CNX Resources Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 5 speakers on the call.

Operator

morning

Speaker 1

and welcome to the CNX Resources Second Quarter 2024 Q and A Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations.

Speaker 1

Please go ahead.

Speaker 2

Thank you, and good morning to everybody. Welcome to CNX's Q2 Q and A conference call. Today, we will be answering questions related to our Q2 results. This morning, we posted to our Investor Relations website an an updated slide presentation and detailed 2nd 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 2Q 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 2

With me today for Q and A are Nick D'Iuliis, our President and CEO Alan Shepherd, our Chief Financial Officer Navneet 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. 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 2

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

Speaker 1

We will now begin the question and answer session. The first question comes from Bert DeNess with Truist. Please go ahead.

Speaker 2

Hey, good morning team. Just wanted to start it off on the Newtek division. It looks like 2Q was a bit above the run rate for the full year guide. Is that still ramping? It looks like you're at 4.5 Bcf.

Speaker 2

Just wondering if that's leveling out? Or are you ramping up throughout the year?

Operator

Hey, this is Ravi. So I think the volume that we saw in Q2 is kind of in line with the projection that you had given out for the whole year between 15 Bcf to 18 Bcf. We got 4.5 Bcf in Q2. I think the numbers that we saw in Q2 is the volume was on the higher end of it. The pricing was slightly better.

Operator

And as we talked about it last quarter, like some of the transactions they kind of like slipped quarters depending on when the volume was produced as opposed to when the transactions takes place. So I think there's no change in our annual free cash flow guidance. So it will stay in that same range around $75,000,000 for the year end. The volume should stay in that same range probably 15 Bcf to 18 Bcf as we added earlier.

Speaker 2

I appreciate it. Thanks. And then the just moving real quick to the Deep Utica. It sounds like the first two wells are in line with expectations. Could you guys maybe give some details just in comparison to your Marcellus wells is maybe a rough well cost or maybe how the 1 year cumes look or anything like that?

Speaker 2

Yeah. Hey, this is Alan. Those wells are still pretty early. So all we're going to say at this point is that they're absolutely meeting expectations on both the cost side and the well performance side. So we're pretty excited about them.

Speaker 2

And we'll provide more kind of a detailed look at those as we move forward in the next couple of quarters. Got it. We'll stay tuned. Thanks for the update.

Speaker 1

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

Speaker 2

Thanks for taking my questions. I guess first just wanted to ask on the line item on income statement. Your other revenue and operating income came in ahead of expectations this quarter and it was up $23,000,000 quarter over quarter. Can you just give us a little detail on what drove that increase in revenue? Yes.

Speaker 2

Some of that's what Robbie talked about earlier, including there is the environmental attribute sales, which were a little bit higher this quarter than last. Additionally, we had a pretty good quarter on water revenue. So we've made some investments over the last couple of years in terms of water handling and we've been able to offer those services to 3rd parties. So we had a really good quarter supplying water to some 3rd party fracs which drove that number. Thanks.

Speaker 2

And then also just wanted to ask on the CNG business. You mentioned that CNX had provided some CNG to a 3rd party in July. You give us any detail on who that 3rd party is? And maybe a little bit more color on what the opportunity set to provide CNG for 3rd parties looks like? And any potential revenue impact in the second half of the year?

Operator

I mean the 3rd party opportunities they exist in all sort of sectors whether it's e fracs, whether it's power generation, whether it's industrial use. So I mean we're pursuing all those opportunities. The 3rd party revenue it's not material for our 2024 guidance change. I would say like we're continuing to develop the Teleflex business opportunity and we'll have more to share on how this shapes up for 2025 guidance, but nothing material to change anything in 2024 yet.

Speaker 2

Thanks, Robbie.

Speaker 1

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

Speaker 3

Hi. Just wanted to follow-up a little bit more here on Newtek. So, obviously, you mentioned getting the CNG vids deployed to a customer in July. And I guess you've got some other aspects sort of get kind of rolled off in the second half kind of from the AutoCEP OFS business. I was hoping you could just kind of characterize what some of these initial offerings to customers are.

