Q1 2023 CNX Resources Corporation Earnings Call
Today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Tyler Lewis Vice President of Investor Relations. Please go ahead.
Thank you and good morning to everybody welcome to <unk> first quarter conference call. We have in the room today, Nick <unk>, our president and CEO , Alan Shepard, Our Chief Financial Officer, <unk>, <unk>, our Chief operating officer, and Ravi Srivastava, President of our New technologies group.
<unk>, we will be discussing our first quarter results. This morning, we posted an updated slide presentation to our website.
So detailed first 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 <unk> 2023 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 risks, which we've laid out for you in our press release today as well as in our previous security and Exchange Commission filings.
We will begin our call today with prepared remarks by Nick followed by Alan and then we will open the call up for Q&A, where Nab and Ravi will participate as well with that let me turn the call over to you Nick.
Thanks, Tyler Good morning, everybody first let me give you the <unk>.
Warning at the start this is take your kids to workday for US we've done over 80 kids.
Kids throughout the hallways in the office at the headquarters today, and we lost contain about 45 minutes ago. So if you hear any yelling and screaming that's what that's all about I apologize in advance, but it is one of my favorite days actually of the year.
First quarter of 2023.
13 consecutive quarters of significant free cash flow generation, that's going back to early 2020, and we've continued to utilize our free cash flow to reinvest into the asset base into acquire significant amount of our shares at prices that we believe represent a substantial discount to their intrinsic value during the quarter, we repurchased an additional 3% of our.
Outstanding shares and Thats, resulting in the cumulative retirement of approximately 28%.
Of the outstanding shares of the company since 2020, and as we discussed on our previous call. This magnitude and the pace of the buybacks has not only been bested by a small handful of very small handful actually of other companies across the S&P 500 over the same period of time.
Get a sense of the magnitude of our share repurchase program. When you look at slide three.
In the deck, which shows the top 30 largest gas producers at least as measured by production and more.
Typically when you look at the last 12 months cash returned to shareholders, which is comprised of share buybacks and any dividends paid divided over each producers market cap you can see that <unk> is at the top of that list and the key takeaway from this slide is that scale doesn't necessarily equate to larger shareholder returns in fact, despite <unk> being at the top of the.
List four largest shareholder return as a percentage of market cap, our 2022 annual gas production ranked somewhere in the middle of this group.
And returning capital to our shareholders of course, that's a crucial component of our capital allocation strategy and we're going to continue to evaluate the most efficient and effective ways to do so and this will ultimately drive long term free cash flow per share growth over an extended period, which is going to result in meaningful shareholder value creation and in.
In addition to our best in class shareholder return strategy, we maintain a prudent financial position are keeping a strong balance sheet, managing our debt levels and maintaining adequate liquidity to weather economic headwinds and Alan will have more on this shortly.
Meanwhile.
Our industry has been smack with a collapsed Nymex beginning late fourth quarter of last year and throughout the first quarter of this year the industry experienced an extraordinary decline in natural gas prices over a very short period of time and specifically we saw Nymex natural gas prices declined by approximately 74% when compared.
In March 2023 to September 2022 prices and as rapid deterioration of pricing over the past few quarters. When you couple it with the much discussed inflationary pressures on every imaginable inputs of the sector does duo duo will pose near term challenges throughout the industry CNS might be the only player in basin.
That will be free cash flow positive for the remainder of 2023 at the current strip and will likely be the only one returning significant capital to owners for the remainder of 2023 and many in the industry are increasing that leverage in outspending cash flow as we speak.
We believe the industry is going to struggle to continue to execute the shale three <unk> business model of returning capital to shareholders. In this phase of the commodity cycle, where you've got prices that are low and costs that are remaining high but on the other hand, <unk> remains well positioned to navigate this type of environment is the low cost producer in Appalachia with one of them.
Robust hedge books in the industry.
So given our targeted activity set and integrated midstream and water infrastructure ownership and we've got more flexibility than most producers to adapt our activity set.
