Q3 2021 CNX Resources Corp Earnings Call
Good morning, and welcome to the XI and X resources third quarter 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Tyler Lewis Vice President of Investor Relations. Please go ahead.
Thank you and good morning to everybody.
Welcome to <unk> third quarter conference call, we have in the room today, Nick Julia <unk>, our president and CEO, Don Rush, our Chief Financial Officer, Chad Griffith, Our Chief operating Officer, and Yummy I can't you Berg, our Chief Excellence Officer.
We will be discussing our third quarter results. This morning, we posted an updated slide presentation to our website.
Also detailed third quarter earnings release data, such as quarterly E&P data financial statements and non-GAAP reconciliations are posted to our website and the document titled three Q2021 earnings results and supplemental information of <unk> resources.
As a reminder, any forward looking statements, we make or comments about future expectations are subject to business stress.
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 then by Don We will then open the call for Q&A, where Chad and Yummy will participate as well with that let me turn the call over to you Nick.
Thanks, Tyler and good morning, everybody that's similar to the last quarter, we had another clean and easy to understand quarter overall slides two and three I think some of that up they both are highlighting our scheme, which has been steady execution. It puts us in a position to manufacture our free cash flow.
Whether it's safety or environmental compliance or overall field operations. All of these things are the areas. We focus on the sequence is a simple one it's consistent methodical execution that results in significant free cash flow generation and then the free cash flow allows for capital allocation opportunities, where we're primarily focused.
On balance sheet, strengthening and share count reduction in.
The net result of all that that's intrinsic per share value growth is.
As we continue to trade at a material discount to our intrinsic per share value as we see it and with net debt declining and leverage improving we steadily increased our attention on share count reduction in Q3 was a good example of this approximately 60% of our free cash flow was returned to shareholders in the form of buybacks and most importantly, a discount.
Prices.
And as slide two highlights we continue to see a significant opportunity to retire additional shares at what we believe to be currently attractive prices and as a result on October 25th earlier. This week. The board has increased our share repurchase authorization by $1 billion now have any sizeable share repurchase authorization.
At our disposal, that's normal course for C. N access part of our toolbox so to speak in terms of how we allocate capital. We recently extended our CNS and see you next midstream credit facilities also extended a bond maturity. These actions were opportunistic and now they provide an even longer maturity runway and more flexibility and capacity for future.
Capital allocation moves and we plan on making such moves as the facts and circumstances dictate the clinical right of return math of capital allocation and free cash flow per share growth.
Now I suppose in many ways, our approach might be a little bit different.
Then what's invoke today in our space our path is really pinned to optimizing intrinsic per share value by looking at the long term by methodically executing by Derisking and obviously by astute capital allocation, we don't necessarily care about scale or size or things like industrial logic that hinges on what's trendy.
Or or their herd mentality.
Instead, we're committing to the impactful math of good old fashion per share value creation, we want tangible actions that are going to be back in the words in the math and we are going to embrace the most local centric capital allocation you can fine which of course is acquiring and betting on yourself.
Now we use these words tangible impactful in local and I think you've seen those with our ESG effort.
Those words tangible impactful local they're not just buzzwords and they're not only applicable to ESG. They permeate everything we do on behalf of our owners our employees and the regions that we operate and live with them.
I don't know if you guys are fans of history, but there was a historian.
Oswald Spengler and his claim to fame was coming up with a theory that national survival requires keeping a nation internally fit and being ready for external events. If you take that approach or that view from that his story and we basically embrace that with how we built <unk>. We built this company internally to not just survive but thrive.
External events play out, whether it's macro or pricing or industry centric and those are going to be the facts and circumstances of drive.
That rate of return math of capital allocation.
So for third quarter, the Cliffsnotes free cash flow and free cash flow per share were up net debt and leverage were improved share count was reduced at deep discount pricing and we increased our 21 free cash flow guidance to $500 million or $2 37 per share.
Keep clinically following the math when allocating free cash flow and rest assured that our actions are going to match our words not just for the balance of what's left to 'twenty, one and not just for next year, but well beyond that.
