CNX Resources Corp

NYSE:CNX

Earnings Call Analysis

CNX Resources: Cost Efficiency and Future Growth Opportunities Outlined

In its recent earnings call, CNX Resources highlighted significant cost improvements, with a 31% reduction in drilling costs from 2023 levels, targeting $1,800 per foot moving forward. The company retains flexibility for production profiles, pending market gas prices. For 2025, CNX plans to release detailed capital expenditure figures next quarter, indicating ongoing evaluations of market conditions. Regulatory clarity on tax incentives for coal mine methane could enhance production capabilities, though specific growth metrics remain uncertain until final guidance is issued by year-end.

Strategic Outlook and Flexibility

CNX Resources has demonstrated a strong capacity for strategic planning and flexibility in its operations. Despite recent price fluctuations in natural gas, CEO Nick Deiuliis highlighted that the capital allocation process remains focused on long-term opportunities. The company retains 11 deferred drilled but uncompleted (DUC) wells, showcasing the ability to adjust production volumes based on real-time pricing signals. Specific production targets and associated capital expenditure (CapEx) guidance will be provided in the next quarter, allowing investors to gauge the company’s response to market conditions.

Cost Improvement and Operational Efficiency

A major highlight is the significant improvement in well costs. CNX has successfully reduced its all-in drilling costs by nearly 31% from 2023, positioning it competitively within the industry. The average cost per foot has decreased from $1,200 to approximately $750, with a target of $1,800 per foot after 2024. Moreover, the time to drill wells has improved by 23%, falling below 50 days. This operational efficiency potentially enhances profitability, allowing for greater margins in a volatile commodity market.

Coal Mine Methane (CMM) Growth Potential

The company is actively pursuing opportunities within coal mine methane, currently capturing between 17 to 18 Bcf per annum. Management indicated that while regulations are still pending, CNX believes there is considerable potential to increase these volumes if appropriate incentives are established. Discussions around tax incentives under the 45Q and 45V programs suggest potential federal credits of about $60 per ton for methane capture, which, if realized, could spur further growth in CMM capacity and production.

Regulatory and Market Opportunities

The future landscape of CNX's operations appears to hinge on potential regulatory changes. The 45V program could offer as much as $3 per kilogram for hydrogen production, and as clarity emerges around these incentives, CNX could identify additional pathways to enhance its operational capabilities. However, the exact impact and guidance surrounding these regulations remain uncertain until more definitive information is available, which is anticipated by the end of the year.

Capital Allocation Strategy and Shareholder Returns

When addressing the company's capital allocation strategy, CNX remains cautious yet optimistic. There's ongoing consideration of share buybacks in light of recent stock appreciation, but management confirmed that the share price is merely a factor in their long-term planning. The inherent flexibility in the balance sheet indicates a commitment to pursuing various capital deployment strategies, including the potential for dividends in the future, although no specific timelines were presented.

Future Guidance and Market Signals

As for future projections, specifically regarding production volumes and capital expenditures, CNX plans to provide a comprehensive update in the next quarter. The management team emphasized that production goals will be contingent upon prevailing gas prices, suggesting a responsive approach to market dynamics. Investors should remain alert for updates that will further clarify the expected financial trajectory.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the CNX Resources Third Quarter 2024 Q&A Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

[Tyler Lewis, executive]

Thank you, and good morning, everybody. Welcome to CNX's Third Quarter Q&A Conference Call. Today, we will be answering questions related to our third quarter results. This morning, we posted to our Investor Relations website an updated slide presentation and detailed third quarter earnings release data such as quarterly E&P data, financial statements and non-GAAP reconciliations, which can be found in a document titled 3Q 2024 earnings results and supplemental information of CNX Resources.

Also, we posted to our Investor Relations website our prepared remarks for the quarter, which we hope everyone had a chance to read before the call as the call today will be used exclusively for Q&A. With me today for Q&A are Nick Deiuliis, our President and CEO; Alan Shepard, our Chief Financial Officer; Navneet Behl, our Chief Operating Officer; and Ravi Srivastava, President of our New Technologies Group.

Please note that the company's remarks made during this call, including answers to questions, include forward-looking statements, which are subject to various risks and uncertainties. These statements are not guarantees of future performance, and our actual results may differ materially as a result of many factors. A discussion of risks and uncertainties related to those factors and CNX's business is contained in its filings with the Securities and Exchange Commission and in the release issued today.

With that, thank you for joining us this morning. And operator, can you please open the call up for Q&A at this time.

