Canada Markets close in 1 hr 21 mins

Edited Transcript of CNX earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q2 2019 CNX Resources Corp Earnings Call

CANONSBURG Aug 4, 2019 (Thomson StreetEvents) -- Edited Transcript of CNX Resources Corp earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Chad A. Griffith

CNX Resources Corporation - COO & VP of Commercial & Marketing

* Donald W. Rush

CNX Resources Corporation - Executive VP & CFO

* Nicholas J. DeIuliis

CNX Resources Corporation - President, CEO & Director

* Timothy C. Dugan

CNX Resources Corporation - EVP

* Tyler Lewis

CNX Resources Corporation - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Holly Meredith Barrett Stewart

Scotia Howard Weil, Research Division - Analyst

* Joseph David Allman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Kevin Moreland MacCurdy

Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst

* Sameer Hyderali Panjwani

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research

* Welles Westfeldt Fitzpatrick

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Yevgeniya E. Trotsenko

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and welcome to the CNX Resources Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Tyler Lewis, CNX Resources Corporation - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everybody. Welcome to CNX's Second Quarter Conference Call. Today, we'll be discussing our second quarter results, and we've posted an updated slide presentation to our website. To remind everyone, CNX consolidates its results, which includes a 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've laid out for you on our press release today as well as in our previous Securities and Exchange Commission filings.

We will begin our call today with prepared marks by Nick, followed by Tim and then Don, and then we will open the call up for Q&A, where Chad will participate as well.

With that, let me turn the call over to you, Nick.

--------------------------------------------------------------------------------

Nicholas J. DeIuliis, CNX Resources Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Good morning, everybody. Tim is going to go into some of the operational details from the quarter in a minute, many of which we're excited about; and Don is going to discuss the financial details as usual, which is going to include our updated 2019 as well as our 2020 guidance.

But before I turn it over to those 2, I'd like to focus a couple brief remark on how CNX is different, and why this is important especially given the challenging commodity price environment that we're all dealing with out there. And I'm going to start on Slide 3 which helps, I think, highlight 3 main drivers of differentiation for CNX relative to the peer group. First one, maybe the most important in some ways is our marketing strategy, which includes our hedge book, and it also includes our minimal firm transportation strategy. FT in some ways, at least, as I look at it, is more debt like than debt itself, so we seriously contemplate any commitments to FT that can have unforeseeable at the time and major negative consequences into the future.

Second big differentiator is our cost structure. And this is, of course, a commodity business. And that cost structure is also supported by our bending strategy, which we believe is going to result in strong cash margins.

And then the last or third differentiator is the asset portfolio, that includes the approximately 100,000 core Southwest PA Marcellus acres, that includes over the 1 million total acres of our footprint, the large stacked-pay inventory, it includes our midstream control, and finally, it also includes a robust water system that's going to benefit us for years to come.

Now these advantages, they've helped us execute a consistent strategy and a philosophy, which is built around generating risk-adjusted returns to grow our NAV per share, while at the same time, we're making sure that we retain a healthy balance sheet.

We follow the math in everything we do. And if you take a look at Slide #4, our 2019 and 2020 program, which we will talk about shortly, they drive several capital-allocation opportunities. We often get the questions on whether we can grow EBITDAX, or whether we can reduce leverage or whether we can reduce share count. For us, however, we don't view these opportunities in isolation. And I think the results speak for themselves. Because of our attention to generate risk-adjusted returns, we've been successful in growing EBITDAX and reducing leverage and in reducing our shares outstanding. And we expect more of the same when we look into the future. And when you're solving for optimizing intrinsic value on a per share basis, this becomes a really powerful dynamic in any part of the commodity cycle, including this one as well.

Now I just mentioned and speaking of that focus on per share of metrics and a per share of basis, I just want to spend a minute on Slide #5. The best long-term illustration of our philosophy is that we've refused to issue equity during the past 5 years, unlike all of the Appalachian peers. And we've also reduced share count by 19%, since the start of our buyback program. Now these 2 things together, they duly over the past half decade, I think, are testament to the value that we place on growing the company's NAV per share, and ultimately, working to protect the equity for our shareholders. We think that the value we place on capital allocation and ultimately the denominator is a significant differentiator compared to the peers, and you can see it. CNX reduced again, our shares outstanding by 19% over the past 1.5 years, whereas peers on average increased share count by over 50% over the past 5 years, resulting in all them having higher outstanding shares since then, as of the end of the second quarter.

I want to jump over now to Slide 6. This slide, I think, really illustrates the value of our midstream companies, CNX Midstream. We've shown a similar slide in the past, but we think it's important to highlight this company and what it means to CNX. At the start, CNX Midstream is reaching an inflection point, and is entering the next phase of its life cycle. CNXM has been focused on a large capital build-out in 2019, and the end of that is rapidly approaching. So what does that mean? It means that the CNX Midstream will start to generate free cash flow starting in the first quarter of 2020, and we think that they can generate between $120 million to $140 million of free cash flow next year. This provides optionality for CNX Midstream and subsequently CNX. Now what shape that takes ultimately is to be determined. We're working on. But having options it's obviously a good thing.

Turning to the value of CNX Midstream, we think there's 2 main pieces of value to CNX, which are, of course: first, the $21.7 million LP units that CNX owns; and then second, the general partner value, which in the example on the slide has shown at over $800 million, which brings the total value to just about $1.1 billion. We think that the GP value is often overlooked despite CNX's expected receipt of roughly $75 million, give or take, from our distribution rights in 2020.

