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

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

Thanks, Tyler. Good morning, everybody. Thanks for joining us today. Before I get into the specifics of my comments, I think it’s important to first highlight 3 themes that are core to the CNX investment thesis. And we think of these 3 in sequence, so I’ll put them in order. So first, we built and now we manage a low-risk $700 million per year of free cash flow annuity that works year after year. And this helps to largely insulate us from the macro events that are out of our control, it creates confidence and conviction in our business and its sustainable and works in any business environment. After that, second, we then apply clinical math. And when the math dictates it, we allocate a significant portion of the free cash flow to reduce our share count at highly accretive rates of return, which is going to continue to deliver unprecedented free cash flow per share growth. That’s a tremendous opportunity for any value investor. And then the third theme, the last one is in addition to our organic free cash flow annuity and our growing free cash flow per share, we’re creating demonstrating and deploying new technologies, which will create incremental free cash flow and free cash flow per share beyond that base business and plan. The new technology opportunities, they are here now. They offer a meaningful avenue for incremental per share value for our shareholders, and they also are the next chapter of Appalachia’s Energy legacy. So, we’re beyond excited by the opportunities in front of us. They’re impressive. They’re outside the box, and they are unique to CNX. So, with that bigger picture in mind, let’s start talking some specifics. And I want to start with some policy discussion and then move to what’s going on…

Thanks, Nick, and good morning, everyone. This quarter represents our 10th consecutive quarter of significant free cash flow generation through our sustainable business model that is grounded in consistent operational execution and clinical capital allocation to optimize free cash flow per share growth. In the second quarter, we generated $62 million in free cash flow, which includes the effect of working capital changes due to the timing of our financial hedge settlements versus our physical sales receipts. As we have said previously, this temporary timing issue simply moves cash between quarters, sometimes positive and sometimes negative. It does not affect the profitability of the pads or the business. On the capital allocation side, as highlighted on Slide 5, we continue to take advantage of current equity market conditions by repurchasing 3.2 million shares in the quarter and another 2.2 million shares after the close of the quarter through July ‘19. Said differently, we bought back another 3% of our total outstanding shares. And over the last 7 quarters, we have repurchased approximately 16% of the outstanding shares of the company. We continue to see this as a remarkable low-risk capital allocation opportunity moving forward. And although we have not given an explicit capital allocation framework, if you extrapolate these levels of buybacks moving forward, you can see that we will continue to dramatically reduce our denominator and thereby meaningfully grow our free cash flow per share. Ultimately, we believe this will drive long-term share price outperformance and reward our long-term earners. More on that in a minute. On the balance sheet side, we repurchased $14 million of 2026 convertible notes, which represents our nearest-term debt maturity. As a reminder, these notes can be settled at maturity with cash, common shares or a combination of the 2 at the company’s discretion.…

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

[Operator Instructions] Our first question comes from Zac Parham of JPMorgan.

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

Yes. This is Chad. I mean I think what we’re seeing is that inflation will certainly persist into next year. But as far as giving a direction or a magnitude, I think it’s a little bit early to tell. We are fairly well positioned with our activity set we’ve got great contracts or [factory] contracts. But certainly, steel and diesel continue to play a role. So, we’re all going to keep an eye on the pricing of those materials, just like everyone else. And I think just to wrap that up, the business is positioned. We are -- we do sell a commodity, right? We sell natural gas. The business is subject to those commodity fluctuations in the steel and diesel and other inputs in our business. And so, inflation has really been both helping and hurting right? And so net on net, I think we’re ahead. And I think we would expect that to continue into next year. At the end of the day, the business plan is still intact. It continues to be a $700 million a year free cash flow annuity. And we’re going to continue to execute on our free cash flow per share growth.

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

Yes, I’d say we obviously -- we haven’t provided an explicit framework, as I mentioned. I mean the graph is designed to be illustrative to show what you could achieve while still achieving the kind of debt levels we seek to reach.

Our next question comes from Leo Mariani of MKM Partners.

I want to see if we get a little bit more color around the CapEx increase here in 2022. You mentioned kind of running the rig, I guess, for really the entire second half of 2022. And it seemed like there was some reference in the prepared comments to kind of de-risking the schedule for ‘23, but I also heard a comment about maybe positioning for some growth. Just trying to get a sense if there’s a little shift in thinking here where perhaps it made sense to grow volumes maybe early next year or something, just given the strength in the curve. And I guess when you talk about de-risk the schedule, is there maybe just concern about having equipment and services up the field on time? Just any color would be great.

