Earnings Call Transcript - CNX Q3 2021

Operator, Operator

Good morning, and welcome to the CNX Resources Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

Tyler Lewis, Vice President of Investor Relations

Thank you, and good morning to everybody. Welcome to CNX's third quarter conference call. We have in the room today, Nick DeIuliis, our President and CEO; Don Rush, our Chief Financial Officer; Chad Griffith, our Chief Operating Officer; and Yemi Akinkugbe, our Chief Excellence Officer. Today, we will be discussing our third quarter results. This morning, we posted an updated slide presentation to our website. Also detailed third 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 3Q 2021 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 on our press release today as well as on our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed then by Don. We will then open the call up for Q&A, where Chad and Yemi will participate as well. With that, let me turn the call over to you, Nick.

Nick DeIuliis, President and CEO

Thanks, Tyler, good morning everybody. Similar to the last quarter, we had another clean and easy to understand quarter overall. Slides 2 and 3 I think sum that up. They both highlight our theme, which has been steady execution that puts us in a position to manufacture our free cash flow. Whether it's safety or environmental compliance or overall field operations, all these things are areas we focus on. The sequence is simple: consistent methodical execution results in significant free cash flow generation. And then the free cash flow allows for capital allocation opportunities primarily focused on balance sheet strengthening and share count reduction. The net result of all that is intrinsic per share value growth. As we continue to trade at a material discount to our intrinsic per share value as we see it, and with net debt declining and leverage improving, we steadily increased our attention on share count reduction. Q3 was a good example of this; approximately 60% of our free cash flow was returned to shareholders in the form of buybacks, and most importantly, at discounted prices. As Slide 2 highlights, we continue to see a significant opportunity to retire additional shares at what we believe to be currently attractive prices. As a result, on October 25 earlier this week, the Board increased our share repurchase authorization by $1 billion. We now have a sizable share repurchase authorization at our disposal, which is normal course for CNX, part of our toolbox, so to speak, in terms of how we allocate capital. We recently extended our CNX and CNX Midstream credit facilities and extended a bond maturity. These actions were opportunistic and now they provide an even longer maturity runway and more flexibility and capacity for future capital allocation moves. We plan on making such moves as the facts and circumstances dictate the clinical rate of return math of capital allocation and free cash flow per share growth. In many ways, our approach might be a little different than what's invoked today in our space. Our path is really pinned to optimizing intrinsic per share value by looking at the long-term, methodically executing, derisking, and obviously by capital allocation. We don't necessarily care about scale or size or what's trendy or the herd mentality. Instead, we are committing to the impactful math of good old-fashioned per share value creation. We want tangible actions that will be backed by the words and the math, and we are going to embrace the most local-centric capital allocation you can find, which of course is acquiring and embedding on yourself. The words tangible, impactful, local, they are not just buzzwords and they're not only applicable to ESG; they permeate everything we do on behalf of our owners, our employees, and the regions that we operate and live in. If you take the approach that national survival requires keeping a nation internally fit and being ready for external events, we embrace that with how we build CNX. We’ve built this company internally to not just survive but thrive as external events play out, whether it's macro or pricing or industry-centric, and those will drive the rate of return math of capital allocation. For the third quarter, the cliff notes: free cash flow and free cash flow per share were up, our net debt and leverage were improved, share count was reduced at deep discount pricing, and we increased our '21 free cash flow guidance to $500 million or $2.37 per share. We are going to keep clinically following the math when allocating free cash flow and rest assured that our actions are going to match our words, not just for what’s left of '21, not just for next year, but well beyond that. Pretty simple. I'm going to turn it over to Don now, who is going to go into a little more detail.