Speaker 3

Are these like customer trials, beta tests? Are you actually getting kind of paid for these? Or are these just kind of like very small test cases? And then I guess in the success case and perhaps the customers would take on these products and offerings and then kind of ramp up next year? And obviously, you talked about revenue a minute ago.

Speaker 3

It sounds like relatively immaterial this year, but would you expect it to be more significant in 2025? Is it going to start to kind of move the needle a little bit next year on these two businesses?

Operator

Yeah. So we're excited about those I think they both solve key problems. On the AutoStep side of things, I mean, it's a technology that transforms our flowback operations, which is a key step in our oil and gas production value chain. And if you ask me how flowback has been done in the past, the conventional flowback is kind of parallel on manual cost intensive, lots of emissions and the technology that we have developed completely transforms that. So we're very, very excited about the solution that we offer.

Operator

It's from an environmental standpoint, from a cost standpoint, automation, safety standpoint. So we've been using the technology ourselves. We don't really need to do a lot of tests. We've been doing that on our own pads for the last couple of years. We're using the technology in all of our pads this year and going forward.

Operator

And the engagement with 3rd party customers have it's been ongoing for the last couple of months ever since we announced the JV and there's a lot of excitement. And we expect to have customer sales in the back half of this year, like the magnitude and all that stuff. We'll share more if we have more details and we expect the auto set part of it, the flowback part of it to be a more meaningful contributor to the 2025 opportunity for us. On the CNG side of things, again, we have a technology that we have developed in house that uses this geobaric energy to produce compressed natural gas without any mechanical compression. So it's cost effective from an emission standpoint.

Operator

It's terrific. And a lot of folks are looking for a solution like that where we have constraints on types and how do you get a power energy solution in the form of CNG to different industrial applications. So I think it just sets a lot of boxes. The 3rd party sales that we had, the revenue was real. It's not material, but we expect to transact on many such deals in the future.

Operator

And then and as we do that, we'll provide more guidance to you guys.

Speaker 3

Okay. That was very helpful. I know obviously like you said there's no guidance. But just from a high level, I mean is the impact of these two businesses going to start to show up in the financials next year? So we'll start to kind of notice it on the investor side?

Speaker 3

And then also just wanted to confirm that as you look out the next couple of years, do you see those two businesses as not really requiring CapEx? So as you ramp it, it's kind of all gravy on the free cash flow for the

Speaker 2

most part? Yes.

Operator

I mean, I think we do expect it of 1 more than the other as a more meaningful contributor to revenue and flows for 2025. And I mean both of these are going to require capital investments and we'll provide color on all that stuff as the plan for 2025 takes form. But yes, I mean, we expect both of them to start contributing meaningfully from 2025 onwards.

Speaker 2

Okay. Thank you.

Speaker 1

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

Speaker 4

Hi, good morning. I know you talked about the 11 deferrals that you're still planning on bringing online early next year. Just curious if you are in addition to that curtailing any production at this point? And if so, can you say how much?

Speaker 2

Good day. This is Alan. We're not curtailing any additional production. We're running just above kind of our hedge book with the margin safety that we need around that production profile to make sure we don't get below the hedge book. Yes, again, the plan is to make a call on whether or not to grow production next year based on how pricing develops.

Speaker 2

I think there's a lot to be seen for the rest of the summer in terms of natural production levels and kind of in basin usage and things like that before we're ready to make that decision.

Speaker 4

Right. Got you. Okay. You mentioned as well the progress some progress, I guess, on coal mine, nothing being allowed under 45B hydrogen tax credit. Any sense for the timeline there on any of your projects if that were to move forward?

Operator

On the 45 week timing, I think there are a lot of PSs out there when it's going to come out. But I think we expect the guidance to come out in Q3 for a time frame and eagerly looking forward to what comes out in that tax policy.

Speaker 4

Could you say if it is favorable, when you could start moving forward on any of the projects that you have contemplated?

Speaker 2

That will be made based on what the guidance is. So ideally, the more favorable the guidance, the more quickly we can get moving on implementing some of the big projects that we're interested in participating in. That's all going to be guidance dependent.