Leo, I’ll take a shot at kicking this off and then turn it over to Chad for some more details because I think sort of big picture, your question speaks to sort of how we approach the business. That’s a good one. What we saw here really was a way -- we go back to those 3 core themes, right, that annuity, that $700 million-ish a year annuity, doing everything we can with respect to investing into the going concern to maintain and ensure continuity to de-risk the continuity of the business. being able to increase the efficiencies, debottlenecking, right, building capacity or optionality in it. So, a large part of that capital expenditure increase, to your point, that we decided to invest in was basically aiming towards those things, either de-risking or building optionality capacity, if and so we choose down the road. We’re not changing our activity set. We’ve got no intention to do that per se with respect to the roughly 1 rig, one frac crew plan, but philosophically, that’s where we see the start of the investment decisions that we’ve made. Chad some -- maybe some details on it.

Yes, sure. Thanks, Nick. So as Nick said, the focus is on de-risking the business, adding capacity, increasing efficiency, developing some of the innovation that we’ve got in the works or debottlenecking, right? And so, all the incremental capital is going to one of those things. And we illustrated 3 specific examples of incremental capital. We’re keeping the rig around for the back half of the year, the second rig around for the back half of the year, bringing in those 3 additional TILs and making the investment into electrifying the rig. All 3 of those things go to either de-risking or adding optionality. There’s not -- I mean, that’s what we ultimately decide to do next year, I think we’ll have to provide some additional color later on as we get closer to that. But obviously, just like we manage the business every day, we keep an eye on what commodity prices are doing. We keep an eye on what service prices are doing, what service costs are doing and then we modify the accordion of activity as appropriate.

The only thing I’ll add there is, the nod to growth opportunities is also now to the new technologies ventures that we’ve been discussing. We’re making investment status position us for that growth.

Got it. Okay. That’s helpful. I mean, I guess, just in terms of this sort of new ventures kind of new technology business, you clearly announced several initiatives here in 2022. Presumably, you expect that to be, I’m assuming kind of a growing business over the next couple of years? Any kind of rough estimate where is like, hey, this could be 10% of CapEx going forward? I don’t know how you guys think about that kind of capital allocation framework between that business and just the traditional bread and butter oil and gas?

Yes, this is Ravi. I mean, first, to say that we’re excited about these opportunities would be an understatement. Like there’s a ton of opportunity available for us to pursue like Nick mentioned in his comments, there is so much we can do to -- so many projects we can pursue to move the world to a lower greenhouse gas emission solution and while providing the quality of life and a reliable energy source for this region for the country. So we’re very super excited about that, and we have the technology, the assets, we’ve got the financial [indiscernible] to do all this. And what you’re starting to see is that these are not kind of sky, vision of the future type concepts. We’re starting to see some tangible results outcomes coming out of it, as you saw with our announcement with NewLife with the TIT and the Dynamis. So, we’re very excited about all that. And through all this, we have provided some data points for what the new tech value universe would look like for us. So, we still need to connect those dots for you guys. And so stay tuned, we’ll provide some more guidance, some more information on that front in the coming quarters. But like one thing I want to emphasize is, what we do with new tech investments and venture opportunities, it is going to be additive to the $700 million per free cash flow program for us, and it’s going to be going to continue to deploy a clinical math on how we deploy that additional free cash flow and what it does to the free cash flow growth. So, super excited about the opportunities. Stay tuned for more details on how some discuss going to pan out. And...

So maybe I’ll add one thing, Leo, just to wrap back under capital question. The initial stages of this are leveraging existing assets we have that are unique to us. So the initial capital outlay is marginal. We’re going to first seek to kind of bring out all the value from there. And then as we move forward, we’ll obviously signal to the market when we’re making different types of investments.

Okay. That’s helpful. And I just wanted to jump over to the buyback real quick. I couldn’t help to notice that I guess it was down quite a bit here this quarter. That was about $151 million last quarter and closer to $59 million this quarter. I just wanted to kind of get a sense, is that more just related to kind of some of the working capital changes this quarter where there maybe wasn’t as much tangible free cash flow. Presumably, just in your prepared comments, you guys talked about being excited about buying back quite a bit of stock here. So, should we think of maybe the much lower amount is more just a one-off related to kind of a temporary just cash flow change in working capital?

