Q2 2022 CNX Resources Corp Earnings Call

Good day.

PNM Resources' second quarter 2022 earnings conference call.

All participants will be in work around that.

He said no conference specialist or Christmas turkeys, followed by zero.

After today's presentation there'll be an opportunity to ask questions.

A question you May Press Star then one on your telephone keypad to Charlie's question. Please press Star then two.

Please note this event is being recorded.

Now I'll turn the conference over to Mr. Tyler Lewis. 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 , Alan Shepard, Our Chief Financial Officer, Chad Griffith, Our Chief operating Officer, Don Rush, our Chief strategy Officer, and Robbie Zero Stobaugh Pres.

<unk> of new technologies today, we'll be discussing our second quarter results. This morning, we posted an updated site 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 and a document titled two Q2022 earnings results and supplemental information of C N X resources as.

As a reminder, any forward looking statements, we make or comments about future expectations are subject to business risks, which we've laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.

We will begin our call today with prepared remarks by Nick followed by Alan and then we will open the call for Q&A, where Chad Dawn and Robbie will participate as well with that let me turn the call over to unit.

Hey, Thanks, Tyler good morning, everybody and thanks for joining us today before I get into the specifics of my comments I think it's important to first highlight three themes that are core to the D. C. N X investment thesis and we think of these three in sequence. So I'll put them in order. So first we built and now we manage a low.

Risks $700 million per year of free cash flow annuity. It works year after year and it helps to have largely insulated from the macro events that are out of our control it creates confidence and conviction in our business and it's sustainable and works in any business environment.

After that second we then apply clinical map and when a math dictates. It we allocate a significant portion of the free cash flow to reduce our share count at highly accretive rates of return, which is going to continue to deliver unprecedented free cash flow per share growth.

That's a tremendous opportunity for any value investor and then the third theme. The last one is in addition to our organic free cash flow annuity and our growing free cash flow per share, we're creating demonstrating in deploying new technologies, which will create incremental free cash flow and free cash flow per share beyond that base business and plan.

The new technologies opportunities. They are here and now they offer a meaningful avenue for incremental per share value for our shareholders and they also are the next chapter of Appalachia as energy legacy. So we're beyond excited by the opportunities in front of us that are impressive or outside the box and they are unique to see annex.

So with that bigger picture in mind.

Let's start talking some specifics and I'm going to start with some policy.

Discussion and then move to what's going on with our new technologies effort. So during our first quarter call. A couple months back we covered discussed how there's these destructive yet predictable consequences that were seeing of current national and global energy policies and these policies have unfortunately been extremely effective and.

Manufacturing energy scarcity, and still get inflation by preventing the most sensible supplies of natural gas and oil from region demand centers and by reliance you quickly on renewable energy that's not yet at scale. So.

So the consequences that we've seen there higher energy prices.

Scarcity that I, just mentioned and inflation economic turmoil and geopolitical instability and unfortunately, they are becoming painfully clear to all.

So this morning I'd like to build on that discussion and talk about what C. N X is doing to improve the current situation.

So perhaps it goes without saying, but I'll say it anyway C. N X is going to continue to advocate for natural gas and the Appalachian region. The standard of living that we all enjoy it's owed in large part to the great men and women doing the hard work to provide our energy and we're obviously proud to be part of that.

In CNS, we focus on the near term tangible actions rather than hypothesizing as to what may or may not occur decades into the future.

And the good news is opportunities exist here now to advance environmental and socio economic goals.

And once again, we're proud to be leading that charge with the recent announcements that we made like our work with the Pittsburgh International Airport and with new like technologies, and I'll talk a little bit more about those two in a minute.

So we've been hard at work driving these and other key initiatives forward to advance our view of a legitimate in an actionable sustainable energy Revolution improper.

And proper planning and inconsistent push towards the so called energy transition, which is pin to an irrational ideology that demands an immediate transition away from natural gas to renewable energy is going to struggle to deliver at scale, that's creating turmoil.

Realistic and achievable sustainable energy Revolution demands a more thoughtful.

More common sense, a more practical approach, which means creating fact based solutions that are grounded in math and science today, not what potentially might happen 20, or 30 years from now and by taking tangible steps to meaningfully reduce global carbon footprints in the most efficient manner, so natural gas in Appalachia.

And C N X all three you're going to have to play a pivotal role in accelerating and enabling that progress <unk>.

<unk> gas its not a bridge fuel and I want to repeat that natural gas is not a bridge fuel instead, it's a catalyst field, which is the basis of the sustainable energy revolution by helping industries across sectors lower costs and emissions immediately.

You'll also fast tracks.

The implementation of new technologies, and that'll allow companies and industries to focus on driving efficiencies to eliminate waste.

Stop egregious labor and human rights practices to grow the value proposition for their ownership and to provide a viable path to achieve carbon reduction targets.

