Good morning, and welcome to the CNX Resources Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead..

Thank you, and good morning to everybody. Welcome to CNX's second quarter conference call. We have in the room today, Nick DeIuliis, our President and CEO; Alan Shepard, our Chief Financial Officer; Navneet Behl, our Chief Operating Officer; and Ravi Srivastava, President of our New Technologies Group.

Today, we will be discussing our second quarter results. This morning, we posted an updated slide presentation to our website.

Also detailed second quarter earnings release data such as quarterly E&P data, financial statements and non-GAAP reconciliations are posted to our website in a document titled 2Q 2023 Earnings Results and Supplemental Information of CNX Resources.

As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our press release today as well as our previous Securities and Exchange Commission filings.

We will begin our call today with prepared remarks by Nick and Nav followed by Alan, and then we will open the call for Q&A where Ravi will participate as well. With that, let me turn the call over to you, Nick..

Thanks, Tyler, and good morning, everybody. Second quarter of 2023, that marks our 14th consecutive quarter of free cash flow generation and the continued execution of our long-term strategy. It also represents the halfway point on the 7-year plan that we presented to the market back in 2020.

So 3.5 years into the plan, we've now generated approximately $1.8 billion in free cash flow. We reduced outstanding debt by almost $415 million, and we repurchased 30% of our outstanding shares. Now there have certainly been twists and turns from the original plan as time has passed and macro events have unfolded.

So we are on pace to exceed our goals, and we've been unwavering in the core principles of our sustainable business model it has, and it's going to continue to generate significant long-term share value for our owners.

And additionally, despite some near-term cyclical challenges that the industry is currently experiencing, the long-term outlook for CNX and for the natural gas industry as being the cornerstones of our collective energy and economic future that the long-term outlook has never been brighter.

During the quarter, we continued to focus on what I referenced is the 3 key areas of long-term for share value creation. The first, we've got efficient execution and the development of our extensive asset base. Second, we've got that continued progress in the growth of our new technologies business unit.

And then last but not least, clinically allocating that free cash flow to acquire a significant amount of our shares at prices that we believe represent a substantial discount to their intrinsic value. Operationally, the team has built some serious and impressive momentum across effectively all fronts in 2023.

Drilling and completions, they're firing on all cylinders. That's true for both the Marcellus and the Utica horizons, and that, of course, establishes a new efficiency level that's going to impact everything from TIL timing to capital intensity.

But instead of me talking about this, let's have Nav, our leader of the operations effort, tell you directly. So I'll turn it over for a few minutes to Nav..

Thanks, Nick, and good morning, everyone. As Nick mentioned, the team has been able to establish a new level of operational efficiency, this is important because it drives our foundational free cash flow generation that supports our sustainable business model. The team had several operational accomplishments in the quarter.

One of the key achievements was that we were able to compress cycle times and get a 7-well pad turned online 24 days ahead of schedule. We also accelerated the timing of 4 additional Marcellus wells that will come online later in the year.

This still acceleration was mainly driven by efficiency improvements and completion activities where we achieved a 34% increase in completed lateral feet per day compared to last quarter. We also decreased completion cost per foot by 5%.

Shortly after the quarter ended, the drilling team successfully its deepest and longest Utica well with the total vertical depth of 13,765 feet and a lateral length of over 15,000 feet. This well in the CPA Mamont area is a great accomplishment and supports the development of this prolific acreage across our long-term plan.

We have continued to apply these lessons to our other Utica drilling operations in Southwest PA, where we successfully drilled, completed and are currently flowing back 2 wells. In SWPA area, we also drilled 2 long Marcellus wells with a lateral length of over 19,500 feet each.

As we progress through our 1.5-rig 1 frac crew full year plan, we will be well positioned to grow volumes in 2024. During the quarter, we continued to run the second horizontal rig, which was released recently. As such, the remainder of this year's activity will primarily be 1 rig and 1 frac crew and the capital spend cadence will decline accordingly.

Moving into 2024 and beyond, we expect capital intensity to lower. The significant investments we are making this year and growing volumes puts us in a position to maintain our target production levels with lower overall activity moving forward.

Alan will go into more detail on the full year guidance shortly, but I want to make 1 important note on our operations. I want to reiterate that we are well positioned to adjust our activity set to respond to any material changes in gas pricing that may unfold in the second half of the year.

This flexibility is 1 of the key advantages of being the low-cost producer and owning our midstream assets. Our well economics remain attractive, even in lower pricing environments and we are not beholden to high fixed cost midstream arrangements that can lead to uneconomic decisions.