Simple I'm going to turn it over to Don now who's going to go into a little more detail yeah. Thanks, Nick and good morning, everyone I'm going to start on slide four which highlights our balance sheet and liquidity strength reduced net debt again in the quarter and also completed a couple of important capital market transactions that reduced our interest expense and extended maturities.
Specifically during the quarter, we opportunistically completed an eight and a half year 400 million dollar senior notes offering at 4.75% due in 2030.
Which was used to pay off our six 5% see next midstream notes due in 2026.
New notes issuance and partial tender for the 'twenty 'twenty six notes closed in September and the complete redemption to pay off the remaining 'twenty 'twenty six notes not tendered closed later on October 15th per the indenture.
This resulted in the September 30th balance sheet, showing a temporarily high cash balance is approximately $234 million of the 2026 bond was ultimately retired on over October 15th.
Slide four represents the current maturity schedule as of October 15th.
After we repaid the remaining balance of the 2026 minutes.
Also during the quarter, we use the <unk> credit facility to repay and terminate the $161 million Cardinal States loan.
All resulting in a net interest savings moving forward as we paid off the 6% loan at par with our 2% revolving credit facility.
Lastly, we completed an amendment and extension to our C Nx and see next midstream credit facilities.
After the end of the quarter.
This extended the maturities to October 2026.
Essentially giving us a five year credit facility.
Our liquidity remains robust as we have over $1 5 billion of Undrawn capacity on our revolvers and our borrowing base increased compared to the prior facility as well.
Let's now shift to slide five.
Which highlights progress on our two main capital allocation priorities since the third quarter of 2020.
As we have discussed in the past, we are focused on reducing debt and returning capital to shareholders through share buybacks since last year <unk> has repurchased $14 7 million shares for $175 million during Q3 2021.
Purchased six 5 million shares for $78 million.
On the debt side, we have reduced net debt by $523 million since year end 2019, which includes a $235 million.
And debt reductions since the third quarter of 2020.
Our capital allocation priorities continue focus to continue to focus on reducing debt and returning capital to shareholders through share buybacks the magnitude and pace of these decisions will ultimately be determined by the facts and circumstances as we move forward quarter after quarter.
We have clear visibility.
And confidence in our cash flows moving forward and our leverage target remains at one five times.
The share price and free cash flow allocation math will dictate when we reach that target.
I'll end on slide six with guidance.
Through continued plan optimization cycle time compression and pulling forward the timing of some activity we increased our production guidance to 570 to 580 Bcf fee.
This higher expected production, along with higher assumed gas and liquids prices in the period have resulted in our adjusted EBITDAX, increasing by approximately $160 million based on the midpoint of guidance.
This all occurred within the previous capital guidance range, which we have simply tightened for the year.
As you can see our free cash flow increase did not go up dollar for dollar rare.
Relative to our EBITDAX increase.
This is because we include working capital changes and our definition of free cash flow, which as a reminder is simply cash flow from operations minus investing cashless.
I'd like to spend a minute explaining the mechanics of one of our key working capital items cash timing of ore hedge settlements versus physical sales settlements.
In particular December hedge settlements will impact 2021 reported free cash flow.
Since we cash settled the December financial hedges in early December while cash receipts.
Timber physical sales arent received until January.
This 30 day dynamic doesn't impact or EBITDAX projections, nor does it impact the long term free cash flow generation of the company, but it does cause free cash flow to slide between reporting periods as the underlying settlement price fluctuate during the quarter.
Typically the effect of this is not material. However, as we enter a volatile December natural gas natural gas contract, we want to make investors aware of this near term working capital dynamic and its potential effect on estimated 2021 free cash flow.
To summarize if December 1st of month pricing goes higher it will reduce Q4, 2021 free cash flow versus our guidance, but increased Q1, 2022 free cash flow.
The reverse is also true.
If the December 1st of month contract falls from current levels C. N X will have a lower December hedge settlement payment and a higher Q4, 2021 free cash flow with a lower Q1 2022 free cash flow.
