CNX Resources Corp Q2 FY2022 Earnings Call

Good day, and welcome to the CNX Resources Second Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I’d now like to turn the conference over to Mr. Tyler Lewis. Please go ahead.

Thank you, and good morning to everybody. Welcome to CNX’s second quarter conference call. We have in the room today, Nick DeIuliis, our President and CEO; Alan Shepard, our Chief Financial Officer; Chad Griffith, our Chief Operating Officer; Don Rush, our Chief Strategy Officer; and Ravi Srivastava, President of New Technologies. Today, we’ll be discussing our second quarter results. This morning, we posted an updated slide presentation to our website. Also detailed second quarter earnings release data such as quarterly E&P data, financial statements and non-GAAP reconciliations are posted to our website in a document titled 2Q 2022 earnings results and supplemental information of CNX Resources. As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Alan, and then we will open the call for Q&A, where Chad, Don and Ravi will participate as well. With that, let me turn the call over to you, Nick.

Thanks, Tyler. Good morning, everybody. Thanks for joining us today. Before I get into the specifics of my comments, I think it’s important to first highlight three themes that are core to the CNX investment thesis. And we think of these three in sequence, so I’ll put them in order. So first, we built and now we manage a low-risk $700 million per year of free cash flow annuity that works year after year. This helps to largely insulate us from the macro events that are out of our control, creating confidence and conviction in our business and its sustainability, which works in any business environment. Second, we then apply clinical math. When the math dictates it, we allocate a significant portion of the free cash flow to reduce our share count at highly accretive rates of return, which will continue to deliver unprecedented free cash flow per share growth. That’s a tremendous opportunity for any value investor. The third theme, the last one, is in addition to our organic free cash flow annuity and our growing free cash flow per share, we’re creating, demonstrating, and deploying new technologies, which will create incremental free cash flow and free cash flow per share beyond the base business and plan. The new technology opportunities are here now. They offer a meaningful avenue for incremental per share value for our shareholders and are also the next chapter of Appalachia’s Energy legacy. We’re beyond excited by the opportunities in front of us; they’re impressive, outside the box, and unique to CNX. With that bigger picture in mind, let’s start talking specifics. I want to start with some policy discussion and then move to what’s going on with our new technologies effort. During our first quarter call, we discussed how there are these destructive yet predictable consequences we’re seeing of current national and global energy policies. These policies have unfortunately been extremely effective in manufacturing energy scarcity and stoking inflation by preventing the most sensible supplies of natural gas and oil from reaching demand centers and by relying too quickly on renewable energy that’s not yet at scale. The consequence is that we’ve seen higher energy prices, energy scarcity, inflation, economic turmoil, and geopolitical instability, which are becoming painfully clear to all. This morning, I’d like to build on that discussion and talk about what CNX is doing to improve the current situation. CNX is going to continue to advocate for natural gas in the Appalachian region. The standard of living we enjoy is owned in large part to the great men and women doing the hard work to provide our energy, and we’re proud to be part of that. At CNX, we focus on near-term tangible actions rather than hypothesizing about what may or may not occur that leads into the future. Good news is opportunities exist right now to advance environmental and socioeconomic goals. We’re proud to be leading that charge with recent announcements we made, like our work with the Pittsburgh International Airport and with NewLife Technologies. We’ve been hard at work driving these and other key initiatives forward to advance our view of a legitimate and actionable sustainable energy revolution. A realistic and achievable sustainable energy revolution demands a more thoughtful, common sense, and practical approach, meaning creating fact-based solutions grounded in math and science today, not hypotheticals 20 or 30 years from now. By taking tangible steps to meaningfully reduce the global carbon footprint in the most efficient manner, natural gas and Appalachia and CNX are going to play a pivotal role in accelerating and enabling that progress. Natural gas is not a bridge fuel, and I want to repeat that; natural gas is not a bridge fuel. Instead, it’s a catalyst fuel, the basis of the sustainable energy revolution by helping industries across sectors lower costs and emissions immediately. We’ll also fast track implementing new technologies that will allow companies to focus on driving efficiencies, eliminating waste, and stopping egregious labor and human rights practices to grow the value proposition for their ownership and provide a viable path to achieve carbon reduction targets. Look, the concept of solar and wind powering the quality of life to which we’ve become accustomed sounds fantastic in theory; it’s romantic as advertised, but the ability of these technologies to satisfy the world’s energy