Look the concept of solar and wind power and the quality of life to which we've become accustomed to that sounds fantastic in theory, it's romantic as advertised but the ability of these technologies to satisfy the world's energy needs is to be kind, a highly highly questionable proposition and it's one.

That's only practically achievable decades into the future and it's highly dependent on major advancements in technology and a massive increase in rare earth element in battery production capacity and here, we're talking around an order of magnitude increase more than currently exists today.

So I'm going to reference in the next minute or so slide three that we put in the slide deck. This morning, and if you want to give a look at that while I'm going through some of these numbers I think that'll help for reference.

Looking at slide three for perspective, the World currently produces roughly 600 <unk> of energy annually and that includes approximately 39 extra jewels from renewable are related to wind solar and geothermal said differently about 6% of current energy production is derived from renewable energy despite decades of policy.

The incentives and subsidies that cost nations' economies and societies trillions of dollars 'twenty 'twenty. One is a good example of that so it was a record year.

For renewable energy installation yet it resulted in only five extra jewels of renewable energy added to the overall global energy production mix now.

Now when you look at the consumption side forecast indicate the world energy demand is going to grow on average of about 2% per year and that works out to 10 to 12 exit joules per year renewable energy is unable to keep pace with that type of global energy demand growth, let alone has the ability to displace fossil fuels anytime soon during.

During the past 20 years World energy demand has grown by roughly 200 extra jewels and over the same time about 35 X. The jewels of renewable energy capacity have been added.

So renewables they've got a long way to go to simply meet new demand before they have any hope of displacing oil and coal in a meaningful way more low cost and environmentally friendly Appalachian natural gas that can help meet this growing demand and make progress now on environmental goals.

Also the 600 <unk> of World Energy production fossil fuels account for 490, plus <unk> of that total and then you've got hydro at around 40 nuclear adds about 25, <unk> and then you've got that 39, <unk> of wind and solar renewables to get to the approximate total of 600.

So a majority of fossil fuel production of course is oil and coal Appalachian natural gas only accounts for about <unk> or 2% of the total global energy production mix and it represents the cleanest lowest greenhouse gas intensive fossil fuel that's out there and within Appalachia <unk> accounts for about a half of <unk> and its got the Lois.

Greenhouse gas intensity and cost structure within the Appalachian Basin.

So we the Appalachian basin in CNS, we're not the problem math and science show that we are the solution and CNS serves as a needed ally as the world seeks to reduce the other 490 <unk> are much higher greenhouse gas intensive fossil fuels and help keep pace with the new energy demand.

Now Theres also while we're talking about this.

The issue of supply chain realities to consider because that's an important one and CNS in Appalachia are closest to the major U S demand centers for energy and for goods and for services and that would allow our local energy to be even more greenhouse gas efficient from an all in scopes went through three lifecycle perspective, which is the way you should look at.

Thanks.

Reducing unnecessary shipping logistics, that's the elephant in the room when it comes to emissions and Appalachian natural gas has a big benefit with respect to that.

Investment in and utilization of our low greenhouse gas intensive natural gas and its derivative products. It will rely on infrastructure that works with green and new technologies, when and if they are ready and able to be deployed to meet future demand. So that means that engines in factories. They can run off 100% compressed natural gas 100% hydrogen.

Related blends between the two same logic applies to additional electric vehicle EV deployment as natural gas turbines on the grid are going to allow electrification to play a more meaningful role sooner of course, that's a good thing.

<unk>, we've been doing we've been quite active making moves and investments consistent with these energy themes and these broader policy realities in mind, let's talk about those for a couple of minutes.

Our new technologies team is got numerous projects in various phases of development, which youre going to help the world moved to a lower greenhouse gas emitting future. While also maintaining reliable energy resources, So that society properly functions and the new technologies team is commercializing technology that will produce low carbon footprint natural gas.

And then as derivative products and associated environmental attributes. These technologies are a game changer for the natural gas extraction and transportation industries technology and assets from C. N X can help displace higher carbon intensive fuels in the U S energy mix, both on the power grid and in the transportation sector.

These displacement opportunities when you add them all up.

They are over 100 Bcf per day of natural gas opportunities in the United States alone, that's a big market opportunity and more products and services can be produced within the Appalachian region. If these types of technologies are deployed.

And I would think of these emerging technologies to be commercialized that we're working on sort of categorize or falling into one of three major buckets.

The first bucket consists of what we designate as having valuable and monetize able environmental attributes, we're capturing methane through incremental capital investment and deployment of technology, which would have otherwise been advantaged to the atmosphere and is ultra low carbon gas.

It is increasingly valuable in a carbon constrained world, our Virginia assets are the foundational piece of that effort. When it comes to CNS and I can tell you coalbed methane is back in a big way, but in a much different world <unk> today has a natural gas pricing base level of value to start things off with but now today. It also enjoys an increase.