Slide 7. This slide highlights some additional areas where we believe CNX is differentiated versus our peers. For 2020, in particular, we're one of the most hedged producers with 86% of our gas volumes hedged including NYMEX hedges at $2.94 an Mcf. Our basis hedges, they also ensure that we're fully protected, unlike peers on hedges with smaller volumes. And our hedge program, when you couple that with our industry-leading costs, it helps drive risk-adjusted returns and our ability to generate free cash flow at the current strip-price environment. And just to be clear and just to make that point, when I say current strip-price environment, it's NYMEX around $2.55, 1 million Btu in 2020. So if you believe gas prices are going to be higher then, obviously, we would expect to generate even more free cash flow. Ultimately, we think that some of these advantages are going to be become more apparent as the industry tries to navigate what's a weaker commodity price environment looking out into the future.

Now we have a number of metrics listed on that slide, that we think are important individually and CNX ticks every one of those boxes. We think these peer leading advantages are going to become more impactful over time.

And over time and moving forward, our focus remains on operational execution and frankly, controlling the elements that are within our control. We've built a solid plan for 2020. It takes into account the challenging macro. This plan and the guidance that's Don's going to discuss shortly, they illustrate many of the capital efficiency and cost improvements that we've realized over the past couple of years. But despite those successes, I want to emphasize that we are going to continue to strive for more and our expectation is we're going to accrue more of those efficiencies.

Which brings me really full circle in conclusion with taking a step back and just looking over how far we've come and where we're heading. Mid-2019 indeed, it has us sitting at an infection point, and I think, sometimes that gets lost with all the noise around commodity price and capital market's upheaval that's out there. But think about the confluence of developments and how they culminate in a very strong position for CNX. So think about how we programmatically hedge to lock in returns and use the forward price deck to run IRR math when it was popular to do the opposite and use imaginary higher price decks. Our approach went from an unpopular one to a winning one when you look at the price curve today. Think about how we didn't want to amp up our risk by taking on the massive FT debt commitments and chase basis differentials that might evaporate the movement a new pipe was commissioned. That helped create a strong balance sheet that we enjoy today. Think about how we invested precious capital in the water and Midstream infrastructure to lower our costs and capital intensity, not just further but for longer. And that build-out is nearly completed, which now benefits us by widening our protective moat of low cost and high margin, also yielding lower capital spend in these non-D&C areas moving forward. And think about how we paid as much attention to the denominator when optimizing intrinsic value per share as we do the numerator. That's how we were able to retire 19% of our company at discount prices to our internal NAV per share view, and we now enjoy year-on-year per share growth and EBITDAX and more importantly, NAV itself. And then finally, think about how we invested in technology through electric frac spreads in real-time operating control rooms. Being first movers and best-in-breed in these areas, that compress cycle times and capital intensity, that in turn puts us in a position to generate free cash flow in 2020, while significantly growing production.

So for sure, these times are challenging when you look at the price deck, but our philosophy of optimizing NAV per share, our focus on capital allocation and our tactical moves that I just walked through, they culminate in a company that's built to thrive in times just like these.

Okay. Tim, let's discuss our operations.

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [4]

--------------------------------------------------------------------------------

All right. Thanks, Nick. Turning to the operational highlights for the quarter on Slide 9, production was 134.5 Bcfe for an increase of 1% over the prior quarter. We turned 4 wells in line in the second quarter, all in Southwest PA Marcellus, while we drilled 30 wells and completed 9. The quarter benefited from continued strong production out of our first quarter turn-in lines, also in Southwest PA Marcellus, helping to drive the 43% increase in Marcellus volumes compared to last year.

E&P standalone capital expenditures declined 5% year-over-year to $226 million. Production cash costs increased $0.07 over the first quarter due to higher gathering, transportation and processing costs as expected.

On Slide 10, you can see that CNX standalone E&P had the second lowest cash production cost in the basin over the past 4 quarters at $1.09 per Mcfe. On a consolidated basis, which nets out payments to the Midstream MLP, production cash costs are just $0.78 per Mcfe. It's important to note that CNX is the second smallest producer in terms of average daily volumes, and that we would expect unit cost to benefit from both increased scale and greater mix of Utica volumes, which had cash cost of just $0.47 per Mcfe in the second quarter. If commodity prices look to remain soft for the foreseeable future, we expect this cost advantage, in conjunction with the hedge book to become even more important.

The hedge book, which Nick discussed, plays into our minimal FT strategy illustrated on Slide 11. We predominantly employ a NYMEX hedge coupled with a basis hedge to lock in realizations, rather than expensive long-term FT, which is effectively debt.

On this slide, you can see how we have -- we now have a fraction of the commitments our peers have, and perhaps most importantly, many of these large commitments are not generating a margin to justify their costs despite being take-or-pay contracts.

Let's shift to some of the recent developments in data, giving us confidence in the program we've laid out. We've got a lot of questions on the Utica, specifically on getting costs lower. Slide 12 highlights some of the new data that we received this quarter on the 4-well Majorsville 6 Southwest PA Utica pad, which, as you can see, has beat our CapEx targets with an average of about $12 million per well on an approximately 6,500-foot average lateral length. We're very proud of these results. More importantly, we believe that this is repeatable based on the drilling performance and completion cycle times we achieved.

