Good day, and welcome to the CNX Resources Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]After today’s presentation there will be opportunity to ask questions. And please note that this event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everybody. Welcome to CNX's fourth quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Alan Shepard, our Chief Financial Officer; and Navneet Behl, our Chief Operating Officer. Today, we will be discussing our fourth quarter results. This morning, we posted an updated slide presentation to our website. Also detailed fourth 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 4Q 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 up for Q&A where Nav will participate as well. With that, let me turn the call over to you, Nick.

Good morning, everybody. 2022, it marked the best year ever for CNX as a public company with respect to free cash flow generation. The fourth quarter marked 12 consecutive quarters of significant free cash flow generation, which helped produce the annual record of $707 million. We utilized the free cash flow to reinvest into the asset base. We used it to reduce debt, and we used it to acquire our discounted shares Cumulatively, you add all this up, we've retired nearly 25% of the outstanding shares of the company since the inception of the share repurchase program in 2020. And to put this in a perspective in terms of the total impact, the cumulative result of acquiring nearly quarter of our company in this short period of time, it's been matched or vested by only four other companies in the S&P 500 and only by 22 companies in the S&P 1500. So when you consider the steep discounts in price that we enjoyed when acquiring our shares relative to the low-risk, long-term free cash flow yield and the intrinsic per share value, CNX may very well be one of one in the S&P 1500 universe of public companies. We're basically doing two things at the same -- material share count reduction and at the same time, at a substantial discounted price. And by the way, while we typically reference share repurchases since the midstream acquisition, is that's our most recent share count high, we've been consistently repurchasing shares since 2017. And we're potentially just getting started because if we continue to see substantially undervalued shares, we're going to continue to opportunistically acquire ourselves to grow per share value for owners. Stepping back for a moment to assess the results of the past few years. It's clear that at the halfway…

Thanks, Nick, and good morning to everyone. As Nick mentioned, this quarter represents the 12th consecutive quarter of free cash flow generation through the execution of our sustainable business model that is grounded in clinical capital allocation to optimize long-term free cash flow per share growth. In the fourth quarter, we generated approximately $276 million of free cash flow or $707 million of free cash flow for the year. This brings our 3-year cumulative total free cash flow to close to $1.6 billion or approximately 55% of our current market cap. Let's first turn to the capital allocation side of the business as highlighted on Slide 5. As you can see, we continued our market-leading shareholder return initiatives by purchasing 12.6 million shares in the quarter and another 1.3 million shares after the close of the quarter through January 17. Said differently, we bought back nearly 7% of our total shares outstanding over that time frame. And since we started this program in Q3 of 2020, over the last 9 quarters, we have repurchased approximately 24% 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 long-term free cash flow per share. On the balance sheet side, this quarter, we also reduced adjusted net debt by $57 million during the quarter, bringing our annual total reduction to $107 million or $360 million since we started the program in Q3 2020. More importantly, our robust liquidity position and long debt maturity runway enable us to take advantage of any deepening valuation disconnects that…

Thanks, Alan. Operator, if you can open the line up for questions at this time, please. .

[Operator Instructions] And our first question today will come from Zach Parham with JPMorgan. Please go ahead.

Nick, I know you mentioned that project level returns are robust at current prices and that -- you've got a significant amount of volumes hedged. But just given the pullback in natural gas prices that we've seen recently, would you consider maybe delaying some completions or slowing activity at all? And I guess if not, is there a price level where you might consider slowing down?

Zach, yes. So there's always obviously going to be a price level where we adjust activity set or capital allocation with respect to repurchases, debt, all those different avenues. And the process that remains constant, remains the same. So we're continually running this math that you speak of. And to sort of cut it short with regard to a conclusion, there is a substantial risk-adjusted acceptable rate of return on our 1 frac crew, 1.5 rig activity set sort of under any foreseeable gas price moving forward. We continue to run it. The reason we continue to run the math is to always be thinking about how that might impact the NAV per share of the company with respect to other allocation decisions like share repurchases. But whether it's share repurchases or this activity set that we've laid out with that 1.5 and 1 sort of activity set, we're good to go. .

Just one follow-up. I know a lot of things have changed since you initially rolled out the 7-year plan several years ago. But in that plan, you expected operating costs to kind of tick lower over time. Maybe could you just update us or give us a little detail on how you expect those cash costs to trend in 2023 and going forward?

Yes. So I think we still have the expectation that the cash cost will trend lower. I think what you saw kind of in the '21, '22 time frame was a higher mix of wet as we brought on some of the additional Shirley-Penn pads, to have those higher process and costs associated with that. And you also saw the impact of kind of higher severance taxes as pricing has moved up. I think moving forward, what you'll see is some of our kind of third-party areas, particularly the legacy Ohio production and the legacy West Virginia production in Shirley-Penn as that leads off and we replace that with our wholly owned kind of gathered infrastructure up in the SWAP CPA, you'll see those prices come down, or average costs come down.

