CNX Resources Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the CNX Resources First Quarter 2024 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

Thanks and good morning everybody. Welcome to CNX's Q1 Q and A conference call. Today, we will be answering questions related to our Q1 results. This morning, we posted to our Investor Relations website an updated slide presentation and detailed Q1 earnings release data, such as quarterly E and P data, financial statements and non GAAP reconciliations, which can be found in a document titled 1Q2024 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 Sheppard, our Chief Financial Officer Amit Bihal, 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 in TNX'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?

Operator

We will now begin the question and answer session. The first question is from Zach Parram with JPMorgan. Please go ahead.

Speaker 1

Hey, thanks for taking my question. First, just wanted to ask on Newtek. Earlier this week, you announced 2 new ventures in that business, 1 in OFS and 1 in alternative fuels. Could you just quantify the potential cash flow generation potential of these 2 ventures and give us some detail on the timing of these 2 ventures generating some cash flow?

Speaker 2

Hey, Zach. This is Ravi. So our guidance for 2024 is unchanged. Our free cash flow guidance for 2024 remains at $75,000,000 a year from for the Newtek Business Group business unit. And as far as the future potential, like, these commercial opportunities are still taking concrete form.

Speaker 2

I think we'll be able to talk more about these opportunities in more in greater detail in the coming quarters, but we expect them to start taking form towards the end of 'twenty four and have a more meaningful impact in 'twenty five and 'twenty six. So stay tuned.

Speaker 1

Got it. Thanks, Ravi. And then shifting gears a little bit, you were aggressive with the buyback again in the Q1. And over the last three quarters, you've been really aggressive, bought back at about double the level of free cash flow generation. It does seem like the buyback pace slowed a

Speaker 2

little bit in April. Could you just

Speaker 1

give us your latest thoughts on how you're thinking about allocating free cash flow between buybacks and debt reduction going forward?

Speaker 3

Yes, this is Alan. Like we talked about in the prepared commentary, our unsecured maturity runway and kind of low secured debt gives us a lot flexibility on a quarter to quarter basis. We're always evaluating the pace and timing of buybacks. In Q1, we saw a real opportunity. The stock was trading in the 20s to grab a lot there, modulated a little bit later in the quarter as the stock kind of ran up.

Speaker 3

I think if you look at $50,000,000 over the projected $300,000,000 there's still a lot of room to buy back shares for the remainder of the year. So, consistent with all these, we're going to be flexible, try to maintain flat to declining debt, but no real changes to the strategy.

Speaker 1

Thanks. Appreciate the color.

Operator

The next question is from Leo Mariani with ROTH MKM. Please go ahead.

Speaker 4

I just wanted to continue to focus a bit on the new tech businesses here, obviously kind of a lot going on with the new kind of CNG LNG business as well as the OFS business. I was hoping you could speak a little bit more to kind of what the physical mechanism here is on these businesses. I mean, it sounds like from the releases, there could be some type of proprietary devices that allow you guys to really capture the CNG without the aid of additional mechanical compression and just also on the well flowback as well presumably there's some kind of proprietary device that you guys are using here. So maybe can you just kind of speak to that and give us a little bit more color on exactly kind of what this product is that you're going to be rolling out to folks?

Speaker 2

Hey, thanks, Leo. And thanks for the question. I haven't heard the rest of the questions, but this might be my favorite question for this hour, because

Speaker 3

we want to

Speaker 2

talk about the technology that we have developed. We are pretty excited about it. It's been in the works for a few years now. We have teased in the past earnings calls and we're very happy that we've reached this milestone where we've engaged in the partnerships where we can start to bring these technologies to market. So to talk more about the technology, what I would do is like I would break the technology into 2 segments.

Speaker 2

And the first step involves combining various discrete functions that are performed in a conventional flowback like pressure management, solids and sand removal and high rate flowback fluid removal. So these are discrete steps in a commercial flowback. What our technology does is combines all this into one equipment into one step and we can implement all this from a highly automated piece of equipment. And we can perform all this at a very high pressure and rate. And because our solution does this in a materially smaller footprint, it reduces the environmental impact and the footprint that's required to deploy this technology.