[Operator]

[Operator Instructions] Today's first question comes from Bert Donnes with Truist.

[Bertrand Donnes, analyst]

Just wanted to start off on the full year '25 capital disclosure. It looks like it maybe got removed from your press release and your presentation, is that 550 no longer accurate? And maybe there's some moving parts on your turn-in-line schedule. So is that moving up or down or is inflation impacting that? Any color there would be helpful.

[Alan Shepard, executive]

Yes. Great question. So I think the way to think about 2025 is next quarter, we're going to provide everyone with kind of the full production volumes we're going to target the associated CapEx with that. That will be entirely a function of what we see developing the pricing for next year. We do still retain the 11 DUCs that we had deferred earlier in the year. So we have pretty significant flexibility in terms of what production profile we want to hit. But again, that all comes back to where we see pricing heading for next year. So this removal disclosure was really just about we're close to next quarter and to provide the exact numbers then.

[Bertrand Donnes, analyst]

Okay. Maybe not as a disclosure, but is the efficiency still similar? Or is it just a matter of moving parts? I just want to make sure that was the part of the question.

[Alan Shepard, executive]

Yes. The efficiency is similar to better. It's just a matter of moving parts and setting the exact number, we want to target sort of a function of gas prices.

[Bertrand Donnes, analyst]

Perfect. Makes sense. And then the second part, I know it's certainly way too early for New Tech exact numbers on '25 and beyond. There are some moving parts on the CMM volumes and pricing and AutoSep looks like it might have slid to the right. Just directionally, do you have any views on 2025 and 2026 versus the $75 million just directionally upwards or downwards.

[Alan Shepard, executive]

Yes. Again, we'll provide the detailed view on that next quarter. And right now, we just kind of defer to what's in the commentary on those.

[Bertrand Donnes, analyst]

Got you. And was the AutoSep push to the right on the -- I think the prior disclosure just implied you were going to do some third-party work in the second half, but I just want to make sure that was either the case still or no longer case?

[Alan Shepard, executive]

Yes. That's still a possibility. The focus right now on AutoSep is working with our JV partner to develop some additional units in [ Male ]. Right now, the existing unit we have is fully deployed on our internal operations. There is potential for some third-party work this year. But the focus of that right now is building out that fleet. We're seeing really good kind of interest from customers. it's still in real early stages. So that's why we -- again, we'll talk about the next quarter where we see the full year guidance for that business, but pretty still looking good there.

[Operator]

The next question comes from Zach Parham with JPMorgan.

[Zachary Parham, analyst]

First, I just wanted to ask on the New Tech business. You mentioned in the prepared remarks you're still waiting on some regulatory clarity for 45V and potentially 45Q. Could you talk a little bit more about the opportunity set if you do get some regulatory clarity there? How much more coal mine methane could you potentially capture? And what would be the associated CapEx spend would that capture incremental volumes?

[Unknown Executive]

Yes. Good question, Zach. The short answer is we don't know and we can't say right now because we don't know enough about how the market is going to develop. In our commentary, we have laid out, there's 4 different pathways that they're pursuing and the first 1 being the ATS program, where the states are looking to kind of reduce their CO2 emissions and look at Auckland Energy Resources to be deployed for electric generation, right? And then we got the 45V pathway for hydrogen production generation. And now we got this 45Q opportunity for CO2 sequestration, greenhouse gas emission reduction opportunity. And then we're also pursuing private sector transactions.

So that's the opportunity set and while the [ ATS ] pathway is defined and that kind of sets the stage for what our opportunity to capture right now is and what our cash flow guidance that we're providing right now. The other pathway is one we're very excited about like what they can be, but they're still taking form. And as these markets start to kind of crystallize, then we'll be in a better position to provide our view on how we could play a role in serving these markets. But right now, it's just too premature like until these pathways for markets become more definitive.

[Zachary Parham, analyst]

My follow-up, I just wanted to ask on the buyback. The stock has moved quite a bit higher. It's higher than where you all bought back in the past. Just curious how you're thinking about the buyback going forward with the stock now in the mid-30s. Do you still consider it a good value to be buying back stock? At some point, do you consider pivoting to a dividend? Just curious how you're thinking about cash return from here in general.

