Earnings Call Transcript - CNX Q1 2024

Operator, Operator

Good morning, and welcome to the CNX Resources First Quarter 2024 Q&A Conference Call. 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.

Tyler Lewis, Vice President of Investor Relations

Thanks, and good morning, everybody. Welcome to CNX's First Quarter Q&A Conference Call. Today, we will be answering questions related to our first quarter results. This morning, we posted to our Investor Relations website an updated slide presentation and detailed first quarter earnings release data such as quarterly E&P data, financial statements and non-GAAP reconciliations, which can be found in a document titled 1Q 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.

Operator, Operator

The first question is from Zach Parham with JPMorgan.

Zachary Parham, Analyst

First, I just wanted to ask on New Tech. Earlier this week, you announced 2 new ventures in that business, one in OFS and one in alternative fuels. Could you just quantify the potential cash flow generation potential of these 2 ventures and give us some detail on the timing of these 2 ventures generating some cash flow?

Ravi Srivastava, President of New Technologies Group

Zach, this is Ravi. Our guidance for 2024 is unchanged. Our free cash flow guidance for 2024 remains at $75 million a year from the New Tech business unit. And as far as the future potential, the commercial opportunities are still taking concrete form. I think we'll be able to talk more about these opportunities in greater detail in the coming quarters, but we expect them to start taking form towards the end of '24 and have a more meaningful impact in '25 and '26. So stay tuned.

Zachary Parham, Analyst

Got it, Ravi. And then shifting gears a little bit. You were aggressive with the buyback again in the first quarter. And over the last 3 quarters, you've been really aggressive, buying back at about double the level of free cash flow generation. It does seem like the buyback pace slowed a little bit in April. Can you just give us your latest thoughts on how you're thinking about allocating free cash flow between buybacks and debt reduction going forward?

Alan Shepard, CFO

Yes. Look, this is Alan. We talked about in the prepared commentary, our unsecured maturity runway and the kind of low secured debt gives us a lot of flexibility on a quarter-to-quarter basis. We're always evaluating the pace and timing of buybacks. In Q1, we saw a real opportunity. The stock was trading in the 20s to grab a lot there, modulated a little bit later in the quarter as the stock kind of ran up. I think if you look at $50 million over the projected $300 million, there's still a lot of room to buy back shares for the remainder of the year. So consistent as always, we're going to be flexible, try to maintain flat to declining debt, but no real changes to the strategy.

Operator, Operator

The next question is from Leo Mariani with ROTH MKM.

Leo Mariani, Analyst

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

Ravi Srivastava, President of New Technologies Group

Thanks for the question. I haven't heard the rest of the questions, but this might be my favorite question for this hour because we want to talk about the technology that we have developed. We are pretty excited about it. It's been in the works for a few years now. We have teased in the past earnings calls, and we're very happy that we've reached this milestone where we've engaged in these partnerships, where we can start to bring these technologies to market. So to talk more about the technology, I would break it into 2 segments. The first step involves combining various discrete functions that are performed in conventional flowback, like pressure management, solid and sand removal, and high-rate flowback fluid removal. What our technology does is it combines all this into one equipment, performing all this from a highly automated piece of equipment. We can perform this at a very high pressure and rate, and because our solution does this in a materially smaller footprint, it reduces the environmental impact. It can be deployed much faster than a conventional flowback spread, resulting in lower costs and reduced cycle times for operators. It's a sealed system, and because of that, it eliminates any fugitive methane emissions. It's highly automated, which results in reduced manpower required to operate this, leading to improved safety performances and reduced costs. For this particular technology, we estimate that there are 20,000 wells that are flowed back in the U.S. and 60,000 wells internationally. All of these wells require flowback, and operators are looking to reduce CapEx and emissions. That's exactly what our solution does. We have partnered with Deep Well Services to deliver the solution within the United States. Deep Well brings strong domain expertise and is a trusted name in the oilfield service industry, and we're excited to partner with them to bring this solution to market. The second part of our technology involves harnessing what we call Geobaric Energy, derived from high-pressure oil and gas reservoirs like the Utica Shale, Haynesville, Eagle Ford, and Montney Shale in Canada. Geobaric Energy, like geothermal energy, is a renewable energy source that has typically been wasted by the oil and gas industry while developing these high-pressure formations. Our technology allows us to harness this energy to manufacture CNG, LNG, and potentially electricity and hydrogen right on our well pad. Our solution allows us to manufacture CNG utilizing Geobaric Energy and without any mechanical compression right on our Utica well pad, filling the CNG trailers and delivering them to customers, bypassing several cost and energy-intensive steps. This solution lowers costs and emissions for customers, which is what the industry is looking for. We have partnered with NuBlu Energy to bring this technology to the U.S. market. NuBlu has a track record of developing CNG and LNG solutions, and we are excited to partner with them.