Speaker 2

It can be deployed much faster than a conventional flowback spread, which results in a lower cost and reduced cycle times for operators. It's a sealed system and because of that it eliminates any fugitive methane emissions And it's highly automated, which results in the reduced manpower required to operate this, which results in improved safety performances and reduced costs. So for this particular technology, for this particular application, like our estimate shows that there's 20,000 wells that are flowed back in U. S. And 60,000 wells internationally.

Speaker 2

And all of these wells which require flowback can be a potential application for this technology and the operators are looking to reduce CapEx, They're reducing they're looking to reduce emissions. And that's exactly what our solution does. So and we have partnered with Deepwell Services to deliver the solution within the United States. And Deepwell brings a strong domain expertise and is a trusted name in the oilfield service industry and we're excited to partner with them to bring this solution to market. And then the second part of our technology involves furnishing what we call geomeric energy, which is derived from high pressure oil and gas reservoirs like the Utica Shale, Haynesville, Eagle Ford, these are formations within U.

Speaker 2

S. And then Montney Shale in Canada and there's various international formations and offshore applications for this technology as well. So geometric energy like geothermal energy is a renewable energy source, but has typically been wasted by oil and gas industry while developing these high pressure formations. I mean not only is this renewable energy source wasted, like operations end up expending time, energy and resources destroying this energy. So what our technology does is it allows us to harness this energy to manufacture CNG, LNG and potentially electricity and hydrogen right on our well pads.

Speaker 2

If you look at a typical CNG value chain, gas is produced on the well pad, energy is spent depressurizing the gas, which is then recompressed and transported to a compressor station, where additional energy is spent to compress it further and then fill in CNG trailers at CNG specifications and then it's transported to a customer. Our solution allows us to manufacture CNG utilizing geometrical energy and without any mechanical compression right on our Utica L pads, fill in the CNG trailers and deliver it to customers bypassing several cost and energy intensive steps. So again, the solution that lowers costs and emissions for customers and which is what industry is looking for and we have partnered with NewBlue Energy to bring this technology to the U. S. Market.

Speaker 2

NewBlue has a track record of developing CNG and LNG solutions and we are excited to partner with them.

Speaker 5

Hey, Leo, this is Nick. Maybe too it will be helpful because to your point there's specific questions about technology and market for these announcements we've made. But also these announcements are sort of additional developments, I call them in a much bigger thing that we've been working on now with Newtek for a couple of years. And it ties to a couple of realities, facts out there in the world today in our industry, right? One is that you got this global demand for energy that keeps growing and you see it in advanced economies like ours with AI and data centers.

Speaker 5

You see it in developing world where they're looking for and insisting on better quality of life for their people and citizens. So world wants all these additional BTUs, horsepowers, kilowatt hours, and they want lower emissions to go along with it. But there's other truths that we're seeing as well. Wind and solar at scale, when you couple that with electrifying everything, that is a recipe for grid disaster and the degree of subsidy probably doesn't change the physics of the matter. So that exclusively is going to have some challenges.

Speaker 5

We see ideas, right, or opportunities to export more Appalachian gas and LNG in it to places like India, China, Europe, wherever. And that sounds great. It's got a certain degree, I guess, of logical merit to it. But the reality there is that you're going to have to build extensive pipelines and LNG facilities to do it. And in this lifetime, that's going to be really challenging.

Speaker 5

So in terms of the near intermediate term, that's sort of DOA, I'm sorry, as an option. And really, it's sort of inefficient when you think about it because in the grand scheme, you're importing on one hand BTUs from 1,000 of miles away to here via things like gasoline and Mideast Oil and then you're exporting our BTUs 1000 of miles away, right, to the other nations that I've mentioned or examples like that with LNG. So it's not the most efficient sort of supply chain net net. You got hydrogen. Hey, the hydrogen economy, it's got some really interesting attributes specifically with blue hydrogen, which means natural gas is going to play a role in that.

