CNX Resources Corp

NYSE:CNX

Earnings Call Analysis

Company Foresees Mid-Single-Digit Growth

The company anticipates mid-single-digit percentage growth in production compared to the previous year. In a strong position with a solid balance sheet and effective hedging strategies, it is planning to allocate nearly all of its free cash flow towards rewarding shareholders, albeit this approach will be reassessed on a quarterly basis.

Introduction to CNX Resources' Q4 2023 Earnings

CNX Resources' earnings call focused on outlining their fourth quarter and full-year results. With updated presentations and earnings release data available online, the call set the scene for an interactive Q&A, aiming to clarify and expand upon the company's performance and strategy, with executives ready to offer insights into their operations and future direction.

New Tech Cash Flow Guidance and Investment Limitations

During the call, CNX Resources discussed changes in their New Tech free cash flow guidance, attributing adjustments to softer pricing in environmental attribute markets and the current structure of available incentive programs. While the guidance suggests scaled-back expectations due to these market conditions, the company remains poised to leverage future investment opportunities should the incentive structure improve.

Strategies to Drive Future New Tech Cash Flow Growth

The company outlined a three-pronged strategy for growing New Tech cash flows. This includes capitalizing on environmental attribute opportunities, leveraging their technology portfolio to create value, and exploring alternative fuel opportunities like hydrogen projects. These diversified approaches are earmarked to supplement the existing $75 million free cash flow anticipated in 2024 and to bolster growth beyond this period.

Production Trajectory and Capital Expenditure Forecast

CNX Resources anticipates its production volumes to start low in Q1 2024 and progressively increase, ending the year with the highest quarterly run rate. The company aims to maintain a flat annual production profile of about 500 million cubic feet per day. Capital expenditure is expected to decrease from approximately $600 million in 2024 to around $500 million in 2025, attributed mainly to operating efficiencies and reduced well completion activities.

Capital Allocation Breakdown

The non-drilling CapEx slated for the year, which ranges from $145 million to $175 million, will be divided among land, midstream, and New Tech investments. Land investments are forecasted to be around $30 million, while New Tech constitutes a minor discretionary spend of $5 million to $10 million, inclusive of ESG reduction efforts. The residual spending will support water and midstream infrastructure compatible with field development.

Monetization of New Tech and Shareholder Returns

Monetization of New Tech cash flows presents dynamic challenges due to market volatility and complexity, making it difficult to predict the split between credits and private party transactions. Additionally, CNX Resources is committed to distributing a significant portion of its free cash flow to shareholders and underscores its strategic priority for long-term debt reduction.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the CNX Resources Fourth Quarter 2023 Q&A Conference Call. [Operator Instructions] 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.

[Tyler Lewis, executive]

Thank you, and good morning, everybody. Welcome to CNX's Fourth Quarter Q&A Conference Call. Today, we will be answering questions related to our fourth quarter and full year results. This morning, we posted to our Investor Relations website, an updated slide presentation and detailed fourth quarter earnings release data such as quarterly E&P data, financial statements and non-GAAP reconciliations, which can be found in a document titled 4Q 2023 Earnings Results and Supplemental Information of CNX Resources. Also, and as previously announced, we posted to our Investor Relations website, our prepared remarks for the quarter. This is a new format to better streamline the earnings process and dissemination of information. So we hope that everyone had a chance to read the prepared remarks before the call as the call today will be used exclusively for Q&A. With me today for Q&A are Nicholas 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. 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]. The first question comes from Bertrand Donnes with Truist.

[Bertrand Donnes, analyst]

Just wanted to start off on the New Tech free cash flow guidance. Maybe could you talk about specifically what's changed over the past 3 months to kind of impact your outlook? And then I suspect it's probably pricing. But secondly, is it a matter of IRRs when you discussed in your prepared remarks about the incentive for new expansion? Is it IRRs not meeting some sort of internal threshold? Or is it maybe that the projects have actually flipped to a negative free cash flow territory?