Slide 13 highlights the blending strategy that we're employing. We have several damp gas pads being blended with dry gas and entering dry gas systems and bypassing expensive processing.

With the coming turn in line of 3 Southwest PA Utica pads over the next few quarters, we expect to see a growing impact in the near term. And as a reminder, it only takes 1 Utica well to blend 3 to 4 damp Marcellus wells.

On Slide 14 as an example of how the Southwest PA Marcellus program continues to fire on all cylinders with our Richhill 71 pad, where we set a Pennsylvania state record by drilling the longest lateral at 19,609 feet, with the 6-well pad having an average lateral length of nearly 16,000 feet. That brings our estimated D&C capital expenditures on the pad roughly to $800 per foot. While we don't expect laterals to consistently be in the 20,000-foot range, we will take advantage when the formation and geography dictate.

Now turning to the Slide 15, we have some details and our -- on our new integrated real-time operation center or IRTOC. The IRTOC is the brain of our organization, where various functional teams collaborate on everything from geosteering wells to monitoring production and maintenance to marketing gas.

So just to sum it up, we're excited to be putting into action all the initiatives we've been talking about over the past few years, and look forward to updating you on their outcomes over the next several quarters.

With that, I'll hand it over to Don.

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Thanks, Tim, and good morning, everyone.

I will start on Slide 16 with some of the financials results for the quarter. Consolidated adjusted EBITDAX for the quarter was $222 million or $1.18 per outstanding share. And standalone EBITDAX plus distributions in the second quarter was $175 million or $0.93 per outstanding share. As you can see, we were able to grow EBITDAX per share year-over-year, despite substantially weaker gas prices this quarter versus last.

On Slide 17, you can see our EBITDAX per share growth going back to beginning of 2017. And also in the quarter, we bought back 8.8 million shares.

Slide 20 shows our guidance. We are currently on track with our capital program for the year, and are still expecting our 2019 capital to come in the previously announced annual range, with the second quarter coming in as planned. For the remainder of the year, capital will peak in the third quarter and come off meaningfully in the fourth. We are forecasting annual production under this plan to be improved. And as such, we are raising our 2019 guidance to an improved range of 510 to 530 Bcfe, a 15 Bcfe midpoint-to-midpoint increase with the same capital spend.

As for EBITDAX, we have seen gas prices and liquids prices come down since last quarter's update. And as a result, forecast to 2019 EBITDAX is lower, despite the higher volumes. It's important to note that our updated EBITDAX guidance assumes strip pricing as of July 8. And as we have said many times now, we make our decisions and model our disclosures using the forward strip at the time.

For 2020, we're reducing of annual capital expenditures by over 30%. And our production volumes are still expected to grow at roughly 10%, based on the midpoint of our 570 to 595 Bcfe range for 2020. This guidance highlights our capital efficiency. And for reference, the guidance is 10% below Street expectations on capital and 5% higher on production, based on the midpoint of the ranges.

Our 2020 development plan assumes that we will turn in line approximately 50 wells, which includes approximately a dozen Utica wells.

Also, on a consolidated basis, CMX Midstream's capital was down substantially, following the large capital build-out completed this year. Lastly, based on the 2020 development plan, we expect 2021 production to be generally flat year-over-year, while allowing us to generate free cash flow at current forward-strip prices.

Slide 21 highlights sensitivities to different commodity prices for next year. And as you can see, we expect to grow production and generate significant protected free cash flow in 2020, based on the current strip pricing. The slide shows even with a further drop in prices, we will still generate significant free cash flow in 2020.

We also tried to generally show the impressive free cash flow generation -- generating potential of our company at a $2.85 NYMEX type pricing going forward.

So to summarize, we are very protected from a near term, low commodity cycle, and we have the cost structure and assets to produce significant free cash flow in a normal or high gas price environment.

Slide 22 is an update of our production cadence. As you can see on the slide, we expect a decline in volumes in the third quarter of 2019, followed by an increase in the fourth quarter. In 2020, we expect consistent quarterly volume growth throughout the year, by turning in line approximately 12 wells each quarter.

The right-hand side of the chart is important. And as we've touched on many times, CNX has differentiated itself with a top-tier hedge book. For 2020, we currently have approximately 86% of our volumes hedged based on the midpoint. And this hedge book is a competitive advantage for us and allows us the ability to ensure we generate returns on the capital we are spending this year, and it gives us confidence in our future cash flows and capital structure going forward.

Slide 23 is just a reminder that we expect to receive an additional $110 million in tax refunds by the end of 2019, and expect to receive an additional $51 million in both 2020 and 2021.

Slide 24 provides some of the revenue and cost line items as it relates to our updated guidance. In 2020, we expect total production cash cost to improve, mainly driven by transportation, gathering and compression.

However, in addition to this, on Slide 25, you can see that we have several processes underway to help drive all of our cost lower. We expect these efforts to positively enhance our spend, and we will update guidance as they unfold. These items are consistently being worked on and improved on by our teams. The main drivers on these efforts will be combining certain teams across upstream and midstream, capturing efficiencies through our integrated real-time operation center, having more efficient capital operations and active contractor management, to name just a few.

These efforts reflect our commitment to reduce costs in this low priced environment and generally follow our commitment for continuous improvement in any pricing environment.

Technology, efficiencies and our desire to be a flat, nimble organization, will allow us to further lower our cost, which will widen our protective moat in a downturn and increase our execution in an upturn.

With that, I'm going to hand it back over to Tim.