Speaker 5

Green hydrogen at scale, that's going to be effectively from a technical perspective and able to scale it a non starter, as well as having some economic challenges. So we think we found a better way with this Newtek approach and it's one that checks all those boxes. It sort of was captured within our Appalachia First vision that we laid out a while ago, which is basically make the natural gas responsibly here and then use it here through things like Ravi said, CNG, LNG, these technologies. And it basically leads to an on shoring of manufacturing of goods that we currently also import. So when you do this, like we're basically shrinking supply chains, you're dropping emissions, you're declining costs, you're growing GDP and you're expanding jobs, family sustaining wages with respect to those jobs as well.

Speaker 5

And our friends in labor and the trade, they love that component of it. So this is real. This proprietary technology, right, it's showing now that we can commercialize this. It is true, and Robbie called it renewal, I call it true alternative energy with regard to the geobaric that he mentioned in the shale formations. And when we're able to harness that, it really allows for efficient and cost effective conversion of the energy in these high pressure shale horizons like the Utica and Haynesville into CNG and LNG and then on the flowback technologies across all the shale horizons.

Speaker 5

So when you think about this, our markets, instead of trying to expand existing markets and horizontally expanding, what we're really proposing here is to vertically expand into market opportunities for natural gas. Vertically expanding into electricity, generation, whether it's the micro grids or meeting demand during power crises, which we've seen recently, or feeding that growing appetite for things like AI data centers. Ground transportation is another huge market opportunity that we see, the CNG LNG, right, but this is the displacing of these gasoline and diesel products with supply chains that are tens of thousands of miles cumulatively. The air industry and fueling it, that's another big opportunity with the sustainable aviation fuel. And then at on shoring of manufacturing, keeping it close to the CNG, LNG and frankly our environmental attributes with waste mine methane capture is a big one.

Speaker 5

So this past week we saw 2 more tangible examples of this with those press releases. Our environmental attributes with waste methane capture is another big example of that. They penetrate those 4 markets that I talked about. They're all individually, those 4 massive

Speaker 3

in terms

Speaker 5

of potential. They all are going to generate free cash flow and they're all going to positively impact our view of NAV per share of the company. But these technologies, they sort of they come from similar opportunities with that harness energy in geobaric form and they both sort of are rooted in the same vision. So sorry for the extensive one, two explanation, but it's something that has been front and center with us for a while And we wanted to take the opportunity to sort of not just address your question, but take a step back and look at the bigger picture.

Speaker 4

That's certainly helpful. Certainly appreciate all of the detail here. I think many, many folks are sort of wondering about a lot of this. I think that's very helpful. And just a quick follow-up to that.

Speaker 4

So if I kind of reg you correctly, it sounds like that you may be kind of starting to roll this out to 3rd party customers later this year and start to see some revenue into this year and into 2025. Can you maybe just talk to the capital side? Do you expect any meaningful capital associated with any of these new businesses that you've announced? Or is it a fairly kind of low capital intensity endeavor for the company?

Speaker 2

Hey, Leo, this is Ravi again. So the capital needs for these solutions are very, very low, especially compared to our E and P program. And there is no at this stage, no incremental capital is planned for 2024.

Speaker 4

Okay, that's great. Thanks.

Operator

The next question is from Bertrand Don with Truist. Please go ahead.

Speaker 6

Hey, good morning guys. Just wanted to shift gears real quick on to the activity curtailments. Maybe just get your thoughts on why you kind of stopped at 11 wells. I would think there's some argument that your hedging is insulating you, but probably another side of that is why don't you just pocket the hedging gains and also curtail production. We had a slight recent drop.

Speaker 6

Just any thoughts on are you more inclined to hold at this level or are you kind of seeing prices and thinking about dropping more?

