Earnings Call Transcript - CNX Q1 2020

Operator, Operator

Good day and welcome to CNX Resources First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note, today’s event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please, go ahead, sir.

Tyler Lewis, Vice President of Investor Relations

Thank you and good morning to everybody. Welcome to CNX’s first quarter conference call. We have on the call today, Nick DeIuliis, our President and CEO; Don Rush, our Executive Vice President and Chief Financial Officer; and Chad Griffith, our Executive Vice President and Chief Operating Officer. Today, we will be discussing our first quarter results and we have posted an updated slide presentation to our website. To remind everyone, CNX consolidates its results, which includes 100% of the results from CNX, CNX Gathering LLC, and CNX Midstream Partners LP. Earlier this morning, CNX Midstream Partners, ticker CNXM, issued a separate press release and as a reminder, they will have an earnings call at 11:00 a.m. Eastern today, which will require us to end our call no later than 10:50 a.m. The dial-in number for the CNXM call is 1-888-349-0097. 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 Chad and then Don, and then we will open the call up for Q&A. With that, let me turn the call over to you, Nick.

Nick DeIuliis, President and CEO

Thanks, Tyler. Good morning, everyone. Thank you for joining us. I hope that your families and institutions are doing well managing the virus and all the challenges that come with it. And speaking of the virus, as we sit here at the end of April, it’s hard not to think back to where we were at the end of January on our last quarterly call and consider just how much the world has changed in 3 short months. We have learned a lot, confirmed a lot that we already believed about our team, our company, and our industry during this time. The way in which our team has responded to these unprecedented times is nothing short of remarkable. They are resilient, creative, and driven. Our frontline field team embraced the essential and life-sustaining roles, and they never missed a beat. They keep producing and flowing the natural gas that our society and economy relies on in times like these. Similarly, our corporate team transitioned seamlessly to remote work and continues to provide top-notch support to the operations team. I am tremendously proud of how we have taken our game to another level and answered the call on behalf of our fellow citizens during this time. I want to take just a few minutes at the outset to thank our team and also say a word of thanks to all the other essential employees and businesses out there, who are on the frontlines doing their best to keep us all safe and healthy through the crisis. So, thank you. Now, I am going to refer to the slide deck. I will start with Slide 4 in the deck that we posted this morning. Slide 4 highlights important points that much of the additional items we are going to discuss will flow from. Those points on Slide 4 are simple, but they are crucial. CNX is focused on optimizing long-term NAV per share as the single biggest financial tool we have at our disposal. To do that, we aim to generate free cash flow across our companies on a consolidated basis and we allocate that cash flow that we generate in the right places at the right times. We focus on NAV per share, generate free cash flow, and allocate that cash flow appropriately to ensure our owners are positioned to succeed. This morning, we are providing a multi-year 7-year plan that demonstrates CNX and CNX Midstream are going to generate free cash flow year-in and year-out. Slide 5 is another important piece of the puzzle because it shows that the CNX approach is not just positive, it is a functioning business model supported by an extensive dataset of accomplishments or actions backing it up. CNX has been proactive and has executed strategic transactions where we streamlined our business lines, divesting what was non-core and investing in what was core. We have been programmatically hedging for years and that has paid off. Since Day 1, we were wary of committing to long-term take-or-pay contracts that could hamper our cash flows and balance sheet. We significantly reduced our overhead spending before it became a necessity. We were the first in-basin to adopt technology like electric frac fleets. We have been focused on being a low-cost producer for years. We recognized the strategic importance of retaining control of our midstream assets. Lastly, we have been reducing debt and de-leveraging for some time now. Slide 5 indicates just how active Q1 and early Q2 have been in keeping our approach in action. There are many items on Slide 5 for Q1 and Q2 that Don and Chad are going to discuss shortly. But I want to mention a couple now. First, Slide 7 shows that CNX was free cash flow positive to the tune of $129 million in Q1 and we anticipate that is a prelude for great things to come in the next few years. What drove the free cash flow for Q1 were numerous factors, many of which I just mentioned, manifesting our approach in action. Another key accomplishment in the quarter was our ability to tap capital markets at very attractive rates, as evidenced on Slide 8 with the Cardinal States gathering project financing, where we raised $175 million at a 6.5% interest rate. We spoke about project financing in our prior earnings call, and this deal was secured despite a really challenging overall environment. It showcases the depth of our asset base and the strong position it occupies in the competitive commodity business that we operate within. Q1 also provided us a chance to demonstrate our capital allocation of free cash flow abilities summarized on Slide 9, where we retired almost $80 million in 2022 notes at a significant bargain discount to par. This showcases how powerful free cash flow can be in down cycles or chaotic times when short-term market pricing and market valuations disconnect from intrinsic value. Before I turn the call over to Don and Chad, I wanted to highlight two items. The first is on Slide 5, specifically looking at the three items listed at the bottom half. We are rolling out a 7-year business plan today, showcasing our company's power and approach in action. The key result from this plan is consolidated free cash flow across both CNX and CNX Midstream. This is essential to how we drive our NAV per share and how we effectively allocate capital. A couple of quick notes on the 7-year look before the team elaborates. First, both CNX and CNX Midstream are substantial free cash flow generators each year of the 7-year plan. This is indeed true for 2020 where we expect to generate $300 million of free cash flow, for 2021 where we aim for $400 million, and for 2022 and beyond, with an average expectation of $500 million per year, cumulatively generating over $3 billion of free cash flow across the two companies in the next 7 years. Another point is that this plan will substantially de-lever our balance sheet. That is already in progress, and it will continue through 2021 and onward. This plan has a very manageable activity phase requiring about 25 TILs and $300 million in consolidated CapEx each year to achieve. Importantly, the plan leaves plenty of inventory in our Southwest PA Marcellus and leaves virtually untouched our Central Pennsylvania Utica inventory. So, the core inventory is going to be extensive at the end of the 7-year plan. Lastly, this plan is grounded in the reality of the forward strip regarding natural gas pricing. If gas prices rally in the interim, we have the ability to throttle up if and when we choose. These highlights of our 7-year plan will be discussed in much more detail in a few minutes, and the slide deck contains that information.

