CNX Resources Corporation (CNX) Earnings Call Transcript & Summary

Hi, everybody. I'm Nick DeIuliis, the President and CEO of CNX Resources in Pittsburgh, Pennsylvania. CNX Resources is the low-cost manufacturer of natural gas in the very prolific Appalachian Basin. What we're manufacturing, natural gas, has an outsized foundational impact on today's economy as well as tomorrow's. And the reason it enjoys that position is that natural gas provides instant quality of life to society at scale, and it does it at a carbon intensity level that is better than most other competing forms of energy, including wind and solar, I might point out. CNX Resources is poised to generate substantial free cash flow over the next 7 years, as you'll see. How are we able to do that? We have a competitive moat that really boils down to 4 strategic advantages. First, I mentioned that we're a low-cost manufacturer in our business. Our costs are going to decline further as you look into the 7 years. Second, we methodically hedge our production of tomorrow, locking in revenues today, which, of course, is a big piece of the puzzle to derisk cash flow generation. Third, we are unique that we own our pipeline infrastructure, which allows us to control our distribution chain from the point of manufacturing at the wellhead all the way to the sales point. And then last, we require low levels of capital intensity, capital reinvestment to sustain and have the free cash flow generation come to roost over the next 7 years. Now we're not just a low-cost manufacturer of a product vital for society, and we're not just a substantial generator of free cash flow. We are also very astute capital allocators. And what we're looking to do is to invest that free cash flow in the right places at the right times to optimize the long-term intrinsic value per share of the company. That's what capital allocation and astute capital allocation means to us. We're going to be ruthlessly rational when it comes to making those decisions and following the math. So I hope that you're interested in our company. We look and focus upon things, as I said, being a low-cost manufacturer of a product that's crucial for society, and being a free cash flow generator and allocating that free cash flow generation under astute capital allocation methodologies to solve and optimize the long-term intrinsic value per share of the company. If you're interested in those same types of things, give us a call and we'd love to talk to you in a more meaningful way. Also, I will point out what we're not. We are not a traditional E&P company. We're not even a traditional energy company. So you're not going to see us focused on solving for production growth, you're not going to see us being interested in becoming the largest producer in the basin or in the country, and you're not going to see us obsessing over short-term E&P-centric metrics, whether they're performance or financial. You will see us obsessing on that long-term intrinsic value per share of the company. Thank you. I'm going to turn things over now to our Chief Financial Officer, Don Rush, who's going to go into more detail on some of these themes that I just highlighted.

Thanks, Nick, and thanks for giving us a few minutes of your time today. As Nick said, we are the low-cost producer in the most prolific natural gas basin in the United States. Our competitive advantages are real and our future is bright. We generate significant free cash flow, and our culture and team is focused on allocating that free cash flow to grow our intrinsic value per share. All that translates into the phenomenal free cash flow yield and margin numbers you see on this page. It is a simple story when you boil it down, starting with the product we sell, natural gas. Natural gas is a fundamental building block over a modern society, with worldwide demand growth. It touches all aspects of our day-to-day lives, and it has reshaped the geopolitical, economic and energy landscape in favor of the United States. It is the most socially and environmentally sustainable way to meet the world's energy needs. And it is irrefutably a long-term strategic asset for the United States of America and will remain an important product for the world going forward. On to our 2021 numbers versus not just our industry peers, but the broader market as well. First and foremost, we produce significant free cash flow, take any industry or index, and we stack up in the top quartile or better for free cash flow yield. Our assets and commercial strategies generate top-tier margins. And finally, our balance sheet is strong and getting stronger as we pay down debt to reach our 1.5x leverage target. And the best news yet, we expect these metrics to improve as time goes on, and we have competitive moats to protect them. As Warren Buffett says, the fundamental basis of above-average performance in the long run is a sustainable, competitive advantage. We want our investors to know that our competitive moats are real and they're sustainable for an extended period of time. It would take our competitors well over a decade and cost them several billion dollars to replicate our business model. I won't unpack each one of these, but let me touch on 2 that are critical. First and most importantly, our vertical integration of owning our midstream pipeline systems is unique in our industry and creates a tremendous advantage. Our competitors have outsourced theirs to third parties, which results in high fixed operating costs and constant contractual disputes with limited negotiating leverage. Owning our own pipelines gives us a cost structure that is almost 50% below the cost structure of our peers, and it allows us to control our product from source to sale. This advantage is nearly impossible to replicate and will persist for decades to come. Second is programmatic hedging. We have the ability to sell our products years in advance at a fixed price, and due to our best-in-class cost structure, lock in a favorable margin stream. Very few industries, from consumer packaged goods to industrials, have this advantage. This tremendously derisks our capital investments, locks in returns and creates predictability in our free cash flow generation for years to come. We now refer to our company as a free cash flow-generating machine due to its predictability and repeatability. This cash flow will improve our balance sheet as we pay down debt, and we expect our free cash flow per share to grow at an amazing 20% per year. And to be clear, this example assumes our stock price appreciates over 15% each year. If for some reason our stock price grows slower or stays flat, our free cash flow per share growth would increase, and our free cash flow yield would skyrocket higher. This all leads to an attractive range of potential outcomes if you invest in our stock. The simplest math is that over the next 7 years, our expected free cash flow generation is enough to eliminate all of our debt and return hundreds of millions of dollars to our shareholders. This example will result in well over a 150% increase in your initial investment and continued ownership in a company expected to generate substantial free cash flow each and every year thereafter. That's a pretty good conservative case. And of course, there's plenty of upside based on investing the free cash flow we generate into higher-returning capital allocation opportunities or returning more of it to our shareholders sooner. And as the market starts valuing us at a reasonable free cash flow yield, our stock will quickly more than double. Ultimately, an investment in CNX has an expected solid, low risk-based return with tremendous amounts of additional upside. So boiling all this down, CNX is a phenomenal investment opportunity, especially considering the volatility and uncertainty of today's marketplace. We are the lowest cost manufacturer of natural gas, which is an incredibly important industry that is not only stable but growing. And the combination of our competitive moats, our culture and our high-caliber team will ensure success for years to come. This is the opportunity. We are CNX. Please give us a call. We'd love to have you, not only as an investor but a partner of ours for years to come. Thank you for your time.