Q2 2021 CNX Resources Corp Earnings Call
Good morning, and welcome to the <unk> resources second quarter 2021 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.
After todays presentation, there will be an opportunity to ask questions.
Ask a question you May press Star then 1 on your Touchtone phone to withdraw from the question queue. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Tyler Lewis Vice President Investor Relations. Please go ahead.
Thank you and good morning to everybody welcome to <unk> second quarter Conference call. We have in the room today, Nick Delius, our president and CEO, Don Rush, our Chief Financial Officer, Chad Griffith, Our Chief operating officer, and Yummy I can't Cube, our Chief Excellence Officer.
Today, we will 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 2 Q2021 earnings results and supplemental.
All information of C N X resources.
As a reminder, any forward looking statements, we make or comments about future expectations are subject to business stress, 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 Yummy.
And then dawn.
We'll then open up the call for Q&A, where Chad will participate as well with that let me turn the call over to you Nick Thanks.
Thanks, Tyler good morning, everybody I'm going to keep my remarks brief. This morning is we had a another simple clean easy to understand quarter and our investment thesis remains intact.
<unk> get slide 2 in our deck the theme that I'd like to highlight once again is that a steady execution.
And that's the same theme that we've been hitting upon in recent prior quarters.
So for sure second quarter is another quarter highlighted by a successful execution of our long term plan that we laid out in April of 2020, the second quarter.
Mark the sixth consecutive quarter of significant free cash flow generation, where we produced $117 million.
We use that free cash flow to continue doing what we said, we do and we reduced net debt by $89 million and Opportunistically bought back $23 million worth of shares at what we consider to be attractive prices.
If you literally have approximately $215 million left in our existing stock repurchase program and as we said in the past we're going to continue to use the future free cash flow to reduce absolute debt until we achieve a leverage ratio of around 1.5 times and while we're doing that if our stock continues to trade at a discount we will have the wherewithal to repurchase.
We cars, along the way, while reducing debt, which is what we've been doing since the fourth quarter of 2020.
And we will utilize both our liquidity and timing flexibly.
And use that flexibility to adjust the free cash flow allocation between debt paydown and share repurchase weightings week by week I will look at that month by month, and we will look at a quarter by quarter.
Sure what will guide us it'll be the math of the risk adjusted returns and per share value. That's what we'll use when we decide how and when we change our weightings.
Also in the quarter, we increased our 2021 free cash flow guidance again by another $25 million to $4.75, or $2.18 per share. This compares.
As to the previous guidance of $450 million or $2 <unk> per share.
So looking at the Cliff notes version of where we're at for the second quarter free cash flow was up free cash flow per share was up that was reduced share count was reduced and then for 2021, our free cash flow guidance was raised now let's hear from.
Thanks, Nick good morning.
I'm going to focus my attention on the topic of ESG to highlight our leadership efforts as well as the significant opportunities we see for free cash flow generation and per share value creation in this area.
Last week, we released our annual corporate responsibility report that provide.
Give me a comprehensive look into our unique ESG accomplishments and our strategy moving forward I want to take a minute today to highlight this company's value and our ESG leadership, not just in the oil and gas space, but in corporate responsibility across all America.
If you haven't already I encourage you to take.
Provide I've answered the full report, which can be found on our website at responsibility Doxy Nx dotcom.
In a world where similarly every public company is racing to announce a net zero target years into the future <unk> has not only achieved net zero, but net negative status.
A deep day and Thats highlighted on our slide 3.
We believe this is the first among natural gas upstream and midstream companies. When you look at the amount of methane, we prevent from being vented into the atmosphere from the extraction of steelmaking coal on an annual basis, which is approximately 300000 metric tons of.
The party methane, we capture around 7 times more <unk> equivalent admission than we produced by our scope, 1 and 2 emissions footprint from daily upstream and midstream operations combined.
Additional opportunities exist to further deepen our net negative scope, 1 and 2 emissions profile.
While by continuing to eliminate fugitive emissions from oil and gas operations, making additional investments in coal mine methane abatement for third parties and leveraging our extensive surface acreage footprint for alternative energy and other.
Carbon abatement projects.
Each of these 3 Avenue.
Third per new exciting opportunities for free cash flow generation and per share value creation. Most importantly, certain of this tangible drivers of our net net.
Negative carbon footprint are practically non replicable and they are unique only to CNS.
On energy company that is.
Carbon negative may seem counterintuitive, but.
While we accomplish this through the same values and priorities that have driven our business and allowed it to thrive in this region for generations. It is important to note that <unk> has not changed on the contrary the world has changed around us and began prioritizing.