needs is a highly questionable proposition. It’s only practically achievable decades into the future and depends on significant advancements in technology and a massive increase in rare earth material and battery production capacity. Looking at Slide 3, the world currently produces roughly 600 exajoules of energy annually, including around 39 exajoules from renewable energy related to wind, solar, and geothermal. Said differently, about 6% of current energy production derives from renewable energy despite decades of policy incentives and subsidies costing nations, economies, and societies trillions of dollars. In 2021, a record year for renewable energy installation resulted in only 5 exajoules of new renewable energy added to the overall global energy mix. When examining the consumption side, forecasts indicate that world energy demand will grow on average by about 2% per year, amounting to 10 to 12 exajoules annually. Renewable energy cannot keep pace with that level of global energy demand growth. Over the past 20 years, global energy demand has grown by roughly 200 exajoules, while about 35 exajoules of renewable energy capacity has been added. Renewables have a long way to go to simply meet new demand before they can displace oil and coal meaningfully. More low-cost and environmentally friendly Appalachian natural gas can help meet this growing demand and enable progress on environmental goals. Also, of the 600 exajoules of world energy production, fossil fuels account for 490-plus exajoules of that total. Hydro contributes around 40 exajoules, nuclear adds about 25 exajoules, with renewables providing 39 exajoules. Thus, the majority of fossil fuel production comes from oil and coal. Appalachian natural gas only accounts for about 12 exajoules, or 2% of global energy production, and represents the cleanest, lowest greenhouse gas-intensive fossil fuel available. Within Appalachia, CNX accounts for roughly half an exajoule, possessing the lowest greenhouse gas intensity and cost structure within the Appalachian basin. So, we are not the problem; we are the solution. CNX serves as a vital ally as the world seeks to reduce the other 490 exajoules of much higher greenhouse gas-intensive fossil fuels and keep pace with new energy demand. Additionally, the issue of supply chain realities is important here. CNX and Appalachia are closest to major U.S. energy demand centers for energy and goods, allowing our local energy to be even more greenhouse gas efficient from an in-depth life cycle perspective. Reducing unnecessary shipping logistics addresses the major emissions issue, and Appalachian natural gas benefits significantly from that. Investment in and utilization of our low greenhouse gas-intensive natural gas and distributive products will need infrastructure that is compatible with green and new technologies when they’re ready to deploy to meet future demand. This means that engines and factories can run on 100% compressed natural gas, 100% hydrogen, or related blends. The same logic applies to additional electric vehicle deployment, as natural gas turbines on the grid will enable electrification sooner. CNX has been quite active, making moves and investments consistent with these energy themes and broader policy realities. Our new technology team has numerous projects in various stages of development that will help the world progress to a lower greenhouse gas-emitting future while maintaining reliable energy resources necessary for societal function. Our new technologies team is commercializing technology that will produce low carbon footprint natural gas and its derivative products and associated environmental attributes. These technologies are game-changers in the natural gas extraction and transportation industries. Through CNX technology and assets, we can help replace higher carbon-intensive fuels in the U.S. energy mix, both on the power grid and in transportation sectors. These displacement opportunities add up to more than 100 Bcf per day in U.S. natural gas opportunities—a significant market opportunity that could yield more products and services in the Appalachian region if these technologies are deployed. I categorize these emerging technologies into three major buckets. The first bucket consists of what we designate as having valuable and monetizable environmental attributes. We’re capturing methane through incremental capital investment and tech deployment, which would otherwise be vented to the atmosphere. As ultra-low carbon gas, it’s increasingly valuable in a carbon-constrained world. Our Virginia assets form the foundation of this effort for CNX. Cold bed methane is back in a big way, but in a much different context. CBM has a natural gas pricing base level today, and it enjoys increasing value tied to its ultra-low carbon characteristics. Recognition of this value is growing across numerous economies and industries. The second bucket involves proprietary technology we’re developing that will fundamentally change the manufacturing process for the extraction and delivery of natural gas. This technology aims to transform drilling, completions, flowback, compression, and processing, making these processes more efficient, reducing associated emissions, and enhancing margins. The third bucket utilizes in-house technology to disrupt industries currently relying on less efficient and higher emitting energy forms. This technology effectively transforms the state of natural gas from gaseous to CNG and LNG, enabling the use of local low-carbon footprint CNG instead of high-carbon