<unk> portion of value tied to its ultra low carbon characteristics recognition of this value I can tell you is growing across numerous economies and industries.

The second bucket of our new technologies effort. Its proprietary technology that we developed that will fundamentally change the manufacturing process for the extraction and delivery of natural gas so the technology here.

That we're working on will transform drilling and completions and flowback and compression and processing and so on it will make these processes more efficient and reduce the risk tied to them lower the emissions associated with them and it will increase the margins with them as well.

The third bucket using in house technology to disrupt various industries currently relying on those other less efficient and higher emitting forms of energy. This technology efficiently transforms a state of natural gas when the gaseous phase into the CMG, A&D, LNG and that compressed or liquefied natural gas on pad.

Can transform the aviation and the ground transportation industries, so instead of offshore high carbon footprint high cost gasoline for ground transportation. The ability now exists to use local low carbon footprint low cost CMG is a similar story for aviation with LNG, replacing jet fuel.

And the business case for this third bucket it really comes down to common sense. When you think it through if we want to lower global greenhouse gas emissions you deploy new renewable energy in the Sunniest in the Windiest places that are still relying on corn oil to displace them you don't place renewables at scale in places like Pennsylvania, where the efficiencies are low.

So the cost of scale are going to be high the supply chains are thousands of miles in length and a lifecycle carbon footprints are going to be in the wrong direction.

So what's better for the planet and for greenhouse gas emissions and for the regional economy and for business models, making products overseas using coal firepower and inefficient power plants and factories that utilized poor labor practices, and having all that wasted costs and energy transporting these products all the way to the United States to sometimes work.

Depending on the weather, if it's windy or if it's sunny or any alternatives simply manufacturing these products here with low carbon footprint natural gas more.

The plants and factories, using local well paid workers and shipping it within a one day drive it's pretty simple.

Now, let's talk about the tangible impactful and local recent results of the new technologies team across those three buckets that we just summarized.

One year, so far has been full of accomplishments spanning all three and we don't expect the pace to to lessen anytime soon.

A pathway for implementing our proprietary technology to disrupt the old economy fuel supply mix is the announced partnership between ourselves and the Pittsburgh International Airport. This is an exciting partnership for both parties and we're going to help the airport lower their costs and reduce emissions and create jobs by using low carbon intensity natural gas.

Displace those traditional aviation and transportation fuels, we just spoke of and it fits obviously squarely in our tangible impactful local mantra.

The partnership with the airport centers on how <unk> has developed that technology to cost effectively convert onsite dry natural gas into LNG CMG and electricity for various uses including as a hydrogen feedstock. So this ties into the hydrogen economy as well and these technologies.

Reduce emissions and operating costs at the airport. It opens up a new frontier for using lower cost lower carbon intensity, LNG and CMG fueling depots for higher energy intensive businesses. When you look at things like Airlines and transit and cargo fleet other related businesses. These natural gas derivative products leverage our local communities.

Workforce as well and create more family sustaining jobs, which is awesome.

Now we also recently announced another exciting partnership that I mentioned earlier between <unk> and new like technologies.

And that is looking to convert air and greenhouse gas into a biomaterial called Aircard, but it's a pretty amazing in a pretty cool technology air carbon is a carbon negative PHP biomaterial, it's produced by naturally occurring micro organisms that replaces plastic and industrial segments ranging from food fashion.

And under our partnership <unk> will work together to capture waste methane from third party industrial activity. It would typically be vented to the atmosphere.

We will capture gather and process that captured methane to remove impurities and compress it and deliver the methane through new and existing natural gas pipeline infrastructure for conversion into air carbon by new light.

The strategic partnership.

With CNS, capturing methane gas to support new life's manufacturing needs.

The result of several manufacturing facilities in the Appalachian region, and advance critical decarbonization goals, while boosting our region's economic activity and the capital investment going on in our region and the job growth of the region. So that's obviously awesome metrics to see going in the right direction and beyond our new technologies team.

Another sort of point with respect to Appalachia, the Appalachian region, It's got the resources and the Knowhow and the work ethic to be the epicenter of providing solutions to the challenges brought by poor energy policy and by weakened geopolitical standing we can be a center for skilled labor job creation to help pave a path to the.

The middle class access for the region's underserved rural and urban communities and we've put into effect a program to do just that.

This quarter. We graduated our inaugural class from the CNS Mentorship Academy consisted of 28 young men and women from this great regions urban and rural communities and six of these talented individuals' recently joined our team at CNS, It's something our entire team and personally myself, obviously very proud of and we expect the second year class to be.

Even larger we're already underway preparing for that because August is coming up on its real quick here.

These young men and women obviously the objective here is to help us build the local energy ecosystem and to cultivate and sustained the middle class for the next generation.

Another note related to what's going on with our new technologies effort. We also recently submitted to the SEC comments regarding their proposed rules for climate disclosure now we're supportive of the Commission's efforts, but we also believe the SEC's proposed rules as drafted is going to creating consistent and highly subjective standards for rich.