Speaker 3

Yes, I think so right now we're kind of sticking to the guidance we gave. We're going to hold a few 11 deferrals for now. It's something we constantly watch. In terms of the discrete decision on those wells, it's a function of coordinating with your operations team on where there's a clean break in terms of which wells you can stop on versus which ones might already be in process. So there's no real magic to that other than syncing up with operations to get to the best answer overall from a free cash flow basis.

Speaker 6

Sorry. And then what about actual shut ins or any of that kind of activity?

Speaker 3

No, not cost plan at this time. Most of our wells run at very low variable costs. So, we're still making pretty healthy margins on those. As you pointed out, we're getting pretty close to hedge level, so we have very little in terms of open volumes. So, we're kind of just working the existing volumes we have into the hedge book.

Speaker 6

That makes sense. And then just to pile on to the Newtek, maybe just a little bit of different approach for this. In the prepared remarks, you referenced the potential to be a meaningful free cash flow contributor on the DWS side. I just wasn't sure, am I reading too much into that versus the NewBlue agreement or is there a tangible difference between the 2?

Speaker 3

I would say, but I mean, Robbie talked about a little bit, they both have very large addressable markets. I think the market for flowback is a little more developed, right? It's very identifiable and we think we'll probably ramp quicker into that market because there is an activity going on and it's a clear superior technology to deploy. CNG and LNG, we've been pushing on those. There are markets for those currently with a lot of the electric frac fleets.

Speaker 3

And market penetration there, we're optimistic on, but it'll probably be a little bit slower than depot. That's why we made that comment. Does that make sense? Ravi, I don't know if you

Speaker 2

have anything? That's absolutely correct. I think the flowback market is something that we can penetrate into very, very quickly and CNG market is going to take a little bit more time to evolve.

Speaker 6

Yes. Understood. Thanks guys.

Operator

The next question is from Jacob Roberts with TPH and Company. Please go ahead.

Speaker 7

Good morning. Good morning. I just wanted to touch base on the kind of the preliminary 2025 outlook. Just curious with the activity levels assumed in that $550,000,000 program. And then maybe if you could provide any color on the kind of the price outlook you might need to see to trigger that incremental $50,000,000 beyond the $500,000,000 you've spoken to about relative to maintenance?

Speaker 3

Yes. It's the same underlying activity set that we talked about on the last call that we can guide to kind of that $500,000,000 run rate. All you're seeing there is the shifting of those 11 wells that we deferred into early next year if we were to ramp back up from, call it, this 555, 560 area back to that 580 target. So that's all we're trying to indicate there. And we're going to watch where kind of the pricing develops to.

Speaker 3

I think we've got a lot to be learned over the summer here in terms of how sustainable the production drops are, how hot summer is. There's a lot of factors that will go into the ultimate planning for 2025 Once we're in a position to firm that up, we will.

Speaker 7

Great. Thank you. And the second question, looking at Slide 5 of the deck, with the debt stack kind of now really weighted to the first part of the next decade, just curious if it changes the philosophy around the duration of the hedge book as we enter the back half of this decade?

Speaker 3

Yes. No, great question. So definitely the balance sheet and the hedge book are correlated or have a relationship. I think what we've talked about in the past on hedging is that we're looking to shorten up the overall length of the book. Historically, we've gone around 5 years.

Speaker 3

We've been kind of watching the books come in by 12 to 18 months. So, we're still very much in the camp of hedging going into the near term year, but just trying to maintain flexibility in kind of the outer years as we see the volatility continue in our space, particularly with some of the projections you're seeing in power demand and gas demand, we want to make sure that we're able to capture those through our hedging program by not getting too far out.

Speaker 7

Thank you. Appreciate the time.

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

Thank you again for joining us this morning. Please feel free to reach out if anyone has any additional questions. Otherwise, we 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.

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Earnings Conference Call
CNX Resources Q1 2024
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