So net net the company is slightly better off if December gas prices go higher since we do have some open volumes that benefit from it but we will not see the increased free cash flow from December physical gas sales until January of 2022.
And that leaves me with a few final points that I wanted to make in regard to our hedge book, how we think about it and how mark to market gains or losses affect future cash flows of the business.
We fundamentally believe that natural gas prices are impossible to consistently predict you might guess right every once in a while but not each and every year for decades.
So we believe in the long run you will catch any gas price upside in the forward markets and over long periods of time, you will not miss out on gas price upside and we'll still protect the downside, but consistently forward hedging over decades.
We view, our hedging philosophy is right way risk mitigation.
Meaning that our free cash flow and our capital investments are protected should prices fall for a few years.
And on the opposite side, if we have the a mark to market loss on our hedge book that means the future annual free cash flow generation of the company.
Has actually increased as we still have a significant open volumes in the future.
Not to mention lots of other ways to create incremental shareholder value in a sustained high gas price world.
Case in point, our previous guidance of $3 4 billion in free cash flow from 'twenty 'twenty through 'twenty 'twenty six.
And hedge book position at that time was based on the approximately $2 59.
Nymex strip that existed at that time.
Thus our hedge book was significantly in the money mark to market.
Since then our mark to market hedge book has moved to a significant out of the money position, which is due obviously to the average Nymex strip moving to over $3 as it stands today.
Higher gas prices have a negative impact to the mark to market of our hedge book net net it is a positive dynamic for the future free cash flow potential of the company.
While we will not be providing updated guidance at this time, we would like to remind everyone that our previously issued seven year guidance was based off of a much lower strip pricing environment at the time of issuance as such it is no longer current given prices are materially higher in the fourth.
It gets to that.
With that I'll turn it back over to Tyler for Q&A.
Thanks, Dawn and operator, if you can open the line for questions at this time please.
Yes, we will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Zach.
Parham with J P. Morgan.
Please go ahead.
Hey, guys. Thanks for taking my question first just wanted to ask on the buyback you were much more aggressive this quarter and also flagged buying back an additional million shares in the first two weeks of October the board raised the buyback authorization by $1 billion.
A number of your peers have laid out more formulaic cash return programs, maybe could you talk a little bit about the pace of the buyback going forward and just your thoughts on allocating free cash flow between the buyback and debt reduction in <unk> and in 2022.
Zach this is Nick.
The a couple of different things maybe to put out there one the 1 billion dollar increase in share buyback authorization as we said in the comments. That's just one of the tools that we always want to have in our toolbox.
To be able to efficiently and quickly allocate capital, where we see opportunities and we're solving right for the long term intrinsic value per share I think from a principal perspective, there's sort of two big drivers of what we're doing in terms of what we think reflects a sustainable financial business model that works over time, one is we always want a.
Component to return capital to shareholders.
<unk> been doing that for a while to your point and two we want to be reducing even though it might be nominal amounts of debt, we wanna be reducing some level of absolute debt on a consistent basis. So beyond those two principles now you're getting into sort of the tactics and those facts and circumstances that.
We spoke about we're very almost just clinical with respect to how we look at the share buyback rate of return and wanting a margin of safety with respect to it and if that rate of return has a significant margin of safety tied to it that's where we will pursue our avenue VA returning capital to shareholders and that's what we see.
You know with respect to where where the shares are at today. This is not prescriptive.
Okay. So in many ways, if you're following the facts and circumstances, it's almost.
The opposite or the mirror image of what were doing with hedging with the programmatic hedging approach. There. We are a very consistent I would expect flexibility to meet a buzzword here on capital allocation when it comes to returning capital to shareholders and that's a good I think approach to have.
With and considering the space that we're in and the commodity and everything else and its twists and turns that it takes so you know what that means for Q4 and what that means for 'twenty two and beyond.
Thank you just follow the rate of return math and you'll see at least in terms of where we're currently at allocation of capital to further improve our balance sheet as well as to reduce share count.
Got it thanks, Nick just wanted to follow up with a question on 2022.