According scopes, one two and three.

Two emissions across different industries and companies. So we believe in transparency and accuracy is there sort of the core tenants. Our position is that the SEC should amend the rules to create greater standardization and better clarity fully transparent and honest accounting of carbon emissions that will underscore the importance.

Things like natural gas and Appalachia as the pathway to a promising future. So encourage you to read that letter to the SEC, which is posted to our website.

And this past quarter, we also announced management changes with Alan Shepherd.

Who you're going to hear from next taken over as CFO , Don Rush moving over to the company's Chief strategy Officer position.

Important steps Don's new role shows where we see the world heading and using his words the ocean of opportunities that it presents to CNS.

Now as to what our new technology efforts that up to you when it comes to our metric of choice free cash flow per share we'll have more to say about that is 2022 unfolds. So stay tuned.

In conclusion, I think its best to summarize this way, we believe the products and goods that we all use daily should be manufactured in Appalachia and the first utilized in the United States to help our local citizens and economies. Similarly, let's first focus on creating new and growing existing markets for our products regionally in Appalachia.

And nearby markets like the northeast U S via short pipelines.

A local first mentality that will go a long way to solving myriad problems across the socioeconomic and environmental spectrum is not protectionism, it's not anti free trade instead, it's common sense, it's rational and it's free market based with that I'll turn things over now to Alan who will cover a little more details about the quarter.

Thanks, Nick and good morning, everyone.

This quarter represents our 10th consecutive quarter of significant free cash flow generation through our sustainable business model that is grounded and consistent operational execution and clinical capital allocation to optimize free cash flow per share growth in the second quarter, we generated $62 million of free cash flow, which includes the effect of working capital changes due to the timing of our financial hedge.

Settlements versus our physical sales receipts as we have said previously this temporary timing issue simply moves cash between quarters, sometimes positive sometimes negative.

Not affect the profitability of the pads or the business.

On the capital allocation side as highlighted on slide five we continue to take advantage of current equity market conditions by repurchasing three 2 million shares in the quarter and another $2 2 million shares after the close of the quarter through July 19.

Said differently, we bought back another 3% of our total outstanding shares and over the last seven quarters, we have repurchased approximately 16% of the outstanding shares of the company.

We continue to see this is a remarkable low risk capital allocation opportunity moving forward and although we have not given an explicit capital allocation framework. If you extrapolate these levels of buybacks moving forward you can see that we will continue to dramatically reduce our denominator and thereby meaningfully grow our free cash flow per share.

Ultimately, we believe this will drive long term share price outperformance and reward our long term earnings more on that in a minute.

On the balance sheet side, we repurchased $14 million of 2026 convertible notes, which represents our nearest term debt maturity as a REIT.

<unk>. These notes can be settled at maturity with cash common shares or a combination of the two at the company's discretion.

By repurchasing the convertible notes with cash we have eliminated the risk of future equity dilution <unk> increased future leverage associated with that subset of the notes.

We'll continue to monitor this capital allocation opportunity moving forward as our share price evolves.

Additionally, on the balance sheet side, we had a slight quarter over quarter increase in net debt, but when you net out the $13 million premium that we paid to repurchase some of the convertible notes earlier. This implies a $2 million reduction in net debt for the quarter looking forward, we expect to continue to both retire debt and reduced share count as the remainder of the year unfolds.

Let's now shift to our updated 2020 to outlook on slide six where I want to highlight two main topics pricing and capital expenditures guidance.

As everyone is aware, we are living in a volatile pricing environment and despite being materially hedged for the remainder of the year. The magnitude of the pricing volatility we are experiencing can materially impact our expected free cash flow for the year, either positively or negatively and both in terms of realized prices on our open volumes and in terms of swings in working capital related to the timing of derivative <unk>.

But of settlements that can materially shift cash flow between periods.

With respect to capital guidance for the remainder of the year, we are increasing our capital by $70 million based on the midpoint of the new guidance range when compared to the previous guidance of 500 million.

This increase is related to three main items the.

The first two items, which account for over half of the increase are related to incremental investments, but ultimately improve efficiency improve business continuity and serve to derisk, our free cash flow annuity and or position us to grow that annuity in the future.

Because the cycle time efficiency, we're selling three previously planned 2023 tools into late 'twenty two.

We are planning to run a second rig for almost the entirety of the second half of the year to ensure there are no delays to our 2023 frac schedule and we are pre buying and locking in key tangible goods and services.

These incremental investments for 'twenty is going to equate to approximately $25 million of the capital increase and will ensure a successful execution of our future operating schedule.

In addition to the incremental activity just discussed we plan to invest $15 million in the second half of this year and projects associated with our ongoing innovation and emission reduction efforts okay.

A great example, highlighting this is the recent announcement of our decision to convert one of our drilling rigs from diesel to electric this.