Don Rush, Chief Financial Officer

Yes, thanks, Nick, and good morning everyone. I'm going to start on Slide 4, which highlights our balance sheet and liquidity strength. We reduced net debt again in the quarter and also completed a couple of important capital market transactions that reduced our interest expense and extended maturities. Specifically during the quarter, we opportunistically completed an 8.5-year, $400 million senior notes offering at 4.75% due in 2030, which was used to pay off our 6.5% CNX Midstream notes due in 2026. The new notes issuance and partial tender for the 2026 notes closed in September, and the complete redemption to pay off the remaining 2026 notes not tendered closed later on October 15 per the indenture. This resulted in the September 30 balance sheet showing a temporarily high cash balance as approximately $234 million of the 2026 bond was ultimately retired on October 15. Slide 4 represents the current maturity schedule as of October 15 after we repaid the remaining balance of the 2026 notes. Also during the quarter, we used the CNX credit facility to repay and terminate the $161 million Cardinal States loan, resulting in a net interest savings moving forward. We paid off the 6% loan at par with our 2% revolving credit facility. Lastly, we completed an amendment and extension to our CNX and CNX Midstream credit facilities after the end of the quarter. This extended the maturities to October 2026, essentially giving us a 5-year credit facility. Our liquidity remains robust as we have over $1.5 billion of undrawn capacity on our revolvers and our borrowing base increased compared to the prior facility too. Let's now shift to Slide 5 which highlights progress on our two main capital allocation priorities since the third quarter of 2020. As we have discussed in the past, we are focused on reducing debt and returning capital to shareholders through share buybacks. Since last year, CNX has repurchased 14.7 million shares or $175 million. During Q3 2021, we repurchased 6.5 million shares for $78 million. On the debt side, we have reduced net debt by $523 million since year-end 2019, which includes a $235 million in debt reductions since the third quarter of 2020. Our capital allocation priorities continue to focus on reducing debt and returning capital to shareholders through share buybacks. The magnitude and pace of these decisions will ultimately be determined by the facts and circumstances as we move forward quarter after quarter. We have clear visibility and confidence in our cash flows moving forward, and our leverage target remains at 1.5 times. The share price and free cash flow allocation math will dictate when we reach that target. I will end on Slide 6 with guidance. Through continued plant optimization, cycle time compression, and pulling forward the timing of some activity, we increased our production guidance to 570 to 580 Bcfe. This higher expected production, along with higher assumed gas and liquids prices in the period, have resulted in our adjusted EBITDAX increasing by approximately $160 million based on the midpoint of guidance. This all occurred within the previous capital guidance range, which we have simply tightened for the year. As you can see, our free cash flow increase did not go up dollar for dollar relative to our EBITDAX increase. This is because we include working capital changes in our definition of free cash flow, which is a reminder: cash flow from operations minus investing cash flows. I would like to spend a minute explaining the mechanics of one of our key working capital items: the cash timing of our hedge settlements versus physical sales settlements. In particular, December hedge settlements will impact 2021 reported free cash flow. Since we cash settled the December financial hedges in early December and cash receipts for the December physical sales aren't received until January. This 30-day dynamic doesn't impact our EBITDAX projections nor does it impact the long-term free cash flow generation of the company. However, it does cause free cash flow to slide between reporting periods as the underlying settlement price fluctuates during the quarter. Typically, the effect of this is not material. However, as we enter a volatile December natural gas contract, we want to make investors aware of this near-term working capital dynamic and its potential effect on estimated 2021 free cash flow. To summarize, if December first-of-month pricing goes higher, it will reduce Q4 2021 free cash flow versus our guidance but increase Q1 2022 free cash flow. The reverse is also true: if the December first-of-month contract falls from current levels, CNX will have a lower December hedge settlement payment in a higher Q4 2021 free cash flow with a lower Q1 2022 free cash flow. So, net-net, the company is slightly better off if December gas prices go higher since we have some open volumes that benefit from it, but we will not see the increased free cash flow from December physical gas sales until January of 2022. And that leaves me with a few final points regarding our hedge book, how we think about it, and how mark-to-market gains or losses affect the future cash flows of the business. We fundamentally believe that natural gas prices are impossible to consistently predict; you might guess right every once in a while, but not each and every year for decades. So we believe in the long run you will catch any gas price upside in the forward markets, and, over long periods of time, you will not miss out on gas price upside while still protecting the downside through consistent forward hedging. We view our hedging philosophy as right-way risk mitigation, meaning that our free cash flow and capital investments are protected should prices fall for a few years. On the opposite side, if we were to have a mark-to-market loss on our hedge book, it means the future annual free cash flow generation of the company has actually increased since we still have significant open volumes in the future, not to mention other ways to create incremental shareholder value in a sustained high gas price world. Based on our previous guidance of $3.4 billion in free cash flow from 2020 through 2026, our hedge book position at that time was based on the approximately $2.50 NYMEX strip that existed at that time. Thus, our hedge book was significantly in the money mark-to-market. Since then, our mark-to-market hedge book has moved to a significant out-of-the-money position due to the average NYMEX strip moving to over $3, as it stands today. Higher gas prices may negatively impact the mark-to-market of our hedge book, but, net-net, it's a positive dynamic for the future free cash flow potential of the company. While we will not be providing updated guidance at this time, we would like to remind everyone that our previously issued 7-year guidance was based off of a much lower strip pricing environment at the time of issuance, and as such it is no longer current given prices are materially higher in the forward markets today. With that, I will turn it back over to Tyler for Q&A.