Chad Griffith, Executive Vice President and Chief Operating Officer

Okay. Thanks, Nick. I am going to start on the 2020 plan update section. Slide 11 highlights that following the end of the first quarter, we completed our spring re-determination of the revolving credit facility at $1.9 million, with bank commitments at the same level. The reduction from the previous $2.1 billion commitment was driven by the Cardinal States project financing and the Q1 hedge monetization of $55 million that Nick discussed during his remarks. The RBL was favorably predetermined at this level despite lower bank price decks, maintaining plenty of liquidity for the company. As we worked through the final days of the re-determination, the oil and gas space was simultaneously hit by generational shocks: first, OPEC and Russia initiated a price war, flooding the market with oil, then secondly, COVID-19 emerged as a global pandemic. I will provide some additional detail as to how we are adjusting our day-to-day business due to these major events. First, we took the health and safety of our workers seriously, being one of the first businesses in the region to send our office staff to work from home. We developed a response protocol aligned with CDC recommendations to ensure our field employees could continue performing their central roles while minimizing contagion risk, working closely with our service providers to ensure broad adoption of similar protocols. We will continue to monitor the situation and recommendations closely, and hopefully soon, we can all begin working our way back to normal. As always, we are keeping a very close eye on the commodity markets. The flood of oil into the market and the sudden collapse in demand for many types of refined fuels has put tremendous pressure on oil prices. Rig activity and frac crews in the oil patch are rapidly declining, which will also lead to a decline in associated gas, which is clearly positive for natural gas prices. We have seen considerable strength returning to prices for the upcoming winter and into 2021. However, the biggest question for us is how much oil will be shut in as we navigate through this crisis. If oil and associated gas continue to flow during the summer, we expect gas prices to remain low but to rally strongly in the winter as existing wells decline and are not replaced due to much lower rig activity. Conversely, if oil storage is full and oil producers are compelled to shut it down, associated gas would disappear from the system, leading to stronger gas prices over the next few months, only to come under pressure again when these oil wells are reactivated. Regardless of how it plays out, we have plans to maximize our cash flow and NAV. Slide 12 illustrates one extreme of our plan. Ordinarily, we would turn a well on as soon as it is ready to flow. The typical volatility in gas prices or the spread between summer and winter is generally not enough to justify the wait. However, the current dynamics are so extreme, and the price curve is so steep that with certain wells, we anticipate generating more cash flow and increasing present value by timing our near-term production to flow more during the much higher winter prices in 2021. Wet production with the current pricing of NGLs and condensate, alongside higher operating costs due to processing, are prime candidates for this strategy. This approach could also apply to any brand-new shale well, given the front-loaded nature of their production profiles. We believe that CNX’s ability to implement this approach is unique among its peer group. Slide 13 illustrates the range of potential outcomes as we continuously assess the changing market. If we shape our production towards winter in 2021, we expect 2020 production to be lower, which is reflected in the low end of our guidance range. The low case assumes delaying live production from 3 new pads and pushing back production from our wet gas Shirley-Pennsboro field until late fall. Conversely, if summer prices improve significantly, we retain full flexibility to ramp production back into 2020, as indicated in the high end of our production guidance range. However, even in that high case, we expect some partially delayed production from our wet production areas for 2 to 3 months as we navigate the worst of NGL and condensate market conditions. Slide 14 highlights some of the impacts of the oil situation on NGLs. Oil-related issues have also depressed prices for NGLs and condensate. While we are optimistic that this will resolve quickly, storage overhang and demand recovery remain significant uncertainties. Therefore, we have adopted a conservative approach in our guidance, assuming rock-bottom prices for the remainder of summer with only modest recovery into Q4. It is important to note that CNX is less impacted by these current dynamics because we have a very low percentage of wet production and the ability to blend a portion of that wet production. Overall, we estimate around 5% of our 2020 production revenue will come from wet gas. Slide 16 provides more details on our updated 2020 guidance. As already discussed, we are optimizing our production profile in 2020 and expect to fluctuate within an updated range as commodity markets evolve over the year. We are also slightly reducing our capital budget, primarily due to improved service costs. CNX Midstream announced a reduction to the distribution this morning, resulting in a $50 million reduction in our standalone EBITDAX for the year. Despite a decrease in EBITDAX, we expect free cash flow to increase by $50 million. I will wrap up my remarks on Slide 17. Our midstream company, CNX Midstream Partners, is a strategic and valuable asset for the CNX enterprise. The company has completed a massive build-out in the Southwest PA operating regions for CNX's future development. Now that this build-out is complete, the ongoing capital intensity for the company will be significantly lower, maintaining stable free cash flow from their fixed fee commercial agreements. CNXM follows a similar philosophy to CNX and is focused on strong capital allocation and maintaining a solid balance sheet. As I mentioned this morning, they announced a reduction to their distribution, which will free up an additional $30 million in cash each quarter, further strengthening their best-in-class balance sheet and financial position moving forward. With that, I will hand it over to Don.