footprint gasoline for ground transportation, while LNG can replace jet fuel in aviation. The business case here comes down to common sense. To lower global greenhouse gas emissions, deploy new renewable energy in the sunniest and windiest locations still relying on coal and oil. Don’t place renewables at scale in locations like Pennsylvania, where efficiencies are low and the costs will be high, as extended supply chains have lengthy life cycle carbon footprints. What is better for the planet, greenhouse gas emissions, regional economy, and business models? Making products overseas using coal-fired and inefficient power plants, relying on questionable labor practices, and incurring high costs and energy for transport to the U.S. Or, simply manufacturing these products locally with low carbon footprint natural gas, utilizing well-paid workers, and shipping them within a one-day drive. It’s pretty simple. Now, let’s discuss the tangible and local recent results of our new technologies team across those three buckets we just summarized. This year has been full of accomplishments, spanning all three, and we don’t expect the pace to lighten anytime soon. A pathway for implementing our proprietary technology to disrupt the old economy fuel supply mix is our announced partnership with the Pittsburgh International Airport. This is an exciting partnership, and we will help the airport lower costs and reduce emissions while creating jobs using low-carbon intensity natural gas to replace traditional aviation and transportation fuels. This partnership centers on our developed technology to cost-effectively convert on-site dry natural gas into LNG, CNG, and electricity for various uses, including as a hydrogen feedstock. This fits snugly in our local impactful mantra. The airport partnership opens new opportunities for using lower-cost, low-carbon intensity LNG and CNG fueling depots for energy-intensive businesses like airlines, transit, and cargo fleets. These natural gas derivative products will leverage our local workforce and create more family-sustaining jobs, which is fantastic. Recently, we announced another exciting partnership with NewLife Technologies, which looks to convert air and greenhouse gas into a biomaterial called AirCarbon. This carbon-negative PHP biomaterial is produced by naturally occurring microorganisms that replace plastics in industrial segments ranging from food to fashion. Under our partnership, CNX and NewLife will collaborate to capture waste methane from third-party industrial activities that would typically be vented to the atmosphere. We’ll gather, process, and compress that captured methane, delivering it through new and existing natural gas pipeline infrastructure for conversion into AirCarbon by NewLife. This strategic partnership aims to capture methane gas for NewLife’s manufacturing needs, resulting in several manufacturing facilities in the Appalachian region while advancing critical decarbonization goals, boosting economic activity and capital investment in the region, and supporting job growth. Another note regarding Appalachia—the region possesses the resources, expertise, and work ethic to be central in providing solutions to challenges stemming from poor energy policy and weakened geopolitical standing. We can serve as a hub for skilled labor job creation to help pave a path to middle-class access for underserved rural and urban communities. This quarter, we graduated our inaugural class from the CNX Mentorship Academy, consisting of 28 young men and women from this great region's urban and rural communities. Six of these talented individuals recently joined our team at CNX, something our entire team and I am personally proud of. We expect the second-year class to be even larger. Our objective here is to help build the local energy ecosystem and cultivate and sustain the middle class for the next generation. Additionally, we recently submitted comments to the SEC regarding proposed climate disclosure rules. We support the commission’s efforts, but we believe the proposed rules will create inconsistent and highly subjective reporting standards for scopes 1, 2, and 3 CO2 emissions across different industries and companies. Our position emphasizes the need for greater standardization and clarity, ensuring transparent accounting of carbon emissions that highlights the significance of natural gas and Appalachia as pathways to a promising future. Please read our letter to the SEC, posted on our website. In this past quarter, we also announced management changes, with Alan Shepard, who you're going to hear from next, taking over as CFO and Don Rush transitioning to the company’s Chief Strategy Officer position. These changes reflect where we see the world heading and the ocean of opportunities it presents to CNX. Regarding our new technology efforts, we will have more to say about that as 2022 unfolds, so stay tuned. To summarize, we believe the products and goods we use daily should be manufactured in Appalachia and first utilized in the U.S. to help local citizens and economies. Likewise, let’s prioritize creating new and expanding existing markets for our products regionally in Appalachia and in nearby markets like the Northeast U.S. through short pipelines. A local-first mentality can significantly address various socioeconomic and environmental issues. It's not protectionism; it's not anti-free trade. It’s common sense, rational, and free-market based. With that, I’ll turn things over to Alan, who will cover more detailed insights about the quarter.

