Commentary on the Domestic Appalachian Energy Industry

Nick Deiuliis Excerpt from First Quarter 2022 CNX Resources Earnings Call

The following is an abridged excerpt of CNX Resources’ First Quarter 2022 Earnings Conference Call, held Thursday, April 28, 2022. This excerpt followed Nick’s initial review of CNX first quarter results and the company’s Sustainable Business Model (SBM). The comments address how the Appalachian energy industry can resolve a host of current economic, social, and geopolitical problems. And how current energy policies, as root causes of many of these problems, need to evolve to allow the Appalachian energy industry to realize its potential. Click here for a full call transcript.

…Let me offer up a few observations about our great industry, nation, and the state of the world. These observations go to the heart of that ‘why?’ that I spoke about, and they impact not just CNX and Appalachia in profound ways, but they also deserve far more discussion than the limited time we have today. But let’s hit on a couple of these observations.

2022 is turning out to be quite the proving ground, verifying certain realities and exposing certain flawed beliefs. First, let’s talk about natural gas supply and how that might be able to grow to respond to an increase in energy demand needs both domestically, as well as in places like Europe.

There’s been a lot of talk about liquified natural gas (LNG) and how US natural gas can save the EU by replacing Russian natural gas and providing much needed energy security during a time of crisis. At the same time, we cannot lose sight of the energy supply challenges that we still have to overcome domestically. And certainly, the industry is doing what it can to increase supply.

CNX is a great example where we expect production and capital expenditures for the year to be toward the higher end of our guidance range. Every little bit of this is going to help, but there are also some harsh realities that are quite ironic, unfortunately.

CNX is a great example where we expect production and capital expenditures for the year to be toward the higher end of our guidance range.

The nation’s natural gas, oil, and pipeline industries cannot ramp up production anything close to the levels that the US and EU is clamoring for anytime soon, and that’s not because of industry unwillingness. We are industries of doers after all. And it’s not because of corporate greed or profiteering as some might allege. No, instead, it’s simply and starkly because policy is consciously and methodically looking to strangle infrastructure investments in the pipes, processing, power generation, and yes, in the LNG infrastructure, all of which are needed to meet the world’s energy demand. These policies are everywhere one looks today.

Global policies, like Paris Accord and the UN IPCC climate roadmap. You see them in national policies via the weaponized regulatory regime and the administrative state. You see it in regional policies like RGGI, and some of these dysfunctional regional transmission organizations that are manipulating energy and electricity markets that are leading to bad outcomes and consequences, like those that we’ve seen in Texas and California. You also see them in state and local policies, such as de facto natural gas development, transmission, or end use bans in places like New York and Boston.

Unfortunately, these policies have been extremely effective in achieving exactly what they were designed to do: create energy scarcity, run up prices, and not allow the most sensible supplies of natural gas and oil to reach the obvious demand centers. That’s why Boston has to import LNG from thousands of miles afar, including Russia at times, instead of taking molecules from Pennsylvania 400 miles away via a pipeline. That’s why US politicians end up pleading with dictators in Venezuela and OPEC to increase output. And most tragically, that’s why the EU is energy dependent on Russia.

For our industry to solve problems and provide solutions, it unfortunately is going to take years. The domestic energy industry has been under attack and penned in for over a decade by these policies, and now it will take nearly as long to correct that. And that’s assuming policymakers wake up to the reality, which is a big assumption as crazy as it sounds considering times like these where common sense tells us domestic energy has never been more vital, and the policies that are designed to stymie it, they’ve never been more harmful.

These policy concerns lead to my second observation. Despite the clear validation of domestic energy as an attractive and a deserving investment option, we believe access to the capital markets for our industry is going to continue to be more restricted.

