. I would think there's some argument that your hedging is insulating you, but probably another side of that is why don't you just pocket the hedging gains and also curtail production? We had a fight recent drop. Just any thoughts on are you more inclined to hold at this level or are you kind of seeing prices and thinking about dropping more?
spk00: Yeah, I think for right now we're kind of sticking to the guidance we gave. We're going to hold at the 11 deferrals for now. It's something we constantly watch. In terms of the discrete decision on those wells, it's a function of coordinating with your operations team on where there's a clean break in terms of which wells you can stop on versus which ones might already be in process. So there's no real magic other than syncing up with operations to get to the best answer overall from a free cash flow basis.
spk05: Sorry, I meant, you know, what about actual, you know, shut-ins or any of that kind of activity?
spk00: Yeah, not contemplating this time. You know, most of our wells run at very low variable costs, so we're still making pretty healthy margins on those. As you pointed out, we're getting pretty close to hedge level, so we have very little in terms of open volumes. So we're kind of just working the existing volumes we have into the hedge book.
spk05: That makes sense. And then just to pile on to the new tech, maybe just a little bit of a different approach for this. In the prepared remarks, you referenced the potential to be a meaningful free cash flow contributor on the DWS side. I just wasn't sure. Am I reading too much into that versus the new blue agreement, or is there a tangible difference between the two?
spk00: Okay. I mean, Robbie talked about it a little bit. They both have very large addressable markets. I think the market for flow back is a little more developed. It's very identifiable, and we think we'll probably ramp quicker into that market because there is an activity going on, and it's a clear superior technology to deploy. CNG and LNG, we've been pushing on those. There are markets for those currently with a lot of the electric frag fleets. Market penetration there, we're optimistic on, but it'll probably be a little bit slower than deep flow. That's why. We made that comment. Does that make sense? Ravi, I don't know if you have anything.
spk02: That's absolutely correct. I think the flowback market is something that we can penetrate into very, very quickly, and CNG market is going to take a little bit more time to walk.
spk01: Understood. Thanks, guys. Again, if you have a question, please press star, then 1. The next question is from Jacob Roberts with TPH & Company. Please go ahead.
spk06: Morning. I just wanted to... I just wanted to touch base on the kind of the preliminary 2025 outlook. Just curious with the activity levels assumed in that $550 million program, and then maybe if you could provide any color on the kind of the price outlook you might need to see to trigger that incremental 50 beyond the 500 you've spoken to about relative to maintenance.
spk00: Yeah, it's the same underlying activity set that we talked about on the last call that we can guide to kind of that 500 million run rate. All you're seeing there is the shifting of those 11 wells that we deferred into early next year if we were to ramp back up from call it this 555, 560 area back to that 580 target. So that's all we're trying to indicate there. And we're going to watch where kind of the pricing develops to. I think we've got a lot to be learned over the summer here in terms of how sustainable the production drops are, how hot the summer is. There's a lot of factors that will go into the ultimate planning for 2025. Once we're in a position to firm that up, we will.
spk06: Great. Thank you. And the second question, looking at slide five of the deck with the debt stack kind now really weighted to the first part of the next decade. Just curious if it changes the philosophy around the duration of the hedge book as we enter the back half of this decade.
spk00: Yeah, no, great question. So definitely the balance sheet and the hedge book are correlated or have a relationship. I think what we've talked about in the past on hedging is that we're looking to shorten up the overall length of the book. Historically, we've gone around five years. We've been kind of watching the books come in you know, by 12 to 18 months. So we're still very much in the camp of hedging going into the near-term year, but just trying to maintain flexibility in kind of the outer years as we see the volatility continue in our space, particularly with some of the projections you're seeing in power demand and gas demand. We want to make sure that we're able to capture those through our hedging program by not getting too far out.
spk06: Thank you. Appreciate the time.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Tyler Lewis for any closing remarks.
spk03: Thank you again for joining us this morning. Please feel free to reach out if anyone has any additional questions. Otherwise, we look forward to speaking with everyone again next quarter.
spk01: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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