One note on our ESG initiatives, we are on target with production equipment modifications to reduce emissions by 70,000 metric tons CO2 equivalent for December 2023 compared to December 2022.

In summary, the operations team's focus on continuous improvement is driving outstanding results, and I'm proud of our team's diligence and continued hard work in positioning CNX as an operational leader in the basin. Now let me turn it over to Nick..

Yes. Thanks, Nav. That's exciting. So if I may, let me pivot now to new technologies. And as I mentioned on last quarter's call, we were expecting the business unit to be free cash flow positive in the year and that has started in the second quarter.

Alan is going to touch on this more in his remarks, but suffice it to say that this is a very exciting part of our business, and it's going to likely materially impact our free cash flow outlook moving into 2024 and beyond.

And most importantly, we're just getting started here, and that's due to our one-of-a-kind asset base that underpins our Appalachia first vision, and we've got a wealth of opportunity to drive even more per share value creation through these efforts in the years ahead.

One effort in our new tech unit that we are very excited about is the Appalachian Regional Clean Hydrogen hub or what's called ARCH2. This is an initiative that we've been working on for some time, and we've touched on it on past calls. But just as a refresher, our contribution to the ARCH2 hub effort is the Adams Fork Clean ammonia project.

That's going to be located in Mingo County, West Virginia, and it's expected to be 1 of the largest, if not the largest, and cleanest ammonia plants in the world. It's also the anchor project of the ARCH2 hub application to the U.S.

DOE, and you might be asking, why get involved in something of this size and scope in Southern West Virginia of all places. Well, first of all, this project in its location, it's a living, breathing example of our Appalachia First strategic vision, which is produced here, use it here first.

And in doing so, we can append the status quo, and we can provide vast economic opportunity in 1 of the hardest hit regions from an energy transition standpoint. Second, this region boasts some of the most abundant, lowest cost. And as Nav just pointed out, lowest emissions natural gas feedstock found anywhere in the world.

So there's no better place to build such a project, and that's exactly why we're so focused on working with our partners to help bring it online. We're eagerly awaiting guidance out of D.C.

related to the Inflation Reduction Act, or IRA on the hydrogen production tax credit, which makes this project viable, in addition to final decisions from the DOE on the hydrogen hub awards.

Now the intent of the hydrogen production provision in the IRA was to incentivize the creation of low carbon intensity hydrogen and to reduce emissions and to create jobs and economic activity in energy communities, and that's exactly what this project does, and it does it in a big way.

Now we've seen the chilling effect chatter out of the nation's capital and what that can do to investment decisions. A recent example was Constellation who caused the $1 billion clean hydrogen project investment, pending IRA implementation guidance. So we're monitoring this very closely.

Of course, we're hopeful that Washington is going to follow the intent of the law and help us make this important West Virginia project a reality. Regarding share purchases, let's talk about that for a minute. We continued our industry leadership on this front during the quarter. We repurchased an additional 2% of our outstanding shares.

And since the start of our recent share buyback program back in the third quarter of 2020, we've repurchased over $1 billion in shares or 30% of the company.

That equates to approximately 75% of our current authorization and that pace in magnitude and most importantly, the percent depletion of our current share repurchase authorization that far exceeds anything you'll see with respect to peers. Of course, actions speak louder than words.

And I think our track record of consistently returning capital to shareholders that speaks for itself. And even though we've been executing the strategy for several years, we're still when you look at it from a big picture perspective in the early innings, and we continue to believe that our shares are undervalued.

So as a result, we are announcing an additional $1 billion share repurchase authorization with no expiration, which reflects our continued confidence in the outlook for our business over time. This increase brings our total authorization to $1.28 billion when you include the $280 million that's remaining on the previous authorization.

And we believe the $1 billion increase in our share repurchase program, that just provides another opportunity to create incredible value over the long term for like-minded shareholders who will benefit as their ownership continues to grow meaningfully over the coming years.

I'd also like to take a minute to briefly highlight the non-op asset sale during the quarter. Broadly speaking, all asset sales, we said this before, they're evaluated under very strict criteria, and we consider the bar to be quite high. However, when something makes economic sense, we're going to capture that value.

In this case, we sold various nonoperated producing oil and gas assets consisting of royalty and working interest primarily located in the Appalachian Basin that were producing approximately 33 million cubic feet per day or roughly $4,000 per flowing MCF.