Tyler Lewis, Vice President of Investor Relations

Thanks, Don. And operator, if you can open the line for questions at this time, please.

Operator, Operator

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

Zach Parham, Analyst

Thanks for taking my question. First, I just wanted to ask on the buybacks. You were much more aggressive this quarter and also flagged buying back an additional million shares in the first two weeks of October; the Board raised the buyback authorization by $1 billion. A number of your peers have laid out more formulaic cash return programs; maybe could you talk a little bit about the pace of the buyback going forward and just your thoughts on allocating free cash flow between the buyback and debt reduction in Q4 and in 2022.

Nick DeIuliis, President and CEO

Zach, this is Nick. A couple of different things to put out there. One, the $1 billion increase in share buyback authorization, as we said in the comments, that's just one of the tools that we always want to have in our toolbox to efficiently and quickly allocate capital where we see opportunities, solving for the long-term intrinsic value per share. I think from a principal perspective, there are sort of two big drivers of what we are doing in terms of what we think reflects a sustainable financial business model, and that is: one, we always want a component to return capital to shareholders; we've been doing that for a while, and two, we want to be reducing some level of absolute debt on a consistent basis. Beyond those two principles, we then get into tactics and the facts and circumstances that we spoke about. We’re almost clinical with respect to how we look at the share buyback rate of return and if that rate of return has a significant margin of safety tied to it, that’s where we’ll pursue our avenue via returning capital to shareholders; that’s what we see with respect to where the shares are at today. This is not prescriptive. In many ways, if you're following the facts and circumstances, it’s almost the opposite or the mirror image of what we're doing with hedging. With hedging, we have a programmatic approach; here I would expect flexibility to be the buzzword. When it comes to returning capital to shareholders, that’s a good approach with considering the space that we’re in and the commodity and everything else. So, in terms of what that means for Q4 and what that means for 2022 and beyond, just follow the rate of return math and you will see at least in terms of where we’re currently at allocation of capital to further improve the balance sheet as well as reduce share count.

Zach Parham, Analyst

Just wanted to follow up with a question on 2022. I know you don't have guidance out there specifically for '22, but you talked about the maintenance program being in place from '22 through '26 at around 560 Bcfe annual production. Just given a little higher volumes in 2021, does that change things at all and rebase that program a bit higher? Really just looking for any color on production trajectory going forward from here.

Nick DeIuliis, President and CEO

We're not going to get into any kind of new guidance information for 2022. We are still in a one rig, one frac environment. The production will kind of bounce around a bit, but no new further information from doing or going forward.