[Ravi Srivastava, executive]

Bertrand, this is Ravi. On the New Tech cash flow side of things, you're right. The way -- what's going to impact the cash flows for New Tech is two things. The volume that qualifies for different programs. And I think the team has done a great job of maximizing what those volumes can be. We've provided the guidance of 15 to 18 Bcf that qualifies for these various programs. And we were focused on getting all that volume kind of turned in line. So that's happened. We're pretty excited about that part of it. The second thing that impacts what the free cash flow is going to be is what the pricing is. And we have seen some softening of pricing, specifically in the ATS market for the Tier 1 [ rec ]and that's driven the cash flows down. But there's some seasonality, there is some volatility that kind of comes into that. What the pricing that we were seeing in Q3, Q4 of last year, there's no reason why we could not go back to those types of pricing later in the year. But what we're trying to do is providing guidance based on the information that we have available at this point in time. And that's where that market stands at this point in time. And on the future investment standpoint, that's correct. I think we have a portfolio of opportunities that we can invest our capital into, and we do have opportunity to go and capture more [ gas ], but at this point in time, with the incentive structure that's available through the programs that we have access to at this point in time, we're limited in terms of how much more capital we can invest to capture this more [ base methane ].

[Bertrand Donnes, analyst]

That makes sense. And then just shifting gears a little bit, it looks like that the footnote on full year '24 cash unit cost just ticks up a little bit versus the 4Q '23 disclosure. Is there any color on which bucket is maybe going up? And does that reverse if you ramp-up your production?

[Ravi Srivastava, executive]

So the way to think about this quarterly-quarterly, quarter-to-quarter kind of unit class numbers, they fluctuate based on kind of the production volumes for the quarter and potential maintenance projects that's flat around between quarters. The way to think about it is always look to the sort of annual guidance that we provide, and then you'll see the -- that's kind of the way you should think about modeling that on an annual basis because there's noise in quarter-to-quarter.

[Bertrand Donnes, analyst]

Okay. So there's nothing specifically going up that we see, [indiscernible].

[Ravi Srivastava, executive]

Yeah.

[Operator]

The next question comes from Zach Parham with JPMorgan.

[Zachary Parham, analyst]

I guess, first, another one on New Tech. In December, you announced you're no longer partnering with the Adams Fork project, which is one of the potential drivers of future New Tech free cash flow growth. Can you talk a little bit about the drivers that you expect to -- you talked about growing New Tech from here. Maybe what drives that higher than the $75 million in 2024 as we go out to 2025 in future years?

[Ravi Srivastava, executive]

Exactly. That's a great question. So the way I would look at new tech free cash flow growth, you could put them into, I would say, three different buckets. One is the environmental attribute opportunities. We talked about the volume that qualifies for some of these opportunities being 15 to 18 Bcf. So we can grow that volume. For that volume to grow, there's better incentives that needs to be available for it. So we're looking for other opportunities, other incentive programs where -- or other pathways that can be created where the realization for the environmental attributes can be -- we can realize more value for these. So we're looking at a portfolio of opportunities on that front. So if that happens, not only the realizations go up, there is opportunity to add more volume to it. So that's one pathway to grow new tax free cash flows. The second part of it that we have talked about in the past is we have a technology portfolio that we're trying to create value out of. And I think ‘24 is going to be the year where we've been in the prototype and testing phase for a lot of that stuff. But I think this year, we start to see that those opportunities start to take commercial scale. So we're excited about those. I think more to come on that front in the coming quarters, but we're very excited with the progress that we've seen on that front. And then the third part is this alternate fuel opportunity where hydrogen projects or getting into CNG, LNG markets creates opportunity for New Tech to grow its cash flows. And again, I think it dovetails with the technology of an IP opportunity that we have that creates CNG and LNG opportunities for us. So more to come on that front, but we're pretty excited about what we have in our portfolio. And those three different buckets combined is what's going to drive new tech cash flows in the coming years.

