CNX Resources Q4 2023 Earnings Report

CNX Resources EPS Results

• Actual EPS: $2.89
• Consensus EPS: $0.30
• Beat/Miss: Beat by +$2.59
• One Year Ago EPS: $1.64

CNX Resources Revenue Results

• Actual Revenue: $999.50 million
• Expected Revenue: $401.62 million
• Beat/Miss: Beat by +$597.88 million
• YoY Revenue Growth: -38.90%

CNX Resources Announcement Details

• Quarter: Q4 2023
• Date: 1/25/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, January 25, 2024
• Conference Call Time: 10:00AM ET

CNX Resources (NYSE:CNX), an independent natural gas and midstream company, engages in the acquisition, exploration, development, and production of natural gas properties in the Appalachian Basin. The company operates in two segments, Shale and Coalbed Methane (CBM). It produces and sells pipeline quality natural gas primarily for gas wholesalers. The company owns rights to extract natural gas from shale properties in Pennsylvania, West Virginia, and Ohio, as well as rights to extract natural gas from other shale and shallow oil and gas formations in Illinois, Indiana, New York, and Virginia. It also owns rights to extract CBM in Virginia, West Virginia, Pennsylvania, Ohio, Illinois, Indiana, and New Mexico. In addition, the company designs, builds, and operates natural gas gathering systems to move gas from the wellhead to interstate pipelines or other local sales points; owns and operates approximately 2,600 miles of natural gas gathering pipelines, as well as various natural gas processing facilities. It also offers turn-key solutions for water sourcing, delivery, and disposal for its natural gas operations and for third parties. The company was formerly known as CONSOL Energy Inc. and changed its name to CNX Resources Corporation in November 2017. CNX Resources Corporation was founded in 1860 and is headquartered in Canonsburg, Pennsylvania.

CNX Resources Q4 2023 Earnings Call Transcript

[Operator]

Good morning, and welcome to the CNX Resources 4th Quarter 2023 Q and A Conference Call. All participants will be in listen only mode. 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.

[Speaker 1]

Thank you, and good morning, everybody. Welcome to CNX's 4th Quarter Q and A Conference Call. Today, we will be answering questions related to our Q4 and full year results. This morning, we posted to our Investor Relations website an updated slide presentation and detailed 4th quarter earnings release data such as quarterly E and 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.

[Speaker 1]

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 and A. With me today for Q and A are Nick DeIuliis, our President and CEO Alan Sheppard, our Chief Financial Officer Namit Beal, 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.

[Speaker 1]

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 and A at this time?

[Operator]

Thank you. We will now begin the question and answer session. The first question comes from Richard Donat with Truist. Please go ahead.

[Speaker 2]

Hey, good morning guys. Just wanted to start off on the Newtek 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?

[Speaker 2]

Is it IRRs not meeting some of internal threshold or is it maybe that the projects have actually flipped to a negative free cash flow territory? Thanks.

[Speaker 3]

Hey, Bertrand. This is Ravi. And on the Newtek cash flow side of things, you're right. The way what's going to impact the cash flows for Newtek is 2 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.

[Speaker 3]

We have provided a guidance of about 15 Bcf 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.

[Speaker 3]

And we have seen some softening of pricing, Specifically in the APS market for the Tier 1 RECs and that's driven the cash flows down. But there's some seasonality, there is some volatility that kind of comes into that. The pricing that we were seeing in Q3, 4 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.

[Speaker 3]

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're limited in terms of how much more capital we can invest to capture this more waste methane.

[Speaker 2]

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

[Speaker 4]

So the way to think about those quarterly, quarterly quarter to quarter kind of unit cost numbers, they 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'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.

[Speaker 2]

Okay. So there's nothing specifically going up that we saw like non GA or LOE. Okay.

[Speaker 3]

Thanks guys.

[Operator]

The next question comes from Zach Parram with JPMorgan. Please go ahead.

[Speaker 2]

Hey, guys. Thanks for taking my questions. I guess, first, another one on Newtek. In December, you announced you were no longer partnering with the Adams Fork project, which is one of the potential drivers of future Newtek free cash flow growth. Can you talk a little bit about the drivers that You've talked about growing Newtek from here.

[Speaker 2]

Maybe what drives that higher than the $75,000,000 in 2024 as we go out to 2025 and future years?

[Speaker 3]

Hey, Zach. That's a great question. So the way I would look at Newtek free cash flow growth, We could put them into, I would say, 3 different buckets. One is the environmental attribute opportunities. We talked about the volume that qualifies for some of these opportunities being 15 Bcf to 18 Bcf.

[Speaker 3]

So we can grow that volume. For that volume to grow, there's better incentive 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 these 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.

[Speaker 3]

So that's one pathway to grow new tech free cash flows. 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.

[Speaker 3]

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 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're pretty excited about what we have in our portfolio. And those 3 different buckets combined is what's going to drive new tech cash flows in the coming years.

