CNX Resources Corp (NYSE: NYSE:CNX) held its Third Quarter 2024 earnings call with VP of Investor Relations Tyler Lewis, CEO Nick DeIuliis, and CFO Alan Shepard leading the session. The executives discussed the company's future capital expenditures, new technology initiatives, and the potential impact of regulatory changes on their Coal Mine Methane (CMM) and AutoSep projects. They also touched upon share buyback strategies and the promising production potential in the deep Utica play, with a specific focus on market pricing conditions.
Key Takeaways
- Capital expenditure for 2025 is under review, awaiting more stable gas price indicators.
- CNX Resources retains 11 deferred drilled but uncompleted wells (DUCs), providing flexibility in production strategy.
- Clarity on 45V and 45Q tax incentives is expected by the end of Q4 2024, which could significantly affect CMM and hydrogen production projects.
- Share buybacks are considered independently of stock price fluctuations.
- Drilling costs in the Utica play have decreased by 31% since 2023, and the company is targeting further cost reductions to $1,800 per foot after 2024.
- The company is open to mergers and acquisitions (M&A) but has no specific plans currently.
- Final regulatory guidance is necessary to determine the potential for increasing CMM volumes beyond the current 17-18 Bcf annually.
Company Outlook
- CNX Resources is preparing to adjust its production volumes and capital expenditures in the next quarter in response to gas market volatility.
- The company is optimistic about the production potential in the deep Utica play, with significant cost reductions achieved and more expected post-2024.
Bearish Highlights
- The uncertainty of gas prices poses a challenge for setting a clear capital expenditure target for the upcoming year.
- Pending regulatory guidance on 45V and 45Q tax incentives creates uncertainty for the company’s technology initiatives and expansion plans.
Bullish Highlights
- The potential for tax credits under 45Q and 45V could provide substantial benefits to CNX Resources’ projects.
- A 10,000-foot Utica well can produce approximately 20 Bcf of gas seven times faster than a Southwest PM Marcellus well, indicating high productivity and return rates.
Misses
- Specific details regarding the expansion of CMM and associated costs are on hold until finalized regulations are in place.
- The company has not committed to any mergers and acquisitions, leaving its strategic growth plans somewhat ambiguous.
Q&A Highlights
- Executives addressed questions about the treatment of CMM under the proposed 45Q and 45V changes, emphasizing the need for final guidance.
- The call ended with an invitation for further questions, indicating that more information would be shared in the next quarter.
In summary, CNX Resources is navigating a complex landscape of fluctuating gas prices and pending regulatory changes. The company is leveraging its deferred wells for strategic flexibility and is closely monitoring the potential for tax incentives that could impact its technology projects and production strategies. With cost reductions in the Utica play and a cautious approach to capital allocation, CNX Resources is positioning itself to adapt to the evolving energy market.
InvestingPro Insights
CNX Resources Corp (NYSE: CNX) has demonstrated strong financial performance and market positioning, as evidenced by recent InvestingPro data and tips. The company's stock has shown remarkable momentum, with a 19.04% price return over the past month and an impressive 63.95% return over the last year. This aligns with the company's optimistic outlook on its deep Utica play and cost reduction strategies discussed in the earnings call.
InvestingPro Tips highlight that CNX is trading near its 52-week high, which corroborates the 99.47% proximity to its 52-week high price reported in the data. This strong performance is further supported by the company's profitability, with InvestingPro data showing a healthy P/E ratio of 10.7 and an operating income margin of 60.36% for the last twelve months as of Q2 2024.
Despite the challenges posed by gas price volatility and pending regulatory decisions, CNX appears to be in a solid financial position. The company's market capitalization stands at $5.64 billion, reflecting investor confidence in its strategic direction. Additionally, an InvestingPro Tip notes that four analysts have revised their earnings upwards for the upcoming period, suggesting positive expectations for the company's near-term performance.
It's worth noting that CNX's revenue growth has seen a significant decline of 53.07% in the last twelve months, which aligns with the company's cautious approach to capital expenditure and production volumes discussed in the earnings call. However, the quarterly revenue growth of 3.79% indicates a potential stabilization or turnaround in progress.
For investors seeking a more comprehensive analysis, InvestingPro offers 14 additional tips for CNX, providing a deeper understanding of the company's financial health and market position.
Full transcript – CNX Resources Corp (CNX) Q3 2024:
Operator: Hello and welcome to the CNX Resources' Third Quarter 2024 Q&A Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call to Tyler Lewis, Vice President of Investor Relations. Please go ahead.