And through this transaction, we're able to monetize noncore assets and effectively pull forward value to be redeployed in an accretive manner. So last, I'd like to highlight our corporate sustainability report that came out during the quarter. This is a product we're very proud of.

Not only does it showcase our transparency and a wide array of information and investors and various stakeholders can use to evaluate our value proposition, but we hope that it showcases how our unique approach to ESG and our Appalachia first strategic vision that prioritizes actions and decisions that are tangible and impactful and local.

I want to take a minute to highlight just 1 example of this that we've discussed a bit in the past. That is the CNX Mentorship Academy, which focuses on local high school students who desire a family sustaining well-compensated career that doesn't require a 4-year college degree.

And the Mentorship Academy uniquely connects the region's premier employers and the building trades and the nonprofit community with local young emerging talent, this tangible local effort.

It's just concluded and wrapped up its second full year and its continued success and its scaling, it underpins our long-term human capital strategy and drives us toward achieving our diversity goals as well as expanding inclusion in our regional economy.

In other words, our goal is to ensure that the vast benefits of the energy and manufacturing economy within Appalachia are available to the young men and women in some of the region's most disadvantaged communities. That be a win for CNX as a company. That would be a win for our collective industries.

And of course, that would be a win for the region at large. And it's a prime example of how we believe effective corporate ESG initiatives should be modeled and how they should be executed. And in a week or so, we kick off the program year for our third class which will be the largest to date hard to believe what's happened in the past 3 years there.

So with that, let me turn things over to Alan..

Thanks, Nick, and good morning to everyone. As Nick mentioned, this quarter represents the 14th consecutive quarter of free cash flow generation through the execution of our sustainable business model and long-term strategic plan.

During the quarter, we generated approximately $135 million of free cash flow, including the proceeds from the previously announced non-op sale. Since we initially laid out our free cash flow plan in the first quarter of 2020, this brings our cumulative free cash flow to approximately $1.8 billion, which is roughly 60% of our current market cap.

We are well on our way and continuing to execute our long-term free cash flow generation plan, and we believe that we remain well positioned to take advantage of any deepening valuation disconnects that might occur in either the data equity markets.

We also continue to believe that our shares trade at a significant discount to their intrinsic value, and we will continue to take advantage of this opportunity moving forward to drive our share count lower and free cash flow per share higher. More on that shortly.

On the balance sheet side, we have constructed our debt maturities and leverage profile to reduce risk and enable maximum flexibility when making capital allocation decisions. Our overall objective of maintaining a low-risk balance sheet through active debt maturity management, and lowering overall absolute debt is unchanged.

Our significant maturity runway and robust hedge book provides visibility into the future that underpins our capital allocation flexibility.

Moreover, as we have consistently demonstrated, our capital allocation plan is intended to be fluid and will adjust as the underlying variables adjust, the most important variable currently being our equity valuation, while we have been consistent in signaling our desire to achieve lower absolute debt levels, the timing of that delevering is an output of running the clinical capital allocation math.

As we've seen over the last few quarters, we expect leverage ratios to tick up and down as underlying EBITDA adjusted commodity prices. Further, absolute debt levels may also fluctuate in the short term based on the timing of free cash flow deployment. However, any such fluctuations are merely short-term noise.

Before turning to the updated guidance for 2023, I want to touch on 3 key themes that we see unfolding moving into 2024 and beyond that drive our confidence in our ability to materially grow long-term free cash flow per share.

First, we expect nat gas realizations to increase in 2024 and beyond as forward NYMEX strip prices are increasing over the same period.

The macro backdrop of strong long-term fundamentals for natural gas demand due to natural gas serving as the cornerstone of our world's energy mix will provide a material boost to our cash flows as we move beyond the near-term pricing environment.

Second, as we've previously guided to, we expect higher levels of production in 2024 and capital levels to decline materially moving forward in 2024 and beyond. As a result of the current operational successes we're experiencing, beginning in 2024 and beyond, we are expecting to grow volumes over 2023 levels to approximately 580 Bcfe.

Holding production at that level beyond 2024 then provides us clear line of sight to driving capital intensity materially lower in 2024 and below $500 million annually by 2025.

This assumes no change in current service cost pricing, but is driven instead by the lower capital intensity needed to maintain our projected 2024 production levels moving forward.

This would return us to maintenance capital levels similar to those initially contemplated as part of our 7-year plan with the exception of the higher current service costs and about 20 Bcfe a year more of production compared to that original plan. The third key theme is that our new technologies group is now cash flow positive.