Don Rush, Executive Vice President and Chief Financial Officer

Thanks, Chad and good morning, everyone. I would like to start by providing an update on our near-term maturity management plan. As you heard from Nick and Chad earlier, and as you can see on Slide 19, we have made significant progress in just one quarter. In Q1 alone, we generated $300 million to allocate towards the 2022 bonds, and we expect to generate another $200 million in 2020, effectively reducing our near-term maturities by over $500 million within this calendar year. As mentioned previously, we have already bought back approximately 10% of our outstanding ‘22 bonds this year. Slide 20 illustrates how our E&P net debt position will change by year-end 2020. As you can see, the remaining $350 million of near-term maturities can easily be managed using free cash flow that is expected to be generated by CNX, protected by our hedge book prior to their maturity date. Looking forward to 2020, our liquidity remains robust, and our next bond maturity isn’t until 2027 once the 2022 bonds are behind us. Those factors, combined with our expected consolidated free cash flow generation capability, put the company in a strong position with an ironclad balance sheet and significant free cash flow allocation options moving forward. Slide 21 demonstrates that our E&P debt and E&P leverage ratios are improving in 2020, and we anticipate both will continue to improve materially with cash flow generated from the business as we progress, utilizing the current NYMEX gas strip. This is a unique position to be in within the E&P sector. Slide 22 highlights that the debt markets are beginning to acknowledge our balance sheet strength. As you can see, our 2022 bonds are trading quite well, indicating that the market anticipates we can easily address them. Starting on Slide 24, I will discuss our 7-year outlook and the excitement surrounding our go-forward business plan. It’s important to note that this plan is robust as it is based on forward gas prices as they exist today and on CapEx costs that we are currently achieving, anchoring the numbers in reality and leaving ample potential for upside as we progress. Before delving into the numbers, I want to break down the rationale behind the 7-year plan into two pieces, as seen on Slide 24. We've previously stated that our hedge book not only protects us from downturns but also acts as a bridge, providing us the ability to reposition the business for a lower-for-longer commodity strip. This historical strategy has been very effective; the $700 million of consolidated free cash flow generated across 2020 and 2021, backed by our hedge book, coupled with our cost structure, previous infrastructure investments, project financing, midstream control, and our team's expertise, have set us up to thrive in the near term and produce significant free cash flow in years 2022 and beyond in the current lower-than-$2.50 gas strip. None of our peers can make that claim; we are truly one of a kind in that respect. While Chad has already laid out our projections for 2020, I want to emphasize that 2021 is shaping up exceptionally well. The strategic moves we are making in 2020 are enhancing our prospects. There is considerable optimism surrounding 2021 gas prices, and I assure you that if this turns out to be a reality, we can easily increase our volumes to 600 Bcfe that year and generate more than the projected $400 million of consolidated free cash flow. Unique to us, if 2021 gas prices do not rise, we maintain the flexibility to have a conservative production profile and still generate the $400 million of free cash flow we have outlined while preparing for any price movements in 2022. Now that the business has matured into our current production profile, we will always have the capacity to generate significant free cash flow regardless of a rising or falling gas price environment. This kind of optionality will greatly benefit us in the future. Looking ahead to 2022 and beyond, our business story becomes straightforward. As shown on Slides 26 and 27, our capital intensity and cost structure decrease; we don’t carry FTE or large fixed cost obligations to grow into. We are not burdened by large debt obligations nor expiring acres of inventory issues dictating our development pace. Effectively, we will