CNX Resources Corporation (NYSE:CNX) Q4 2023 Earnings Call Transcript

CNX Resources Corporation (NYSE:CNX) Q4 2023 Earnings Call Transcript January 25, 2024

CNX Resources Corporation beats earnings expectations. Reported EPS is $0.68, expectations were $0.27. CNX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the CNX Resources Fourth Quarter 2023 Q&A Conference Call. [Operator Instructions] I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

Tyler Lewis: 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 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. Statements are not guarantees of future performance and our actual results may differ materially as a result of many factors. The 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?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bertrand Donnes with Truist. Please go ahead.

Bertrand Donnes: Hey, good morning guys. Just want 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? Thanks.

Ravi Srivastava: Hey, Bertrand, this is Ravi. And on the New Tech cash flow side of things, you are 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 have provided a guidance of about 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 are pretty excited about that part of it. And 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 AEPS market for the Tier 1 RECs and that’s driven the cash flows down.

But there is 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 is no reason why we could not go back to those types of pricing later in the year. But what we are 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 incentive structure that’s available through the programs that we have access to at this point in time, we are limited in terms of how much more capital we could invest to capture this more waste methane.

Bertrand Donnes: That makes sense. And then just shifting gears a little bit, it looks like 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 it maybe going up and does that reverse if you ramp up your production? Thanks.

Alan Shepard: So, the way to think about that’s quarterly – quarter-to-quarter kind of unit cost numbers. They fluctuate based on kind of the production volumes for the quarter and potential maintenance projects that slide around between quarters. The way to think about it is always to look to the sort of annual guidance that we provide and then you will see that’s kind of the way you should think about modeling that on an annual basis, because there is noise in quarter-to-quarter.

Bertrand Donnes: Okay. So there is nothing specifically going up that we feel like…

Alan Shepard: No.

Bertrand Donnes: Okay, got it. Thanks, guys.

Operator: The next question comes from Zach Parham with JPMorgan. Please go ahead.

Zach Parham: Hey, guys. Thanks for taking my questions. I guess first, another one on New Tech. In December, you announced you are no longer partnering with the Adams Fork project, which is one of the potential drivers of future New Tech free cash flow growth. Could 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 into 2025 in future years?

Ravi Srivastava: Hey, Zach, that’s a great question. So the way I would look at New Tech free cash flow growth, you could put them into, I’d 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 is 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 that the realization for these environmental attributes can be – we can realize more value for these. So we are 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 Tech free cash flows. The second part of it that we have talked about in the past is we have a technology portfolio that we are trying to look to create value out of. And I think ‘24 is going to be the year where we have 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 are excited about those. I think more to come on that front in the coming quarters, but we are very excited with the progress that we have seen on that front. And then the third part is this alternate fuel opportunity where hydrogen projects for getting into CNG LNG market opportunities – 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 are 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.

Zach Parham: Thanks, Ravi. 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: Yes, I think as we talked about historically, we are 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 a NPV kind of total IRR basis. We did drill some CPA Utica wells this year. And we have talked about those, we expect those to come online next year and that’s some of the shales you are talking about. But overall, in the next few years, the mix should look pretty consistent that you have seen historically, but in the longer term, you wouldn’t see us migrate up towards CPA towards the latter part of the decade.

Zach Parham: Great. Thanks for the color, guys.

Operator: The next question comes from Leo Mariani with Roth MKM. Please go ahead.

Leo Mariani: Yes. Hi, 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 shales 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 and hit that guidance range? And I know that previously last year you kind of had the point estimate on guidance and this year you got a little bit of a range. So maybe just provide any kind of color around that would be helpful?

Alan Shepard: Yes, you will 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. We should end the year at the highest kind of quarterly run-rate. But on average as we talked about, we are trying to maintain kind of a flat production profile on an annual basis about 580 Bcf.

