CNX Resources Q3 2024 Earnings Call Transcript

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October 24, 2024

There are 12 speakers on the call.

Operator

Hello, and welcome to the CNX Resources Third Quarter 20 24 Q and A Conference Call. All participants will be in listen only mode. 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.

Speaker 1

Thank you, and good morning, everybody. Welcome to CNX's Q3 Q and A conference call. Today, we will be answering questions related to our Q3 results. This morning, we posted to our Investor Relations website an updated slide presentation and detailed Q3 earnings release data, such as quarterly E and 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 and A.

Speaker 1

With me today for Q and A are Nick DeIuliis, our President and CEO Alan Shepherd, our Chief Financial Officer Navneet Bell, 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.

Speaker 1

And operator, can you please open the call up for Q and A at this time? Of

Operator

course. Today's first question comes from Bertrand with Truist. Please go ahead.

Speaker 2

Hey, good morning team. Just wanted to start off on the full year 'twenty five capital disclosure. It looks like it maybe got removed from your press release and your presentation. Is that $550,000,000 no longer accurate? And maybe there are some moving parts in your turn in line schedule.

Speaker 2

So is that moving up or down? Or is inflation impacting that? Any color there would be helpful.

Speaker 3

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.

Speaker 3

But again, that all comes back to where we see pricing cut in for next year. So the removal disclosure is really just about we're close to next quarter and provide the exact numbers then.

Speaker 2

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

Speaker 4

the part of the question.

Speaker 3

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

Speaker 2

Perfect. Makes sense. And then the second part, I know it's certainly way too early for Newtek exact numbers on 2025 and beyond. There's some moving parts on the CMM volumes and pricing. And AutoCEP looks like it might have slid to the right just directionally.

Speaker 2

You have any views on 2025 and 2026 versus the 75,000,000 like just directionally upwards or downwards?

Speaker 3

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

Speaker 2

Got you. And was the AutoSet pushed 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 just want to make sure that was either the case still or no longer the case?

Speaker 3

Yes, that's still a possibility. The focus right now on AutoSet is working with our JV partner to develop some additional units in that fleet. Right now, the existing unit we have is fully deployed on our internal operations. So there's potential for some third party work this year. But the focus of that right now is building out that fleet.

Speaker 3

We're seeing really good kind of interest from customers. I mean, it's still in real early stages. So that's why we'll again, we'll talk about it next quarter where we see the full year guidance for that business, but maybe still looking good there.

Speaker 2

Got you. Appreciate the details. Thanks, guys.

Operator

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

Speaker 5

Thanks for taking my questions. First, just wanted to ask on the Newtek 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 with that to capture incremental volumes?

Speaker 4

Yes. Thanks for the question, Doug. And 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 one being the APS program where the states are looking to kind of reduce their CO2 emissions and look at our current energy resources to be deployed for electric generation, right.

Speaker 4

And then we got the 45V pathway for hydrogen production generation. And now we got this 45.2 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 APS 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.

Speaker 4

And the other pathways, while 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 have 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.

Speaker 6

My follow-up, I just wanted

Speaker 5

to ask on the buyback. The stock has moved quite a bit higher. It's higher than where you all thought back in the past. I'm 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?

Speaker 5

At some point, do you consider pivoting to a dividend? Just curious how you're thinking about cash return from here in general?

Speaker 3

Yes. So we continue to see a very attractive opportunity over the long term for CNX when we look out into the future prospects of the business. But I wouldn't read into that in terms of short term allocation decisions. It's sort of counterproductive 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.

Speaker 3

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 spits 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. Thanks, guys.

Operator

Thank you. The next question comes from Leo Mariani with Roth Capital. Please go

Speaker 1

ahead. Hi.

Speaker 7

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 pairing 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 a little more cautious on overall activity on the drilling side or perhaps maybe those just slid a tiny bit into early 2025 on the turn in lines?

Speaker 3

Yes, it's more of the latter. Those were chills that were kind of scheduled for that mid to late December and kind of slipped 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 DUCs.

Speaker 7

Okay. That's helpful. And then just wanted to follow-up on the 45Q, 45B 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 some like a CO2 perspective, it's around $85 per ton.

Speaker 7

Is that something similar that you think could occur for methane? And then under the 45 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 timeframe as to when you think a decision could be made under those potential bills?

Speaker 4

Yes. Thanks for the question. On the 45Q side of things, I think the numbers that's been floated out there in the draft language is around $60 per ton. But at the same time, like there's a

Speaker 3

lot

Speaker 4

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'll still have to wait until the final language is out. On the V side of things that talks about a tax incentive for producing hydrogen. And I think the best the most that you can get is like $3 per kilogram.

Speaker 4

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 rigorous exercise of understanding like, again, like specifics of what the guidance is going to entail. So it's very difficult to say at this point in time what that will be. So stay tuned once the guidance is 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 45B side of things, what we've heard from the treasury is that it's expected before the end of the year in Q4.