And that flexibility in volatile times like these becomes incredibly impactful when you combine it with how NAV and his operations team are focused on driving efficient execution optimization throughout the natural gas manufacturing process things are going quite well operationally across drilling and completions activities as well as all of the <unk>.
Larry activities that support both and assuming we don't make any adjustments to our activity set related.
Related to the broader macro environment, we expect to be around the one six bcf per day run rate near mid year as discussed on the last call and this will position us to finish the year within our stated annual production guidance range.
Now solid steady operational performance that creates optionality to optimize per share returns and we're starting to see that as we speak and our decision points for 2024 I think that's a great example of this at work.
One option is to keep activity steady at the one Frac crew plan through 2023 in early 2024, which will result in increased production to approximately 590 <unk> in 2024 without increasing activity beyond a single Frac crew.
That's a scenario that has been and is currently reflected in the guidance for 2023 free cash flow and capital. The one Frac crew plan so to speak no an alternative option would be to slow some select activity in capital in 2023 full 2024 production closer to flat from 2000, 2023, sorry, 2023 levels and then build DUC in.
Venturi to bring on at the right time and build incremental free cash flow in the near term now ultimately as we've mentioned on previous calls and this will continue to reiterate production. It's a result, and not an objective within our strategy and business model and our decision making is going to be focused on long term per share valley.
As opposed to quarter to quarter or year to year Opex will clinically follow the math as Nymex takes us twists and turns but the key to understand for now is <unk> recent operational efficiencies to a new higher level of performance.
In addition to the core business of the company.
The new technologies group, let's talk a minute about that it's delivering tangible results and developing exciting projects. One project that we recently announced is a collaboration with Adams for energy, who is constructing a multibillion dollar clean ammonia manufacturing facility in Mingo County, West, Virginia, and CNS has entered into a strategic <unk>.
Partnership to provide natural gas wastewater disposal in carbon sequestration services to that project CNS is also leading the engagement with the Appalachian regional clean hydrogen hub better known as arch to to hopefully attract do HUD designation in funding for the project. This project fits squarely with CN.
<unk> is focused on tangible impactful and local functional ESG solutions and it also supports our Appalachia first vision that will catalyze a new vibrant middle class in the region, especially in some of the most underserved parts of the regions such as Mango County, West, Virginia, So stay tuned for future updates on this exciting project and by the.
I mentioned, the tangible financial results being delivered by the new technologies team at CNS Happy to report that new technologies will be firmly free cash flow positive in 2023 that didn't take long and more importantly, it will be a growing contributor to our free cash flow in 2024 and beyond.
And I'd like to mention that we expect to release, our 2022 corporate sustainability report shortly I would encourage every owner to read this document it probably is the single best product that reflects the summation of this company's strategy and philosophy and values and business model and to US, it's not a compliance document or a check.
The box activity, but instead, it's a cataloging of a focused and deliberate investment accompany resources into everything we're doing to embrace and advance our Appalachia first division in many ways. It is our clinical math of how we go about making resource investment decisions combined with a labor of love and there are many good takeaways youll see.
And the report on what we're doing across all three categories of E F and G. Many of these include updates on investments, we're making within the communities we operate in and our new technologies initiatives to revolutionize the energy and transportation industries on slide eight if you give that a look at highlights some of the corporate sustainability report metrics.
You can see Appalachia is the lowest methane intensity basin across the United States and CNS screens, even better than the Appalachian Basin average.
Our methane intensity is expected to decline rapidly as illustrated in the top right of the graph as we continue to focus on driving results again that are tangible and impactful in local.
To wrap up my remarks by discussing the <unk> that I, just mentioned or governance side of the equation of ESG, specifically, if you're a shareholder of <unk> X then you've probably heard from the company either directly or indirectly through a proxy statement mailer asking you to vote in accordance with our board of Directors' recommendations at our annual <unk>.