I know you don't have guidance out there specifically for 'twenty, two but you talked about the maintenance program being in place from 22 through 26 at around 560 Bcf fee.
Annual production, just given a little higher volumes in 2021 does that change things at all Rebase that program a bit higher you know really just looking for any color on project production trajectory going forward from here.
Yeah, well, we're not going to get into sort of any kind of new guidance or information for 2022, well we are still in a kind of one one rig one fracs environment.
The production will kind of bounce around a bit but no no no new further information from we're doing going forward.
Alright, Thanks, guys. That's it for me.
Yeah.
The next question comes from Leo Mariani with Keybanc. Please go ahead.
Hey, guys just wanted to follow up a little bit on in terms of capital allocation, which I know is something that you guys are.
Emphasized quite a bit.
It would just seem to me that in the in the current environment might make sense to maybe drill a couple more wells given that.
The futures prices here in <unk>, and 'twenty do or just the best they banned in a number of years and I would certainly think that.
Returns on a couple more wells in our program for example.
Might look very very strong.
I know you're very focused on buyback as.
As well and I understand that but just any thoughts on the potential to do a little bit more just given that we're in a multiyear high on natural gas here.
I think obviously to your point you look at the rate of returns for incremental activity that they're certainly at a level that on a risk adjusted basis or above our thresholds Leo but I would also say that the same is true when it comes to things like share count reduction opportunity for the same reasons at the same drivers.
The bigger issue that to US is that in Q3 was a good example of this as well as 21 overall, we found ourselves to be in a really good operating rhythm and that in a world today of the twists and turns on commodity and inflationary pressures and everything else on top of right the safety and compliance Asps.
<unk> of our business that we remain hyper focused on we like where we're at with sort of this effect of one one rig one frac crew array and that's generating a substantial amount of free cash flow or we've got a pretty.
Good gameboard of allocation opportunities, including what you brought up but others as well so I think we stay.
Within that one rig one frac crew operating plan for the foreseeable future.
Recognizing your point with respect to what commodity has done to some perspective rate of returns.
Okay now that's helpful.
And then just in terms of.
Capital certainly noticed that you bumped up the midpoint on Capex, a little bit here in in 'twenty one.
Correct me, if I'm wrong, but I don't think there's necessarily oh.
Digital activity, so not sure if that's perhaps maybe a little bit of an inflation that maybe wasn't expected when the budget was originally set.
And then obviously just looking at like third quarter Capex. The number was down quite a bit from the prior quarter. So maybe some of this is timing, but I guess should we be expect spending to maybe tick up a little bit in <unk>, just looking for some incremental color on the capital.
Yeah, I'll I'll start and Chad sort of could kind of finished I'll start like you know what.
We don't look at the company quarter to quarter or calendar year calendar year.
So we're not as focused on sort of what those sort of metrics are at the given time or focus on the rate of returns and stuff over a much longer time horizons, but as far as you know you.
Can you go a little faster you spend a little more you go slower I spent a little less for chat chat can give you a little bit of color like how great. The team's doing yeah I mean.
It's particularly with respect to the production gains that we've seen on.
The team all the credit goes to the team out in the field.
The consistent plan that we've been talking about for a number of quarters now.
The consistent goalposts that we've given to the team just allows those guys to plan ahead plan further in the future.
Just continue to execute at an extremely high level that allows continued gains and efficiency continual reduction in downtime and you're just you're just going to see.
Really exciting by what's going on with those teams in the field.
Massive credit to those guys for Bam to bring bringing some additional production a year and just gaining continuing to gain efficiency out there.
Okay, So you're saying, there's nothing really on the inflation side of note just to be clear on that.
We're fairly contracted for the near term movie. So you know what what it does over the long term I don't know, it's anybody's guess, but for we stay fairly contracted and in the near term yeah. That's a good point. So the bulk of our expenses are fairly well contracted for.
A future time period.
It's no secret I think everybody is seeing inflation on all parts of the economy right, but that's that's that also helps our top line as well right. We sell a commodity so there's certainly a lot of inflation youre seeing that inflation not only on the input costs, but also on the revenue line.