systematically harvest our core areas, typically at a rate of around 25 wells per year, while producing significant free cash flow under the strip as evidenced by our average of $500 million a year with this plan. I will reiterate that these projections are based on the current forward gas prices. If gas prices climb back towards the $2.75 to $3 range, the free cash flow figures will increase even more. We are confident that over the long term, $3 gas prices make more sense than the current $2.40 gas prices. Most companies in the E&P sector struggle to create business models that yield free cash flow neutrality at the current strip. Cash flow neutrality is not a viable business strategy, it’s often smoke and mirrors, which has left debt, equity, and private equity markets wary of our industry due to having been burned too many times in the past. Our objective is to break even, refinance debt, and continue to sustain the business, not merely survive. If E&P companies are compelled to use their own generated cash to fund their operational needs, prices will necessarily rise to accommodate that demand. In conclusion, I want to expand on some points Nick made earlier today. CNX’s go-forward business plan is unique and quite challenging to replicate. Our long and steady journey to reach our current position has been deliberate and counter to industry trends. We are proud of our achievements and our methodology. However, we’re not done yet; the best is yet to come. While our peers strive to survive in a $2.50 NYMEX gas price environment, CNX planned for this circumstance and is now built to excel in it. This strength is derived from attributes outlined on Slide 30. Simply put, to be successful, one requires high NRI Tier 1 acres, a best-in-class cost structure, a solid balance sheet, and a nimble business model that can adapt to changing commodity prices. You must have well-conceived and capitalized infrastructure in place, control your own midstream destiny, ensure substantial revenue predictability, and have a forward-thinking and proactive team at every level—qualities that CNX possesses. These characteristics enable us to maintain a strong foundation capable of generating substantial free cash flow even in the lower points of the commodity cycle. We expect that while we currently look favorable at the existing strip, we will appear even more attractive in a higher gas price environment, allowing for greater free cash flow generation and the capability to accelerate development and production when the timing is right. Our extensive inventory of Tier 1 Southwest PA Marcellus acreage along with our phenomenal CPA Utica acreage will enable us to capture any upside for the long term. These attributes underpin our 7-year plan, which we believe is the only sustainable strategy for being a successful E&P company in the long run. All of this has been built through years of hard work, ensuring that we remain the best positioned leader within this sector for years to come. I am especially excited about a future where capital markets remain selective and where the private equity model for energy investment dwindles, a landscape where our peers can only spend money that their businesses generate—a scenario in which CNX will undoubtedly excel. Slide 27 translates our annual free cash flow projections for 2021 into a free cash flow yield. As demonstrated, it is by far the best free cash flow yield among our Appalachian peers, and the best free cash flow yield in the mid-cap E&P space, period. Remember, the 2021 cash flow yield illustrated is safeguarded by our best-in-class hedge book. Looking forward to 2022 and beyond, our free cash flow yield climbs even higher into the mid-20% range at our current share price. In summary, when you combine our free cash flow yield with our robust balance sheet, it presents an exceptional investment opportunity across any industry and especially relative to our peers. CNX’s guidance is firmly based off the current NYMEX gas strip. The takeaway box on Slide 38 encapsulates it perfectly: CNX is distinctly the best combination of a downside-protected company with significant upside potential. From a relative investment perspective, you would be hard-pressed to find a better opportunity in any sector right now. With that, I’ll turn it back over to Tyler.