Can you quantify what level of decline you expect?

Yes. I think rashly, we're always targeting to get back to kind of that $1 range.

And our next question will come from Leo Mariani with MKM. Please go ahead.

I was hoping you could speak a little bit more on some of the operational slippage that you kind of discussed on the fourth quarter. You mentioned there was the issue with the abandoned Utica well. But just wanted to kind of get a sense. I mean, it certainly seems like with the -- as you're seeing lower production in 4Q, something you expect a little bit lower production in the first quarter of '23. Were there any other just like major supply chain issues? Or do you guys have any like labor issues on the frac side or certainly hearing from other operators? And if you a piece of equipment that breaks or something, it's just really hard to kind of get these days in a rapid fashion, just given the tight supply chain market. So I just wanted to get a little bit more kind of color around what's been kind of happening with the ops here of late.

Yes. So Leo, basically, the way to think about it is we have a 1 frac crew program, right? So any kind of delay pushes all the future pads to the right a little bit. And obviously, the biggest signal contributor last year was abandoned Utica wellbore. And then in the Q4, we had weather and a couple of other issues. So it more -- it's more on our side as opposed to anything you see. I mean, certainly, we experienced the same sort of supply chain issues everyone else does in the basin. But it's more just things slipping to the right on that end. We're constantly evaluating opportunities to potentially get back on that cadence. You run that math, we just thought it made more sense to let kind of the production dip a little bit in Q1 and just focus on getting back to our 1.6 Bcfe run rate.

And then just can you speak a little bit to the CapEx range in '23 at $575 million to $675 million. I guess that's just eyeballing the math kind of 15% to 18% range or whatever in terms of the numbers here. You talked about how you kind of assumed inflation continued in that range. So maybe just help us out a little bit with how to get to the lower end versus the higher end?

Yes. So I think the way you want to think about it as kind of the 2 big buckets that we split out this time. So on the D&C side, basically that range is reflective of the potential for inflation to kind of soft in the back half of the year. I think you'll probably see elevated prices for the first half. And then as prices have come down pretty rapidly, you should see some softening in the supply chain cost in the second part of the year. Then on the non-D&C side, if you think about those projects, a lot of pipe construction and midstream construction. And most of that stuff is bid kind of currently as it's being done. So you need a wider range there because you're not sure what environment you could be bidding into in the next kind of 5 or 6 months. So just with kind of the uncertainty in the world, we went with wider ranges this time. And as Nick mentioned, as those could tighten up through the year, we'll provide that color to you all.

And our next question will come from Neal Dingmann with Truist Securities. Please go ahead.

My first question is on OFS inflation and specific. It sounded like you all suggested a bit that your day rates might be a bit higher than potentially some other rigs. I'm just wondering, do you all believe I would call it, your higher-end rigs and fracs are worth these incremental costs. And my second just on that, just quickly. So a brief period year-to-date. I'm just wondering if you could talk about what you're seeing on OFS inflation year-to-date.

Yes. So our focus on OFS is always locking in consistent crews that are not recent spot crews that have been called together. We want long-termism in our supply chain that kind of underpins our business model. So to get that, you might have to pay a little extra here there. When a supplier comes, you ask it for a price increase because they could potentially go somewhere else. You're willing to pay that just for all the kind of other externalities that creates to have that consistency. And that's our focus. We're not trying to pinch pennies and chase spot crews to save a buck here or there. We want long-term is in the supply chain -

Great. And then OFS year-to-date, anything?

Like I said, I think you're still seeing levels where we're at the second part of 2022. And right now, the range we're showing here reflects that those kind of persist throughout the year. But again, as prices come down, OFS will soften as it always does in a lower price environment.

And then, Nick, if I could ask one more. I'm just curious, looking at your sort of financial operational strategies. I'm just wondering you've laid this out, you've stuck to this. And I'm just wondering. Do you all go back -- would you, I guess, what I'm wondering, would you all consider altering these plans to potentially more growth, dividends or I don't even know, maybe even something strategic with your midstream given the sizable position you have there? Again, why as this is just looking at -- I know 1 year doesn't make history, but for the past year, your stocks up 6% despite the share returns versus your 3 closest peers up somewhere around 30% to 60%. So I'm just wondering when you kind of look back if you would consider any of these alternatives.