This is Nick again. Another good question. Going back to prior quarters, we didn’t hit it this time explicitly in the comments because we’re already a bit chatty with the comments this quarter did, but that’s a sustainable business model that we referenced. Obviously, things go away and really what we do within quarters is we have a couple of desires we want to stay within. One of which is to pay down some level of debt, sometimes it might be a nominal amount like it was this quarter because of the buyback opportunities. And then the other thing is to stay within some free cash flow bumpers for the quarter and obviously for the year. So -- and you put on top of that, right, a very volatile world where gas price is changing like they are and impacting equity markets, et cetera. It’s going to be a target-rich environment, we think, with regard to buybacks for the remainder of the year and going into ‘23. So, when you look at that in total, yes, it basically goes to what was the free cash flow looking like for the quarter because of things like settlements and working capital adjustments. And then from there, what’s a good allocation of that bucket across debt and share buybacks, which there we can follow the math. And it’s the same type of sort of process that we’ll use for Q3 for the rest of the year and then for ‘23 and beyond. And that’s the approach that basically is summarized at least conceptually or illustratively on Slide 8 that Alan was referencing.

Our next question comes from Neal Dingmann of Truist.

If I could just maybe tack on the last question, I know it’s been asked a lot today just around capital allocation. Do you all consider -- you obviously buyback sound to be like one of the primary focuses right now, are there -- you talked about either bolt-ons, M&As out there. Do you all look at sort of what the returns would be. And just is it simply buybacks versus if you would go in buying the assets in the market, you compare those? And does that play the key role in deciding what to do with that capital?

Yes. This is Don. So yes, like we’ve mentioned a bunch of different times. I mean, evaluating M&A, we are going to be selective and picky. I mean, we do look at this from an internal kind of risk-adjusted rate of return standpoint -- and as we’ve said before, these somewhere out to bid, it has to compete with our other capital allocation opportunities. And right now, at this current time, the best risk-adjusted meaning for way to grow our free cash flow per share is buying ourselves. So that’s our version of M&A at the time. And as Nick and Alan have already laid out, the business model we’re running is unique in the E&P space. It really focuses on de-risking and growing our annual free cash flow and allocating that to reduce the share count to grow free cash flow per share very materially. And then the things that Ravi kind of mentioned on working on are just added it on top of that. So, we’re always in the know of what’s going on in the M&A space, but with the low-risk opportunity to grow free cash flow per share, so visibly in front of us of buying ourselves, it’s hard to compete with that.

Well said, Don. And then my follow-up is on operating efficiency. Specifically, you all continue to do well on the cost side. Everybody has a bit of inflation. I’m just wondering, given the sort of lower rig count that you all are running today versus in the past, are you still as efficient as if you were to have a larger scale? I’m just wondering when it comes to pad development and all those sorts of things, maybe just discuss, if you will, given the rig count you have today, do you still see -- and are you able to experience the efficiencies that you would otherwise with a larger plan?

Yes. No, it’s a good question. I’d say it actually helps us be efficient because having that line of sight and that predictable activity set allows the team to be hyper focused on the targets that are coming up. right? And so we know where we’re going, we know when we’ll be there. We know what we need to execute and the team could be hyper focused really on a pad-by-pad basis instead of diluting your key athletes across multiple pads or multiple activity sets. We can be hyper-focused on that given set of activity and make sure we’re executing at the highest level possible.

[Operator Instructions] Our next question comes from Michael Scialla from Stifel.

I wanted to follow up on the new technology ventures. Alan, you said the incremental capital there is minimal given you’re leveraging a lot of existing assets. I want to see how the returns compete relative to, say, your upstream and midstream business? Is it more like a midstream type of return that you’re anticipating from these? And maybe when do you see or anticipate seeing meaningful cash flow from these new ventures?

Yes, I’ll go ahead and start that and then Alan can kind of leverage on top of it. So obviously, like we talked about on the M&A discussion, these returns are sort of fundable. They compete across the portfolio and a lot of the great things about like technology, ability to enhance margins for kind of minimal sort of spend upfront. So, the world’s great world volatile. There’s a lot of changes coming across over the next decade. And really, what we’re trying to do is position CNX in this region in this basin to be very, very successful in leading the way in this sustainable energy evolution. So as the world desires lower and lower carbon intensive or greenhouse gas intensive products and goods and services and energy sources, we have ways to deliver that. And as that premium kind of valuation starts slowing and being more recognized throughout the ecosystem, we’re setting ourselves up well to materially participate in this revolution. So I wouldn’t look at it as just that either we’re kind of rate of returns. These things are symbiotic and work intangible together. So, lots of exciting stuff coming down the road here and very excited to participate in it very meaningfully from both the company standpoint and the region standpoint.