[Zachary Parham, analyst]

Maybe my follow-up on the E&P business. 11 of your 35 planned turning lines in 2024 will be in the Central PA area versus the Southwest PA area, which is up a bit from 2023. Can you just talk a little bit about what your future development split will look like? Will we see more activity shift to Central PA versus Southwest PA over time?

[Ravi Srivastava, executive]

Yes. I think as we've talked about historically, we're very focused on continuing to develop that Southwest PA asset. That's where the bulk of our infrastructure is currently. And right now, we assess those opportunities on an NPV kind of total IRR basis. We did drill some CPA Utica wells this year, and we've talked about those. We expect those to come online next year and that's some of the [indiscernible] you're talking about. But overall, in the next few years, the mix should look pretty consistent that you've seen historically. But in the longer term, you would see us migrate upwards CPA towards the latter part of the decade.

[Operator]

The next question comes from Leo Mariani with ROTH MKM.

[Leo Mariani, analyst]

I just wanted to follow up a little bit on kind of production trajectory here in 2024. I know you guys only had kind of two [ tills ]in the fourth quarter. So just generally speaking, should we expect kind of production to dip a little bit here in the second quarter and then kind of start kind of moving up as we get to the middle of the year to kind of hit that guidance range? And I know that previously, last you kind of had the point estimate on guidance. And this year, you've got a little bit of a range. So maybe just provide any kind of color around that would be helpful.

[Ravi Srivastava, executive]

Yes. You'll see kind of similar to what you saw last year. Q1 will probably be the low number for our volumes, and that will build throughout the year, and we should end the year at the highest kind of quarterly run rate. But on average, as we talked about, we're trying to maintain kind of a flat production profile on an annual basis of about 500 [ ADVs ].

[Leo Mariani, analyst]

Got it. Okay. That's helpful. And then can you just talk a little bit more about how you get from 2024 capital to 2025 capital? So you got roughly $600 million this year, and it's expected to kind of step down to closer to 500 next year. Can you maybe just kind of talk us through a little bit what the kind of delta there is?

[Ravi Srivastava, executive]

Yes. What you're seeing there is what we kind of set out to achieve, right? We're going to hold production flat and focus on capital efficiency. And when you do whole production flat, you end up needing to turn to mine fewer and fewer wells each year. So the ‘25 plan is going to -- you should expect to see fewer TILs and with that comes lower capital, right, particularly on the completion side. So that's really the big driver there. We're not modeling any sort of cost reductions or anything in that, it's truly an activity-based reduction.

[Leo Mariani, analyst]

Got it. I'm assuming a lot of this is probably just a function of lower decline rates as you continue to hold production flatter, just taking fewer wells? And is there also any kind of component that you're seeing where perhaps the wells have improved at all? I'm just trying to get a sense of -- it's a pretty big step down, right, going from 600 to 500, call it, 17%, 18% less capital. It's a really nice change in efficiency. Just wanted to see if there's any kind of well improvement performance component here?

[Ravi Srivastava, executive]

Yes, I would describe it as well improvement performance. I mean, we will have the CPA Utica wells in that plan next year, and we expect those to be very robust like we saw in prior years. So really, it's just the -- to maintain 580, you hit it, the production declines are lower, the capital intensity on the infrastructure side is lower and you end up with lower completion activity. So that's right where we want to be. So we see a signal to grow production in this basin.

[Leo Mariani, analyst]

Yes. That makes sense.

[Operator]

The next question comes from Michael Scialla with Stephens.

[Michael Scialla, analyst]

Maybe just a follow up on Leo's question there, too. I'm just curious with that step down to $500 million, was there anything built in CapEx-wise for the Adams Fork project in that time frame? Or was that further out?

[Ravi Srivastava, executive]

No, that was further out.

[Michael Scialla, analyst]

Okay. Got it. And then your production guidance for this year, looks like you're implying some mid-single-digit growth year-over-year. I want to see how you see the in-basin fundamentals playing out this year? And any concern about potential bottlenecks on storage or export capacity?