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [6]

--------------------------------------------------------------------------------

All right. I wanted to make one last comment and that is to say, thanks to the Board, to Nick, and of course, all of our employees. It's been a great run since I arrived back here in Pittsburgh in January of 2014, when we'd really just begin our transformation from a large, multi-segment conglomerate to a best-in-class, pure-play natural gas E&P.

That transformation is complete and the we've achieved much in the last 5.5 years, positioning this company as one of the strongest, lowest cost operators in the basin. With that, I felt today was the appropriate time to announce that I'll be retiring from CNX at the end of the year, and that Chad Griffith will be taking over as COO. Chad is the logical choice to succeed me, having been President of CNX Midstream since September of 2018, overseeing all aspects of our Midstream business during that time. I wanted to make this announcement today so that we have appropriate time to ensure a smooth transition. I intend to stay on board for the remainder of the year and do everything I can to help Chad as he transitions into this new role, overseeing both upstream and midstream operations. I have every confidence that Chad is the right person to take CNX into the future, and I look forward to working with him over the next few months to help make that happen.

With that, I'll turn it back to Nick for a few closing comments.

--------------------------------------------------------------------------------

Nicholas J. DeIuliis, CNX Resources Corporation - President, CEO & Director [7]

--------------------------------------------------------------------------------

And I just want to thank Tim. He's been the valued member, of course, of our leadership team through one of the most consequential periods of time in our history, and we've got a long history. He and I were talking the other day, if you look over the course of his tenure, we've taken production cash cost from about $2.16 an Mcf to $1.18. That's a 45% reduction. Production, on the other side of things, went from 172 Bcf, and you compare that to last year's production, it was north of 500 Bcf. That's an increase of almost 200%. And then beyond those things, these other drivers of rate of returns and intrinsic value per share, the EUR, cycle times, countless operational metrics have improved markedly over the past 5 years because of Tim's leadership. And I think, most importantly, and our team believes most importantly, the safety and compliance footprint that Tim leaves is second-to-none in the basin, and it really embodies the continuous improvement and excellence that we talk about.

So that's a testament to his leadership, and that is a heck of a legacy to leave behind. And on behalf of the Board and the team, I wanted to thank Tim on the call for all his contributions to the company. And we look forward to the collaboration that he's going to bring with the rest of the team in the coming months as we work to build on those accomplishments that we just talked about and take us to the next level. And rest assured, if you're our ownership on the call and listening, we're going to squeeze every last ounce of effort and insight out of Tim in the coming months as we finish 2019 strong and set up for what, I think, is going to be an impressive 2020.

--------------------------------------------------------------------------------

Tyler Lewis, CNX Resources Corporation - VP of IR [8]

--------------------------------------------------------------------------------

Operator, if you can open the call for Q&A at this time please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question will come from Sameer Panjwani with Tudor, Pickering and Holt.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [2]

--------------------------------------------------------------------------------

Maybe to start off on the Midstream side of things with CNXM inflecting a free cash flow, how do you think about drop downs in 2020? And can you help frame the retained Midstream EBITDA at CNX? And maybe also at the debt capacity at the MLP? And then finally, with the heavy build-out of Midstream assets, both internally and at CNXM nearing completion, how do you think about the strategic value of Midstream ownership going forward?

--------------------------------------------------------------------------------

Chad A. Griffith, CNX Resources Corporation - COO & VP of Commercial & Marketing [3]

--------------------------------------------------------------------------------

Sameer, this is Chad Griffith. I -- we have a couple of thoughts on how Midstream fits into the bigger picture here at CNX. I think, first and foremost, we don't need to do any drops in either company's base plan to hit any of the guidance that we provided. Both companies are performing very, very strong, very healthy companies without conducting any kind of drop-down transaction. So we don't need to do any drops to, sort of, hit our targets.

I think second, I think you already hit it. The Midstream business is really hitting an inflection point towards the end of this year. We're transitioning into a free cash flow generation mode, which is going to continue to improve the balance sheet and generate cash on a go-forward basis. That growth provides a lot of optionality at the Midstream business to just do a lot of exciting things with.

Sort of -- unfortunately, the third point sort of the MLP market is what it is. And we are continuing to monitor that MLP environment and sort of monitoring it out on a go-forward basis. So sort of where the equity values are with the MLP market is, makes it a little bit challenging to use that currency to do transactions with.

And the last, the balance sheet capacity and the optionality there, it gives us some options to sort nimble around the edges on some of these things. But certainly, none of that is in any of our base case forecast or guidance.

As far as retained EBITDA, there is a small amount of retained EBITDA from the Midstream business still at the upstream level. It's not an order of magnitude -- it's less than $10 million. I want to say, it's really maybe $5 million, $6 million.

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [4]

--------------------------------------------------------------------------------

So that's for the -- I'll jump in. This is Don. That's for the what's in the DevCo structure currently flowing. There is still build-outs to happen, both at the DevCo III area, which we've talked to could be a significant EBITDA generator once that occurs. And there is the water business in the Virginia Cardinal States assets, that have -- currently producing cash flows that are more mature assets, that could be looked at to be dropped at some point in the future.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [5]

--------------------------------------------------------------------------------

Okay. And on those 2 kind of last assets, the water system and the gathering system, I guess, any kind of ballpark estimate for what that EBITDA could look like getting into 2020?