Our ESG friendly work, we have been doing for decades.
Zane abatement operation that led to a net carbon negative status or the same operations, we have been perfecting for many decades.
Led to the birth of the company you see today.
So from innovative leadership on the environmental front.
<unk> has potential to have the potential to translate into significant per share value for our shareholders, let's pivot over to the social front, which is a hallmark of our tangible impactful local ESG brand.
We have led and we are we are determined to continue to lead our industry in the broader corporate community there as well.
That's why in addition to initiatives within the company designed to foster an inclusive corporate culture, we have challenge ourselves with an aggressive diversity target for our internal workforce of 40% over the next 5 years.
I will tackle this challenge true strategic too.
So I will tackle this.
This challenge through strategic opportunities to increase the diversity of our workforce rather than 1 size fits all policy designed to simply meet a target. We will believe we believe a diverse workforce yields innovative ideas and important diversity of thought and opinion.
These internal initiatives tied.
Directly to the $30 million per loan Tropic commitment, we have made through the <unk> Foundation as well as the Mentorship Academy, we are working to establish for young adults in disadvantaged areas by investing in urban and rural underserved communities and population in our footprint will generate return for the company through.
And expanded diverse hiring pool and return for the entire region through prioritization of the empowerment of the most marginalized among us.
Encouraging.
Progress in our communities while at the same time, increasing the local pool.
Diverse talent is what sustainability means.
To CNS.
Beyond this signature items of our net carbon footprint and our diversity leadership many of our tangible impactful local ESG accomplishments were continuations from prior years, we were the first mover in the adoption of an all electric frac spread and we recycle overnight.
90% of our produced water our employees worked the entire year accident free desk by the operational challenges of the pandemic.
<unk>.
Delivered families sustaining mediant.
Compensation level that exceeded over 150000 per year top among Pittsburgh region.
Public companies have of the direct reports of the CEO of our diverse we are a large net provider of tax revenue to the local communities and the state government long term focused optimizing intrinsic per share value being the low cost producer of our product and pay for performance culture are the guidepost of.
Of directors and our corporate governance again I encourage you to review our corporate responsibility report and see for yourself, how we continue to position <unk> alone at intersection of ESG leadership and performance low cost operation astute capital allocation and profitability.
That presents the best in class offshore for ESG focused investors. Thank you I'll turn it over to Don.
Thanks, Amie and good morning, everyone.
Im going to start on slide 4 this is a slide we have shown before and compare some of our main financial metrics to before indices listed on the page as.
Our body <unk> screens very well across the board.
Slide 5 highlights our cost advantage relative to our peers, which is structural and gives us an advantage versus our peer group.
And given that <unk> is a low risk free cash flow annuity that is supported by our low cost advantage asset.
Base and hedge book, we believe that we are trading at a significant relative discount in terms of free cash flow yield which is highlighted on the bottom right graph as Nick highlighted we will continue to pay down debt and reduce our shares under these conditions.
And over the past 3 quarters, we have bought back $84 million.
You can see shares.
Slide 6.
<unk>, our cost structure by quarter as expected our second quarter costs were up slightly due to 2 Shirley penns barrel wet pads coming online in the quarter.
However, as you can see we continue to expect our full year 2021 fully burdened cash costs.
To be around $1.5 per Mcf.
Also I think that is worth noting that if you look at our income statement for the quarter you will see that we had a loss on commodity derivative instruments of negative $539 million.
This consisted of an unrealized loss of 529 million.
And a realized loss of just $10 million in the quarter.
We mark to market, our entire hedge book each period and with the recent increase in future gas prices. This has resulted in a loss for the period with the vast majority of it being unrealized.
Slide 7 highlights the plan in action.
6.6 consecutive quarters of free cash flow generation in the books, we have a high degree of confidence in continuing to execute our long term 3 plus billion dollar free cash flow plan that we laid out last year.
This confidence is supported by our low cost structure hedge book and operational proficiency.
Slide 8 highlights our balance sheet strength.
And as you can see we paid down approximately $89 million and net debt this quarter.
We have a significant runway and a lot of flexibility before our nearest term bonds mature in 2026 and.
And we have only approximately $320 million.
<unk> drawn on our credit facilities, which equates to around 2 or 3 quarters of expected free cash flow generation.
Given our track record of free cash flow generation with a clear path to further delever the balance sheet.
I'll wrap things up on slide 9 which hits on some guidance updates as well as some information.
Cash taxes.