[Ravi Srivastava, executive]

No. I mean, it's all going to be weather dependent. I think up here been [indiscernible] has been pretty consistent and staying flat. So we'd expect the supply side to remain steady and it's going to be a demand function. We'll see how kind of we get through the winter here the rest of February and March, and we'll have a better view on that. But we're protected in any scenario with our hedge book, so we're ready to go for whatever ‘24 brings.

[Michael Scialla, analyst]

Got you. And if I could ask one more. For this year's non-drilling CapEx, the $145 million to $175 million you talked about, can you give any rough split on the land, midstream and New Tech break out there?

[Ravi Srivastava, executive]

Yes. The New Tech is in a separate bucket. It's in that discretionary line, and that's pretty de minimis. It's in that $5 million to $10 million range, but that also includes all of our efforts on ESG reductions. So there's two kind of things in that bucket. On the land side, it will be around the $30 million sort of range and the rest is split between water infrastructure and midstream infrastructure that kind of keeps up with the field development.

[Operator]

[Operator Instructions]. The next question comes from Jacob Roberts with TPH.

[Jacob Roberts, analyst]

We were wondering if you're able to give any insight into the split of the $75 million in New Tech in terms of perhaps credit versus private party transactions? And then is there any expectation given the volatility of those markets in terms of how they'll be monetized on a quarterly basis?

[Ravi Srivastava, executive]

So as we've said in our prepared commentary, the sources for the cash flow for New Tech is coming from the EPS market. There's some of the compliance part that we're part of, and there's some voluntary transactions that we've taken. So at this point in time, we're making some dynamic decisions on where the opportunity is and where to direct those attributes to. So it's difficult to provide the split on an ongoing basis. But what I would say is that some of the other transactions on the voluntary side and all that stuff, they're all driven by what the other opportunity costs are. So the EPS program is probably a good driver for what the realization would be for some of this stuff. And then the variability is going to come from the volume and what's happening in that market for pricing, the EPS market.

[Jacob Roberts, analyst]

I appreciate that. And then my second question, at a high level, how are you guys thinking about balancing uses of FCF in the coming years between shareholder returns, which have been on a solid pace, potential debt reduction or even maybe how you're planning to handle those maturities in the '26, '27 time frame?

[Ravi Srivastava, executive]

Yes. So we've been pretty consistent in kind of message to the market. In the longer term, we are looking to delever that's going to occur through kind of absolute debt reduction as well as kind of growth in gas pricing and the New Tech revenue side.We're well positioned right now with where the balance sheet sits and where the hedge book sits to have the luxury to basically deploy close to 100% of free cash flow to shareholder returns. It's an odd kind of a quarter-by-quarter decision though, to continue that pace, right? We always talk about following the math, and that's what we do. Right now, we still see a lot of opportunity in the undervalued shares to continue where we're at.

[Operator]

The next question comes from John Abbott with Bank of America.

[John Abbott, analyst]

Ravi, my question is for you. You talked about those three different opportunities to grow free cash flow on the New Technology side. You've talked about these commercial opportunities in bucket #2. Can you provide any more color on what those are approximately? What are you looking at there? Or do we have to wait and see?

[Ravi Srivastava, executive]

What I could say is, like we've developed a portfolio of IP around opportunities that help reduce costs on the oil and gas flow back, completion side of things and reduces emissions on that side of things. It's very exciting and more to come on that front. I think it's been in this prototype phase. We've been doing a lot of testing on that, but I think we're at a point where it starts to take some commercial scale. So stay tuned, in the next couple of quarters, we'll have a much better idea of how that shapes out in the New Tech free cash flow in the coming years.

[John Abbott, analyst]

And then my other one is just sort of a quick follow-up, just you gave your 7-year plan a while back. Any thoughts about when you may update your longer-term guidance?

[Ravi Srivastava, executive]

Yes. I mean right now; we've been extremely successful in that plan. We're at 33% of the share repurchases. We've still got three years left to go on that plan. When there's a material change to kind of the strategy that we've laid out, that's the appropriate time to update it. Right now, there's nothing that I can point to that's planned to do so.

[Operator]

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

[Tyler Lewis, executive]

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

[Operator]

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