This will add about $7 million of capital in 2022 in order to lower future operating cost and reduce our emissions footprint.

The same rationale in cost savings for this investment that we've experienced in our electric Frac and were excited to once again be the first mover in pushing this based on forward in terms of technology lower mission operations and more cost efficient operational techniques there.

The remainder of this bucket of capital spend will go towards investments that lower future methane intensity and operational costs, while helping to set us up with a business plan to market. These new services across the oil and gas space. We're excited about these capital investments in innovation that we believe are incredible value add areas of our business and moving forward. We plan on increasing the spotlight on this capital bucket and the value of <unk>.

With it.

The third and final piece of the capital changes, mainly driven by a higher inflationary environment than initially anticipated as you'll recall when we started the year. We indicated that we incorporated an inflation increase of 5% to 10% or around $30 million for 2022, when compared to our 2021 budget.

Given the continuing inflationary pressures that still exists today, we are now expecting an incremental $30 million of impact, resulting in a full year inflation impact of approximately 10% to 20%. This.

This inflation is mainly driven by higher diesel in steel prices and increased competition for reliable high perform equipment and service providers throughout our supply chain.

One final note on guidance the capital increases largely being offset by the improved pricing environment and positive working capital changes and as such we're leaving our free cash flow guidance for 2022 were approximately $700 million I'll caveat again, however, that'll end up higher or lower based on how the volatility around gas prices plays out for the remainder of the year.

Additionally, given our now lower share count approximately 700 million of free cash flow is expected to result in free cash flow per share of $3 69 for 2022 again. This is not an end of the year share count projection, but based on our current share count.

This increase in expected free cash flow per share is a perfect segue into slide seven.

Slide seven illustrates a core tenant of the <unk> investment thesis, the incredible and unique opportunity for rapid low risk free cash flow per share growth that results from our sustainable business model.

This graph includes what we've already achieved and what we expect moving forward looking back at the last two years, we've already more than doubled our free cash flow per share since 2020, looking forward, assuming that cost of enterprise value and assuming 80% of future free cash flow was allocated to share repurchases and the remaining 20% to balance sheet management total shares outstanding would.

<unk> by an additional 54% while still achieving significant deleveraging.

In other words free cash flow per share doubles by 2026, our leverage ratio declined to roughly one times and the implied share price again, assuming a constant enterprise value would appreciate to almost $45 per share due to this rapid share count reduction.

This potential share count reduction only accelerates if stock price appreciation does not keep pace with the decline in outstanding shares when.

When you compare this projection to the Detroit free cash flow per share you can see 2026 free cash flow for shares that were five times higher.

Lastly, I want to conclude by re emphasizing what Nick laid out at the beginning of his remarks. Despite the volatility around US we are focused on actions to strengthen and derisk, our long term free cash flow annuity, which under current conditions. We now estimate to be $700 million per year, we will continue to apply clinical math and the allocation of that free cash flow and our current free cash flow yield.

We expect the majority of that free cash flow to be allocated to share buybacks, which will dramatically grow our free cash flow per share.

Lastly, we're in the early stages of developing an exciting and growing business with our new Tech ventures that is poised to materially add to our already compelling investment thesis, but most importantly shape. The next chapter of Appalachian Energy legacy.

With that I'll turn it back over to Tyler for Q&A. Thanks.

Thanks, Alan and operator, if you could please open the lineup for questions at this time please.

We will now begin the question and answer session.

So that's a question you May press Star then one on your telephone keypad here using a speakerphone, please pick up handset before pressing the keys.

Charlie a question. Please press Star then two.

As time went on military parts with somewhere roster.

Our first question comes from in fact, Perm with JP Morgan. Please go ahead.

Hey, guys. Thanks for taking my question.

I guess first just talking about the current operational environment and the inflation that you're seeing although that you added $30 million into the budget, but just any early thoughts on what inflation could look like in 2023 could that be another 10% or so just just any color you have there.

Yeah. This is Chad so thanks for the question.

I think what we're seeing is that inflation will certainly persist into next year.

As far as giving a direction or a magnitude I think it's a little bit early to tell we are fairly well positioned.

Our activity set with the rig contracts with refractory contracts.

But certainly steel and diesel continue to play a role. So we're all going to keep an eye on the pricing of those materials, just like just like everyone else.

And I think just to wrap that up.

The business is positioned we are we do sell a commodity right we saw natural gas.

The business is subject to those commodity fluctuations in the steel and diesel and other inputs in our business and so inflation is really been both helping and hurting alright, and so net net I think we're ahead I think we would expect that to continue into into next year.

At the end of the day.

The business plan is still intact. It continues to be a $700 million a year free cash flow annuity and we're going to continue to execute on our free cash flow per share growth.

Thanks for thanks for that color.

