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Text: We have in the room today, Nick DeIuliis, our President and Chief Executive Officer; Don Rush, our Chief Financial Officer; Chad Griffith, our Chief Operating Officer; and Yemi Akinkugbe, our Chief Excellence Officer.
Today, we will be discussing our first quarter results.
And then we will open the call up for Q&A.
Then we're going to go over to Don Rush, our Chief Financial Officer, to talk about the financials, and then Yemi will wrap things up to talk about some thoughts on ESG that we've got.
But starting now on Slide two.
There's one main theme that I think is important to highlight, and the theme there is steady execution.
First quarter was another example of steady execution, and it's illustrated by us generating $101 million in free cash flow.
This is the fifth consecutive quarter that the company generated significant free cash flow.
Similar to last quarter, we used some of that free cash flow to pay down debt.
That helped build further liquidity.
And we use some of the free cash flow to buy back our shares in the open market at attractive pricing.
So for the quarter, we repurchased 1.5 million shares at an average price of $12.26 per share at a total cost of $18 million.
We still have ample capacity of around $240 million under our existing stock repurchase program, which, as a reminder, that's not subject to an expiration date.
Also in the quarter, we upped our free cash flow guidance by $25 million to $450 million.
That's $2.04 per share compared to the previous guidance of $1.93 per share.
Our steady performance drives our confidence in continuing to execute upon our seven year free cash flow plan, and we continue to expect will generate over $3 billion over those seven years.
Again, this is done by steady execution each and every day.
Our long-term plan is largely derisked through our hedging program that supports us a simple operational program that consists of one rig and one frac group.
We've worked hard to get the company to where we are today, and our focus is going to remain on successfully executing that plan.
I want to jump over now to Slide three.
This is a slide that we have shown for the past few quarters now, but I think that it's a really powerful one.
Our competition for investor capital is not so much among just our Appalachian peers, but more so across the broader market.
And as you can see by three of the main financial metrics that we track, CNX streams incredibly well across various metrics and indices.
We believe that these things matter most to generalist investors, along with what has become a much simpler differentiated story.
CNX is a differentiated company due to the structural cost advantage we enjoy compared to our peers, mainly because we own our midstream infrastructure.
And this moat provides us with superior margins that drive significant free cash flow, which, in turn, puts us in a unique position to flexibly allocate capital across the full spectrum of shareholder value creation opportunities.
While our near-term focus is to continue to reduce debt and opportunistically acquire shares, we continually evaluate all our alternatives that we've got.
So last, in that regard, with respect to the often asked about potential M&A activity, our view remains consistent from last time we spoke.
Our two key screening metrics or the ability to deliver long-term free cash flow per share accretion and having good risk-adjusted returns.
The strength of our company affords us the ability to be patient on this front to ensure that we avoid M&A missteps that too often permanently can destroy shareholder value.
With that, now, I'm going to turn things over to Chad.
I'm going to start on Slide four, which highlights some of the key metrics that make CNX an incredibly attractive investment today, particularly relative to our peers.
For us, it begins in the upper right quadrant where we illustrate our peer-leading production cash costs.
While our Q1 result of $0.66 is up roughly $0.05 quarter-over-quarter, we're still more than $0.11 better than our next closest competitor.
It's also worth noting that, that $0.05 increase was driven predominantly by some reworking of our FT book, which allowed us to eliminate some unused FT and exchanges for some FT that is better matched up with our production locations.
As Don will go into more details momentarily, our low production cash costs allow us to generate more operating cash flow per Mcfe at a given gas price relative to our peers.
And this operating margin creates -- this operating margin advantage creates many other advantages for CNX.
First, we'll generate more EBITDA per Mcfe, which means we need less daily production to achieve the same level of EBITDA compared to our peers.
This allows us to maintain that level of EBITDA, but less maintenance drilling, thereby consuming fewer of our acres each year.
The operating margin advantage also enhances each well's return on capital, which means a greater subset of our net acres are in the money.
So fewer well each year from a broader amount of net acres means that we'll be able to sustain this formula for decades to come.
By the way, the lower number of new wells required to maintain our EBITDA means that less of that EBITDA is consumed by maintenance capital expenditures.
That is how we generate, on average, $500 million per year of free cash flow over the next six years at strip pricing.
Wrapping up this slide, you can see that we continue to trade at very attractive free cash flow yield on our equity, while continuing to pay down debt and returning capital to shareholders.
Slide five is another illustration of our cost structure when you look at it on a fully burdened basis.
That means that this cost illustration includes every cash cost that exists in our business.
We expect cost to continue to improve, primarily driven by a reduction in the other expense bucket, which consists primarily of interest coming down and additional unused FT rolling off.