Tyler Lewis, Vice President of Investor Relations

Great. Operator, could you please open the line for Q&A at this time?

Operator, Operator

Our first question today will come from Welles Fitzpatrick of SunTrust. Please go ahead with your question.

Welles Fitzpatrick, Analyst

Hey, good morning and thanks for the—lots of aggressively worded prepared remarks. It’s a good guide. It’s a good multiyear guide. On Page 25, you guys discuss accelerating production; is that more dependent on gas prices or the opportunity costs like bond prices or other items getting less attractive?

Don Rush, Executive Vice President and Chief Financial Officer

Yes. This is Don. I appreciate it, Welles. I think it’s a combination of both. As you roll forward, you would assume that bond yields and those sorts of things would improve if gas prices improve. So right now, we are considering whether we would dispatch incremental crews to accelerate some production. So that’s within our control to do. As Chad laid out, predicting the future is challenging and the volatility in either direction is quite substantial. So as we sit here today, we are in a wait-and-see mode. We possess the capacity to ramp up or down depending on how the summer shapes out. By September or October, we will likely have a clearer understanding of the winter outlook for 2021. If it leans toward a bullish scenario, we will have an excellent opportunity to capitalize on that. Conversely, if it turns out to be unfavorable, we can still ensure significant free cash flow and prolong our steady state.

Welles Fitzpatrick, Analyst

Okay. And then regarding the production profile you mentioned on Slide 13 and the potential to choke back some wells in Shirley-Pennsboro, am I correct in assuming that if there are any midstream or processing penalties related to that, those would be minimal?

Chad Griffith, Executive Vice President and Chief Operating Officer

There are some well commitments and volume commitments in that area that are factored into the guidance numbers that we provided. We are trying to work with those service providers to identify solutions beneficial to both parties, but the volume commitments in the Shirley-Pennsboro area are minimal.

Don Rush, Executive Vice President and Chief Financial Officer

If you refer to the appendix where we detail some operating expenses, there is a slight uptick in that, as Chad mentioned, it impacts the overall economics of these decisions. Still, considering the shorter-term free cash flow perspective, it remains a logical decision to defer some production. If conditions change, we can adjust accordingly, but for now it makes financial sense given the existing forward numbers, particularly in terms of managing our cash flow.