Operator, Operator

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

Leo Mariani, Analyst

I just wanted to follow up a little bit on capital allocation, which I know is something you guys emphasize quite a bit. It seems to me that in the current environment it might make sense to drill a couple more wells, given that the futures prices here in '22 are the best they've been in a number of years, and I would certainly think that returns on a couple of more wells in a program, for example, might look very strong today. I know you're very focused on buybacks as well, and I understand that, but just any thoughts on the potential to do a little bit more, just given that we're at multi-year highs on natural gas here.

Nick DeIuliis, President and CEO

I think obviously, to your point, the rate of returns for incremental activity are certainly at a level that on a risk-adjusted basis are above our thresholds, Leo. I would also say that the same is true when it comes to share count reduction opportunity for the same reasons and same drivers. The bigger issue, though, is that in Q3 was a good example, as well as 2021 overall. We found ourselves to be in a really good operating rhythm, and in a world today of the twists and turns on commodity, inflationary pressures, and everything else, on top of the safety and compliance aspects of our business that we remain hyper-focused on. We like where we’re at with this one rig, one frac crew arrangement generating substantial free cash flow. We've got a pretty good game board of allocation opportunities including what you brought up and others as well. So I think we stay within that one rig, one frac crew operating plan for the foreseeable future, recognizing your point with respect to what commodity has done to some perspective rate of returns.

Leo Mariani, Analyst

Okay, and that’s helpful. In terms of capital, I certainly noticed that you bumped up the midpoint on CapEx a little bit here in 2021; correct me if I’m wrong, but I don’t think there is necessarily additional activity? So, not sure if that's perhaps maybe a little bit of inflation that maybe wasn’t expected when the budget was originally set? And then, obviously just looking at third-quarter CapEx, the number was down quite a bit from the prior quarter. So maybe some of this is timing, but should we expect spending to maybe tick up a little bit in Q4? Just looking for some incremental color on the capital.

Don Rush, Chief Financial Officer

Yes, I’ll start and Chad can finish. We don't look at the company quarter-to-quarter or calendar year-to-calendar year. We’re not as focused on what those metrics are at a given time; we’re focused on rate of returns and a much longer time horizon. But as far as expenditure; you go a little faster, you spend a little more, you go slower, you spend less. But Chad can give you a little bit of color on how great the team is doing.

Chad Griffith, Chief Operating Officer

Yes, particularly with respect to the production gains we’ve seen on the team; all the credit goes to the team in the field. The consistent plan that we've been talking about for a number of quarters now, along with the goalposts we’ve given the team, allows them to plan further ahead and just continue to execute at an extremely high level. It allows gains in efficiency and continues to reduce downtime. You're going to see just really exciting progress from what's going on with those teams in the field; massive credit to those guys for being able to bring some additional production this year and just continue to gain efficiency out there.

Leo Mariani, Analyst

So, you're saying nothing really on the inflation side of note, just to be clear on that?

Don Rush, Chief Financial Officer

We're fairly contracted for the near term moving forward. What it does over the long term, I don't know; it’s anybody's guess. But we stay fairly contracted in the near term.

Nick DeIuliis, President and CEO

Yes, that’s a good point. The bulk of our expenses are fairly well contracted for a future time period. It’s no secret that everybody is seeing inflation on all parts of the economy, but that also helps our top line as well because we sell a commodity. There is a certain amount of inflation you’re seeing not only on input costs but also on the revenue line. In a situation where we are one frac crew, one rig, sort of activity level, you look at potential impact of that inflation on our input costs relative to our operating margin or relative to our free cash flow generation, and it's really just not a big material driver relative to our operating margin and free cash flow generation.

Operator, Operator

The next question comes from Neal Dingmann with Truist. Please go ahead.

Neal Dingmann, Analyst

Nick, could you elaborate a bit more on what you said about the key being the intrinsic per share value? How do you think about that regarding ramping production versus what’s going on with pricing or hedges? I’d love to hear how you think about pulling that forward on intrinsic per share value in today’s environment.