Thanks, Nick, and good morning, everyone. This quarter represents our 10th consecutive quarter of significant free cash flow generation through our sustainable business model grounded in consistent operational execution and clinical capital allocation to optimize free cash flow per share growth. In the second quarter, we generated $62 million in free cash flow, which includes the effect of working capital changes due to the timing of our financial hedge settlements versus our physical sales receipts. As we have said before, this temporary timing issue simply shifts cash between quarters, sometimes positive and sometimes negative; it does not affect the profitability of the pads or the business. On the capital allocation side, as highlighted on Slide 5, we continue to take advantage of current equity market conditions by repurchasing 3.2 million shares in the quarter and another 2.2 million shares after the close of the quarter through July. Effectively, we bought back another 3% of our total outstanding shares, and over the last seven quarters, we’ve repurchased approximately 16% of the outstanding shares of the company. We view this as a remarkable low-risk capital allocation opportunity moving forward. Although we haven't given an explicit capital allocation framework, if you extrapolate these buyback levels, we will significantly reduce our share count and meaningfully grow our free cash flow per share. Ultimately, we believe this will drive long-term share price outperformance and reward our long-term investors. More on that in a moment. On the balance sheet side, we repurchased $14 million of 2026 convertible notes, which represent our nearest-term debt maturity. As a reminder, these notes can be settled at maturity with cash, common shares, or a combination of both at the company’s discretion. By repurchasing the convertible notes with cash, we eliminated the risk of future equity dilution or increased future leverage associated with this subset of notes. We will continue to monitor this capital allocation opportunity as our share price evolves. Additionally, we noted a slight quarter-over-quarter increase in net debt. However, netting out the $13 million premium paid to repurchase some of the convertible notes early implies a $2 million reduction in net debt for the quarter. Moving forward, we expect to continue retiring debt and reducing share count as the remainder of the year unfolds. Now let’s shift to our updated 2022 outlook on Slide 6, where I want to highlight two main topics: pricing and capital expenditures guidance. We are living in a volatile pricing environment. Despite being materially hedged for the remainder of the year, the magnitude of the pricing volatility we are experiencing can significantly impact our expected free cash flow for the year, both positively or negatively in terms of realized prices on our open volumes and swings in working capital related to timing of derivative settlements that can shift cash flow between periods. Regarding capital guidance, we are increasing our capital budget by $70 million compared to the previous guidance of $500 million. This increase relates to three main areas. The first two items, accounting for over half of the increase, involve incremental investments improving efficiency, enhancing business continuity, and de-risking our free cash flow annuity or positioning us for future growth. Cycle time efficiency leads us to advance three previously planned 2023 TILs into late 2022. We plan to run a second rig for most of the second half of the year to avoid delays in our 2023 frac schedule, pre-buying and locking in key tangible goods and services. These incremental investments account for approximately $25 million of the capital increase, ensuring successful execution of our future operating schedule. Along with the previously mentioned incremental activities, we plan to invest $15 million in the second half of this year in projects associated with our ongoing innovation and emission reduction efforts. A