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

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

Leo Mariani: Got it. So I am assuming a lot of this is probably just a function of lower decline rates as you continue to hold production flatter, it’s just taking fewer wells and is there also any kind of component that you are seeing where perhaps the wells have improved at all. I am just trying to get a sense of it’s a pretty big step down, alright, going from $600 million to $500 million, call it 17%, 18% less capital, it’s a really nice change in efficiency. We just wanted to see if there is any kind of well improvement performance component here.

Ravi Srivastava: Yes, I wouldn’t 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 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.

Leo Mariani: Okay, thank you.

Ravi Srivastava: So we see a signal to grow production in this basin.

Leo Mariani: Yes, that makes sense. Thank you.

Operator: The next question comes from Michael Scialla with Stephens. Please go ahead.

Michael Scialla: Yes. Good morning, everybody. Maybe just to follow-up on Leo’s question there too. I am just curious so with that step down to $500 million, was there anything built in CapEx wise for the Adams Fork project in that timeframe or was that further out?

Nick DeIuliis: No, that was further out.

Michael Scialla: Okay, got it. And then your production guidance for this year, it looks like you are implying some mid single-digit growth year-over-year. 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?

Nick DeIuliis: No, I mean, it’s all going to be weather dependent. I think up here, peers have been pretty consistent and staying flat. So, we would expect the supply side to remain steady and it’s going to be a demand function. We will see how kind of we get through the winter here the rest of February and March and we will have a better view on that. But we are protecting any scenario with our hedge book. So, we are ready to go for whatever ‘24 brings.

Michael Scialla: Got it. And if I could ask one more, the 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?

Nick DeIuliis: Yes. The new tech has been in 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 is two kinds of things in that bucket. On the land side, if you are around the $30 million sort of range and the rest is split between water infrastructure and midstream industry structure that kind of keeps up with the field development.

Michael Scialla: Great. Appreciate it.

Operator: [Operator Instructions] The next question comes from Jake Roberts with TPH. Please go ahead.

Jake Roberts: Good morning.

Nick DeIuliis: Good morning Jake.

Jake Roberts: We were wondering if you are able to give any insight into the split of the $75 million in new tax in terms of perhaps credits versus private party transactions. And then is there any expectation, given the volatility of those markets in terms of how they will be monetized on our quarterly basis?

Nick DeIuliis: So, as we have said in our prepared commentary, the sources for the cash flow that is coming from the EPS market, there is some of the compliance markets that we are part of and there is some voluntary transactions that we have taken. So, at this point in time, we are 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 are 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.

Jake Roberts: Okay. I appreciate that. And then my second question at a high level, how are you guys thinking about balancing usage of FCF in the coming years between shareholder returns which have been on a solid pace, potential debt reduction or even maybe how you are planning to handle those maturities in the ‘26/27 timeframe?

Alan Shepard: Yes. So, we have been pretty consistent and kind of meshing through the market. In the longer term, we are looking to de-lever 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 are 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 are at.

Jake Roberts: Great. Appreciate the time.

Operator: The next question comes from John Abbott with Bank of America. Please go ahead.

John Abbott: Hey, good morning. Hey, Ravi, my questions for you. You talked about those three different opportunities to grow free cash flow on the new technology side. You have talked about these commercial opportunities in bucket number two. Can you provide any more color on what those are approximately, what you are looking at there or do we have to wait and see?

Ravi Srivastava: Look, what I could say is like we have 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 have been doing a lot of testing on that, but I think we are at a point where it starts to take some commercial scale. So, stay tuned in the next couple of quarters, we will have much better idea of how that shapes out in the new tech free cash flow in the coming years.

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

Nick DeIuliis: Yes. I mean right now we have been extremely successful in that plan. We are at 33% of the share repurchases. We still got 3 years left to go on that plan. When there is a material change to kind of the strategy that we have laid out, that’s the appropriate time to update it. Right now, there is nothing that I can point to that’s plan to do so.

John Abbott: Alright. Thank you very much.

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: 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.