Shareholders' meeting, which includes voting against a climate lobbying shareholder proposal on the surface. This shareholder proposal seems immaterial and perfunctory at least to a degree but of course, we all know optics can be deceiving. So we decided to take an objective and a vocal approach and stating a public opinion and support of owner.
<unk>.
Frankly, we see these types of shareholder proposals fueled by a cottage industry of self serving actavis firms that are more interested in placing proposals for attention than genuinely improving the business of the underlying company or the industry or the environment for that matter and will look to create value or even want to engage with the company, but instead their.
<unk> to manufacturer attention for attention sake, and worse, yet they end up eroding sound governance, and a long term and they frustrate our duty to shareholders solely so these firms can appropriate value for themselves as.
As such these proposals are spam like in nature, and they are immaterial and not only at zero value, but they often destroy value. We hope that the industry in the capital markets will follow our lead and pushed back against these types of proposals because we see them as a much bigger issue that ultimately needs to be solved by shareholders and proxy advisory companies and by.
The way as such we were happy to see glass Lewis as recent recommendation to vote against this proposal and we will continue to do our part to see this through to the right outcome. So with that let me turn it over to Alan to review the details of the quarter.
Thanks, Nick and good morning to everyone.
Nick mentioned this quarter represents the 13th consecutive quarter of free cash flow generation through the execution of our sustainable business model and long term strategic plan.
In the quarter, we generated approximately $89 million of free cash flow.
We initially laid out our free cash flow plan in the first quarter of 2020. This brings our cumulative total to approximately $1 7 billion or roughly 65% of our current market cap.
Let's first turn to the capital allocation side of the business as highlighted on slide six.
As you can see we continued our market leading shareholder return initiatives by repurchasing approximately 6 million shares in the quarter and another 500000 shares after the close of the quarter through April 13.
In total we bought back approximately 3% of our shares outstanding over that timeframe and since Q3 of 2020, we have repurchased approximately 28% of the outstanding shares of the company.
Due to what we see is a significant disconnect between the current share price and its intrinsic value repurchasing our shares continues to be a remarkable low risk capital allocation opportunity, which will dramatically reduce our denominator and thereby meaningfully grow our long term free cash flow per share.
On the balance sheet side total debt levels remained essentially flat with the previous quarter, while net debt slightly increased as we used cash from the balance sheet towards share repurchases during the quarter.
Our net debt to trailing 12 month EBITDA was one eight times and we expect it to continue to adjust throughout the year to reflect fluctuations in EBITDA driven by commodity pricing.
More broadly as part of executing our sustainable business model, we expect to continue to pay down absolute debt levels over time to further bolster our balance sheet and thats always the magnitude and pace of that deleveraging will be a function of our capital allocation process.
As seen on slide five the balance sheet management activities that we've undertaken during the last several years have positioned us with substantial liquidity.
Debt maturity runway. These two attributes amongst others differentiate us and allow us to confidently continue our market leading shareholder return initiatives, even during downturns in the commodity cycle. Additionally, they position us to take advantage of any deepening valuation disconnects that might occur in either the equity or debt markets.
Let's now shift to our updated 2023 outlook on slide seven.
As Nick already discussed due to the mild winter weather and increased year over year national production levels, we have seen a rapid and remarkable natural gas price decline that started in the first quarter of 2022 and continued through the first quarter of 2023. Additionally, even though we have approximately 80% of our 2023 gas production.
<unk> fully hedged for Nymex and basis differentials. This leaves roughly 100 Bcf of natural gas volumes that are open and exposed to pricing fluctuations roughly half of those open volumes were sold in the first quarter and the remaining half are spread across the remaining three quarters of the year.
Therefore, as a result of a decline in Q1 price environment in the over $1 per <unk> declined environment prices for the remainder of the calendar year since our last quarterly call. We are updating our annual EBITDAX range to be between $950 million and $1 5 billion and our full year free cash flow guidance to approximately $250 million.