Okay. Any sense on -- are these pretty long-dated projects? Or could you see cash flow in the near time from any of these?

Yes. I’d just say we provided the 3 buckets, and I think it varies amongst the buckets, right? Some of them might be showing up next year as others might have a longer lead time. And obviously, once we have the clarity, we’ll roll that out to the market.

Okay. And then I just wanted to ask on hedging. It looks like you continue to add some hedges in 2023 and beyond. I think in the past, you’ve done those with swaps. Any change in your policy at all given the outlook for global natural gas markets.

No, we’re going to continue to layer in programmatically and methodically layer in higher dollar hedges as the strip continues to bump up. So -- and we’re still sticking with swaps. And from our perspective, this is one of the key tools that’s allowed us to be kind of the first mover and a leader in shareholder returns, right? This hedge book gives us the comfort to do things like eliminate 16% of the outstanding shares over the course of 10 quarters. So, we’re going to stick with that.

Very good. And then just one last one, if I could. Nick, last quarter, you talked a bit about -- and you did this quarter as well about policy and particularly needing more pipeline infrastructure in Appalachia. Anything you’re seeing at all federal, state, local level that gives you more or less encouragement that could happen?

There’s obviously so much going on. We just got news last night, right, with what’s going on in D.C. But obviously, the details are very cloudy at this point. Same stories across regions and states, et cetera. But I do think one of the common themes over the course of ‘22 so far is that there is a growing realization and maybe it’s a realization that some don’t want to see or hear, but nevertheless, it’s occurring, that there must be a crucial role, a pivotal role for natural gas in the overall sort of domestic as well as global energy mix. There’s just nothing else that’s going to be able to fill the void on the demand, whether it’s exajoules or kilowatt hours or transportation miles. And that’s not a hit against any other piece of the energy portfolio it’s just the reality. So, when you look at what is going on with the desire to evolve away from oil and coal and then you couple that with what renewables are capable of with respect to scaling up over a 3-, 5-, 10-year period, there’s a huge sort of gap that needs to be plugged. The EU figured that out when Russia turned off the gas pass with Ukraine. And I think we’re starting to figure that out domestically here when you look at summer and winter periods and what’s going on with things like grid or how we’re going to charge all the EVs, et cetera, with the transition. So, I think that acceptance is a big driver ultimately into whether or not infrastructure is allowed to be built by the private sector with regard to things like pipelines. So, if anything, sitting here today, even though the world has gotten even more volatile and a little bit crazier than last quarter, I actually am a little bit more in the bullish camp that infrastructure that’s needed and ready and willing to be built with the private sector side of the economy will actually get done to some extent for natural gas.

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

My first question is on tax. I mean last quarter, you gave that guidance on when you would start potentially paying meaningful cash taxes. Now sort of looking at the time, I guess, would be about cumulative cash flow about $3.5 billion based off your initial plan. When it comes to long-term cash tax rate are you closer to being a 15% cash tax long term? Or are you closer to 20% after you reach that?

Right. We’re probably closer to 20% when you add better one stayed.

All right. That’s very helpful. And then my other question is on the turn in lines during the quarter. It looks like you turned to sales 3 wells in Marcellus well in CPA South. And typically, a lot of times I sort of think of the deep Utica there. Were these more just -- what was the thought process of turning on those, what particular wells down in that area?

John, thanks for the question. So, this is Chad. So those 3 CPM Marcellus wells are actually TD. We’ve drilled them. We’ve not yet turned them in line. But the thought is -- the reason we did that is we were on pad already drilling CPA Utica wells. We had the rig there. We have the inventory. We’ve seen what offset operators’ results have been lately. And looking at all those inputs, it was an accretive rate of return project that added to the plan. So, it was sort of a no-brainer for us to go ahead and drill those while we were there and then include them in the go-forward plan. We believe it’s going to be a good contributor to the $700 million a year free cash flow annuity and continue to support our plan to buy back shares and increase our free cash flow per share.

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

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

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