Good morning, and welcome to the CNX Resources Second Quarter 2024 Q&A Conference Call. All participants will be in a 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. Please go ahead.

Thank you, and good morning to everybody. Welcome to CNX's second quarter Q&A conference call. Today, we will be answering questions related to our second quarter results. This morning, we posted to our Investor Relations website, an updated slide presentation and detailed second quarter earnings release data such as quarterly E&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&A. With me today for Q&A are Nick DeIuliis, our President and CEO; Alan Shepard, our Chief Financial Officer; Navneet Behl, 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. And operator, can you please open the call for Q&A at this time.

The first question comes from Bert Donnes with Truist. Please go ahead.

I just wanted to start it off on the New Tech 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. Just wondering if that's leveling out? Or are you ramping up throughout the year?

This is Ravi. The volume we experienced in Q2 aligns with our annual projection of 15 Bcf to 18 Bcf, as we recorded 4.5 Bcf in Q2. The Q2 numbers reflected a volume at the higher end of our forecast, with slightly better pricing. As mentioned last quarter, some transactions may cause variations in quarterly reporting depending on when the volume is produced versus when the transaction occurs. There is no change in our annual free cash flow guidance, which remains approximately $75 million by year-end. We expect the volume to stay in the same range of about 15 Bcf to 18 Bcf as previously indicated.

Moving on to the deep Utica, it appears that the first two wells are performing as expected. Can you provide some details in comparison to your Marcellus wells, such as a rough estimate of well costs or how the one-year cumulative production looks?

This is Alan. Those wells, they're still pretty early. So all we're going to say at this point is that they are absolutely meeting expectations on both the cost side and the well performance side. So we're pretty excited about them. And we'll provide more kind of a detailed look at those as we move forward in the next couple of quarters.

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

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

Yes. Some of that's what Ravi talked about earlier, including the environmental attribute sales, which were a little bit higher this quarter than last. Additionally, we had a pretty strong water revenue quarter. So we've made some investments over the last couple of years in terms of water handling. We've been able to offer those services to third parties, so we had a really good quarter supplying water to some third-party fracs, which drove that number.

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

I mean the third-party opportunities, they exist in all sorts of sectors, whether it's e-fracs, whether it's power generation, whether it's industrial use. So, I mean, we've been pursuing all those opportunities. The third-party revenue, it's not material for our 2024 guidance change. I would say like we're continuing to develop that 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.

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

Just wanted to follow up a little bit more here on New Tech. So obviously, you mentioned getting the CNG bids deployed to a customer in July. And I guess you've got some other aspects that get kind of rolled off in the second half, kind of from the AutoSep OFS business. I was hoping if you could just kind of characterize what some of these initial offerings to customers are? Are these like customer trials, beta tests? Are you actually getting 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. It sounds like relatively immaterial this year, but would you expect it to be more significant in '25, they're going to start to kind of move the needle a little bit next year on these two businesses?

Yes. So we're excited about both the businesses. I think they both solve key problems on the AutoSep 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. If you ask me how flowback has been done in the past, the conventional flowback is kind of analog, manual cost-intensive, lots of emissions. The technology that we have developed completely transforms that. We're very, very excited about the solution that we offer. It's from an environmental standpoint, from a cost standpoint, automation, and safety standpoint. We've been using the technology ourselves. So 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 on all of our pads this year and going forward. The engagement with third-party customers has been ongoing for the last couple of months ever since we announced the JV, and there's a lot of excitement. We expect to have customer sales in the back half of this year; the magnitude, and all that stuff, we'll share more as we have more details. We expect the AutoSep part of it, that 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 Geobaric Energy to produce compressed natural gas without any mechanical compression. It's cost-effective, environmentally friendly, and a lot of folks are looking for a solution like that, where we have constraints on pipes and how to deliver an energy solution in the form of CNG to different industrial applications. I think it checks a lot of boxes, and the third-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. As we do that, we'll provide more guidance to you.

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

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

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

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? If so, can you say how much?

This is Alan. We're not curtailing any additional production. We're running just above our hedge book with the margin safety that we need around that production profile to make sure we don't dip 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. I think there's a lot to be seen for the rest of the summer in terms of national production levels and in-basin usage and things like that before we're ready to make that decision.

You mentioned the progress on coal mine methane qualifying for the 45V hydrogen tax credit. Do you have any insight on the timeline for any of your projects if that advances?

On the 45V timing, I think there are a lot of guesses out there when it's going to come out. But I think we expect the guidance to come out in Q3, Q4 for a timeline, and we're eagerly looking forward to what comes out in that tax policy.

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

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.

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

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, but I'm just wondering if there's an aspect that is keeping the value you're realizing more normalized over time?

Yes. So I think the PA PUC Tier 1 REC values, I think it's publicly disclosed, like what's coming out. I think the range that we've seen this year is between $33 to $36 per megawatt hour, which translates into a certain dollars an MMBtu. So don't ask me to do the math live on a call, but the value for the credits have expressed in $36 per megawatt hour, and it's been in that range of $33 to $36 all year, and that's what we're forecasting will remain in that range over the next two quarters. And going back, if you go back a few years, I think it was in the $17 per megawatt hour range, and it's come up over the last couple of years, and it stayed at this level. 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.

I'm looking back at Q2 2023 when you had 2026 hedged at about 50% to 55%. Now, for 2027, it seems to be around 40%, which is about 10% to 15% lower. I'm curious if this is the perspective we should have regarding the business for the latter part of the decade. I know it's a long way off, but you mentioned being open to reducing the hedge book over time. I'm interested in knowing what the preferred level might be.

Yes, I think we've been pretty consistent in the objectives we're trying to implement on the hedge book the last couple of quarters, which is one, we want to be roughly 80% 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. So you've seen this have kind of reduced hedge activity over the last few quarters as the book has come in.

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

I apologize if this was mentioned earlier, but could you talk a bit about service costs and what you're observing from both vendors and materials? I'm curious if you've noticed any shifts in equipment out of the basin, as it seems we haven't heard much about that recently.

On the service cost side, what we've seen is service costs staying flat for the first half of the year. Our projections are they're going to stay almost flat for the next half of the year, too.

I was curious about the unusual cycle we've experienced, starting from pre-pandemic, through the pandemic effects, and then the subsequent inflation in services and the broader macro environment. It appears that leverage has remained primarily in the hands of producers, with pricing being influenced by capital discipline across the sector. Do you think we’ve returned to that state? In your projections, what’s the worst-case scenario regarding inflation that you consider when modeling for the rest of this year and next year?

Yes. We generally think about the basin as balanced right now. There hasn't been a lot of change in rig activities from our basin in the Pacific going back to coming out of the pandemic era. The inflation we saw in '22, we attribute mostly back to the macroeconomic inflation just across wage gains and other things across the general economy, thus to anything that was particular to our basin dynamics. So when we think about it going forward, it's more of what we expect national inflation levels to do because we don't see an uptick in activity in our basin on the producer side.

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

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

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