Sameer Panjwani, Analyst

Good morning, guys. Considering the longer terms, when we think about the cumulative free cash flow, the cumulative expected free cash flow from 2022 through 2026 is projected to exceed the total outstanding debt after the 2022 maturity. Should we expect CNX to transition to a no-debt business model, or is there a change in your thoughts on leverage?

Don Rush, Executive Vice President and Chief Financial Officer

This is Don. I will address that question in parts. Historically, our hedge book has not only provided protection but also facilitated a business repositioning over the last few years. The criteria for a healthy balance sheet in the E&P space have shifted. By leveraging our expected cash flow for 2020 and 2021, we can achieve a more optimal capital structure for the future. When looking at 2022 and beyond, we will strategically position the business and allocate free cash flow to the best opportunities available at that time. Historically, our approach has involved using free cash flow to pay down debt, expand production, develop infrastructure, and return capital to shareholders. Therefore, while we acknowledge the evolving standards for healthy balance sheets, we remain committed to strategically deploying our cash flow as market conditions dictate.

Sameer Panjwani, Analyst

That's very helpful. Did you quantify what your leverage profile would look like considering you've acknowledged a shift in benchmarks?

Don Rush, Executive Vice President and Chief Financial Officer

Yes. We discussed it on Slide 21, where we project our leverage ratio to decrease to 2.1 by the end of the year and subsequently drop below that level in 2021 due to ample cash flow generated from the business. If, as you mentioned, the threshold for leverage ratios adjusts to 1x or 1.5x, we could position ourselves accordingly by 2022. The convergence of different capital markets may yield favorable gas prices and influence our approach at that point. It is challenging to determine our exact position now, but we will remain responsive to market metrics and variables as we approach the latter part of 2021 and into 2022.

Sameer Panjwani, Analyst

Understood. Regarding your long-term maintenance program, how should we gauge the base decline trajectory over time along with non-drilling and completion spending rates?

Don Rush, Executive Vice President and Chief Financial Officer

We outlined some details on Slide 27 regarding non-drilling and completion spending. We have frequently discussed the substantial upfront investments in our water systems and infrastructure systems, which will ultimately enhance our cost and capital efficiency moving forward. We're beginning to see that reflected in our results now, especially after providing greater clarity and transparency going forward. With a longer maintenance production profile, your base decline rates should decrease over time. We speculated that base declines in the mid-30s will gradually fall into the 20s and then further head into the teens as the duration of the plans progress.

Jane Trotsenko, Analyst

Good morning and thank you for taking my questions. My first inquiry is on the second quarter. Can you provide insight into how this quarter looks, particularly regarding production? I noticed Slide 13, and I was curious about CapEx and completions?

Chad Griffith, Executive Vice President and Chief Operating Officer

Certainly. In Q2, we currently have no wells shut in for economic reasons. That ongoing assessment is key, as we look at commodity prices daily to optimize our approach. We do, however, anticipate curtailing some of our wet production, likely beginning in May and continuing for a minimum of 2 to 3 months. This strategy is to defer production to later in the year to capitalize on significantly higher prices anticipated then, generating more cash flow and increasing the present value of those wells. Should gas prices continue to steepen, we may consider deferring additional production throughout the year.

Don Rush, Executive Vice President and Chief Financial Officer

In terms of capital spending, it should remain consistent as the year progresses, meaning the Q1 number will serve as a benchmark. The difference in our guidance for Q2 and Q4 will align fairly closely to Q1 levels.

Jane Trotsenko, Analyst

It seems like you will not be completing any wells in Q2, correct?

Chad Griffith, Executive Vice President and Chief Operating Officer

Correct, we will maintain a frac crew throughout the period. Our consistency is apparent, and we also retain the option to bring on a spot crew should gas prices rally, enabling us to complete several wells quickly and benefit from those strong price conditions.

Don Rush, Executive Vice President and Chief Financial Officer

The decision-making concerning production management is highly dependent on efficiency post-completion and the water flow-back cycle. Saving some output for later can enhance cash flow sustainability in the interim. We are not altering our capital program significantly but maintaining our operational integrity while optimizing production flow.