There are no changes to production and capital guidance for the year. However, we did mark to market gas and NGL price assumptions.
Which improved from our last update in April as such we increased our full year, EBITDA and free cash flow guidance by $25 million.
And as you can.
Can see due to our share repurchases and our increase in annual free cash flow expectations, we increased our free cash flow per share guidance to $2.18.
Per share.
A few final items with respect to taxes. We currently have a federal NOL balance of approximately $1 billion.
And an unutilized.
Utilized IDC deductions of approximately $945 million.
As a result of these 2 balances available.
We do not expect to be a material cash taxpayer during our 7 year free cash flow plan through 2026 with that I will turn it back over to Tyler.
Thanks, Don and operator, if you can open.
The line for questions at this time please.
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 are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then 2.
The first question is from Leo Mariani.
Danny of Keybanc. Please go ahead.
Good morning, guys.
I was hoping you could talk us through a little bit on the pace of activity here for the rest of the year I noticed you had kind of 14 wells that you are able to bring online.
Second quarter do we see that start to drop off.
You know quite a bit here in the second half and just trying to get a sense is the is the low point of turn in lines is going to be for Q1. It also I was hoping you could help us a little bit with with Capex in terms of kind of matching that up just trying to get a sense on the capex. If you could help us out in terms of how that trends over the.
Orders as well and anything you can quantify it would be great.
Sure. Thanks for the question this is Chad.
I'll get started on that maybe Dan can fill in at the end if there's anything I leave out.
I think I think what youre seeing in the capital program.
Remember, we're generally a 1 rig 1 frac crew program, alright, but we did add a little.
<unk> activity is beginning of this year to take advantage of some NGL prices. So we added a pad and.
That ultimately ended up doing is it sort of it add some capital in the first half of the year and I had a couple of sales into Q2.
But I think.
Rest of the year is we're back to that 1 rig 1 frac crew program and so it's really just a matter of looking at the guidance numbers for the full year.
The next few hours and taking out what we've done to date and then just sort of dividing by 2 will get real close to.
So the mark on what to expect in the next 2 quarters on the production on capital and Intel's Yes.
Yes, no just theyre just add onto that chatter thats, an easy way to think about Q3 and Q4 should be.
Fairly similar so.
Consistent capital and sort of production between each 1 of them and again sort of can take guidance and sort of see what those numbers are.
Okay. So number of turn in lines is pretty even in <unk> and <unk>. So if we take.
The guide of kind of 37 pills and just subtract the first half hills pretty.
<unk> kind of gets us there physically.
Yes.
Good day, Chad mentioned, the 1 rig 1 frac crew it until turning in line 1 week earlier, 1 weekly could put you on hedges of quarters, but net net as far as the number like the capital numbers in the production numbers Q3, Q4 will be similar.
Okay No that's helpful.
Helpful. And then just in terms of your G&A guidance here.
Now what you're seeing on your chart here on page 6.
You guys are talking about full year cash G&A in 'twenty, 1 or 11 cents per am but just noticing you kind of came out at 15.
In the first half so it seems like it's implying.
Pretty much pretty large second half reduction in 'twenty, 1 on cash G&A, just any color kind of around that.
Yes.
Of it.
Yeah. Some of it's just mechanical around what what kind of rolls through as far as the Q1 and Q2 in regards to how the the equity and stick stuff transition across.
So we're always looking to optimize the business from the company moving forward, but the quarter variability is more mechanical in nature.
Okay. So just timing of some of the expenses all right no that's helpful.
Obviously, you guys decided to accelerate wet gas activity, which seems to have made a lot of sense, just given the really high NGL.
Price is if we continue to see high NGL price is could we see a little bit more of that later this year in terms of bringing on some of these.
<unk> rich pads, obviously ngls have done it.
Incredibly well and then just.
Lastly in a similar vein obviously, the 22 strip looks great now at this point.
What are you would you guys consider something other than maintenance mode for next year.
Yes. This is Chad I'll start on the liquid side.
Not only are we looking at timing of pads and timing of D&C activity. We're also looking at how to optimize our flowing production now through the midstream system, we own in southwest PA, we have a lot of flexibility.
<unk> ability with where we deliver those volumes.
We have some some damp Marcellus volumes, we've got some dry slip a utica volumes.
Have the option to either blend those together and sell it as a dry gas, where we can reroute the damp Marcellus volumes to processing and extract Ngls and received a premium.
We do that analysis really on a daily.
Basis, and try to optimize the existing production stream to extract as much cash flow as possible.