Speaker 5

Okay. Very helpful. Thank you.

Operator

Thank you. The next question comes from Nitin Kumar with Mizuho. Please go ahead.

Speaker 8

Hi. Good morning, guys, and thanks for taking my question. You've given us some color on the 45Q and 45B, but I'll 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.

Speaker 8

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?

Speaker 4

I mean, I would say that it's again too early to say, Dylan, less the language for the 45Q draft language as it pertains to methane capture is finalized. It's we'll just be up like hypothesizing what that means. So like once the language is clear, I think we'll be able to provide better guidance.

Speaker 8

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 and D cost today of forget about 45V or 45Q. What is the cost of maybe implementing new systems on mines?

Speaker 8

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?

Speaker 4

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 like what qualifies, how much qualifies. So I would say stay tuned until the better information is available for us so we can provide better guidance on the matter.

Speaker 8

All right. I thought I could take a shot. Thanks guys.

Operator

Thank you. The next question is from Michael Scialla with Stephens. Please go ahead.

Speaker 9

Good morning, everybody. I wanted to ask on the Deep Utica play, obviously, some very high rates there. Anything if say 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 cost side to know if you really want to push the pedal down there if the market looks like it needs more gas?

Speaker 3

I'll answer maybe the first question first. We're extremely happy with the performance on the cost side and just the overall execution at a NAV team. In terms of ramping volumes, those wells are super prolific in early time, so you certainly have that optionality. We don't have any kind of near term nature constraints. I think what you're hitting at is just really the function of pricing.

Speaker 3

And in any ramp up situation, as we've seen 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 we were to achieve that sort of market price signal.

Speaker 9

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 third, 2 thirds on the completion side?

Speaker 6

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

Speaker 6

So we'll keep continuing making progress on both cost and drilling performance. Just to kind of give you an example on drilling performance is our 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 'twenty three, which was like $1200 per foot down to like about $7.50 per foot. And we are making progress continuously as we speak.

Speaker 9

Great. And Ebony, is it fair to say it competes with your Marcellus right now or is it still kind of a little bit higher cost play?

Speaker 3

It's absolutely competed. It's in the mix in the capital allocation process for sure. Yes.

Speaker 6

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 PA Marcellus well will make about 20 Bcf 7 times faster than the Southwest PA well, right? So these are highly prolific, highly high rate of return wells. So we are really excited about the play.

Speaker 9

Great. Appreciate the color. Thank you, guys.

Operator

Thank you. The next question is from Jacob Roberts with TPH. Please go ahead.

Speaker 3

Good morning. Good morning.

Speaker 10

Maybe for Ravi, stepping away from the financial outlook on the 45Q and 45B changes, if we think about the 18Bs of coal mine methane today, should we be viewing those potential changes under 45Q and 45B as mutually exclusive opportunities or is there a way to benefit from both?

Speaker 4

I mean, I hate to kind of repeat the same thing. Until the guidance is out, I don't know, well, and 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.

Speaker 10

Fair enough. As a follow-up, just given the equity appreciation, has that changed any conversations around the M and 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?

Speaker 3

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

Speaker 10

Great. Appreciate the time guys.

Operator

Thank you. The next question comes from Kevin McCurdy with Pickering Energy Partners. Please go ahead.

Speaker 11

Hey, good morning guys. 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% from 2023. Where does that put you on $1 per foot for this latest round of wells?

Speaker 3

Yes. So I think the number key I have in mind is, call it, dollars 1800 per foot is where we're targeting after 'twenty four.

Speaker 11

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.

Speaker 11

But can you just kind of confirm for us on the CMM volumes this year, I think you're at 17 Bcf 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?

Speaker 3

Yes, David. It's all going to be a function of the incentive program we talk about. 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 and what time.

Speaker 11

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

Speaker 3

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

Speaker 11

Great. I appreciate it. Thank you, guys.

Operator

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

Speaker 1

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.

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Key Takeaways

  • 2025 CapEx guidance deferred: Full-year production volumes and associated capital spending will be detailed next quarter, as CNX retains 11 DUCs for flexibility and expects efficiency to be similar or better than current levels.
  • Regulatory clarity awaited for 45V (hydrogen) and 45Q (CO₂ sequestration) tax credits in the New Technologies CMM segment, making it too early to quantify incremental methane capture, project capex or revenue potential until final rules are issued.
  • Deep Utica performance: Drilling time has fallen below 50 days (a 23% improvement), all-in well costs are down ~31% from 2023 to about $750/ft, and these wells deliver seven times faster production than Southwest PA Marcellus.
  • Capital allocation discipline: The share buyback program remains part of CNX’s framework, with the current stock price merely an input, and M&A or dividends also under consideration based on the outcome of its allocation process.
  • 2024 drilling schedule adjustment: Five turn-in-lines slipped into early 2025 due to year-end timing rather than a reduction in overall drilling activity.
A.I. generated. May contain errors.
Earnings Conference Call
CNX Resources Q3 2024
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