Despite the significant drop in gas prices for 2023, our operational plan and capital guidance for the year remains unchanged as the current long term strip prices continue to reflect a bullish longer term gas outlook.
We continue to expect annual production volumes to be between $555 and 575 Bcf.
And to return to around a one six bcf per day run rate around mid year.
During the quarter, we ran two full rigs a top hole rig in a continuous frac crew, we expect to release the second rig towards the end of the second quarter and as such we expect the cadence of capital spending to reflect the decline in activity.
Sequentially lower in the third and fourth quarters.
As we touched on last quarter and as we've highlighted again on slide seven our activity set and a corresponding capital expenditures. This year represented growth plan rather than merely a maintenance our production plan. This year's capital spend makes critical investments in key long term infrastructure projects that maintain our basin, leading cost position and enable us to grow our production volumes in 2020.
Four to around 590 Bcf <unk>.
Approximately 5% year over year.
Lastly, despite no changes to the current plan at this time should forward gas prices declined further throughout the year, we have a great deal of built in Optionality and will not hesitate to reduce our capital activities that in accordance with our focus on achieving the best long term economic results.
Regarding servicing commodity costs, while we are seeing some positive indications, we're not yet seeing a decline in these costs reflective of the drop in gas prices the industry has experienced however.
However should gas prices continue on their current trajectory.
We would expect that dynamic to change during the second half of the year as has typically been experienced in other cycles. We believe that this potential service cost deflation in the second half of the year would have some benefit in 2023, however, given the potential timing of the reduction of its biggest impact will be seen on 2020 for capital.
This expected change in service costs. In addition to the higher expected production volumes previously mentioned will help drive higher free cash flow in 2024 and beyond.
Switching briefly on fully burdened cash costs per unit, we expect 2023 cost to be lower than 2022, and most important we continue to expect to drive our cash costs lower moving forward as we optimize all parts of the business.
To conclude we are confident that the sustainable business model. We have created will continue to deliver value to our shareholders throughout the cycle as evidenced by our expectation of being able to continue to generate free cash flow for the remainder of 'twenty three despite where prices are currently at our focus for the remainder of the year will be on safe compliant and efficient execution to develop our extensive natural gas.
Asset base on accelerating free cash flow growth from our new technologies business on a consistent and clinical capital allocation to grow our long term free cash flow per share and most importantly, as always on ensuring all of our decisions continue to reflect a long term owner mindset.
That I will turn it back over to Tyler for Q&A, Thanks, Alan and operator, if you can please open the lineup for questions at this time please.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Zach <unk> from J P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my question I guess first just on the balance sheet.
For the past several quarters, you've been very aggressive with the buyback with less focus on debt reduction.
Nick in your prepared remarks, you mentioned continuing to return cash to shareholders through the remainder of 'twenty three but just how are you thinking about the balance sheet here with gas prices moving lower over the last six months Youre approaching two turns of leverage will you consider shifting more free cash flow back to the balance sheet. Later this year just in.
Any color there.
Yeah, Hi, this is Alan so I think what Youre seeing now is the cumulative effect of all of our transactions last several years have positioned us to kind of withstand this sort of environment. So we've been very clear that we are built to kind of continue to be able to do shareholder returns throughout the cycle. So.
So for the rest of the 23, given our maturity runway given our ample liquidity and given our hedge book, we're comfortable that we'll be able to consistently return capital and not have to have any sort of issues with that management and the foreseeable future.
Got it thanks for that color.
And then one just on Opex operating costs were higher than expected <unk> and I noticed in the slide deck that you increased the 2023 fully burdened cash cost guidance by about <unk> <unk> per him.
Can you just give us color on what's going on there is that just deflation driven just any thoughts on that number.
Yeah. So we've got two primary drivers of the first kind of the impact in the first quarter of being able to be able to sell unutilized FTE. So there wasn't as much of a spread on some of our pipes. As we had initially forecasted so that was one of the primary drivers of the second is we've added some kind of incremental planned maintenance major maintenance projects on the compressor side. So we've updated the outlook for.