It could be something like ESG investing gone awry, or it could be the Federal Reserve climate stress test on banks, or it could be SEC climate disclosures. To manage this risk, the prudent course under our Sustainable Business Model is to maintain a debt level, maturity schedule, and a liquidity level whereby we never need access to debt markets. Fortunately, we reached that point. Our guidance and future free cash flow generation, when you couple them with our balance sheet metrics, means CNX has the optionality to organically de-lever and be independent of the debt capital markets. For our industries, the CNX way needs to become the norm until policymakers and capital markets allow themselves to be mugged by the facts.

I’ll wrap with my third and final observation. The topic is one of sadness.

I’ve been around this industry and company for 32 years now. I’ve seen a free market driven, innovative, and entrepreneurial movement that disrupted the world with the shale revolution. I’ve witnessed the establishment of an energy powerhouse with the United States and energy independence if we want it. I’ve experienced vastly improved quality of life and revival of the middle class in an improved environment, including lower carbon intensity for my lifelong home of Appalachia as it retooled itself to take advantage of the shale revolution. And I’ve worked for a company that completely transformed from exclusively coal to now best-in-breed natural gas and midstream. And I’ve worked with people, of course, who care and who excel and who achieve, and who are compensated at the very best levels to be found in any industry.

So, CNX today is strong, vibrant, and secure. When you look at its future path, the opportunities are mind-boggling, from our developing exciting emerging technologies to what we should deliver on shareholder per share value.

Yet my emotion in 2022, as I said, is that of sadness, because much of what ails this nation and world did not have to be. Putin did not have to be enabled. Ukraine did not need to be destroyed. Americans didn’t need their households to be robbed by the thief known as inflation. And our energy security and our grid reliability, whether it’s Texas, California or Europe, none of them needed to be compromised. Yet, all of this happened, and it continues to run rampant, and it’s going to get worse, potentially much worse.

Putin did not have to be enabled. Ukraine did not need to be destroyed. Americans didn’t need their households to be robbed by the thief known as inflation. And our energy security and our grid reliability, whether it’s Texas, California or Europe, none of them needed to be compromised.

Why? Because the full potential of the American energy industry to unleash prosperity domestically and abroad, it’s been deliberately handcuffed. Energy scarcity has been manufactured by policy design. These industries were not allowed to become victims of their own success by providing more supply of our widgets, so that not only infrastructure and demand grew, but so that supply and demand would balance, so the prices can moderate, so the dictators don’t hold the free world hostage.

The current state of our energy industry, economy, and geopolitical standing are not healthy. Until the health of those improve, we’re all going to pay the price. It’s just a question as to what extent. This didn’t have to be. How long shall we continue to tolerate it?

The good news is the Appalachian region has the resources, know-how, and work ethic to be the fountainhead, or the catalyst, of the modern energy and manufacturing industries. We can be a center for skilled labor job creation to help pave a path to middle class access to the region’s underserved rural and urban communities. The only thing preventing this from happening is a collective willingness to embrace data and facts over politics and ideology.

We should embrace the assets, and the workforce, and the energy in the Appalachian region to be utilized first in this region and then far beyond. It can make western Pennsylvania, Ohio, western Virginia, or West Virginia the true energy capital of the world by developing and utilizing homegrown resources to build a local energy ecosystem that will cultivate and sustain the middle class for the next generation.

These natural gas-based products, they’re more environmentally friendly, lower cost and will be sourced locally in the Appalachian region instead of faraway lands with extensive supply chains of carbon footprints.

This is a realistic, actionable solution for the Appalachian region that runs counter to other efforts championed by establishment organizations, or by those with ideological goals.

The final thought ties back to where we started. Despite the challenges noted in my observations, we’re going to continue to embrace our tangible, impactful and local approach to ESG, which is going to help us execute our Sustainable Business Model and deliver long-term per share value, while advocating for our industry and region. The opportunity is now to reframe and redefine the region’s energy utilization and economic strategy, and it will directly and tangibly benefit local citizens, the local environment, and the entire region. When the ‘why?’ of what we do is so compelling, our path forward is always clear.

Commentary on the Domestic Appalachian Energy Industry