great example is our recent decision to convert one of our drilling rigs from diesel to electric, which will add about $7 million of capital in 2022 to lower future operating costs and reduce our emissions footprint. We expect similar cost-saving rationale for this investment as we’ve seen with our electric track, and we’re excited to again be a first mover in pushing the basin forward in terms of technology, lower emissions operations, and cost-efficient techniques. The remainder of this capital expenditure will go towards projects that lower our future methane intensity and operational costs while setting up a business plan to market these new services across the oil and gas space. We’re excited about these capital investments in innovation that we believe add significant value to our business. Additionally, we plan to increase the focus on this capital bucket moving forward and spotlight the value associated with it. The third and final aspect of the capital increase is driven by a higher inflationary environment than initially anticipated. Initially, we incorporated a 5% to 10% inflation increase for 2022, around $30 million compared to our 2021 budget. Given the continuing inflationary pressures, we now expect an additional $30 million of impact, resulting in a full-year inflation effect of approximately 10% to 20%. This inflation primarily stems from higher diesel and steel prices and increased competition for reliable, high-performing equipment and service providers throughout our supply chain. One final note on guidance: the capital increase is largely offset by the improved pricing environment and positive working capital changes, thus leaving our free cash flow guidance for 2022 at approximately $700 million. I’ll caveat again: this could be higher or lower based on the volatility surrounding gas prices for the rest of the year. Additionally, given our now lower share count, the approximately $700 million of free cash flow is expected to yield free cash flow per share of $3.69 for 2022. This is not an end-of-year share count projection, but rather based on our current count. This increase in free cash flow per share is a segue into Slide 7, which illustrates the core tenet of the CNX investment thesis: the incredible and unique opportunity for rapid low-risk free cash flow per share growth stemming from our sustainable business model. This graph includes achievements and expected developments moving forward. Over the last two years, we’ve more than doubled our free cash flow per share since 2020. Assuming a constant enterprise value and 80% of future free cash flow allocated to share repurchases, the total shares outstanding would further reduce by 54%, while enabling significant deleveraging. In other words, free cash flow per share could double by 2026, with our leverage ratio declining to roughly 1x. The implied share price, assuming a constant enterprise value, may appreciate to nearly $45 per share due to rapid share count reduction. This potential reduction in share count only accelerates as stock price appreciation may not keep pace with declining outstanding shares. In comparing this projection to 2020’s free cash flow per share, it suggests that 2026’s free cash flow per share will be over five times higher. Lastly, I want to reiterate what Nick mentioned at the beginning of his remarks: despite ongoing volatility, we are focused on actions to strengthen and de-risk our long-term free cash flow annuity, estimated now at $700 million per year. We will continue to apply clinical math in allocating that free cash flow, and at the current free cash flow yield, we expect the majority to be directed toward share buybacks, significantly boosting our free cash flow per share. We're in the early stages of developing an exciting and expanding business with our new tech ventures, poised to materially contribute to our already compelling investment thesis and shape the next chapter of Appalachia’s energy legacy. With that, I’ll turn it back over to Tyler for Q&A.