That.
Got it okay.
The next question comes from Leo Mariani from Roth.
Please go ahead.
Hey, guys I was hoping you could talk a little about these kind of two different scenarios that you are envisaging here.
And are outlined on the call where there could be some cutting activity depending on what the math tells you can totally understood it's very <unk>.
Focused on what the market and math and tell you here, but just wanted to get a little better sense of kind of what youre going to be looking at obviously near term gas prices are very weak, but as you look out into 2020 thought as you mentioned the stress.
Generally higher so is it really more of a drop in that strip as we get into the winter and into 2024 that may cause.
<unk> to kind of pull back a little bit on an activity this year.
<unk> are also going to be some impact.
From pump spot prices, just trying to get a sense of how that dynamic plays out in terms of spot versus strip affecting your plans here.
Yes.
Couple of things on that so from a kind of ongoing production perspective, our variable costs are incredibly low because of the midstream ownership. So the way we look at this opportunity is always in terms of.
Kind of when we're going to bring wells on.
Think about in terms of til cadence or deferring, our completions activity or something in that realm. I think what you saw in 2020 is kind of the play that we would use the cash prices continue to be weak.
Kind of delayed sales from Congress shoulder season towards the end of the year and you bring those on in the winter. So obviously.
We're looking at that continuously and we will keep an eye on the strip and maybe I'll kick it over to Matt for how he thinks on kind of shut ins and other things of that nature.
Yes.
On shutting in of existing production.
What we're trying to do is optimize over the lifecycle valuation of the asset so since we have integrated upstream and midstream.
What we are trying to maximize is our sand phase II sales point.
Okay.
The deliverability of the gas and so for that we have.
Doing all of that analysis on all of the wells based on where they are on the lifecycle phase.
And that will go into the decision because for example sometime.
Easy to shut those wells in but it is like pretty expensive to kind of like lift them up and get back them to sales. So we are trying to solve for two things one is maximizing production and two is minimizing the cost.
Okay No that's helpful for sure here.
And then I E.
I just wanted to be clear, though it sounds like though at this point you guys reiterated the guidance everything is intact. So there hasnt been any kind of material change of course, and I guess I'll just have to wait to see what happens just wanted to clarify that.
Yes, yes, that's right right now where the the forward strips were kind of a steady state and we're keeping an eye on it.
We are developing plans to react to create the most optimal scenario.
'twenty four 'twenty five forwards that you mentioned those right now are basically following that math same keep the one frac crew activity set going and the rhythm that if those forwards change to your point those will change the longer term rates of return that's when we got the ability and the flexibility to adjust when needed.
Okay very clear that's helpful for sure I just wanted to ask on the Adams Fork deal here for sure obviously, a very sizable project area in West Virginia can you just provide a little bit more color on what <unk> role. There is going to be are you folks going to be like an exclusive gas supplier.
To that clean ammonia plant and on the carbon capture side, you guys kind of taking sort of a traditional <unk> role, where you guys will kind of manage storage reservoir and drill injection wells and very that Cotwo ground, just any additional color would be great.
Hey, Leo this is Ravi.
Alright.
The strategic partnership that we are discussing with Adam spoke at this point in time, we will be the gas supplier of gas assets at pretty close to where this facility will be constructed and.
Bob.
And we do have the expertise in drilling these deep wells.
So question Cotwo assets in place that allow us to sequester the cotwo.
And the deep <unk> formation, so we will bring those expertise amongst other services that we can offer to this project.
Okay. Thank you.
Okay.
Our next question comes from Michael <unk> from Stephens. Please go ahead.
Hey, good morning, guys.
Ellen you mentioned, you've been a bit surprised.
Industry activity Hasnt responded to lower gas prices yet.
Thoughts on.
Takeaway capacity from the basin.
I guess with or without MVP, how that looks.
Yes so.
I haven't really been any changes to takeaway capacity right to your point pending where MVP lands I don't think we have any unique insight into whether that project is going to come on or not.