Certainly NGL prices are up but so are gas prices and so to us it's really about the relative spread between NGL and gas.
And so we have moved some volumes some incremental volumes to processing to to take advantage of that.
Frac spread but the relative strength in gas.
Has really kept us from going further all in on that move.
Local gas prices have recovered and are very strong and we continue to sell a lot of lot of volumes blend volumes in settlement of dry outlets.
On the D&C activity or adding incremental are shifting activity.
Play, there's a lot of the similar math.
We look at all in sort of risk adjusted rates of return on where we want to spend our D&C capital. We have additional wells. So we can go back to and surely pittsboro and take advantage of strong NGL prices, but we have to look at the returns of that activity relative to the returns that we have on income.
R R.
Our base dry gas plan that we have in southwest PA.
And so we're looking at that Theres a couple factors the prices continue will move.
Certainly the cost structure each opportunity is as relevant but we're looking we're looking at how to optimize the schedule going forward based upon how commodity prices are changing.
Okay. Thanks, I think your second question, Yes, you had a second question on.
Yes, I was just trying to get at.
Do you do you look at 'twenty, 2 and if gas stays really strong at $3.50, do you guys still.
Still want to stay in maintenance mode, just due to the prioritization of debt pay down or is there a.
Chance to maybe do a little better than maintenance mode. If gas is really strong next year.
Yeah, and I think a lot of times, where we've sort of talked about this and we think about it in terms of like more production sculpting as opposed to just purely called additive additive work. So if you look across the forward strip and the way we've talked.
But the forward strip moves up meaningfully I think he can think through things like that nature, but as far as like period to period seasonality or just 1 year, yes, we will try to squeeze as much production as you can into the kind of high price points, but that's more just call. It trying to get things on the line, a little bit quicker versus a little bit slower but sort of.
Net net not looking for brand new activity really just trying to pull things up a little bit or like we've done in the past if it goes the other direction will delay things a little bit to just try to get that upfront 6 months of production into the best pricing environment that you can.
That's great. Thank you.
The next question is from Zach <unk> of J P. Morgan. Please go ahead.
Okay.
The last several quarters, you've used a majority of the free cash flow to reduce debt, but also bought back. Some shares can you just talk about what else you would need to see to get a little more aggressive with the buyback in the past.
I think you've talked about wanting to perhaps turn leverage target.
But where does your hedge book you really locked in a while other future revenues to get to that level or are you still waiting on hitting that target before getting more aggressive really just any color you have there.
Yeah, and I think we've talked about this a lot a lot historically.
Brickley and we've gone more aggressive historically in certain quarters and as far as what we'll do going forward. There's a lot of different factors that will impact that and I think to your point I mean.
More day.
Closer you get to the target and the more forward visibility and the cash flows that are sort of locked in the the more you can lean into things.
As opposed to others.
We've recognized that gas prices are very unpredictable our equity is still sort of trades unpredictable whenever our free cash flows are pretty much locked in at this kind of always been puzzling to me personally. So we're trying to be call it thoughtful and prudent in and do both at the same time, the weightings will vary by.
Cash situation and net net as the.
The balance sheet and the debt keeps coming down you get closer to the target clearly have more ability to push more towards cash.
Shareholder returns as the balance sheet gets closer both just mechanically as of the quarter, we're in plus the cash flow certainty that we.
Forward keeps growing too as we layer in hedges.
Got it thanks for that color I guess, 1 more from me can you talk a little bit about what youre seeing on local basis and your exposure there.
And with the MVP pipeline is further delay how do.
Quarter by impacting basis within zone within the basin.
Yes. Thanks for the question this is Chad again.
Certainly.
MVP timing risk is certainly very relevant to in basin pricing.
We sort of saw the regulatory challenges that were coming along for that pipeline.
I don't know.
Do you see that at least a year ago, we got aggressive on the in basin hedging.
Back in last year coming into the beginning of this year, we got pretty aggressive on the invasive hedging we got generally as part of the programmatic hedge we try to keep basis and Nymex pretty locked in.
In lockstep matched up.
We saw.
So the risk coming with MVP and potential tightness in the invasive market and so we leaned into the in basin hedging program and.
And got out ahead of it while that basis price was was fairly was pretty good.
And now we're sitting at a point, where we're over 90% hedged on in basin pricing exposure through the end of 2024.
And we continue to layer on additional hedges beyond that where we see attractive opportunities to do so.
Got it thanks for the color guys Thats all from me.
The next question is from Neal Dingmann of true. Please go ahead.
Morning.
Can you say.