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [6]

--------------------------------------------------------------------------------

So a lot of that, obviously, depends on the commercial arrangement that you would put in place between CNX and CNX Midstream. We have highlighted in the past that the Cardinal States opportunity between where it is just transitioning from the [TCO] into Transco Zone 5 and the flows that's going through there to be $10 million to $25 million type of an EBITDA opportunity there. And the water business, obviously, and the commercial arrangements would dictate what the ultimate would be. We've looked at, historically, at the Analyst Day, we walked through what potential general rates would point that to be, and that was the, at the time, closer to $50 million growing as the volumes grow over time.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [7]

--------------------------------------------------------------------------------

Okay. Okay. That's helpful. That's a pretty good overview of part of sum of the parts opportunity at CNX. I think one other piece that gets overlooked sometimes is your fee acreage position. And if I recall correctly, CNX has one of the highest NRI positions in the basin. I wanted to get your thoughts on potentially monetizing some of this to take advantage of higher return opportunities such as buybacks.

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [8]

--------------------------------------------------------------------------------

Yes. So we have sold a lot of acreage in businesses, if you look historically at CNX and its predecessor, CONSOL Energy. So we've done a lot in that arena over our overall history here, and we know how to get M&A transactions done. When you look at doing overriding royalty sales, the balance you to watch and what we talked through on the call today, one of our strategic advantages, we believe is our cost structure. So adding cost to our future drilling locations, really -- while it may help in the near term, it can really hurt your cost structure and your competitive advantage in the long term. That being said, we do look at transactions, and as Nick has mentioned, we follow the math. So it's a balancing act is what we do and choose not to. The good news is, as Chad mentioned, we don't have to do anything, we don't need to do any of these to fix our balance sheet or to help us out to fund our business. So we're able to opportunistically look, and if the math makes sense, we'll pursue it. But those pieces that add cost to your structure, we're picky on.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [9]

--------------------------------------------------------------------------------

Okay. Okay. That's helpful. And if I can just squeeze one last question in here. Just on the 2020 outlook, I'm just trying to understand the capital allocation rationale that results in production beyond the hedge book. Seems like given current strip, any excess volumes would generate marginal cash flows. So just would appreciate your thoughts there.

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [10]

--------------------------------------------------------------------------------

Yes. And as we talked about, we use the forward strip to make our decision making. And as we've learned here over the past 6 months or 6 years, the forward strip is very volatile. So we keep a close eye on it. Hence why we do -- continue to maintain a very healthy hedge book to ensure that we're making returns on the capital we do spend. We think right now, these pads generate adequate returns, but we're ultimately always watching. And we do have flexibility built into our go-forward business model in '19, and especially, obviously in '20, since we're coming out pretty early with our initial viewpoint on '20, to dial that back or dial that up as conditions warrant. As you're looking at the next couple of months, the weather patterns will really influence pretty majorly on how gas prices change. And we have a flexible enough plan in front of us to morph to fit what's best in that environment.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [11]

--------------------------------------------------------------------------------

Okay. That's really helpful. And congrats on the retirement, Tim.

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [12]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Welles Fitzpatrick with SunTrust.

--------------------------------------------------------------------------------

Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [14]

--------------------------------------------------------------------------------

And, yes. I echo that congrats on the retirement.

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [15]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [16]

--------------------------------------------------------------------------------

So looking -- and I know this is probably getting way ahead, but looking at the '21, kind of, soft guidance, should we basically be thinking about that as the way that CNX exists in the current strip environment in the kind of $2.25 to $2.75 environment that you guys will essentially stay flat to flattish and become a free cash flow machine going forward? Is that how you'll are looking at it internally?

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [17]

--------------------------------------------------------------------------------

We've tried to stay very consistent in our views and our thoughts and really focusing on risk-adjusted returns and creating NAV per share over the long-haul intrinsic value per share. Now to do that, you need to produce and make cash flow, and you do have to have a healthy balance sheet. So as we're looking forward into the forward strip and where the price deck sits, a $2.75 gas price environment is very different than the $2.25 gas price environment. So we're trying to build a company and a machine that can work in low prices and be ready to accelerate and take advantage of high prices. And as we've done in the past, if we do see the ability and the opportunity to catch higher pricing and grow, that's something we will consider. Ultimately as we've done in the past, we'll look to do the same thing, which is hedge the gas first, ensure that you're going to have the cash flow growth and the return on the capital that you are spending before you spend it. And if the gas prices stay lower for longer, we're in a good, strong position to stay at a minimal level and keep a healthy balance sheet and just look to make that next incremental investment based off of the conditions that exist in 2021.

--------------------------------------------------------------------------------

Nicholas J. DeIuliis, CNX Resources Corporation - President, CEO & Director [18]

--------------------------------------------------------------------------------

I think the catchphrase for 2021 is really optionality. If you think about what we're doing, what we're not trying to solve at the end of the day for free cash flow or for production growth or things like that. Like Don said, you follow the math, you follow the returns. And you want optionality, whether it's balance sheet, whether it's cash flows or whether it's asset portfolio, you want the optionality to be able to pivot, as you get closer to '21, across those 3 big opportunities of drill bit, capital investment, share count reduction and debt reduction. And when you look at 2021, based on what we're expecting to perform in post, for the balance of '19 and going into '20, we should have a substantial level of optionality to be able to pivot and optimize no matter what gas prices do, whether it's the $2.25 or the $2.85 world that we're faced with in '21.

