The following is a summary of Nick Deiuliis’ introductory comments from CNX Resources’ Third Quarter 2022 Earnings Conference Call, held Thursday, Oct. 27, 2022.
I want to provide a few thoughts regarding the macro backdrop and how CNX is continuing to uniquely position itself not just amongst energy companies, but also amongst the broader equity markets.
During the second quarter call, we discussed in depth the world’s growing demand for responsible energy development and how natural gas sourced from the Appalachian basin is an essential catalyst fuel in delivering that future. We laid out our vision of Appalachia as the heart of a sustainable energy revolution, and we discussed the numerous opportunities CNX is developing to leverage our existing asset base and core competencies to create significant free cash flow opportunities for our shareholders beyond our core gas development activities.
Today, however, I want to pivot back to the core of our investment thesis and the actions we are taking to position CNX for long-term per share value creation in the face of increasing uncertainty on three main fronts.
First, during the third quarter, the macro-economic backdrop in the US has continued to become more uncertain as inflation continues to erode purchasing power, interest rates have risen sharply, and equities valuations have declined. Despite this challenging backdrop, CNX was able to execute an attractive long-term debt refinancing that further extended our maturities profile and thereby unlocked additional degrees of freedom with respect to our capital market activities. Our combination of consistent quarterly free cash flow generation, extensive available liquidity, and our long debt maturity runway uniquely positions CNX to take further advantage of any deepening valuation disconnects that might occur in either the equity or debt markets.
Make no mistake about it, CNX is well positioned to continue to play offense in this type of environment.
The second area of uncertainty that featured prominently during the third quarter is the continued inability of our elected representatives to achieve consensus on interstate pipeline permitting reform. Without a meaningful acknowledgment of energy realities from Congress, the natural gas industry continues to be unable to unlock the full potential of US shale to serve the obvious energy demand centers here in the US.
Despite Washington continuing to ignore rational energy policy for the time being, CNX is one-of-one who has positioned itself to work in this potentially capacity constrained world. So, while Appalachia awaits future pipelines to be built, CNX will continue to focus on executing our maintenance of production plan to generate an annuity-like stream of significant free cash flow regardless of where we are in the commodity cycle. In addition to our organic base development plan, we will leverage our extensive legacy asset base to create new free cash flow growth opportunities through our New Technologies efforts and deep dry Utica development. We will clinically allocate this incremental free cash flow to create long-term per share value growth.
The third and last area of uncertainty that I want to highlight is the pricing volatility in the natural gas markets, and what we experienced during the third quarter is a reminder of just how volatile the commodity markets are, as well as how difficult they are to predict. However, CNX is uniquely positioned to respond to this uncertainty through its consistent programmatic hedging strategy and its basin-leading cost structure derived from its midstream ownership.
These two strategic differentiators significantly lower risk and provide long-term free cash flow visibility throughout all phases of the commodity cycle. This de-risked approach creates opportunity for significant long-term per share free cash flow growth even if lower natural gas price scenarios were to materialize.
So, the CNX story is simple, yet unique. It is a story about keeping our head down and executing our sustainable business model plan over an extended time-period time to generate sustainable per share value. Most companies do well when gas prices are high. What makes CNX unique is our ability to still thrive when prices are low, and things get tough. Our sustainable business model does not rely on gas prices staying high or on accurately predicting the future, which we all know is impossible; but instead, it is based on building a business that works in whatever the future holds. We are over two and a half years into executing this plan across many different macro backdrops, and Q3 adds another successful quarter to our track record.
I’ll wrap up my commentary with some final thoughts on our social impact. As we’ve discussed before, CNX’s sustainable business model is not only focused on creating value for our shareholders, but also on creating tangible and impactful value in the local communities in which we’ve operated for the last 150+ years.
I wanted to take the opportunity to highlight the kick-off of the second class of young men and women who are entering the CNX Mentorship Academy this fall.
As a reminder, this initiative is focused on exposing students in our underserved urban and rural communities to the myriad of career opportunities that exist within not just the energy industry but also throughout the region. These young adults are the foundation of tomorrow’s economy, and we are excited to build upon the success of last year’s class and to continue to provide a unique corporate engagement model for others in the region to follow. This fits right into CNX’s vision for the region as we wait for pipes to get built out of the basin.
There is no reason to wait to bring demand and manufacturing into our regions, which will help lift communities out of poverty by creating long-term manufacturing jobs, all while lowering global carbon emissions and improving the economy.
Additionally, in furtherance of CNX’s overarching aim to creating tangible and impactful value for our local community, another effort we’ve engaged in is “The HQ at CNX.” The HQ as we call it was created to provide office space in our headquarters building for non-profit, charitable, underserved, and underrepresented organizations to elevate and thrive their business while enabling collaboration with like-minded business individuals. We view it as the living embodiment of our Foundation – to find the diamond in the rough that might not receive attention from the establishment but is doing the important, hard work on the ground in our communities.
That’s what CNX is after – investments we can make that produce returns not only for our company but for the wider region. For generations, this region has fed CNX with unmatched talent and CNX has in turn fed the region with jobs, investments in our communities, and quality of life derived from the product we bring to market. That virtuous circle that is part of the fabric of our legacy lives on today through initiatives like our Foundation, Mentorship Academy, and HQ concept.
The HQ initiative is well underway, and we’ve gotten in half a dozen co-workspace tenants, which include a local non-profit career development association, a regional non-profit mentorship organization, a small local university, and two female-owned for-profit businesses (one a social media/marketing firm and the other a deli). We are excited for the opportunities ahead for the HQ to help reinforce our overall tangible, impactful and local value add philosophy.