Nick DeIuliis, President and CEO

Yes, I think there is sequential thinking to some of this. The field execution that Chad was just talking about is the precursor to everything. If you’re able to do that safely and compliantly and you’ve got the geology and operational efficiencies to bring to bear, then you’re going to generate a significant amount of free cash flow with our cost structure. You are going to be able to do that, and that’s what we’ve been doing for some time now. With the free cash flow being generated, the next sequential issue is putting that balance sheet into a current state of best-in-class to take advantage of any twist or turn seen with volatility or capital markets or commodity dynamics. We have been hard at work on that for a while. Don's comments pointed that out on one of the slides regarding our balance sheet having all its major issues addressed for the foreseeable future. That then puts you in the last stage, what we call a sustainable financial business model to be able to methodically return capital to shareholders. For us, that basically means share count reduction or dividends, and we’re going to follow that clinical rate of return risk-adjusted math. When you look at intrinsic per share value versus share price, there was a significant rate of return seen in Q3 tied to that. So we took advantage of that, and if and when those facts and circumstances change, like share price, then we have options like dividends as the vehicle to return capital to shareholders. We think sequentially; we follow the math, and if you think of it sequentially, viewing one issue as a prerequisite to the next lands us where we landed in Q3 and how we're thinking about the rest of 2021 and beyond.

Neal Dingmann, Analyst

Last, I know the answer to this, but given your large acreage position, what are your thoughts on M&A? It seems like there are starting to be a few more smaller, bolt-on deals for you. What are your thoughts on that? Thank you.

Chad Griffith, Chief Operating Officer

Yes, we’re always looking at everything that could create sort of value. I think we've shown we pick and are quite particular regarding our return hurdle thresholds necessary to do these things, and that’s going to continue going forward. We’ll look at opportunities, but just as we have picked and are particular when it comes to M&A.

Operator, Operator

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

Michael Scialla, Analyst

On Slide 6, you mentioned plan optimization or pull-forward activity. What does that entail? I want to see if you had any color to add around that.

Chad Griffith, Chief Operating Officer

Yes Michael, this is Chad. The analogy I like to use is our plan: it’s one rig, one frac crew, but it’s kind of like an accordion, right? You can compress it or expand it. We generally average about one rig, one frac crew through the plan, but with some ability to either accelerate or slow down activity as a function of other opportunities for accounts. When trying to accelerate or pull forward some activity, it’s largely driven by, as already mentioned, the execution of the team in the field; but there’s also an opportunity to accelerate by gaining efficiencies and getting a completion done quicker. When you get a drill completed quicker, that moves up the next set of activities, right? You finish Pad A a week earlier, you can move onto Pad B a week earlier than originally planned. So that contraction of the plan, like an accordion, allows some capital and production to move between quarters or years.

Michael Scialla, Analyst

So you’re not really changing your 37 TILs for the year; it doesn't necessarily change. But when they come online in the fourth quarter might be a little earlier than planned, which could have contributed to the bump in production guidance. Is that the right way to think about it?

Nick DeIuliis, President and CEO

That’s a good way to put it. It depends how fast the team keeps going. Sort of a little bit of self-fulfilling if you keep going faster, you keep getting things online quicker. But, that being said, the team is doing an amazing job. It feels like every pad they’re on, they are setting new records. It’s an impressive team we have.

Michael Scialla, Analyst

I know you had been targeting longer-term fully burdened cash costs of $0.90 per Mcfe. Is that still attainable with these higher gas prices or is that moved up now? Could you discuss any cost pressures you’re seeing, other than obviously your GP&T goes up with higher prices? Any other pressures on costs?

Nick DeIuliis, President and CEO

We’re not going to get into any new kind of cost information for 2022 and beyond. We try to stay ahead of these sorts of situations at least in terms of the near term, but feel confident in the team being able to address and continue to get better going forward.