It's a good question, Neal, because it really speaks to the broader strategy and philosophy that we apply within the company. So first thing I'll say, like any option when it comes to sort of realizing the NAV per share of the company and the share price, we're obviously wide open to considering it and running the math. But just sort of walking through the overall strategy and approach. The first chapter, which wasn't all that long ago was really trying to set us up to execute the strategy, to your point, that we've been employing in the past couple of years. And that was no small task. That was a massive lift. We had a figure out how to reintegrate midstream. We had to figure out how to spin coal. We had to figure out how to refi our balance sheet and build it into what we wanted it to be. We had to delever, right? So all those things were accomplished and it really put us in a position to be that positive free cash flow generator and then be able to allocate the capital. Now when we started on sort of the capital allocation side, once we had all that other stuff accomplished, we didn't hide anything and told Mr. Market exactly what we intended to do. We're very clear about that. Our Chairman of the Board, he wrote a book on it literally the outsiders and if you want to get a read into how we think about our decision making, just give that book a read. It's almost just a perfect road map how we think on behalf of owners. And I'll say it's not rocket science, but it is absolutely different for the space that we're in. And it's also, I think, incredibly effective…

And our next question will come from John Abbott with Bank of America. Please go ahead.

First question is just more on your ability to how the opportunities that you see to potentially add to your inventory in this sort of pricing environment? Could you discuss the potential bolt-on opportunities that your acquisition opportunities you see in Appalachia at this point in time?

Yes. I think the kind of the bolt-on opportunities are fairly reduced at this point. There's not a lot of private equity operators left. We always compare any potential M&A opportunity to the opportunity of doing M&A in ourselves through our buybacks. So it's a pretty high hurdle when you come at it from that perspective. So there's currently nothing kind of on our radar from that perspective, given where our share prices are trading.

Appreciate. And also, I understand the -- that you continue to focus more on SWAPs. What hasn't been the appeal in terms of collars from your perspective -- from a hedging perspective?

Yes. I mean when we look at it, we just don't think it's a free lunch to have the collar. I mean we get the SKU and everything, but we like having the certainty of the fixed kind of SWAP number. And particularly in this environment where you've seen us be able to layer into some pretty attractive hedges, we're going to stick with that strategy.

I understand because I'm just -- what I'm trying to understand is, so when you hedge I mean sometimes it's I guess it could be at higher prices, but sometimes it can be a lower prices and you have a buyback program, so if the stock goes higher, you're using hedges that may have been like hedge at alower price. So I'm just sort of trying to understand that value proposition. Why not go with the collars?

Yes. Again, we evaluate all sorts of hedging strategies, and we always come back to the SWAP is the most effective. There's nothing that we can point to with a collar that says that's going to be any more effective than just a straight SWAP, right? There's just -- there's no implied free launch by going the collar over the SWAP. And then when we think about buybacks to your question, we think the stock is materially disconnected from its intrinsic value. So we're more than happy to kind of pay the prices we're at today.

And our next question will come from Jeoffrey Lambujon with Tudor, Pickering, Holt. Please go ahead.

First one was just on free cash allocation to repurchases in 2023 and going forward. I know you just hit on this in a lot of detail on how aggressive you all been and taking advantage of market conditions. For the buyback, which, I guess, most recently in Q4 was maybe 75% to 80% of free cash flow for the quarter. So the share price where it is today and just given your comments on not really seeing much that competes in terms of M&A on the radar relative to share price. I guess we can pencil in more of the same, but is there anything else you mindful of as we think about that?

No. We just remind folks that it's a continuous process. Capital allocation is a constant discussion. If any of the variables change, we would change our strategy so.

Okay. Great. And then as my follow-up, I just wanted to dig a little deeper on the non-weather-related operational issues you mentioned in Q4, specifically aside from the Utica wellbore. Just wanted to get a sense like what exactly contributed there and to what magnitude and if those are in the rear-view at this point in time.

Yes. So I think certainly, as I mentioned in my comments, we believe those are in the rear-view Outside of the weather, nothing individually material. There's still a lot of smaller delays that added up to the frac line pushing to the right.

And our next question will come from Noel Parks with Tuohy Brothers. Please go ahead.

Please excuse my background noise, I'm bit on the move here. I apologize if you touched on this already, but with the free cash flow calculation, there was a pretty big swing in accounts receivable in the quarter that contributed to the free cash flow. I just -- it just seems larger than I had seen before. Is there any particular on that?

Yes. So one of the things we've been working on from a liquidity and risk management perspective is matching up the physical payment timing on the derivatives with the physical cash receipts. So a lot of that started to take hold in Q4. So some of the notes that we saw that were asking about that difference between the realized loss and the cash out the door on the derivatives. That's what caused that. From our perspective, it's a great opportunity to eliminate that kind of 50-day lag between when we have to pay those. And when we get the physical sales ourselves. And so that's kind of a great derisker particularly, it was more important when the gas prices were trading around $10, but it's still important from a liquidity management and risk management perspective. So you see that unwind in the upcoming quarters as we effectively done is slid cash from period to period.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Tyler Lewis for any closing remarks.

Thank you. Thank you, everyone, for joining this morning. Please feel free to reach out to us if you might have any additional questions. Otherwise, we will 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 your lines at this time.