Thanks, Alan. Operator, if you could please open the line up for questions at this time.

Our first question comes from Zac Parham of JPMorgan.

First, talking about the current operational environment and the inflation that you’re seeing. I know that you added $30 million to the budget. But any early thoughts on what inflation could look like in 2023? Could that be another 10% or so? Just any color you have there?

Yes, this is Chad. I mean, I think what we’re seeing is that inflation will certainly persist into next year. But as far as giving a direction or magnitude, I think it’s a bit early to tell. We are positioned well with our activity set and have great contracts. But certainly, steel and diesel continue to play a role. We’ll keep an eye on the pricing of those materials, just like everyone else. To wrap up, the business is positioned. We do sell a commodity, natural gas. Our business deals with those commodity fluctuations in steel, diesel, and other inputs. Inflation has been both a helping and hurting factor. So, net on net, we're ahead, and we expect that to continue into next year. Ultimately, our business plan remains intact; it continues to be a $700 million a year free cash flow annuity, and we will continue to execute on our free cash flow per share growth.

Just a follow-up. On Slide 8, which you just referenced in the prepared remarks, you talked about the significant free cash flow per share growth that you can generate through 2026. That slide assumes 80% of free cash flow goes to buybacks. I know you all don’t have an official framework out there, but is that a good percentage to assume going forward? Any color would be helpful.

Yes, we haven't provided an explicit framework, but the graph illustrates what could be achieved while also achieving the debt levels we seek to maintain.

I want to see if we could get more color around the CapEx increase in 2022. You mentioned you’d be running the rig for really the entire second half of 2022. It seems like there was some reference in the prepared comments to de-risking the schedule for 2023, but I heard a comment about possibly positioning for some growth. Just trying to understand if there’s a shift in thinking here where it may make sense to grow volumes early next year, given the curve's strength. And when you talk about de-risking the schedule, is there concern about having equipment and services on the field on time?

Leo, I’ll take a shot at kicking this off and then turn it over to Chad for more details. Your question really speaks to how we approach the business. What we observed here was a way to go back to those three core themes: that annuity, the $700 million per year annuity, ensuring continuity of the business. A large part of the capital increase we decided to invest in was about either de-risking or building optionality for the future. We’re not changing our activity set; there’s no intention to do that regarding the roughly one rig, one frac crew plan. But philosophically, that’s where the current investment decisions lie. Chad, any details to add?

Yes, sure. As Nick said, the focus is on de-risking the business, adding capacity, increasing efficiency, and advancing the innovations we have in the works. All incremental capital goes toward those goals. We illustrated three specific examples of this – keeping the second rig for the back half of the year, the three additional TILs, and the investment to electrify the rig. Each of these projects serves either to de-risk or add optionality. Whatever decisions we make regarding next year will be communicated later. We monitor commodity prices and service costs to adjust our activity accordingly.

Just to add on the capital question, nodding to the growth opportunities in our new technologies ventures we’re discussing. We are investing in positioning ourselves for that growth.

Got it. That’s helpful. I guess just in terms of the new ventures/technology business, you announced several initiatives in 2022. Presumably, you expect this to become a growing business over the next couple of years? Any estimates on how this might comprise around 10% of CapEx going forward? How do you see capital allocation in this respect?

This is Ravi. First, to say we’re excited about these opportunities would be an understatement. There’s a ton of opportunity available for us to pursue. There are numerous projects we can advance toward lower greenhouse gas emission solutions while providing a reliable energy source. We’re very enthusiastic about this. These are tangible projects, not just visions of the future—the results are becoming evident with our announcements with NewLife and the TIT and the Dynamis. Stay tuned; we’ll provide more guidance as we connect the dots for you. What we do with new tech investments will be additive to our $700 million free cash flow program. We’re deploying clinical math in determining how to allocate that additional free cash flow.

To add to the capital question, the initial stages of these projects leverage existing assets unique to us, so the upfront capital outlay is marginal. We will first seek to maximize the value from these initiatives before making larger investments.

That’s helpful. I just wanted to jump over to the buyback real quick. I noticed it was down significantly this quarter, about $151 million last quarter and closer to $59 million this quarter. Is this decline related to working capital changes this quarter?

This is Nick again. Another good question. Our sustainable business model, of course, factors into this. What we manage within quarters considers two stipulations: paying down some level of debt while remaining inside our free cash flow limits for the quarter. Volatility in gas prices can impact free cash flow each quarter and influence our access to share buybacks. We anticipate a target-rich environment for buybacks moving forward. We evaluate cash flow factors—settlements and working capital adjustments—as a basis for this allocation.

Our next question comes from Neal Dingmann of Truist.

If I could attach my last question, just around capital allocation. You buybacks seem to be one of your main focuses now. Do you also look at bolt-ons or M&A? Do you examine the returns versus buying assets in the market? Does it play a key role in deciding the allocation of capital?