We saw a gas producer I think we'd all like to see that just to.
Help with national kind of production levels, but I think my comment.
On kind of industry response was more too on the supply the service cost side, we haven't really seen that rollover, just yet, but we're expecting it to as we see some folks adjust their schedules moving forward.
Maybe to follow up on the.
The cost side, you said, you anticipate 23 costs, if I heard you right below 22 is that.
Based on.
Further efficiencies on their side and assuming similar Oss costs or do you actually anticipate.
The decline in <unk> as well.
Yes. So we did last year about about 20 right now we're guiding to $1 50 with kind of the current cost environment. So we're going to try and beat that even so that's the genesis of that comment.
Okay. Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Noel Parks from Tuohy Brothers. Please go ahead.
Hi, good morning.
Hi, good morning.
Going back to the.
Adams Fork and the ammonia plant project I'm, just curious could you talk a bit about.
Maybe how long you are in discussions for forming the partnership and how.
How the.
<unk> 45, Q carbon capture credit increase play then.
I'm wondering was there a possibility of a deal in the works even before that.
It became evident or was that really a catalyst for making it happen.
Hey, this is Ravi again so.
The strategic partnership discussions with Adam's Fork are still being worked out there theres a lot of detailed that'll instead of going to go into it and the relationship could change over time.
Some of the other milestones are hit.
The discussion has gone up.
Pursue.
But without them <unk> and on the on the 45 to side of things that is definitely something that.
That improves the <unk>.
For that project.
These incentives.
They provide they can they can provide us.
Pretty steady revenue stream I think the technology that we're trying to deploy there is going to give us.
A fairly clean stream of cotwo be sequestered and the assets the midstream assets the surface assets on the forest base assets that we have in place kind of make us the ideal partner to <unk>.
Who partnered with in a project like that and we.
We expect a $45 <unk> type incentives to continue to make.
Projects like this viable in these disadvantaged communities that are that are impacted by energy transition types.
Scenarios.
So were excited that Theres a lot of things that can make this project.
Sort of very suitable and in that West Virginia region, those access to water.
Access to power that has access to our midstream assets gas assets, but there's a lot of play but still the 45 three type credits play a huge role in making the project liable.
Great.
On the macro front of course with the volatility we've seen in in Nat gas over.
Last quarter plus.
Much of the industry understandably has been looking to the LNG capacity coming online 24 to $25 26 and.
I detect in those discussions a little bit.
More of a shift.
A more granular perspective as far as.
Exactly which trains which projects.
How they are running according to schedule, whether for example, with a higher interest rate environment some of them might get pushed out a bit I am just curious have you detected anything in the win that that affects your your macro thinking, especially as Youre looking ahead to 2024 and 'twenty.
<unk> 25.
I know you have an eye on because of your programmatic hedging policy.
This is Nick I think.
Macro from a demand perspective for natural gas and <unk>.
And on the record for this for a while it's sort of a major thrust of the new technologies effort within the company.
Things like LNG exports, certainly is going to have a role in a time with respect to not just national energy supply demand and natural gas markets, but also global of course, but from a sequential thinking perspective for a lot of reasons from policy to to just straight up economics b.
More immediate and more impactful opportunity for demand creation within natural gas and the Appalachian basin is with vertical integration into transportation.
Types manufacturing types of industries and that's why we're so excited about projects like Adams for.
Those can be done much quicker those basically shrink supply chain from tens of thousands of miles cumulatively to dozens of miles in some instances and those have immediate sort of economic drivers benefits rationale that also tie quite nicely with policy, whether it's regional state or federal so it's those.
Inspiration opportunities manufacturing opportunities, we think when you get down to the actual capital will be deployed to in the front, let's say three to five years LNG export and growth of LNG export. We're certainly had its time, but thats probably going to come later and after this was first step.
Yes.
Great. Thanks for the clarification, that's all for me.
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 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.
Conference has now concluded thank.
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