Jane Trotsenko, Analyst

Understood. About the medium term, could you share the well mix expectations, say 25% Utica and 75% Marcellus wells? Additionally, what is the envisioned development strategy for West Virginia?

Chad Griffith, Executive Vice President and Chief Operating Officer

The comments regarding 2020 project a total of 34 wells planned, out of which 12 are Utica wells. Beyond 2020, determining the right mix of wet versus dry gas is still being evaluated, with a focus on maximizing return rates. Our D&C investment will be driven by where we expect the best developments.

Don Rush, Executive Vice President and Chief Financial Officer

As we previously mentioned, the Southwest PA Utica will necessitate funding; the one pad that we executed this year is nearly complete, with one additional planned for next year. The remaining work will primarily focus on the Southwest PA Marcellus, with some of the Shirley-Penns volumes shifted to the latter half of the year. We maintain flexibility to adapt as market conditions dictate; however, the majority of development efforts will be concentrated in the Southwest PA Marcellus, emphasizing a dry gas focus.

Jane Trotsenko, Analyst

Regarding Slide 25, what Henry Hub price would trigger CNX to accelerate production by 10% in 2022?

Don Rush, Executive Vice President and Chief Financial Officer

We’re not providing an exact price point. The forward strip indicates potential hedging opportunities that could influence our decisions. There are myriad factors, including the behavior of NGLs and potential capital allocation opportunities around that time. While prevailing gas prices certainly impact our decision-making, various elements guide our operational strategy continuously.

Holly Stewart, Analyst

Good morning, gentlemen. I’d like to follow up on what Jane asked. Could you quantify the 2 to 3 months of projected production shut-ins?

Chad Griffith, Executive Vice President and Chief Operating Officer

Are you referring to production volumes specifically?

Holly Stewart, Analyst

Yes, volumes.

Chad Griffith, Executive Vice President and Chief Operating Officer

The actual volumes will depend on the behavior of NGLs and condensate prices, particularly in the Shirley-Pennsboro area, which is predominantly wet. We’re assessing the situation as NGL prices fluctuate due to accumulated storage at refineries coupled with reduced refinery activity, complicating outflows and amplifying price volatility. Fortunately for CNX, wet production constitutes a minor segment of our overall portfolio. This challenging environment primarily impacts that particular area.

Don Rush, Executive Vice President and Chief Financial Officer

You can observe on Slide 13 how that projected shut-in appears, the estimated change in production is around 300 a day for May.

Holly Stewart, Analyst

That helps, Don. As for NGL or condensate prices, would you return production based on that or are we dealing with shut-ins?

Don Rush, Executive Vice President and Chief Financial Officer

Our approach has been careful. If market conditions remain unfavorable, production may remain deferred, but we will ensure transparency about the evolution of our business. While a couple of months can seem insignificant in the grander scheme, they play a vital role in cash flow optimization and valuing the business in the long run.

Holly Stewart, Analyst

Perfect. Lastly, regarding 2021, your 46 TILs for 2020 is still on track, and the long-term plan indicates 25 TILs. Can you elaborate on this for 2021? Will it still consist of a 1.5 rig program and a 1 crew program?

Don Rush, Executive Vice President and Chief Financial Officer

Yes. The details are somewhat variable based on market conditions. If we aim for the higher end of the 600 Bcfe we discussed, we will have a rig program akin to what we executed in 2020. If prices remain muted, we may target a slightly reduced number closer to 30 wells. The influencing factor is market dynamics, and we are prepared for either scenario.

Chad Griffith, Executive Vice President and Chief Operating Officer

That’s right. We will closely monitor commodity markets and gas prices. We retain some contingent drilling capacity should conditions warrant increases, which allows us to respond quickly as required.

Don Rush, Executive Vice President and Chief Financial Officer

The decisions regarding production management hinge on effective execution post-completion. As we are currently set, we aim to maintain stability while optimizing delivery in a way that matches market dynamics, enabling strong performance at both the present and future.

Holly Stewart, Analyst

That’s very helpful. Thank you so much.

Operator, Operator

This will conclude our question-and-answer session. The conference has now concluded. Thank you all very much for attending today’s presentation. You may now disconnect.