I think in a situation, where we're and we're one one frac crew one rig.
Sort of activity level, you look at the potential impact of inflation on our input costs relative to our operating margin or a relative to our free cash flow generation and its really just not a big material driver relative to like I said, our operating margins and free cash flow generation.
Okay. Thank you guys.
The next question comes from Neal Dingmann with Truest. Please go ahead.
Memorial Nick could you everyone.
Dig a little bit more I think it was interesting what you said about the key being the intrinsic per share value and if so how do you think about that on just you know you were asked earlier about maybe ramp in production a little bit versus.
What's going on with pricing or hedges.
I really love to hear how you think and sort of today's.
Environment, the best way to to sort of pull that forward on intrinsic per share value.
Yeah, I think theres, a theres a sequential thinking to some of this rights of the field execution that Chad was just talking about is the precursor to everything if you're able to do that safely and in compliance Lee and you've got the the geology and the the operational efficiencies to bring to bear than Youre going to Jennie.
<unk>, a significant amount of free cash flow with with our cost structure, you're just gonna be able to do that and that's what we've been doing for some time now well when you've got the free cash flow being generated then the next sequential issue is putting that balance sheet into a current state of best in class to be able to take advantage of any twist or turn you'd see with volatility or cap.
Markets are commodity or whatever the case might be we had been hard at work at that for a while and you know Don summation in his comments sort of made the point that's made on one of the slides that we've got a balance sheet and held it.
Basically has all of its major issues addressed for the foreseeable coming years in terms of period of time and that then puts you I think in the last stage of this what we call the sustainable financial business model to be able to methodically return capital to shareholders and for us.
Basically share count reduction or dividend and we're going to follow that clinical right of return risk adjusted math and when Youre looking at intrinsic per share value versus share price. There's a heck of a rate of return that we saw in Q3 tied to that so we took advantage of that and if and when those facts and circumstances change I E share price.
Alright, then we've got options like dividends as the vehicle to return capital to shareholders. So we think of it sequentially. We follow the math and if you think of a sequentially one being a prerequisite to the next thing it's sort of landed where we landed in Q3 and how we're thinking about the rest of 'twenty, one and going into 'twenty two and beyond.
And then lastly, I think I know the answer to this guys, but I mean again, given your large acreage position, but just just thoughts on M&A. It seems like there's starting to be a few more smaller I consider bolt on incremental deals for you all.
Your thoughts on that thank you.
Yeah, I mean, we're obviously always looking at everything that could create sort of value. It's just I think as we've shown we're just we're just pack here and our return hurdle thresholds necessary to do to do things and you know that that's going to continue going forward. So we'll look at stuff. We're just I think pick here.
Most and when it comes down with it.
Thank you. The next question comes from Michael.
CLO with Stifel. Please go ahead.
Hi, Good morning, guys, congrats on a nice quarter.
On slide six you mentioned plan optimization of pull forward activity.
What what does that entail and I just wanted to see if you had the media color to add around that.
Yeah, Michael this is Chad.
So the analogy I like to use is that the our plan with one rig one frac crew, but it's kind of like an accordion right. So you can sort of compress it you can sort of expand it.
Generally average about one rig one frac crew through.
Through the plan.
With some ability to either accelerate or slow down activity is a function of other opportunities for us.
And so when you think about trying to accelerate or bring bring forward. Some activity. One it's largely driven by as I already mentioned just the execution of the team in the field, but theres also that but by accelerating bye bye bye, gaining those efficiencies and getting a completion done quicker by getting a.
Drill completed quicker that that news app.
The next set of activity right. So you get pad a finished a week earlier you can move on to pad B a week earlier than you. Originally planned so that that contraction of the plan sort of like an accordion allows some some of the capital in some of the production to sort of move around on a.
Between quarters or between years.
Okay got it so you're not really changing your 37 tools for the year doesn't.
Necessarily changed but when they come online in the fourth quarter might be a little earlier than the plan, which could have contributed to.
The bump in production.