--------------------------------------------------------------------------------

Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [19]

--------------------------------------------------------------------------------

Okay. No, that makes total sense, and I guess, then the kind of fundamental -- the nonfundamental driver that might impact could be a share count rally because presumably, the opportunity cost then of putting it back in the ground would go down. Is that a fair enough interpretation?

--------------------------------------------------------------------------------

Nicholas J. DeIuliis, CNX Resources Corporation - President, CEO & Director [20]

--------------------------------------------------------------------------------

Yes. That's -- the 3, like I said, are -- like you mentioned, there's where the shares are trading at versus what we think the implied NAV per share the company is, based on the forward strip. There's what those rate of returns are on the drill bit, based on all the metrics on the performance side of the operation as well as the gas price strip. And then the last piece of that is, what is leverage ratio doing based off of cash flows because of commodity price, and where that all plays out depends on all 3 of those factors. So going into '21, we should have a substantial level of capacity, flexibility, optionality to pivot across those 3 and weigh one more than the other based on the what the math tells us.

--------------------------------------------------------------------------------

Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [21]

--------------------------------------------------------------------------------

Okay. No, that's perfect. And then just one more, if I could drill in a little bit. On the well costs on Majorsville, obviously, that's come down a whole heck of a lot. Can you talk about -- presumably most of that efficiencies. Can you talk about the repeatability of that? And also within that question, kind of the difference between 6E and 6F, and what was causing those deltas in cost there?

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [22]

--------------------------------------------------------------------------------

So I think, the -- yes, it's repeatable. We have just efficiency doing what we've been talking about with the Utica for the past several quarters. We've talked about the challenges, drilling through the vertical section, the salt section, and some of those other formations, where we have to get through to set our deep intermediate strength. That's where a lot of the challenges lie. The well that had little -- slightly higher cost, we had a few day delay there with some drilling issues but nothing major that we didn't overcome. But when you look at the overall cost there, we've been talking about this target at $12 million and -- $12 million to $12.5 million for the last 1.5 years or so. And we have mentioned before, we saw a clear path to this number, and we think it is very repeatable. Well results will stand up as well we think. And -- so we're excited about what the Utica brings to the table for us and the results that it'll generate.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

The next question comes from Kevin MacCurdy with Heikkinen Energy Advisors.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [24]

--------------------------------------------------------------------------------

How does the depth of the deep Utica change as you go east to west in Southwest PA? And is there any difference in the difficulty of drilling those wells?

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [25]

--------------------------------------------------------------------------------

There is. We've talked about the deep Utica in Pennsylvania, it is much different than the Marcellus, it's much more compartmentalized. It varies from area-to-area and not just from Southwest PA to CPA but even within Southwest PA, there are different compartments. Geohazards in some areas are much more challenging. And that is where I really think, we have been able to differentiate ourselves and achieve these numbers that we've got laid out here. We've talked about the use of seismic to place laterals properly to avoid geohazards, and we're in the process of doing that, and I think you'll see more results like this as we move forward.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [26]

--------------------------------------------------------------------------------

Okay. And I think earlier you said, 12 Utica wells in 2020. What is the locational breakdown of that? Are they all in Southwest PA?

--------------------------------------------------------------------------------

Nicholas J. DeIuliis, CNX Resources Corporation - President, CEO & Director [27]

--------------------------------------------------------------------------------

Yes. They are not all in the SWPA Utica. We have a pad in Monroe County as well, which are included in those numbers.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

The next question will be from Holly Stewart with Scotia Howard Weil.

--------------------------------------------------------------------------------

Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [29]

--------------------------------------------------------------------------------

Maybe just a few questions on 2020, you referenced some cost savings. Can you just maybe talk through what you're seeing there, doing there? Is it just a per unit, given the growth? Or -- well, and then maybe reference what you're thinking on the service cost assumptions within that plan?

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [30]

--------------------------------------------------------------------------------

Yes. So we see both. I mean, Holly, obviously with the growth it helps on the scalability as Tim mentioned earlier. Our cost structure looks great amongst peers, but even better whenever you realize that there is room to improve just on scalability. And then second, on an absolute dollar standpoint. I mean, we are driving for more efficient use of our real-time operating center and adequate vendor management. Obviously, the forward cash strip provides challenges, but also it provides potential opportunities, whenever you're looking to the service providers.

--------------------------------------------------------------------------------

Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [31]

--------------------------------------------------------------------------------

Okay. And then maybe, Don, it might be too in the weds for the call for this, but just thinking about the outlined growth assumptions for 2020. Have you ran sensitivities on the free cash flow number if you were to, sort of, do a flat exit-to-exit production from '19 to '20 versus the 12% annualized growth?

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [32]

--------------------------------------------------------------------------------

Yes. We do. We do keep pretty close eye in balancing really. We've talked about it over time, sort of, a minimum level of activity we want to do to have a healthy, efficient running business, and that meets to our CNX Midstream commitments, it utilizes the service contracts that we have a place, and keeps a nice, strong, healthy balance on our water. So there is some mobility to potentially dial back potentially, as gas prices unfold here over the next few months. I do think weather -- finishing up the end of summer, and likewise, the first, call it, October, November, as you're heading in, will set the realities of how gas will unfold in 2020. And if it heads one way, we'll try to lean back even more than we have. And if it heads the other, we have optionality to do even more in 2020, if it warrants it.