Just a follow up in slide eight in the deck, which you just referenced in the prepared remarks, you talked about the significant free cash flow per share growth that you can generate out through 2026, that's slide assumes 80% of free cash flow goes to buybacks I know that you all don't have an official framework out there, but is that a good percentage to.

Assume going forward, maybe just any color you can give on how you think about the buyback going forward.

Yeah.

Yeah, I would say, we obviously, we haven't provided an explicit framework as I mentioned I think the graph is designed to be illustrative to show what you could achieve while still achieving the kind of debt levels, we seek to to reach.

Got it thanks for that thanks, guys.

Our next question comes from Leo Mariani of Tam partner. Please go ahead.

Hey, guys.

To see if we get a little bit more color around the Capex increase here in 2022, you mentioned kind of running.

The rig.

I guess for really the entire second half of 2022 and it seemed like there was some reference in the prepared comments to kind of derisking. The schedule for 'twenty three but I also heard a comment about maybe positioning for some growth just trying to get a sense. If there is a little shift in and thinking here, where perhaps it.

It made sense to to grow volumes, maybe early next year or something just given the strength in the curve.

I guess, if you're talking about de risks the schedule is there maybe just concern about.

So having equipment and services shut the field on time, just any color would be great.

All right.

I'll take a shot at kicking this off and then turn it over to Chad.

For some more details because I think sort of big picture question speaks to sort of how we approach the business is a good one.

What we saw here really was away we go back to those three core themes right that that annuity that $700 million ish a year annuity.

Doing everything we can with respect to investing into the going concern to maintain and ensure continuity to derisk. The continuity of the business being able to increase the efficiencies debottlenecking right building capacity or optionality in it. So a large part of that capital expenditure increase to your point.

We decided to invest in was basically aiming towards those things either derisking or building optionality capacity and so we choose down the road, we're not changing our activity set we've got no intention to do that per se with respect to the <unk>.

One rig one frac crew plan, but philosophically.

That's where we see the start of the investment decisions that we've made Chad maybe some details on it yes sure. Thanks, Nik So as Nick said the focus is on the.

Derisking the business, adding capacity increasing efficiency.

Developing some of the innovation that we've got in the works.

Or or or Debottlenecking, right and so all the incremental capital is going to one of those things and we illustrated three specific examples of incremental capital keeping the rig around for the back half of the year. The second rig around for the back half of the year.

Bringing those three additional tills and making the investment until electrifying the rig all three of those things go to either derisking or adding optionality theres not I mean, that's.

What we ultimately decide to do next year I think we'll have to provide some additional color later on as we get closer to that but obviously just like we manage the business every day, we keep an eye on what commodity prices are doing we keep an eye on what service prices are doing what service costs are doing.

And then we modify the accordion of activity as as appropriate.

Only thing I'll add there is the nod to growth opportunities is also a nod to the new technologies ventures that.

We've been discussing stuff.

We're making investments now to position us for that growth.

Got it okay. That's.

That's helpful. I guess just in terms of this sort of new ventures.

New technology business.

You announced several initiatives here in 2022.

Presumably you expect that to be I'm, assuming kind of a growing business over the next couple of years any kind of rough estimate or is like hey, this could be you know 10% of capex going forward and I don't know how you guys think about that kind of capital allocation framework between that business and just the traditional bread and butter oil and gas.

This is ravi.

I mean firstly.

I'd say that to.

To say that we're excited about these opportunities would be an understatement.

There's a ton of opportunities available for us to pursue like next Nick mentioned in his comments.

Oh, okay.

There is so much we can do so many projects we can pursue to move the world.

A lower greenhouse gas emission solution.

Providing the quality of life and in a reliable energy source for for this region for the country. So we're super excited about that.

And I'd.

We have the technology assets that we got the financial wherewithal to do all this and in what Youre starting to see is that these are not these are not pie in the sky vision of the future type concepts you guys starting to see some tangible.

Results outcomes coming out of it as you saw with our announcement with new like with.

With the.

With the VIP and the dynamism.

Excited about all that in and through all of this we have provided some data points for what the new Tech value universe would look like for us. So we still need to connect those dots for you guys.

So stay tuned we will provide some more.

Some more guidance and more information on that front in the coming quarters, but like one thing I want to emphasize is like what we do with the with new Tech investments and.

Metro opportunities it is going to be additive to the $700 million per year of free cash flow program for us.

It's going to be going to continue to deploy clinical math on on how we deploy that additional free cash flow and what it does to the free cash flow growth. So super excited about the opportunities stay tuned for more details on how some of this stuff is going to pan out.

<unk>.

So maybe I'll add one thing just to wrap back under capital question. The initial stages of this are leveraging existing assets. We broke we have that are unique to us. The initial capital outlay is marginal.

We're going to first speak to kind of ring out all the value from there as we move forward, we'll obviously signaled to the market, where we're making different types of investments.