Production guidance is that the right way to think about it I mean like charter to it depends how fast the team keeps going sort of this sort of a little bit of self fulfilling if you keep going faster you keep getting things online quicker, but that's you know it's that the team is doing an amazing job. It feels like every every pad they're on they're setting new records. So that's our impressive team we have.
Got you.
And then I know you had been targeting you'd mentioned last quarter youre targeting kind of longer term fully burdened cash costs of 90 cents per Mcf. He is that still attainable with these higher gas prices or has that moved up now and maybe just any discussion around the cost pressures.
Seeing other than obviously your G. P N T goes up with higher prices.
Prices, but any other pressures you're seeing on the well cost.
Yeah. So like I said, we're not going to get into any new new kind of cost information for 'twenty, two and beyond but it's sort of chat setting you can chime in a bit I mean, what we tried to stay well and well in advance of these these sorts of situations at least sort of in the near term, but feel confident on the team being able to to address and continue to get better going forward, but yeah I'd say.
The so just to make sure that we're thinking about things the right way or.
Our G P and T rates are largely contractually fixed so they're not necessarily a function of a commodity price or or I mean, theres, a little bit of fuel burn there, but it's it's a it's a very small component of the G P and T line item.
L O he's been very consistent through the quarters through the years.
Maybe the one area, where we do see a bump is on taxes, just because of the higher sort of commodity a higher higher commodity price, yes, there's a little bit more of a severance tax associated with that but really beyond that that's really the only thing that's really a function of that commodity price.
I mean, another advantage of gas gathering oil and gas like we do with our midstream company, we don't have contracts tied to inflationary indexes and material fashion. So its like our midstream costs arent the same as peers and the cost advantage actually grows for us if you know.
Those contracts of others go here.
Yep got it thank you.
The next question comes from Holly Stewart with Scotia, Howard Weil. Please go ahead.
Yes.
Good morning, gentlemen.
Just a couple quick ones for me.
I think Don or maybe CAD, you mentioned last quarter that you would continue to take a look at kind of that dry liquids mix and an adjust just curious given where pricing is.
As we look at it.
At the forward strip and in the future.
How are you thinking about making the.
Adjustments to the program and then and then maybe Chad just from that kind of incremental push or for Q.
On that optimize activity is there any.
Yeah, any any thoughts that you can share on just how we should think about that that activity mix.
Yes, certainly on the on the on the dry versus wet.
Mix, you know where we're at as far as existing production goes it's something we optimize on a daily basis as we've mentioned a few times in the past.
You generally have all the numbers you need to do that math and we are doing that really on a on a real time everyday basis to to move that gas through that midstream system that we own whether we want to take that gas to a dry outlet blending.
Blending it with some some lower btu gas and selling it as dry gas or moving at the processing and better thing from Ngls.
It's math, we do every day and optimize that every day.
As far as the scheduled timing as we look into the future that there there is some additional wet.
<unk> pads out there some additional wells that are available to us where we're assessing the right timing for those.
And those are available for us and we are.
Continually doing the math on that to optimize the schedule.
Really everyday as commodity prices move around.
Okay. That's that's helpful and maybe Don just on.
On the 'twenty two 'twenty three it looks like you added.
Some hedges there I think on our math here.
<unk>, 70% in 2023, any any just thoughts here I'm moving forward I know you keep kind of averaging up on the portfolio do you feel like you're good for now going out that far or is that something you're just going to kind of keep.
That cost averaging higher.
Yeah.
We've said for a while now I think going back to 2017, or so I mean, it's it theres a theres a dollar cost averaging effect to this so I mean, we are hedging all the time. So we will continue to kind of chip away at this stuff over over the long haul and build and build a business that works really well if gas prices are call it low moderate or high to me that's like the most sustainable thing.
Can make and then it's the most prudent thing you can do to to run a very successful company over a long period of time.
Okay. Maybe then just one final one big picture for you Nick.
Ah I think several of your peers had that have said that the forward strip is not supportive of incremental drilling activity I'm curious where you are.