Tyler Lewis: Thank you and good morning to everybody. Welcome to CNX's third Q&A conference call. Today, we will be answering questions related to our third quarter results. This morning we posted to our Investor Relations website an updated slide presentation and detailed third quarter earnings release data such as quarterly E&P data, financial statements and non-GAAP reconciliations which can be found in a document titled 3Q 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 in 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 Instructions] Today's first question comes from Bert Donnes with Truist.
Bert Donnes: Hey, good morning team. Just wanted to start off on the full year ‘25 capital disclosure. It looks like it maybe got removed from your press release and your presentation. Is that $550 million no longer accurate? Maybe there's some moving parts on your turn and line schedule. So is that moving up or down or is inflation impacting that? Any color there would be helpful.
Nick DeIuliis: Yes, great question. So I think the way to think about 2025 is next quarter, we're going to provide everyone with kind of the full production volumes we're going to target the associated CapEx with that. That'll be entirely a function of what we see developing the pricing for next year. We do still retain the 11 DUCs that we had deferred earlier in the year. So we have pretty significant flexibility in terms of what production profile we want to hit. But again, that all comes back to where we see pricing headed for next year. So the removal disclosure is really just about, we're close to next quarter and provide the exact numbers then.
Bert Donnes: Okay. Maybe not as a disclosure, but is the efficiency still similar or is it just a matter of moving parts? Just want to make sure that was the part of the question.
Nick DeIuliis: Yes, the efficiency is similar to better. It's just a matter of moving parts and setting the exact number we want to target as sort of a function of gas prices.
Bert Donnes: Perfect, makes sense. And then the second part, I know it's certainly way too early for new tech, exact numbers on ‘25 and beyond. There’re some moving parts on the CMM volumes and pricing and AutoSep looks like it might've slid to the right just directionally. Do you have any views on 2025 and 2026 versus the $75 million? Am I just directionally upwards or downwards?
Nick DeIuliis: Yes, again, we'll provide the detailed view on that next quarter. As of right now, we're just trying to defer to what's in the commentary on this.
Bert Donnes: Got you, and was the AutoSep pushed to the right on the, I think the prior disclosure just implied you were going to do some third party work in the second half but just want to make sure that was either the case still or no longer the case.
Nick DeIuliis: Yes, that's still a possibility. The focus right now on AutoSep is working with our JV partner to develop some additional units in that fleet. Right now, the existing unit we have is fully deployed on our internal operations, so there's potential for some third party work this year. But the focus of that right now is building on that fleet. We're seeing really good kind of interest from customers, and it's still in real early stages. So that's why we'll, again, we'll talk about an exporter where we see the full year guidance for that business, but I think it's still looking good there.
Operator: The next question comes from Zach Parham with JPMorgan.
Zach Parham: Thanks for taking my questions. First, I just wanted to ask on the new tech business. You mentioned in the prepared remarks, you're still waiting on some regulatory clarity for 45V and potentially 45Q. Could you talk a little bit more about the opportunity set if you do get some regulatory there? How much more Coal Mine Methane could you potentially capture and what's — what would be the associated CapEx spent with that capture incremental volumes?
Nick DeIuliis: Yes, thanks for the question, Zach and the short answer is we don't know and we can't say right now because we don't know enough about how the market's going to develop. We have in our commentary we have laid out there's four different pathways that they're pursuing. And the first one being the ATS program where the states are looking to kind of produce their cod emissions and look at alternate energy resources to be deployed for electric generation, right and then we got the 45V pathway for hydrogen production generation and now we got this 45Q opportunity for CO2 sequestration greenhouse gas emission reduction opportunity and then we're also pursuing private sector transactions. So that's the opportunity set in and while the ATS pathways is defined and the kind of sets the stage for what our opportunity to capture right now is and what our cash flow guidance they are providing right now. And the other pathways while they're very excited about the like what they can be but they're still taking form and these markets start to kind of crystallize then we'll have — will be in a better position to provide our view on how we could play a role in serving these markets. But right now it's just too premature like until these pathways for markets become more definitive.
Zach Parham: Thanks for that. My follow-up, I just wanted to ask on the buyback. The stock has moved quite a bit higher. It's higher than where y'all fought back in the past. I'm just curious how you're thinking about the buyback going forward with the stock now in the mid-30s. Do you still consider it a good value to be buying back stock? At some point do you consider pivoting to a dividend, just curious how you're thinking about cash return from here in general?