--------------------------------------------------------------------------------

Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [33]

--------------------------------------------------------------------------------

Okay. So -- and maybe, Nick, then just thinking about the high-level discussions that you had with the Board on the growth in this commodity tape. Is there some, I guess, color you can provide around that? And going with the higher growth rate in 2020 versus maybe starting at a lower level, and if commodities respond bumping up?

--------------------------------------------------------------------------------

Nicholas J. DeIuliis, CNX Resources Corporation - President, CEO & Director [34]

--------------------------------------------------------------------------------

The growth rate is a result. It -- we don't think much of it beyond, it's just the result that spits out at the end of something else that we're solving for. And really the discussions across the management team and the Board have been across 3 big opportunities right now: a significantly discounted share price; some pretty compelling rate of returns, because of our performance metrics and cost structure on the drill bit; and the ability and desire of markets to see a stronger, well-maintained, healthy balance sheet. So that's the balancing across those 3, when we run our math on rate of return and risk-adjusted returns, it leads to some of the results, one of which was the production growth that you're referencing, the other one being the free cash flow in '20. And what we do is, we monitor those and recalibrate those, and recalculate those constantly, as the forwards change. And frankly, as some of our internal data come in, like the D&C cost on the Utica, that Tim had mentioned. And we optimize that on a running, ongoing basis. So when we get to the Q3 call, if commodity price has changed significantly, we'll update what, if any, changes we've seen with respect to the balance in '19 and then at '20 program, whether it's capital, free cash flow and share count and balance sheet and all of those things wrapped into one.

--------------------------------------------------------------------------------

Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [35]

--------------------------------------------------------------------------------

Okay. That's helpful. And then maybe for Don, you referenced the $800 per foot on the longer lateral pad. Do you have the target for Marcellus well cost for 2019 you could share?

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [36]

--------------------------------------------------------------------------------

Well, I think -- Holly, this is Tim. I think the target is around $815, a foot, I believe. And a lot of that is lateral-length dependent, and -- but we've seen those costs, we've achieved it, they're not aspirational, that's built into the plan, and we still are -- look for ways to continually improve that. And one additional comment that I wanted to make, so I think it was Welles question on Majorsville 6, the -- I believe, it was the F well that had the higher cost. That was also a pilot hole where we did a little bit of science work on it and that's where some of the additional cost came from.

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [37]

--------------------------------------------------------------------------------

And we do look at our cost per foot, it's important to note too that we do include flowback, and we do kind of look at as a everything-you-need-dollar-per- foot type play. So Tim's laid out the targets, we've laid out on the efficiency -- efficiency push to reduce spend across all the buckets. So I feel good. We've already kind of got there, and we're looking for ways to improve.

--------------------------------------------------------------------------------

Holly Meredith Barrett Stewart, Scotia Howard Weil, Research Division - Analyst [38]

--------------------------------------------------------------------------------

Okay. That's helpful. And then maybe one final one, if I could. Just, Tim, any update to share on the status of the Shaw pad?

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [39]

--------------------------------------------------------------------------------

We're continuing to move through that. We still plan to complete the 3 remaining wells. That won't have an impact on '19. But it will -- they will get completed. We're just keeping that somewhat flexible, so we can work -- make sure we work through all the appropriate issues with the regulatory agencies and all parties involved.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

The next question comes from Joe Allman of Baird.

--------------------------------------------------------------------------------

Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

--------------------------------------------------------------------------------

Tim, congratulations on your retirement, and Chad congratulations to you as well. And my question is for Tim. So, Tim, what further operational improvements do you look forward as you fill out your tenure there at CNX and as you kind of watch the company from a distance after you retire? And, chad, I'd love to get your insights as well.

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [42]

--------------------------------------------------------------------------------

I think, when you look at what we highlighted on Majorsville 6 on the Utica, that it really kind of stands up everything we've said about Utica in the last couple of years. We have been a frontrunner in the Utica, and we'll continue to be. But I think it shows that the numbers that we've been putting out there and -- on the Utica and what we expect of it is coming through. There's always room to continually improve. We'll look to improve those drilling efficiencies, now that we've seen the $12 million mark. I don't think it's unreasonable to think that we can get down in that $10 million to $11 million mark per well. Obviously, some of that depends on lateral length, and then there's always room. We continually look for ways to optimize our completion efficiencies. It's not just about getting the cost down, but it's also about improving well results and maximizing that EUR per 1,000 foot.

--------------------------------------------------------------------------------

Chad A. Griffith, CNX Resources Corporation - COO & VP of Commercial & Marketing [43]

--------------------------------------------------------------------------------

And this is Chad. I'm just super excited to get this opportunity, and I've been working with these guys for years at this point. So I really want -- looking forward to working with this team further. Tim has put together a heck of a team downstairs, we got a lot of talent. Really looking forward to working more closely with those guys. And really bringing to that team, I think, what we've been able to bring into the Midstream team over the last 9 months, 12 months, is really just a focus to making sure that every dollar we spend is earning a return that is creating value for our shareholders. And just really continuing to drive that focus on cost and that every dollar matters.

--------------------------------------------------------------------------------

Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

--------------------------------------------------------------------------------

That's helpful. And, Tim, I know, you commented on the Utica, but any kind of comments on further improvements in the Marcellus?