Chad Griffith, Chief Operating Officer

So just to ensure we are thinking about things the right way: our GP&T rates are largely contractually fixed. They are not necessarily a function of a commodity price; though there’s a little bit of fuel burn there, it’s a very small component of that GP&T line item. LOE has been very consistent through the quarters and the years; maybe the only area we see a bump is on taxes due to the higher commodity price resulting in more severance tax associated with that. But really beyond that, that’s the only thing materially impacted by commodity price.

Nick DeIuliis, President and CEO

Yes, and another advantage of gathering gas like we do with our midstream company is that we don’t have contracts tied to inflationary indexes in material fashion. Our midstream costs aren’t the same as peers, and the cost advantage actually grows for us if those contracts of others go ahead.

Operator, Operator

The next question comes from Holly Stewart with Scotia Howard Weil. Please go ahead.

Holly Stewart, Analyst

Just a couple of quick questions from me. I think Don or maybe Chad, you mentioned last quarter that you would continue to look at kind of that dry liquids mix and adjust. Just curious, given where pricing is as we look at the forward strip and into the future, how are you thinking about making those adjustments to the program? Also, perhaps Chad, just from that kind of incremental push for Q4 on that optimize activity, any thoughts on how we should think about that activity mix?

Chad Griffith, Chief Operating Officer

Yes, certainly on the dry versus wet mix. As far as existing production goes, it's something we optimize daily. As we’ve mentioned before, we have all the numbers necessary to do that math, and we’re doing that on a real-time basis to move that gas through the midstream system we own. Whether we want to take that gas to a dry outlet, blending it with some lower BTU gas and selling it like dry gas, or moving it to processing and benefiting from the NGLs, it's math we do every day and optimize. Regarding the scheduled timing as we look into the future, there are some additional wet pads and wells available to us. We're assessing the right timing for those, and we are continually optimizing that schedule on a daily basis as commodity prices move.

Holly Stewart, Analyst

That’s helpful. And maybe Don, just on 2023, it looks like you added some hedges there. I think on our math, you’re approximately 70% hedged in 2023. Any thoughts here on moving forward? I know you keep averaging up on the portfolio. Do you feel like you’re good for now going out that far, or is that something you’re just going to keep cost averaging higher?

Don Rush, Chief Financial Officer

Yes, like we’ve mentioned for a while, there is a dollar-cost averaging effect to this. We’re hedging all the time. We’ll continue to chip away at this over the long haul and build a business that works well regardless if gas prices are quite low, moderate, or high. To me, that’s the most sustainable thing you can do.

Holly Stewart, Analyst

Overall, several of your peers have said that the forward strip is not supportive of incremental drilling activity. I’m curious where you fall on this topic conceptually. I think we would tend to agree with it, but do you outright disagree?

Nick DeIuliis, President and CEO

If you look at the forward pricing, certainly on the liquid side but also with natural gas, there are rate of returns to be had with activity. However, the industry for a long time has been subject to a lot of groupthink and herd mentality. What’s changed is probably the focus on discipline and free cash flow generation. We think this is a good thing, and it’s something we’ve been focused on for a while. The reason you're seeing hesitancy isn’t necessarily the rate of return math; I think it’s more because it’s just not the popular focus right now. Everybody is looking more towards the discipline model, perhaps for good reasons or other reasons. But that can change quickly. Whether we enter a new chapter on trends is uncertain, but we will remain consistent with how we approach things.

Operator, Operator

The next question comes from Greg Tuttle with Piper Sandler. Please go ahead.

Greg Tuttle, Analyst

Thanks everybody. I guess the first question, as you think about tomorrow, your internal ideas of intrinsic value per share are reached by the market. You alluded earlier to a potential base dividend. How do you think about a base or a base plus variable in that scenario as a way to return capital to shareholders?