Okay. That's helpful and I just wanted to jump over to the buyback real quick can help to notice that I guess it was down quite a bit here. This quarter. My math is right at about $151 million last quarter and closer to 59. This quarter I just wanted to kind of get a sense.

Is that more just related to kind of some of the the working capital changes this quarter, where theres maybe it wasn't.

Much tangible free cash flow.

Presumably just in your prepared comments you guys talked about being excited about buying back quite a bit of stock here. So should we think it may be that much lower amount is more just a one off related to kind of a temporary cash flow change in working capital.

Hello. This is this is Nick again another good question.

Going back to prior quarters, we didn't hit it this time explicitly in our comments because we were already a bit chatty with the comments this quarter, but that sustainable business model that we referenced obviously didn't go away and really what we do within quarters as we have a couple of desires, we want to stay within one of which is to pay down some level of that sometimes it might be a nominal amount like it.

Was this quarter because of the buyback opportunities and then the other thing is to stay within some free cash flow bumpers for the quarter and obviously for the year. So and you put on top of that right, a very volatile world where gas prices changing like they are in impacting equity markets et cetera, it's going to be a target rich environment, we think with regard to <unk>.

Buybacks for the remainder of the year and going into 'twenty three so when you look at that in total yes. It basically goes to what was the free cash flow looking like for the quarter because of things like settlements and working capital adjustments and then from there whats a good allocation.

Of that bucket across debt and share buybacks, which there we follow the math and it's the same type of sort of process that we'll use for Q3 for the rest of the year and then for 'twenty, three and beyond and Thats. The approach that basically is summarized at least conceptually or lesser Italy on slide eight.

Alan was referencing.

Okay. Thank you guys.

Our next question comes from Neal Dingmann of chest. Please go ahead.

Maybe good morning, guys. If I could just maybe touch on the last question I know, it's been asked a lot today just on capital allocation.

The old consider.

Obviously buybacks sounds to be like one of the primary focuses right now are there.

You talked to that either bolt ons M&A is out there you all look at sort of what the returns would be and just is it simply buybacks versus if you would got in and buying assets in the market you compare those and does that play the key role in deciding.

What to do with that capital.

Yeah. This is Don so yeah like we've mentioned a bunch of different times I mean evaluating M&A, we are going to be selective and picky. I mean, we do look at this from an internal kind of risk adjusted rate of return standpoint, and as we've said before to summarize the bid.

It has to compete with other capital allocation opportunities.

And right now at this current time, the best risk adjusted meaningful way to grow our free cash flow per share is buying ourselves. So that's our version of M&A at the time and as Nick and Alan have already laid out.

What's more we're running is unique in the E&P space, they're really focusing on derisking and growing our annual free cash flow and allocating that to reduce the share count to grow free cash flow per share very materially and then the things that Ravi kind of mentioned on working on or just additives on top of that so we're always in the know of whats going on in the M&A space.

But let's say the low risk opportunity to grow free cash flow for sure. So visibly in front of us are buying ourselves, it's hard to compete with that.

So well sat down and then my follow up is on operating efficiencies specifically.

You'll continue to do well on the cost side of it it has a bit of inflation.

Wondering given the sort of lower rig count that you all are running today versus in the past are you still as efficient as if you were to have a larger scale I'm just wondering when it comes to pad development and all those sort of things maybe just discuss if you will given the rig count you have today do you still see or you're able to.

<unk> experienced the efficiencies that you would otherwise with the larger players.

Yeah, No. That's a good question I'd say, it actually helps us be efficient because having that line of sight and that predictable activity set allows the team to be hyper focused on the on the targets that are that are coming up right and so we know where we're going we know when we'll be there and we know what we need to execute and the team can be hyper focused really on a pad by pad basis.

Instead of diluting your key athletes across multiple paths are multiple activity sets, we can be hyper focused on that given set of activity.

Make sure we're executing at the highest level possible.

Great details thanks, guys.

Once again as a final reminder, if you are.

Please press Star then one.

Your next question comes from Michael Scoria Stifel. Please go ahead.

Hey, good morning, everybody I wanted to follow up on the technology ventures.

When you said the incremental capital there is minimal given you're leveraging a lot of existing assets I wanted to see how the returns compete.

Pete relative to say your upstream and midstream business is it more like a midstream type of return that youre anticipating from these and.

When do you see.

I anticipate seeing meaningful cash flow from these new ventures.

Yeah I'll go ahead and start that and then Allergan kind of leverage on top of it. So obviously like we have like we've talked about on the M&A discussion. These returns are sort of fungible they compete across the portfolio and a lot of the great things about like technology <unk>.

The ability to enhance margins for kind of minimal sort of spends upfront so the world.

It's crazy the worlds volatile theres a lot of changes coming across over the next decade and really what we're trying to do is position C&I acts in this region. This basin to be very very successful in leading the way in a sustainable energy evolution. So as the world desires lowered lower carbon intense over greenhouse gas intensive products and goods and <unk>.