--------------------------------------------------------------------------------

Timothy C. Dugan, CNX Resources Corporation - EVP [45]

--------------------------------------------------------------------------------

Well, I think, the Marcellus, we saw the -- with RHL 71 what we did there at $800 a foot. Using our real-time operational center, there's ways we can gain efficiency there, through geosteering, through management of our completions from that operation center. There is always room for improvement. I think a lot of the times, we -- people think that you're going to hit a wall on improvements, but technologies change, processes change, equipment changes. And whether it's fluid systems, bits, drilling rigs, frac crews, you look at what we're doing with Evolution, that's a perfect example, the all-electric frac fleet, and the efficiencies we're gaining from that. We'll continue to find ways to utilize new technologies, processes and make things better.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

The next question comes from Jane Trotsenko with Stifel.

--------------------------------------------------------------------------------

Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [47]

--------------------------------------------------------------------------------

My first question is on West Virginia, how do you think about West Virginian production and activity levels going forward? And also, could you maybe discuss FT and well commitments in West Virginia? And how they fit into the 2020-2021 program?

--------------------------------------------------------------------------------

Chad A. Griffith, CNX Resources Corporation - COO & VP of Commercial & Marketing [48]

--------------------------------------------------------------------------------

All right. This is Chad. Those 2 questions are actually related. As we think about West Virginia, particularly out of Shirley-Pennsboro area, sort of the cadence that we're thinking about down there is roughly a pad a year, give or take. And that schedule is sculpted to meet the drilling -- the minimum volume commitment associated with CNX Midstream. And so those are all sort of linked. And we're doing it in a way that's really optimizing that drill program to -- for the benefit of both CNX and CNX Midstream.

--------------------------------------------------------------------------------

Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [49]

--------------------------------------------------------------------------------

So it seems like FT commitments is not something that drives the program, right?

--------------------------------------------------------------------------------

Chad A. Griffith, CNX Resources Corporation - COO & VP of Commercial & Marketing [50]

--------------------------------------------------------------------------------

Yes. That's correct. Because we at CNX -- as I'm sure you're aware, we have a very, very low -- we've relatively small FT book relative to our peers. Our FT layers are all predominantly filled. And so it's really -- like the incremental drilling decision is not driven by a need to fill FT.

--------------------------------------------------------------------------------

Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [51]

--------------------------------------------------------------------------------

And this is the same case how Utica, you basically sell volumes in basin. And it seems like you don't have any well commitments in Ohio, Utica, right? But still planning to complete 1 pad a year, right?

--------------------------------------------------------------------------------

Chad A. Griffith, CNX Resources Corporation - COO & VP of Commercial & Marketing [52]

--------------------------------------------------------------------------------

As far as the Ohio program goes, we've got a few wells in the plan for this year. I think incremental opportunities on a go-forward basis are a little bit more of a case-by-case decision. None of those decisions will be driven by well commitments or FT commitments. It's really just opportunistic, if the rate of returns justifies investment in other wells in that area.

--------------------------------------------------------------------------------

Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [53]

--------------------------------------------------------------------------------

Okay. And my final question is on basis differentials. I saw that you guys are guiding to slightly wider basis differentials next year. I think it's due to high in-basin sales. I just wanted to confirm that -- or maybe you see some other developments that would explain that?

--------------------------------------------------------------------------------

Chad A. Griffith, CNX Resources Corporation - COO & VP of Commercial & Marketing [54]

--------------------------------------------------------------------------------

We do. Because of our low FT book, we don't rely on expensive long-haul FT to move our gas to other basins. The way that's resulted is there's a lot of our peers who have that long-haul export capacity and lot of that's under water at this point. So we've been able to avoid that burden from our cost structure. But that does result in a lot of our gas being sold in basin. And so in order to offset the risk of the volatility of that local, physical realized price, we've been able to -- we make sure we match our sales with a matching basis hedge to take the -- so that's a matching financial basis hedge that takes the risk out of the physical sale of that product.

--------------------------------------------------------------------------------

Donald W. Rush, CNX Resources Corporation - Executive VP & CFO [55]

--------------------------------------------------------------------------------

For our basis guidance it's just a strip, it -- July 8th. So it's our proportionate mix on the sales points, which we show in the appendix, using the strip from July 8th to calculate the basis. So no views, just a strip.

--------------------------------------------------------------------------------

Yevgeniya E. Trotsenko, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate Analyst [56]

--------------------------------------------------------------------------------

Okay. Okay. And the last question, if I could. In the press release, you mentioned that transportation and the other in line that is slightly higher due to higher expenses to CNXM. Is it related to gathering fees? Is it just like an annual escalation of the gathering fees? Or what is it?

--------------------------------------------------------------------------------

Chad A. Griffith, CNX Resources Corporation - COO & VP of Commercial & Marketing [57]

--------------------------------------------------------------------------------

Predominantly that bump was caused because the -- of the handful of pads that we turned in line in the first 2 quarter of the year. They're sort of a disproportionate number, roughly half of those were wet wells. And -- let me rephrase that. One of the pads was a wet pad and one of the pads was a damp pad. And that damp pad was wet enough, and based on the relative NGL and gas prices, we elected to take that gas to processing. So sort of net-on-net, we took 2 pads to processing out of the handful of pads we turn on line in the first half the year. That's disproportionately high for us. And so it's just with a temporary sort of swing where our GP&T went up slightly for the first half of the year.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Tyler Lewis for any closing remarks.

--------------------------------------------------------------------------------

Tyler Lewis, CNX Resources Corporation - VP of IR [59]

--------------------------------------------------------------------------------

Great. Thank you. We appreciate everyone taking the time and join us today, and I look forward to speaking with you again next quarter. Thank you.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.