[Alan Shepard, executive]

Yes. So we continue to see a very attractive opportunity over the long term for CNX when we look out in the future prospects of the business. But I wouldn't read into that in terms of short-term allocation decisions. It's sort of kind of productive for us to provide near-term guidance on those activities. What I will say is I'll point everybody back to fundamentally our clinical capital allocation process is the same regardless of what the share price is. The share price is just an input into that process. We're going to continue to follow that process and the results that it kind of sticks out. The only other thing I'd note there is we have pretty significant flexibility just in terms of where our balance sheet is and with our hedge book, all capital allocation opportunities are open to us.

[Operator]

The next question comes from Leo Mariani with ROTH Capital.

[Leo Mariani, analyst]

I just wanted to follow up a little bit more here on the guidance. It looks like you guys removed 5 turn-in-lines from the schedule in 2024. Just curious if maybe those kind of slid to the right? Or are you paring back some activity? Obviously, gas prices have not been fantastic here over the last couple of months. So just trying to get a sense if you're being little more cautious on overall activity on the drilling side or perhaps maybe those just slid a tiny bit into early '25 on the [ turn ] on lines?

[Alan Shepard, executive]

Yes, it's more of the latter. Those were tills that were kind of scheduled for that mid to late December and finish lift across the year-end line. So it's kind of artificial if you think about it from that perspective. So there's no change in the activity set from what we indicated back in the spring where we deferred those 11 [ gas ].

[Leo Mariani, analyst]

Okay. That's helpful. And then just wanted to follow up on the 45Q, 45V potential tax credits here. Could you just give us kind of a sense of roughly what type of federal tax credit is kind of being contemplated under 45Q. I guess, something like a CO2 perspective, it's around $85 per ton. Is that something similar that you think could occur for methane and then under the the 45V rules? Is there potentially some kind of multiple -- big multiple of that number in terms of the tax credit? Just trying to get a sense of what you think is being kind of contemplated right now. And any high-level time frame as to when you think a decision could be made under those potential bills?

[Ravi Srivastava, executive]

Yes. Thanks for the question. On the 45Q side of things, I think the number that's been floated out there in the draft lines is around $60 per tonne. But at the same time, there's a lot of moving parts to understand like what's going to qualify, what's not. So I think it's too early to say like which volumes are going to qualify for that I think we will have to wait until the final language is out. On the V side of things, it talks about a tax incentive for producing hydrogen.

And I think the best -- the most that you can get is like $3 per kilogram and how that translates into what incentive it would be for coal mine methane. I think it's going to have to go through a very ridiculous exercise of understanding like again, like specifics of what but the guidance is going to entail. So it's very difficult to say at the same time what that will be. So stay tuned on the guidance out, I think we'll be able to provide more color and as for the timing, I think I can say at least on the 45V side of things, what we've [ kept ] from the treasury that is expected before the end of the year in Q4.

[Operator]

The next question comes from Nitin Kumar with Mizuho.

[Nitin Kumar, analyst]

You've given us some color on the 45Q and 45V, but try something maybe a little different. On the 45Q the treasury has been a little bit prescriptive in terms of what equipment qualifies. They have a date of, I think, 2018 and a 12-year sunset. Could you walk us through your current operations in CMM what is the sort of average life of that equipment today? And is this being replenished or sort of renewed every few years?

[Ravi Srivastava, executive]

I mean I would say Nitin again, it's too early to say until unless the language for the 45Q craft language as it pertains to methane capture is finalized -- it's we just hypothesizing what that means. So like what's the language is player, I think we'll be able to provide better guidance.

[Nitin Kumar, analyst]

Okay. Fair enough. And then I want to just maybe circle back to Zach's question. I understand you can't talk about plans to increase CMM, but do you have a sense of what is the F&D cost today of -- forget about 45V or 45Q, what is the cost of maybe implementing new systems on mines? And what is the opportunity set for CNX I think you do about 17 to 18 Bcf a year, how much can you grow that?

[Ravi Srivastava, executive]

Yes. I mean I think it kind of goes back to the same question, Nitin, where like in the absence of good guidance in terms of like what's going to qualify, what's not it will be too premature to talk about what qualifies, how much quantifies. So I would say stay tuned until the current information is available for us, so we can provide better guidance on the matter.

[Operator]

The next question is from Michael Scialla with Stephens.

[Michael Scialla, analyst]

I wanted to ask on the deep Utica play, obviously, some very high rates there. Anything to gas prices improve next year? Is there anything that would -- if you wanted to ramp that play that would constrain that any infrastructure issues? Or is it still too early on the the cost side to know if you really want to push the pedal down there if the market looks like it needs more gas?