[Speaker 2]

Thanks, Robbie. Maybe my follow-up on the E and P business. 11 of your 35 planned turn in 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? We see more activity shift to Central PA versus Southwest PA over time?

[Speaker 4]

Yes, I think 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 a NPV kind of total IRR basis. We did drill some CPA Utica as well, wells this year, and we've talked about those. We expect those to come online next year, and that's some of the tills you're talking about.

[Speaker 4]

But overall, In the next few years, the mix should look pretty consistent that you've seen historically, but in the longer term, you wouldn't see us migrate up towards CPA towards the latter part of the decade.

[Speaker 2]

Great. Thanks for the color, guys.

[Operator]

The next question comes from Leo Mariani with Roth

[Speaker 5]

trajectory here in 2024, I know you guys only had kind of 2 tills in the 4th quarter. So just generally speaking, should we That kind of production to dip a little bit here in the Q2 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.

[Speaker 4]

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 about 580Bs.

[Speaker 5]

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've got roughly $600,000,000 this year and it's expected to kind of Step down to closer to $500,000,000 next year.

[Speaker 5]

Can you maybe just kind of talk us through a little bit what the kind of delta there is?

[Speaker 4]

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 hold production flat, you end up to turn in line fewer and fewer wells each year. So the 'twenty five 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.

[Speaker 4]

We're not modeling any sort of cost reductions or anything of that. It's truly an activity based reduction.

[Speaker 5]

Got it. So I mean, I'm 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'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 $600,000,000 to $500,000,000 call it 17%, 18% less capital. It's a really nice change in efficiency, we just wanted to see if there's any kind of well improvement performance component here?

[Speaker 4]

Yeah, I wouldn't describe it as well improvement performance. I mean, we will have the CPA Utica wells in that blend 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. Okay.

[Speaker 5]

Thank you. It's always

[Speaker 4]

a signal to grow production in this basin.

[Operator]

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

[Speaker 6]

Yes, good morning everybody. Maybe just to follow-up on Leo's question there too. Just Curious with that step down to $500,000,000 was there anything built in CapEx wise for the Adams Fork project in That timeframe or was that further out?

[Speaker 4]

No, that was further out.

[Speaker 6]

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?

[Speaker 4]

No, I mean, it's all going to be weather dependent. I think up here, it appears to have 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 kind of we get through the winter here the rest of February 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 2024 brings.

[Speaker 6]

Got you. And if I could ask one more, for this year's non drilling CapEx, the $145,000,000 to $175,000,000 you talked about, can you give any rough split on the land midstream and Newtek breakout there?

[Speaker 4]

Yes, the Newtek is in a separate bucket. It's in that discretionary line and that's Pretty de minimis, it's in that $5,000,000 to $10,000,000 range, but that also includes all of our efforts on ESG reduction. So there's 2 kind of things in that bucket. On the land side, if you're around the $30,000,000 sort of range and the rest is split between water infrastructure and midstream infrastructure that Kind of keeps up with the field development.

[Speaker 6]

Great. Appreciate

[Operator]

The next question comes from Jacob Roberts with TPH. Please go ahead.

[Speaker 4]

Good morning.

[Speaker 3]

Good morning, Jacob. Good morning.

[Speaker 7]

We were wondering if you're able to give any insight into the Of the $75,000,000 Danubeck 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'll be monetized on a quarterly basis?

[Speaker 3]

So as we've said in our prepared commentary, the sources for The cash flow for Invesque is coming from the APS market. There's some of the compliance markets 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 too, 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 APS program is probably think a good driver for what the realization would be for some of this stuff.

[Speaker 3]

And then the variability is going to come from the volume and what's happening in that market for pricing, the APS market. In that market for pricing, the APS market.

[Speaker 7]

Okay. 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 'twenty six, 'twenty seven timeframe?

[Speaker 4]

Yes. So we've been pretty consistent in kind of messaging to the market. In the longer term, we are looking to delever. That's going to encourage through 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 sit and where the hedge book sit To have the luxury to basically deploy close to 100 percent of free cash flow to shareholder returns, it's a odd kind of a by quarter decision though to continue that pace, right?

[Speaker 4]

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.

[Speaker 7]

Great. Appreciate the time.

[Operator]

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

[Speaker 8]

Robbie, my question is for you. You talked about those 3 different opportunities To grow free cash flow on the new technology side, you talked about these commercial opportunities in bucket number 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?

[Speaker 3]

Look, what I could say is like we've developed a portfolio of IP around opportunities that help reduce costs on the oil and gas Flowback, 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 much better idea of how that shapes out in the Newtek free cash flow in the coming years.

[Speaker 8]

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

[Speaker 4]

Yes, I mean right now we've been extremely successful in that plan. We're at 33% of the share repurchases. We still got 3 years left to go on that plan. When there's a material change to kind of the strategy that we've laid out, that would be the perfect time to update it. Right now, there's nothing that I could point to that's planned to do so.

[Speaker 8]

All right. 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.

[Speaker 1]

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.