You mentioned about potentially this buy more stock back could you talk about what discount you need to do so.
Okay.
Yeah as far as I mean, we haven't given any public guidance on exactly our buyback plan. So we've been buying back shares we bought back about $85 million worth of shares over the last 3.
3 quarters in.
Commentary out of the gates at where we're trading you can expect us to continue to do 2 things pay down debt and buy back shares.
Clearly as we've said before the higher day free gasoline yield.
The faster you want to do it in.
The let's call it balanced by quarter will change.
By quarter, but net.
Net net the ability to do both.
Not do both sometime in the future, but returning capital to shareholders. Today, I think is fairly unique relative to a lot of folks.
You can expect that to continue going forward.
Yes, no great Great answer that's I was just trying to determine.
Quarter to quarter, So how do you decide.
Because you do have a great free cash flow and then just 1 follow up maybe maybe more for Chad just on you mentioned earlier about taking advantage of the year about Ngls Ngls continue to be.
Quite high obviously, you've got a great footprint to be able to do so going forward. So you talked about would you do more pads on that length I'm just kind of look at it.
Which way maps out there I know you have certainly the availability to do so.
Yeah, I tried to touch on that a little bit earlier.
Sorry, if I didn't quite get it all cleared but when we look at that we look at the we have to look at the return of that next pad and a wet area versus that next pad in the dry area and with gas prices with the gas price strength.
And the ability to hedge that gas price for multiple years.
For several years to that new pad production.
When you look at the risk adjusted rate of return.
When you look at those 2 opportunities strong gas market with the ability to hedge and a strong NGL market with less of a ability to hedge a lot of times the.
The sort of the scale still land in favor of that dry pad, but look we're looking at it continuously as the prices in the forward strips evolve we update our numbers and we shuffled the schedule around accordingly to bring forward.
The best risk adjusted rates of return first.
Very good thanks, guys.
Okay.
The next question.
<unk> is from Noel parks with Tuohy Brothers. Please go ahead.
Hey, good morning.
Alright, great.
I have a couple of things.
I was just curious.
Okay.
Talking about.
Your first half activity levels, and taking advantage of NGL prices getting stronger and I guess I'm thinking in sort of a bull case per gas I'm curious about.
Just service availability.
In the basin and weather.
You can any conceivable.
No danger of.
Having any capacity issues I guess I'm sort of wondering you know like what's the crack spread spare capacity out there as far as you know.
High quality effective crews and equipment.
When you look at when you look at rig like current rig deployment.
Lower 48.
Current frac crude deployment, lower 48, where roughly.
A third to a half below prior peak so that's it.
It's still good crews still good rigs available.
I think theres lots of availability of crews.
Yeah, what meant.
And on down the supply chain as you were talking about sand or chemicals or even labor it's ed.
It's fairly readily available non opioid go deploy incremental activity.
And then no with with our position on the.
The Reagan Frac program that we've laid out where we're in great shape.
With respect to being contracted and covered on the cost of those services. So we don't see any any pinch points with respect to our ability to continue to execute like we have.
Yeah.
Great Thanks and.
My other 1 you know as.
Yes, she concerns.
Moving to.
Become more and more.
On investors' minds I'm curious for the <unk>.
Private operators around you do you have any sense.
Sort of the state are there.
Work on our investment and working.
We are working on their methane emissions. Unfortunately that that is 1.
Area, where.
You know, even though they're really conscientious companies risks being powered by the Nebraska is sort of the the worst actors out there so.
Just.
I'm wondering what it is.
Inside your head on that.
Yes, I mean, it's hard to tell about.
Private companies, but like you said.
Yes.
Umbrella as widespread right now everybody is working towards that.
You just get Nuggets of information on a few private companies here are there working to reduce their.
The scope, 1 scope scope too as well by all of US who kept going like a very clear picture as to what Theyre doing.
It'd be hard to tell because again got their private it is only when we're interacting with them in.
Sharon idea is that when we get some some insight as to what Theyre doing.
I do think that the.
The regulatory environment is moving in a direction, where obviously the rigor and the stringency of methane emission.
<unk> is only getting tighter so to a large extent that that's not a secret of course within the base and I think many of the different operators private or public.
We're trying to develop plans and operating plans and processes that they will be ready for that but like Amy said, it's tough to gauge.
Individually and company by company.
Thanks, that's helpful. That's all from me.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Tyler Lewis for closing remarks.
Great. Thank you.
Thank you everyone for joining us here today, please feel free to reach out if anyone has any additional questions. Otherwise we look forward to speaking with everyone again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.