Yes, we evaluate M&A opportunities. We’re selective and assess from an internal risk-adjusted rate of return perspective. They must compete with other capital allocation opportunities. Currently, the best risk-adjusted way to grow our free cash flow per share is buying back our shares. Our operational model focuses on de-risking and growing the annual free cash flow while allocating that to reducing share count, which enhances free cash flow per share greatly.

Well said, Don. And then my follow-up is on operating efficiency. You all continue to perform well on the cost side amid inflation. Given your lower rig count versus in the past, are you still as efficient as if you were running at a larger scale? Do you see, and are you capable of experiencing efficiencies as with your current plan?

It helps us be efficient. The visibility from having that predictable activity set allows us to concentrate efforts on target operations. We’re hyper-focused on targets in knowing what we need for execution over a pad-by-pad basis instead of diluting operations across multiple pads.

Our next question comes from Michael Scialla from Stifel.

I wanted to follow up on the new technology ventures. Alan, you stated the incremental capital is minimal given you’re utilizing a lot of existing assets. Could you elaborate on how these returns compare to your upstream and midstream business? Are they expected to yield returns similar to midstream?

Yes, I’ll start that, and then Alan can follow up. The returns do compete across the portfolio, and the great advantage of technology lies in enhancing margins for minimal upfront expenditure. The world is evolving rapidly. Our goal is to position CNX within this region and basin to lead in this sustainable energy shift. As global demands trend toward lower greenhouse gas-intensive products, we possess tools to fulfill those needs. As such premium valuations emerge and gain recognition within the ecosystem, we’re well-positioned to participate significantly.

Okay. Are these projects long-dated, or could you see cash flow appearing soon from any of them?

It varies among the three buckets we’ve outlined, with some measurable outputs possible next year while others may require a longer lead time. We'll roll out specifics to the market when we have clarity.

One last question if I could. Nick, last quarter, you discussed policy and the need for more pipeline infrastructure in Appalachia. Are you seeing any federal, state, or local developments that provide encouragement regarding this?

There’s a lot happening. We received news last night about events in D.C. The details remain cloudy. However, one theme taking shape throughout 2022 is a growing acknowledgment, albeit hard for some to embrace, of the crucial role for natural gas in the overall domestic and global energy mix. No alternative can effectively fill the demand void, whether it’s exajoules, kilowatt hours, or transportation miles. Noting shifts away from oil and coal while also evaluating renewables’ scaling capabilities, there’s a critical gap necessary to fill. The EU learned this reality when Russia interrupted natural gas supplies through Ukraine, and we’re evolving domestically as well as we observe summer and winter challenges such as those concerning the grid and EV charging. Thus, while the world has become more volatile, I feel slightly more positive that necessary infrastructure will likely receive the go-ahead from private sector efforts regarding natural gas.

Our next question comes from John Abbott of Bank of America.

My first question is regarding tax. You mentioned last quarter guidance on when you might start to pay meaningful cash taxes. It seems like the timing coincides with cumulative cash flow around $3.5 billion based on your initial appraisal. Long-term, are you closer to a 15% cash tax rate or near 20% after you reach that level?

We’re probably closer to 20%, considering the better one state.

That’s very helpful. My other question concerns the turnaround times during the quarter. I noted that you turned three Marcellus wells in CPA South on. Typically, I think about the deep Utica in that area. Can you explain the thought process behind turning these wells on?

Thanks for the question, John. Regarding those three CPA Marcellus wells, they are actually TD; we’ve drilled them but haven’t turned them in line yet. We decided to drill those while on pad already, having the rig there and our inventory available. Observing the recent results from offset operators convinced us it represented an attractive rate of return project, so we proceeded. We believe they’ll significantly contribute to our $700 million annual free cash flow annuity and support our share buyback strategy and increase free cash flow per share.

This concludes our question-and-answer session. Now I’d like to turn the call back over to Mr. Tyler Lewis for any closing remarks.

Great. Thank you, and thank you, everyone, for joining this morning. Please feel free to reach out if you have additional questions. Otherwise, we look forward to speaking with everyone again next quarter. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.