Nicholas DeIuliis, President and CEO

Leo, this is Nick. It might also be helpful because to your point, there are specific questions about technology and market for these announcements we've made. But also, these announcements are sort of additional developments, I call them in a much bigger thing that we've been working on now with New Tech for a couple of years. It ties to a couple of realities in our industry. One is the global demand for energy that keeps growing. You see it in advanced economies like ours with AI and data centers, and you see it in the developing world where they're insisting on better quality of life for their citizens. The world wants these additional Btus, horsepowers, kilowatt hours, and they want lower emissions to go along with it. However, wind and solar at scale, coupled with electrifying everything, creates challenges for the grid. The idea of exporting more Appalachian gas and LNG units to places like India, China, and Europe sounds logical, but it will be really challenging to build the extensive pipelines and LNG facilities required. This makes it inefficient and sort of impractical. Hydrogen has interesting attributes specifically with blue hydrogen, meaning natural gas will play a role, but green hydrogen at scale is technically and economically challenging. We believe we found a better way with this New Tech approach, which checks all those boxes. It’s captured within our Appalachia First vision, aiming to produce natural gas responsibly here and use it here through technologies like CNG and LNG. This approach leads to onshoring of manufacturing of goods we currently import, shrinking supply chains, reducing emissions, declining costs, and expanding jobs with family-sustaining wages. Our proprietary technology shows we can commercialize this efficiently and cost-effectively adjust natural gas at various shale horizons into CNG and LNG. We are proposing to vertically expand into market opportunities for natural gas, electricity generation, and ground transportation, displacing gasoline and diesel products. We saw 2 more tangible examples of this with the recent press releases; each of these has the potential to generate free cash flow and positively impact our view of NAV per share.

Leo Mariani, Analyst

That's certainly helpful. I appreciate all the detail here. Many folks are wondering about this. Just a quick follow-up: If I kind of read you correctly, it sounds like you may be starting to roll this out to third-party customers later this year and see some revenue by the end of this year into 2025. Can you maybe just talk to the capital side? Do you expect any meaningful capital associated with any of these new businesses that you've announced? Or is it a fairly low capital intensity endeavor for the company?

Ravi Srivastava, President of New Technologies Group

Leo, this is Ravi again. The capital needs for these solutions are very, very low, especially compared to our E&P program. At this stage, no incremental capital is planned for 2024.

Operator, Operator

The next question is from Bertrand Donnes with Truist.

Bertrand Donnes, Analyst

Just wanted to shift gears on to the activity curtailments. Can you share your thoughts on why you stopped at 11 wells? I would think there's some argument your hedging insulates you, but why not just pocket the hedging gains and curtail production? We saw quite a recent drop. Are you more inclined to hold at this level? Or are you seeing prices and thinking about dropping more?

Alan Shepard, CFO

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

Bertrand Donnes, Analyst

What about actual shut-ins or any similar activities?

Alan Shepard, CFO

No, not costs at this time. Most of our wells run very low variable costs. We still make pretty healthy margins on those. As you pointed out, we're getting close to hedge levels. Therefore, we have very little in terms of open volumes. We're working to integrate just some volumes into our hedge book.

Bertrand Donnes, Analyst

To pile on to the New Tech, in the prepared remarks, you referenced the potential to be a meaningful free cash flow contributor on the DWS side. Is there a tangible difference between the two?

Alan Shepard, CFO

I would say, as Ravi mentioned, they both have very large addressable markets. I think the flowback market is a little more developed; it's identifiable, and we believe we'll ramp quicker into that market because of the ongoing activity and it's a clear superior technology to deploy. CNG and LNG are markets we’ve been pushing on as well, but will probably be a bit slower than the Deep Well. That's why we made that comment. Does that make sense?

Ravi Srivastava, President of New Technologies Group

That's absolutely correct. I think the flowback market is something that we can penetrate into very quickly, while the CNG market will take a bit more time.

Operator, Operator

The next question is from Jacob Roberts with TPH & Company.

Jacob Roberts, Analyst

I just wanted to touch base on the preliminary 2025 outlook. Just curious about activity levels assumed in that $550 million program, and any color on the price outlook you might need to see to trigger the incremental $50 million beyond the $500 million you’ve spoken about?

Alan Shepard, CFO

Yes, it's the same underlying activity set that we talked about on the last call. We're guiding to that $500 million run rate. All you're seeing is the shifting of the 11 wells we deferred into early next year. If we were to ramp back up from $550-560 back to that $580 target, that's all we're trying to indicate there. We're going to watch how the pricing develops. We have a lot to learn over the summer in terms of how sustainable the production drops are. A lot of factors will go into the ultimate planning for 2025. Once we're able to firm that up, we will do so.

Jacob Roberts, Analyst

Great. Looking at Slide 5 of the deck, the debt stack is not really weighted to the first part of the next decade. Does it change the philosophy around the duration of the hedge book as we enter the back half of this decade?

Alan Shepard, CFO

Yes, great question. The balance sheet and the hedge book are correlated. In the past, we’ve been looking to shorten the overall length of the hedge book, historically around 5 years. We’ve been watching this come in by 12 to 18 months. We're still very much in the camp of hedging going into the near-term, but we want to maintain flexibility in the outer years due to continued volatility in our space, particularly with some projections in power demand and gas demand. We want to ensure we can capture those through our hedging program without getting too far out.

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

Thank you again for joining us this morning. Just feel free to reach out if anyone has any additional questions. Otherwise, we look forward to speaking with everyone again next quarter. Thank you.

Operator, Operator

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