We are expecting around $10 million of unused firm transportation to roll off in 2021, a modest amount next year in 2022 and then another $20 million rolling off across -- through 2023 through 2025.
These are simply contractual agreements that are expiring.
So with these changes, and assuming all future free cash flow goes toward debt repayments, we would expect fully burden cost to decrease to around $0.90 per Mcfe and then lower in years beyond 2021.
Before handing it over to Don, I wanted to spend a couple of minutes on our operations, the gas markets and provide a hedge book update.
During the quarter, we turned in line five Marcellus wells, and we're in the process of drilling out another 13 that will be turned in line within the next two weeks.
Those 18 wells had an average lateral length of just over 13,000 feet and has an average all-in cost of less than $650 per foot per lateral foot.
Also during the quarter, we brought online two Southwest PA Utica wells, the Majorsville 12 wells.
Deep Utica have continued to come down with the all-in capital cost for these two wells averaging $1,420 per lateral foot.
Production from these wells are being managed as part of our blending program, but we're very encouraged by the data we're seeing.
As we've really discussed, we only have four additional SWPA Utica wells in our long-term plan through 2026, but based on what we're seeing so far at Majorsville 12, we're excited about the deep Utica's potential as either a growth driver if gas prices improve or as a continuation of our business plan for years and into the future.
As for our CPA Utica region, as a reminder, we continue to expect about a pad a year through the end of the 2026 plan.
This continues to be an area that we are very excited about.
Shifting to the gas markets, we saw weakening in the near-term NYMEX and weakening to the curve of in-basin markets.
As a gas producer, we're always rooting for stronger prices.
But fortunately, our cost structure and hedge book make higher prices a luxury for CNX, instead of a necessity as it is for many of our peers.
The way we see it, there are four fundamental drivers of gas price that need to be in our favor to actually see higher gas prices.
One, moderate production levels; two, lower storage levels; three, higher weather-related demand; and four, sustained levels of LNG exports.
If all four hit, expect gas prices to surge.
But despite our optimism and others' dire needs, it's becoming less likely each year that all four of those factors line up in favor of strong gas prices.
As an example, just last year, everyone was expecting all four factors to line up in 2021, and the forward curve surge, but a mild winter, lack of strong winter storage draw and growing drilling and completion activity have weighed on 2021 pricing.
The difficulty in having all four factors line up in favor of strong gas prices is why we will continue to focus on being the low-cost producer and protecting our revenue line through our programmatic hedging program.
That's why we do not rely on full commodity cases to make projections or investment decisions.
Insead, our free cash flow projections and investment decisions are based on the forward stroke.
Speaking of our hedging program, during Q1, we added 136 Bcf of NYMEX hedges, 15.5 Bcf of index hedges and 61.3 Bcf of basis hedges.
For 2021, we are now approximately 94% hedged on gas based on the midpoint of our guidance range and after backing out 6% to liquids.
That 94% includes both NYMEX and basis hedges or fully covered volumes, which are hedged at $2.48 per Mcf.
It is a true realized price that we will receive in the year.
We are also now fully hedged on in-basin basis through 2024.
We will continue to programmatically hedge our volumes before we spend capital by locking in significant economics, which are supported by our best-in-class cost advantage.
Q1 was the fifth consecutive quarter of generating significant free cash flow and consistent execution of our plan.
Our confidence in future execution supports a $25 million increase in our 2021 free cash flow guidance and our continued expectation to generate over $3 billion across our long-term plan.
Slide seven is a new slide that highlights our superior conversion of production volumes into free cash flow.
The top chart highlights that CNX is able to convert production volumes into EBITDA more efficiently than our peers as a result of our low-cost structure generating higher margins.
The bottom chart further highlights the superior conversion cycle through a reinvestment rate metric, which is simply capital divided by operating cash flow.
As you can see, CNX has an incredibly low reinvestment rate, which supports our expectation to generate average annual free cash flow of $500 million across our long-term plan.
Our profitability profile allows us to generate an outsized free cash flow per Mcfe of gas and per dollar of capital spending.
Also, this low reinvestment rate demonstrates the company's commitment to generating cash used toward investor-friendly purposes, which include balance sheet enhancement and returning capital to shareholders.
Slide eight highlights our balance sheet strength.
We have no bond maturities due until 2026, so we have a substantial runway ahead of us that provides significant flexibility.
In the quarter, we reduced net debt by approximately $70 million.
And after the close of the quarter, we completed our semiannual bank redetermination process to reaffirm our existing borrowing base.
Lastly, as you can see on the slide, our public debt continues to trade in the 4% to 5% range.
Now let's touch on guidance that is highlighted on Slide nine.
There are a couple of updates on this slide.
The first is the pricing update, which is simply a mark-to-market on what NYMEX and Basis are doing for cal 2021 as of April seven compared to our last update, which was as of January 7, 2021.