Nick DeIuliis: Yes. So we continue to see a very attractive opportunity over the long term for CNX and we look out in the future prospects of the business, but I wouldn't read into that in terms of short-term allocation decisions. It's sort of counterproductive for us to provide near-term guidance on those activities. What I will say is I'll point everybody back to fundamentally our clinical capital allocation process is the same regardless of what the share price is. The share price is just an input into that process in order to continue to follow that process and the results that it kind of spits out. The other thing I'd note there is we have pretty significant flexibility just in terms of where our balance sheet is and with our hedge book. All capital allocation opportunities are open to us.
Operator: The next question comes from Leo Mariani with ROTH Capital.
Leo Mariani: Hi. I just wanted to follow up a little bit more here on the guidance. It looks like you guys removed five turn-in lines from the schedule in 2024. Just curious if maybe those kind of slid to the right, or are you pairing back some activity? Obviously, gas prices have not been fantastic here over the last couple months, so just trying to get a sense if you're being a little more cautious on overall activity on the drilling side or perhaps maybe those just slid a tiny bit into early 2025 on the turn-in lines.
Nick DeIuliis: Yes, it's more of the latter. Those were chills that were kind of scheduled for that into late December and kind of slipped across the year end line. So it's kind of artificial if you think about it from that perspective. So there's no change in the activities from what we indicated back in the spring where we deferred those 11 DUCs.
Leo Mariani: Okay, that's helpful. And then just wanted to follow up on the 45Q, 45V potential tax credits here. Could you just give us kind of a sense of roughly what type of federal tax credit is kind of being contemplated under 45Q? I guess from a CO2 perspective, it's around $85 per ton. Is that something similar that you think could occur for methane? And then under the 45V rules, is there potentially some kind of multiple, big multiple of that number in terms of the tax credit? Just trying to get a sense of what you think is being kind of contemplated right now and any high level timeframe as to when you think a decision could be made under those potential bills?
Nick DeIuliis: Yes, thanks for the question. On the 45Q side of things, I think the numbers that's been floated out there in the draft lane, which is around $60 per ton. But at the same time, there's a lot of moving parts to understand like what's going to qualify and what's not. So I think it's too early to say which volumes are going to qualify for that. I think we'll have to wait until the final language is out. On the V side of things, it talks about tax incentives for producing hydrogen. I think the most that you can get is like $3 per kilogram. And how that translates into what incentive it would be for Coal Mine Methane, I think it's going to have to go through a very rigorous exercise of understanding, like again specifics of what the guidance is going to entail. So it's very difficult to say at this point in time what that will be. So stay tuned once the guidance is out. I think we'll be able to provide more color. And as for the timing, I think I can say at least on the 45V side of things, what we've heard from the Treasury is that it's expected before the end of the year in Q4.
Operator: The next question comes from Nitin Kumar with Mizuho.
Nitin Kumar: Hi. Good morning, guys, and thanks for taking my question. You've given us some color on the 45Q and 45V, but I'll try something maybe a little different. On the 45Q, the Treasury has been a little bit prescriptive in terms of what equipment qualifies. They have a date of, I think, 2018 and a 12-year sunset. Could you walk us through your current operations in CMM? What is the sort of average life of that equipment today, and is this being replenished or sort of renewed every few years?
Nick DeIuliis: I would say that again it's too early to say until unless the language for the 45Q draft language as it pertains to methane capture is finalized, it will just be like a hypothesizing what that means. Sol like once the language is cleared, I think we'll be able to provide better guidance.
Nitin Kumar: Okay. Fair enough. And then I want to just maybe circle back to Zach's question. I understand you can't talk about plans to increase CMM, but do you have a sense of what is the F&D cost today of, forget about 45V or 45Q, what is the cost of maybe implementing new systems on mines, and what is the opportunity set for CNX? I think you do about 17 to 18 Bcf a year. How much can you grow that?
Nick DeIuliis: Yes, I think I mean it kind of goes back to the same question, Nitin, where like in the absence of guidance in terms of what's going to qualify, what's not, it'll be too premature to talk about what qualifies, how much qualifies. So I would say stay tuned until the better information is available for us so we can provide better guidance on the matter.
Operator: The next question is from Michael Scialla with Stephens.
Michael Scialla: Good morning, everybody. Yes, I wanted to ask, on the deep Utica play, obviously some very high rates there. Anything, if the gas prices improve next year, is there anything that would, if you wanted to ramp that play, that would constrain that any infrastructure issues? Or is it still too early on the cost side to know if you really want to push the pedal down there if the market looks like it needs more gas?