Don Rush, Chief Financial Officer

Yes, as Nick said, if you're not in super growth mode as a company, you should return significant free cash flow to shareholders. It makes common sense for any industry, not just ourselves. But when you look at how to do it, I think for us, the way we run the hedge book, we’re focused on resilient predictable recurring free cash flow and growing free cash flow per share. From a dividend perspective: a base dividend could be on the cards, but for a variable dividend, I don't think that would be a part of what we're doing; it would be, you could say, a variable dividend would be potential buybacks. This would be based on rate of return versus other opportunities to grow free cash flow per share for the business. However, circumstances change all the time, and the market may look very different when these sorts of things happen.

Greg Tuttle, Analyst

Thank you. Following up on Holly's question, what triggers is CNX looking at where you could potentially see industry-wide growth for natural gas? How do you think about that dynamic in the market?

Don Rush, Chief Financial Officer

We just think it’s fickle. It’s a couple of Bcf a day difference between good and bad gas prices. There’s a reason I don’t want to predict gas prices because a change of a couple Bcf a day can have significant implications. Best of luck if that’s your goal; it's very fragile both directions.

Operator, Operator

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

Noel Parks, Analyst

Just a couple of things, if we are looking at 2022, what are you seeing for service rates? What sort of inquiries are you getting from competing vendors? Do you think looking into next year, we’re going to see limited room for negotiation, given prices?

Nick DeIuliis, President and CEO

For 2022 and beyond, we're not going to comment on any new information or guidance about that. But, generally, as mentioned, Chad pointed out earlier, we stay mostly contracted for a decent piece of the near future. What happens beyond that, I don't think anybody knows. However, there are advantages to having a smaller capital program; with one rig and one frac crew, we expect to see margin expansion that more than offsets the cost increases for our business. So I think even if the future unfolds unfavorably, we feel good about where we stand with our high margins and smaller capital program.

Noel Parks, Analyst

Do you have a sense of any repositioning on the part of industrial users in basin demand due to the run-up we’ve seen in gas prices? Do you see any renewed interest in hedging, or maybe they will lock in supply for the longer term?

Chad Griffith, Chief Operating Officer

For a long time, buyers of gas, such as consumers and power plants, benefited from relatively steady low prices. These prices dis-incentivized these consumers from hedging or investing in infrastructure and storage. In a situation where daily consumption of natural gas is up over 80% versus several years ago, but there hasn't been material expansion of storage, pipelines continue to be challenged, I think my expectation is that this volatility is going to encourage these consumers to come back into areas where they had not participated for the last several years.

Noel Parks, Analyst

Is it conceivable that, at least on a regional basis, this could make a significant dent in the backwardation we've seen for so long?

Nick DeIuliis, President and CEO

It’s hard to say—if 2 Bcf a day of supply shows up and it’s a warm winter, then gas prices aren’t that attractive anymore. If no new supply shows up and it’s a cold winter, then gas prices are really high. It’s simply impossible to predict how the future unfolds; it’s just too thin and tied up in the market.

Operator, Operator

The next question comes from John Abbott with Bank of America. Please go ahead.

John Abbott, Analyst

I apologize if some of these topics have been covered already. First question is on hedging. You look like you are continuing to add to your hedge book. I mean, I don't see that changing as you want to reduce your risk. While you use swaps, can you share the rationale behind the preference for swaps over collars at this point?

Nick DeIuliis, President and CEO

Yes, we will continue to hedge and view it as a risk. There are other products out there but if you want more upside, you need to take more downside. So if there’s any products we can procure with upside without the downside, that's great, but the products tend not to add value.

John Abbott, Analyst

At what price and given the potential future cash flow off the strip, does the potential acceleration of a build-out to CPA itself make sense, or is it not within the timelines given sufficient Marcellus?

Nick DeIuliis, President and CEO

We will look at these things and as I said, it will be based on facts and circumstances. What the world looks like six or 12 months from now might be completely different; that said, there’s still a lot of volatility, and you want to be cautious about making decisions until you see how things unfold.

Operator, Operator

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

Tyler Lewis, Vice President of Investor Relations

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

Operator, Operator

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