Fall out on this topic conceptually I think we would tend to agree with it they're disagree with this statement outright certainly perceived as an industry growth at AR.
A lot lower commodity price levels out on the forward curve. So just curious what your what your thoughts are here.
I think if you look at the forward pricing and certainly on the liquid side, but also with with natural gas.
There are rate of returns to be had with activity I think what you're seeing though is the industry for a long time.
Probably decades has been suspect to a lot of group think and herd mentality and what's changed is probably where the popular focus has gone to recently, which is this concept of discipline and right. The free cash flow generation, which we think obviously the good thing that's something we've been focused on for awhile.
And things like scale, right with with industrial logic and whatnot. So I think the reason you're seeing a hesitancy isn't because of necessarily rate of return math.
I think it's more because it's just not the popular thing right now everybody is looking more towards the the disciplined model.
For good reasons, maybe maybe for other reasons, but that can change quickly as you know so when we enter a new chapter of what the next big thing is who knows but for US I think you can rest assured we will remain consistent on how we're approaching things.
Okay No. That's that's super helpful. Thank you.
The next question comes from Greg Tuttle with Piper Sandler. Please go ahead.
Yes.
Thanks, everybody.
I guess first question as you think about let's say tomorrow your internal ideas of intrinsic value per share are reached by the market.
You alluded earlier to a potential base dividend, how do you think about a base or a base plus variable as you know in that scenario as a way to return capital to shareholders.
Yeah. It is as Nick said, I mean, if you're not a super growth mode. As a company I mean, you should be returning significant free cash flow to shareholders. So I mean, that's something I think that's common sense for any industry not just ours, but when you look at the.
How to do it I mean, I think for US I mean, the way we run the hedge book and where we're really focused on resilient predictable reoccurring free cash flow and kind of growing that free cash flow per share right. It is where we sort of said so from from dividend perspective.
This dividend could be on the cards, but for variable dividend I don't think that that'd be something that would would be a part of the business that we're running it would be our or call. It variable dividend would be potential buybacks. There's the wastewater we would sort of think about it and again it would be it would be rate of return base there'd be a jump ball competition versus other opportunities.
Entities to grow free cash flow per share for the business.
Net net you know fact and circumstances change all the time. So you know I don't know what the world looks like whenever these sorts of things happens, but rest assured that the business model. We're running is geared to return a return a significant portion of free cash flow to shareholders and to focus on trying to grow the intrinsic value for.
Sure and the free cash flow per share of the company.
That's super helpful. Thank you.
Lastly, following up on Holly's question, maybe not CNS related but.
For the industry like what triggers it.
<unk> looking at where you would potentially see industry wide growth for Natgas like how do you guys think about that dynamic in the market.
We just think it's fickle minute, you're you're not it's a couple of Bcf a day is a difference between like fast gas price gas price I mean that.
Theres a reason no one can predict gas prices because weather and a couple of Bcf a day can be the difference between good and bad so.
Best of luck if that's.
Your goal is to try to predict what it is because they can just change very quickly it's very fragile both directions.
That's super helpful. Thanks, I appreciate it.
The next question comes from Noel Parks with Tuohy Brothers. Please go ahead.
Hey, good morning.
Good morning.
Just a couple of things.
Looking ahead to 2022 and I apologize.
Starting with.
As far as what you're seeing for for service rates.
Yes.
You know what sort of inbound inquiries, you're you're getting maybe from competing vendors.
And.
You know whether.
You have a sense that looking into next year, it's going to be I mean, we're going to see just sort of very little room for negotiation given sort of the path we're on with prices.
So I guess I'm, just trying to get a sense of.
Do you think kind of 101 thing for all at least for this cycle.
The pricing power.
It's reverted to the vendors and that big deal.
Or is your sense that that's where it's going to stay probably heading into next year.
Yeah, So just sort of 'twenty, two and beyond we're not going to comment on any any new information or guidance, but that and generally which I did mention earlier, just with where we stay mostly contracted for you know a decent piece of the near future at least as far as what happens beyond that I don't think anybody knows I do know, though that you know are or there's advantages.