Nick DeIuliis: I mean, it's maybe the first question first. We're extremely happy with the performance on the cost side and just the overall execution of [inaudible] team. In terms of ramping volumes, those wells are super prolific in early times, so you certainly have that optionality. We don't have any kind of near-term major constraints, I think, of what you're hitting at. It's just really the function of pricing. And in any ramp-up situation, as we've seen in the past, you do need some lead time to do it, but there's nothing I'd point to right now that would prevent us if we were to keep that sort of market price signal.
Michael Scialla: Great. Could you — is it too early to say on the cost side, or can you give me some days, which I guess would imply is $100,000 per day a good estimate on the drilling side, and then we can assume like one-third, two-thirds on the completion side?
Alan Shepard: I think I can give you, Michael, the cost side. So far, like we put in our guidance here is we've gotten a drilling down to like under 50 days. That's a 23% improvement over ‘23. And on the current set of wells that we've just completed, we've improved even more that. So I am very pleased with the progress we have made, but not anywhere close to satisfying on where we should be. So we will keep continuing making progress on both cost and drilling performance. Just to kind of give you an example on drilling performance is, are all in cost like we've been able to drive them down like almost 31% from 2023. And drilling has been the major driver for that cost coming down, and drilling costs have come down almost 38% from ‘23, which was like $1,200 per foot, down to like about $750 per foot. And we are making progress continuously as we speak.
Michael Scialla: Great. Is it fair to say it competes with your Marcellus right now, or is it still kind of a little bit higher cost play?
Nick DeIuliis: It's actually, it's absolutely competed, it's in the mix and the cap allocation process for sure.
Alan Shepard: And just to kind of give you an idea of like these are highly prolific wells. For example, 10,000 foot Utica well compared to a Southwest PM Marcellus well will make about 20 Bcf seven times faster than the Southwest PM well, right? So these are highly prolific, highly, high rate of return wells. So we are really excited about the play.
Operator: The next question is from Jacob Roberts with TPH.
Jacob Roberts: Good morning. Maybe for Ravi, stepping away from the financial outlook on the 45Q and 45V changes. If we think about the 18V of Coal Mine Methane today, should we be viewing those potential changes under 45Q and 45V as mutually exclusive opportunities or is there a way to benefit from both?
Ravi Srivastava: I mean I hate to kind of repeat the same thing. Until the guidance is out, I don’t know, we don't know whether that 18 Bcf and how that's going to get that treatment. So once we have better idea, once we have better information, we'll be able to provide more color on how that 18 Bcf gets treated under the two programs.
Jacob Roberts: Fair enough. As a follow-up, just given the equity appreciation, has that changed any conversations around the M&A market and what opportunities might be out there? And then more specifically, do you think there are opportunities that exist that would align more with the new technology segment?
Nick DeIuliis: Yes, I would just refer back to the earlier commentary. I talked about our capital allocation process and one of the things that gets considered throughout that process is M&A, both oil and gas and potentially other things as you alluded to, but nothing specific common on at this point.
Operator: The next question comes from Kevin McCurdy with Pickering Energy Partners.
Kevin McCurdy: Hey, good morning, guys. Can I ask for a little clarification on the well cost on the Utica side? I think you mentioned earlier that costs were down 31% from 2023. Where does that put you on $1 per foot for this latest round of wells?
Nick DeIuliis: Yes, so I think the number, Kevin, I have in mind is called $1,800 per foot is where we're targeting after ‘24.
Kevin McCurdy: Got you. Okay. That's helpful. And then I appreciate all the updates on the new technology side, and I know that you're kind of limited on what you can say. But can you just kind of confirm for us on the CMM volumes that this year, I think you're at 17 to 18 Bcf, that's not capped at that rate, right? You could potentially increase that over the next few years if there was an incentive to do so?
Nick DeIuliis: Yes. It's all going to be a function of the incentive program we talk about. We enjoy the ability to grow the portfolio, but until we see final regulations, we can't analyze how and which projects would come online over time.
Kevin McCurdy: Any thoughts of the total capacity that you could grow to?
Nick DeIuliis: Again, without the details of the program, you can't make that estimate.
Operator: Thank you. This concludes our question and answer session. I would now like to turn the call back over to Tyler Lewis for any closing remarks.
Tyler Lewis: Great. Thank you again for joining us this morning and please feel free to reach out if anyone has additional questions. Otherwise, we'll look forward to speaking with everyone again next quarter. Thank you.
Operator: The conference is now concluded. Thank you for your participation. You may now disconnect your lines.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
Comments (0)