[Alan Shepard, executive]

I'll answer the first question first. We're extremely happy with the performance on the cost side and just the overall action at a [ NAS ] team. In terms of ramping volumes, those wells are super prolific in early times, so you certainly have that optionality. We don't have any kind of near-term major constraint, I think of what you're heading at. It's just really a function of pricing. And in any ramp-up situation, as we see in the past, you do need some lead time to do it, but there's nothing I'd point to right now that would prevent us if you achieve that sort of market price signal.

[Michael Scialla, analyst]

Great. Could you -- is it too early to say on the cost side? Or can you give -- I mean, you gave some days, which, I guess, would imply is $100,000 per day, a good estimate on the drilling side, and then we can could we assume like 1/3, 2/3 on the completion side?

[Navneet Behl, executive]

I think I can give you, Michael, the cost side. So far, like we put in our guidance here is we've gotten a drilling come down to like under 50 days, and that's a 23% improvement over '23 and on the current set of wells that we've just completed, that's -- we have improved even more that. So I am very pleased with the progress we have made, but not anywhere close to satisfy on where we should be. So we'll keep continuing making progress on both cost and drilling performance.

And just to kind of give you an example on drilling performance is are all-in cost, like we've been able to drive them down like almost 31% from 2023. And drilling has been the major driver for that cost coming down and drilling costs have come down almost 38% from '23, which was all $1,200 per foot down to like about $750 per foot. And we are making progress continuously as we speak.

[Michael Scialla, analyst]

Navneet, is it fair to say it competes with your Marcellus right now? Or is it still kind of a little bit higher cost play?

[Alan Shepard, executive]

It's absolutely completed. It's in the mix and the capital allocation process for sure.

[Navneet Behl, executive]

Yes. And just to kind of give you an idea of like these are highly prolific wells. For example, 10,000-foot Utica well compared to [ Southwest PMR ] as well make about 20 Bcf 7x faster than the Southwest PA well, right? So these are highly prolific, highly high [indiscernible] wells. So we are really excited about the play.

[Operator]

The next question is from Jacob Roberts with TPH.

[Jacob Roberts, analyst]

Maybe for Ravi. Stepping away from the financial outlook on the 45Q and 45V changes. If we think about the 18 Bcf of coal mine methane today, should we be viewing those potential changes under 45Q and 45V as mutually exclusive opportunities? Or is there a way to benefit from both?

[Ravi Srivastava, executive]

I mean I hate to kind of repeat the same thing. Until the guidance is out, I don't know. Well, we don't know whether that 18 Bcf and how that's going to get that treatment. So once we have better idea, once we have better information, we'll be able to provide more color on how that 18 bcf gets treated under the 2 programs.

[Jacob Roberts, analyst]

Fair enough. And a follow-up, just given the equity appreciation, has that changed any conversations around the M&A market and what opportunities might be out there? And then more specifically, do you think there are opportunities that exist that would align more with the new technology segment?

[Alan Shepard, executive]

Yes. I would just defer back to the earlier commentary, I talked about our capital allocation process and 1 of the things that get considered throughout that process is M&A, about oil and gas and potentially other things as you alluded to. But nothing specific to comment on at this point.

[Operator]

The next question comes from Kevin MacCurdy with Pickering Energy Partners.

[Kevin MacCurdy, analyst]

Can I ask for a little clarification on the well cost on the Utica side. I think you mentioned earlier that costs were down 31% and from 2023, where does that put you on a $1 per foot for this latest around the wells?

[Alan Shepard, executive]

Yes. So I think the number to have in mind is, call it, $1,800 per foot is where we're targeting after '24.

[Kevin MacCurdy, analyst]

Got you. Okay. That's helpful. And then I appreciate all the updates on the New Technology side. I know that you're kind of limited on what you can say. But can you just kind of confirm for us on the CMM volumes this year, I think you're at 17 to 18 Bcf. That's not capped at that rate, right? You could potentially increase that over the next few years if there was an incentive to do so?

[Alan Shepard, executive]

Yes. It's all going to be a function of the incentive programs we talked about. We we enjoy the ability to grow the portfolio. But until we see final regulations, we can't analyze how and which projects would come online over time.

[Kevin MacCurdy, analyst]

Any thoughts of the total capacity that you could grow to?

[Alan Shepard, executive]

Again, without the details of the program, you can't make that estimate. Thank you.

[Operator]

This concludes our question-and-answer session. I would now like to turn the call back over to Tyler Lewis for any closing remarks.

[Tyler Lewis, executive]

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

[Operator]

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.