We also increased our NGL realization expectations by $5 per barrel as a result of the increase in expected NGL realizations.
As we have already highlighted, we are increasing free cash flow for the year by $25 million.
Lastly, there are a few other guidance related items to highlight that are not captured on this slide that I would like to address in advance of questions.
We expect production volumes to be generally consistent each quarter throughout the rest of the year, with a very slight decrease expected in the second quarter.
As for capital cadence, we expect capital to have a bit more variation.
Specifically, we expect our first half capital to be more than our second half capital, so Q2 should be near Q1 and Q3 and Q4 a bit less.
As we have said previously, quarterly capex cutoffs are difficult to predict since a pad going a bit faster or a bit slower can change the period numbers materially without changing our long-term plan and forecast at all.
I'm Yemi Akinkugbe, the Chief Excellence Officer here at CNX.
A few of you may be wondering what exactly this role entail.
The short answer is I oversee and manage all operational and corporate support function withing the company.
The longer answer is what I want to speak about in more detail today.
We've been focused on the underlying tenets of ESG and its benefit with generation.
This is an effect or a means we only talk about to ponder up to certain interest for short-term end.
Instead, the concept was part of our fabric long before the current management team joined the company, and it will be part of our fabric long after it's gone.
With that backdrop, let's talk for a minute where we have been and where we are heading on this front.
A lot of you when it comes to ESG is simple and can really be summed up in three words: tangible; impactful; local.
We've been the first mover across the board, and I just want to highlight a few of our significant accomplishments over the years.
First, we proactively reduced Scope one and two CO2 emissions over 90% since 2011, something that a few, if any, of any public company had claimed.
Two, we were the early adopters and innovators of commercial-scaled coalbed methane capture in the 1980s.
This resulted in historical mitigation of cumulatively over 700 Bcf of methane emission that would have otherwise been vented into the atmosphere.
Annually, we capture nearly as much methane from this operation than the nation's largest waste management company does from its landfill.
That ingenuity and leadership on a key tenet of ESG is what ultimately birth this company we see today.
Three, we were the first to fully deploy an all-electric frac spread in the Appalachian Basin.
This improved our emission footprint, increased our efficiency and support our best-in-class operational cost performance.
The elimination of diesel fuel in this operation is equivalent to taking 23,000 passenger vehicles off the road for a year.
We recycled 98% of produced fluid in our core operation.
This prevented unnecessary water withdrawal and eliminates the need for disposal.
Our unique pipeline network decreases the need for water trucking, which have the dual benefit of reducing community impact of trucking, while reducing overall air quality emissions.
These achievements are important and impactful, but ESG is not just about proven track record.
To us, it's about what we are doing now and how we'll continue to push the envelope through intangible, impactful and local accomplishments.
Committing to target or goals decades into the future without a concrete path to accomplish them and without accountability for those words, in our opinion, is the epitome of flawed corporate governance.
These are the strategies that have allowed CNX to thrive for over 150 years and will continue to drive our success.
Let me introduce a few of our efforts this year.
We introduced methane-related KPIs into our executive compensation program.
We've committed to make substantial multi-year community investment of $30 million over the next six years to widen the path of the middle class in our local community, while growing the local talent pipeline.
We've redoubled our efforts to spend local and hire locally.
100% of our new hires will be from our area of operation, and we will maintain at least 90% local contract workforce.
We committed 6% of our contract spend to local, diverse and businesses in 2021 and dedicated 40% of the total CNX small business spend to companies within the Tri-State area.
We adopted a task force on climate-related financial disclosure, or TCFD framework and a FASB standard for both our E&P and midstream operation.
In addition, the transparency and the financial sustainability of our business is second to none.
One year into our seven year free cash flow generation plan, we have a low-risk balance sheet driven by the most efficient, lowest cost operation in the basin.
This leads to independence from equity and debt market when pursuing value creation.
Finally, while you will hear more about this in the weeks and months ahead, I want to take the opportunity to announce that CNX is developing an innovative proprietary solution in combination with a few commercial solutions that allows us to significantly minimize from a blowdown and pneumatic devices, which make up about 50% of our emission source.
The blowdown solution under development will also allow us to recirculate methane, which will otherwise be admitted into the atmosphere back into the gathering system.
This is yet another leadership step for a company that continues to lead and deliver tangible impactful ESG performance that is reducing risk and creating sustainable value for our shareholders.
Tangible, impactful, local ESG is our brand of ESG.
We don't follow the herd.
We chart our own course and do what we know is right and impactful over the long term for employees, our communities and our shareholders.

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qtrly average daily production 1,562.5 mmcfe versus 1,476.5 mmcfe.
2021e fcf guidance increased to approximately $450 million.

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