As of having a smaller capital program that one rig and one frac crew in a world like that and you know we will see and expect to see margin expansion that would more than offset kind of court cost increases for us I mean, I think it's a it's more of an issue for larger capital programs with our court smaller margins, but with a relatively small capital program and our high margins we feel good about however.
The future ends up unfolding, which you know is anybody's guess, what the world as it is today.
Great. Thanks.
And.
A general question just just to the degree that you're aware of are in touch with you know.
Industrial users.
Based on demand and so forth do you have any sense that.
This run up we've seen in gas prices, which of course helped by.
Exports in LNG.
Do you have a sense of any.
Sort of a repositioning on their part in terms of.
Just maybe a renewed interest in hedging where maybe it didn't seem necessary for a long time or either greater or or.
Less interest in and try and barrel.
Maybe lacking.
Lacking supply for the longer term.
Yeah. So this is Chad I'll take I'll take a shot at this and certainly others feel free to add but I think for a long time, I think I think buyers of gas consumers of gas.
Utilities power plants et cetera, certainly benefited from.
Relatively steady low prices.
And those low steady prices disincentivize.
These consumers of gas to hedge to invest in infrastructure and invest in storage.
And now we're in a situation where.
Daily consumption of natural gas is up.
What 80% versus several years ago, we've had no material expansion of storage.
<unk> continued to be challenged.
And certainly you've seen Uh huh.
<unk> seen historically a reduction in for liquidity and some of the buy side of the hedges.
I think my expectation that certainly this volatility is certainly going to encourage some of these consumers of natural gas to come back into some of these areas where they they had not participated in for the last several years.
Great and just a follow up as it is again not trying to ask you I have a crystal ball, but does it is it conceivable you think that the.
At least maybe on a regional basis that could.
Make a significant dent in the backwardation, we've seen for so long now.
Yeah, I don't know, it's easy to sort of answer like I said, it's if it's a if it's a two bcf a day of supply shows up and it's a warm winter than gas.
Gas prices arent that attractive anymore, if no supply new supply shows up and it's a cold winter gas raises it really I think it's just an impossible thing to predict how the future kind of unfolds, we'll test it just it's just too thin.
Too thin and too tied up a market.
Right fair enough. Thanks, a lot.
The next question comes from John Abbott with Bank of America. Please go ahead.
Good morning, and thank you for taking our questions I do apologize if some of these topics had been covered advanced jumped on the call little bit late.
First question is on hedging here I mean, it looks like you continue to add to your hedge book I mean I don't.
You'll see that ever really sort of changes.
As you'd like to reduce your risk.
But you do use of swaps I mean, what is why is there why the preference of our swaps over colors at this point in time.
Yeah, No. We address the fact that you know we're gonna can sort of continue to hedge and we view that as a risk and yes. They are.
There's other products out there, but they all you don't you're not gaining kind of like free free upside do you see more upside to take more downside. So there's products that we can get the upside without the downside, maybe but I mean, we look at these things you just ended up just not not really gaining ground on the problem that whatever product you end up on.
Alright, and I think you also addressed that the if the macro is a little bit fragile up there but.
What price.
You know Mike.
Because given where the strip is given the potential future cash flow off the strip.
At what point does the potential acceleration of a buildout to CPA itself makes sense or is it still not within the time prices given sufficient Marcellus inventory.
No yeah. When we look at we look at these things and like I said it would be it would be a facts and circumstances based on what the world looks like I mean, I don't I.
Six to 12 months from now it might be a completely different at a better to the worst so I mean, we're looking at all these things we'll try to.
To make the best call. It at the time that you know to me it still seems like Theres a lot of volatility so and in a lot of volatility you don't.
You kind of wait to see how things will unfold first before you would think about any of those sorts of things.
Alright, I appreciate the color and thank you for taking our questions.
This concludes our question and answer session I would like to turn the conference back over to Tyler Lewis for any closing remarks.
Great. Thank you and thank you everyone for joining us. This morning, please feel free to reach out if you have any additional questions. Otherwise, we'll 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.