Services and energy sources, we have ways to deliver that and as that premium kind of valuation start slow and in being more recognized throughout the ecosystem.

We're setting ourselves up well to materially participate in this in this revolution. So I wouldn't look at it as just an either or kind of rate of returns. These things are symbiotic and work and tangent together, so lots of exciting stuff coming down the road here very excited to participate in it very meaningfully from both the company standpoint out of the region standpoint.

Okay, and any sense on the timing of these pretty long dated projects or could you see cash flow in the near term from any of these.

Yes.

I would just say you know we provided the three buckets and I think it varies amongst the buckets right some of them might be showing up next year as others might have a longer lead time.

Once once where you have the clarity.

We'll roll that out to the market.

Okay, and then just wanted to ask on hedging it looks like you continue to add some hedges in 2023 and beyond I think in the past you've done those with swaps any change in your hedging policy at all given the outlook for global natural gas markets.

No we're going to continue to layer in a programmatic familiar methodically layer in the higher dollar hedges as the strip continues to bump up.

So sticking with swaps.

From our perspective. This is one of the key tools has allowed us to be kind of a first mover and a leader in shareholder returns. This hedge book gives us the comfort to do things like.

Eliminate 16% of the outstanding shares over the course of 10 quarters. So we're.

We're going to stick with that.

Yeah.

Very good and then just one last one if I could Nick last quarter, you talked a bit about it.

And you did this quarter as well about <unk>.

Policy, and particularly needing more pipeline.

The restructure in Appalachia anything you're seeing at all.

Federal state local level that gives you more or less encouragement that that could happen.

There's obviously so much going on we just got news last night right with what's going on in D. C. But obviously the details are very cloudy at this point.

Same stories across regions and states et cetera, but I do think one of the common themes over the course of 'twenty. Two so far is that there is a growing realization that maybe it's a realization that some don't want to see or hear but nevertheless, it's occurring that there must be a crucial role a pivotal role.

For natural gas in the overall sort of domestic as well as global energy mix. There's just nothing else, it's going to be able to fill the void on the demand, whether it's <unk> or kilowatt hours or transportation miles and that's not a hit against any other piece of the energy portfolio is just a reality so when you look.

At what is going on with the desire to evolve away from oil and coal and then you couple that with what renewables are capable of with respect to scaling up over a three 510 year period, there's a huge sort of gap that needs to be plugged you figured that out.

Russia turned off the gas taps with Ukraine, and I think we're starting to figure that out domestically here. When you look at summer and winter periods, and what's going on with things like grid or how we're going to charge on the evs et cetera with with the transition. So I think that acceptance is a big driver ultimately into whether or not infrastructure is allowed to be built by.

The private sector with regard to things like pipelines. So if anything sitting here today, even though the world has gotten even more volatile and a little bit crazier than last quarter, I actually I'm, a little bit more in the bullish camp that infrastructure, that's needed and ready and willing to be built with the private sector side of the economy will actually get down to some extent for natural gas.

Yeah.

Good. Thank you guys appreciate it.

And our next question comes from John Abbott of Bank of America. Please go ahead.

Good morning, and thank you for taking my questions.

My first question is on tax I mean last quarter, you gave that guidance on when you would start potentially paying meaningful cash taxes now.

Sort of looking at the time I guess it would be about cumulative free cash flow of about $3 5 billion based off your initial plan.

Well when it comes to long term cash tax rate.

Are you more are you closer to being a 15% cash taxes. So they are long term or are you closer to 20% after you reach that.

Alright, we're probably closer to 20% when you add federal and state.

Alright.

Very helpful.

And then my other question is on the on the turn in lines during the quarter.

It looks like you turned to sales three wells in the Marcellus wells the CPA itself.

Typically a lot of times I sort of think of the deep Utica there.

Or are these more just.

What was the thought process of turning on those what particular wells down in that area.

John Thanks for the question. So this is Chad.

Three CPA Marcellus wells are actually TD, we've we've drilled them, we've not yet turn them in line.

But the thought is.

The reason we did that is we were on pad already drilling CPA Utica wells, we had the rig there we have the we have the inventory we've seen one offs offset operators results have been lately.

And looking at all of those those inputs it wasn't accretive rate of return project that added to the plant.

So it was sort of a no brainer for us to go ahead and drill those while we were there.

And then include them in the go forward plan.

We believe it's going to be a good contributor to the $700 million of your free cash flow annuity and continue to support our plan to buy back shares and increase our free cash flow per share.

I appreciate the color and thank you for taking our questions.

Yeah.

This concludes our question and answer session.

Turn the call back over to Mr. Tyler Lewis for any closing remarks.

Great. Thank you and thank you everyone for joining this morning, please feel free to reach out if you might have any additional questions. Otherwise we look forward to speaking with everyone again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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