Speaker 1

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

Speaker 2

Good morning. Ravi, I was wondering if you could give us more insight into the range and pricing you're seeing on the Tier 1 credit market as you monetize those? I know you just mentioned that we should expect a pretty steady state volume and value from here. So I'm just trying to square that with the historical ranges that the PA Public Utility Commission publishes on those Tier 1 credits, which may be the wrong market to be looking at. I'm just wondering if there's an aspect that's keeping the value you're realizing more normalized over time?

Operator

Yes. So I think the PAPUC Tier 1 rec values, I think it's publicly disclosed like what's coming out. I think the range that you've seen this year is, I want to say between $33 to $36 per megawatt hour ish which translates into a certain dollar an MMBtu. So don't have to do the math live on the call. But the value for the credits is expressed in $3 per megawatt hours and it's I think it's been in that range of $33 to $36 ish all year and that's what we're forecasting that the rate is going to stay in over the next the remaining two quarters.

Operator

And going back if you go back a few years, I think it's been on a trend up 3 years ago. I think it was in a $17 ish per megawatt hour range and it's come up over the last couple of years and it stayed at this level. And we expect it to stay at this level. If anything changes our guidance will reflect the change in the impact it's going to have on our cash flows.

Speaker 2

Got it. I appreciate that. Then maybe just in general kind of doing some back of the envelope math. If I look at back to Q2, 2023 at that time you had 2026 hedged around 50% to 55%, I believe. And then looking at today relative to 2027 that's sitting 10% to 15% lower, let's call it maybe 40%.

Speaker 2

Just wondering if that level is how we should be thinking about the business over the back half of this decade. I know it's a long time off, but I believe you mentioned on the call that willingness to go lower on the hedger book over time, but just wondering what that ultimate comfortable level may be? Yes. I think we've been pretty consistent with what we're trying to implement on the hedge book last couple of quarters, which is 1, we want to be 80% roughly hedged going into any given upcoming year. And then beyond that first 80%, we've been looking to shorten up the duration of the book.

Speaker 2

So you've seen us have kind of sort of less hedge activity over the last few quarters as the book has come in. Great. Appreciate the time guys.

Speaker 1

The next question comes from Noel Parks with Tuohy Brothers. Please go ahead.

Speaker 2

Hi, good morning. I apologize if you touched on this earlier, but I just wondered, could you just talk a bit about service costs, what you're seeing on both from both vendors and materials? I was wondering if you've seen any shifts of equipment out of the basin. Feel like we're not hearing much on that front these days? Thanks.

Speaker 2

On the service cost side, you've seen is service costs staying flat for first half of the year. And we our projections are they're going to stay almost flat for next half of the year too. Okay. Okay, great. And I just wondered, I mean, it's been such an unusual cycle when we look from pre pandemic pandemic effect and then the inflation afterwards sort of in services and then more broadly macro.

Speaker 2

And it seemed that we were kind of on this path of the leverage kind of remaining almost entirely in producers' hands or largely on pricing just as just from capital discipline really holding pretty much across the sector. Is that essentially you think we're back there? And I mean in your modeling, do you I guess maybe I'd ask what's the sort of worst case most highest inflation scenario you entertain when you look to model rest of the year, next year and so forth? Yes. We generally think about the basin as balanced right now.

Speaker 2

But there hasn't been a lot of change in rig activities in our basin in Pacific going back to coming out of the pandemic era. So the inflation we saw in 2022, we attribute most of that to the macroeconomic inflation, just across wage gains and other things across the general economy as opposed to anything that was particular to our basin dynamic. So when we think about it going forward, it's more of what do we expect national inflation levels to do, because we don't see an uptick in activity in our basin on the producer side. Okay, great. Thanks a lot.

Speaker 1

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

Speaker 2

Thank you again for joining us this morning and please feel to reach out if anyone has any additional questions. Otherwise, we're just speaking with everyone again next quarter. Thank you.

Speaker 1

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 Q2 2024
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