As we discussed on prior calls, there are 3 main categories that the New Tech Group has been pursuing.

One, expanding alternate fuel markets such as CNG, LNG and hydrogen; two, developing oilfield services technologies that lower cost and reduce emissions; and three, attaining value recognition for the environmental attributes tied to our waste methane abatement operations.

The latter of these 3 being the most progressed in terms of impacting free cash flow in the near term. For the quarter, we recorded approximately $8 million in revenue associated with environmental attributes.

We are still in the very early stages of developing these opportunities, but to provide some color on the near-term magnitude of their impact, we believe we have line of sight on the new technologies group contributing approximately $75 million in free cash flow annually starting in 2024 with the potential of achieving up to $100 million.

Additionally, we expect this annual free cash flow from the New Tech Group to grow meaningfully higher in the years beyond 2024. The potential is truly exciting, and we look forward to providing more updates in detail on these projections in the coming quarters.

When you consider these 3 factors together, it is easy to see the free cash flow per share potential of the company in the coming years. They also make for a very easy capital allocation decision to continue reducing our share count. The overall trend is clear.

Unless our share price materially re-rates, we expect our outstanding shares will continue to shrink dramatically over the next several years, contributing to further growth in our free cash flow per share. Now let's shift to our updated 2023 outlook on Slide 6 to clarify how we see the remainder of the year unfolding.

We have updated each of the major guidance components for the impact of the non-op sale that occurred during the quarter and have adjusted our EBITDA and free cash flow outlook for the year to reflect that transaction as well and to reflect the decline in near-term commodity prices that occurred during the quarter. Starting with production.

The key takeaway, as Nick and Nav mentioned, is that our operational progress for 2023 has been excellent on a wellhead basis, we remain on track with the initial plan for 2023 after adjusting for the non-op sale. The adjustments we are making to narrow our production range to between 545 and 555 Bcfe are being driven by 3 factors.

First, we've removed approximately 9 Bcfe of volumes associated with the non-op sale. As a reminder, the effective date of that sale was April 1, and the asset was producing approximately 33 million cubic feet equivalent per day. The second adjustment is related to lower expected ethane recoveries for the year.

One of our key downstream counterparties has been unable to take the ethane volumes initially forecasted due to their plant start-up challenges. And as such, that ethane has remained in the gas stream have been sold for heat value.

The bottom line is that due to penalty provisions in our contract with this customer, our overall free cash flow for the year has not been impacted by this. However, we expect our reported production equivalent volumes for 2023 to be approximately 9 Bcfe lower than they would have been had the ethane been recovered as planned.

Lastly, due to the operational efficiencies, we expect to offset approximately 3 Bcfe of the non-op and ethane adjustments. In summary, despite the noise associated with the 2 downward adjustments, the key takeaway is that the operations are successfully on track with our plan.

And as such, and as stated earlier, we are also reaffirming our production outlook for 2024, which is now approximately 580 Bcfe after updating our prior guidance of approximately 590 Bcfe to reflect an estimated 10 Bcfe impact of the non-op sale on next year's volumes. Next, turning to capital.

The second quarter included spend associated with running 2 rigs and 1 completion crew for the entirety of the quarter. The second horizontal drilling rig has been recently released, which will result in the cadence of capital spend moving sequentially lower through the remainder of the year.

On the service cost side, while we have seen some modest downward movements in certain categories, there has not been enough downward movement to materially impact projected 2023 capital levels. As such, we are moving the lower end of our capital range is up to reflect this.

Moving forward, we are optimistic we may see further reductions on the service cost side as we head into 2024, and we will provide color on that in future calls as that outlook becomes clearer. One last point on capital.

As we touched on earlier, our 2023 activity set and corresponding capital expenditures represent more than a maintenance of production plan. This level of capital spend allows us to keep an efficient operational pace that results in production volume growth from 2023 to 2024.

Additionally, despite no changes to the current plan at this time, should forward gas prices decline further throughout the year, we will not hesitate to adjust our capital activity set in accordance with our focus on achieving the best long-term economic results.

Lastly, on guidance, we've also increased our free cash flow outlook for 2023 to approximately $325 million.

This update includes the onetime proceeds from the non-op sale, offset by roughly $12 million free cash flow decrease due to the same non-op sale and a roughly $35 million decrease due to the continued decline in commodity prices experienced during the quarter.

However, despite the near-term commodity headwinds on a per share basis due to the continued reduction in shares that occurred during the quarter and the increased overall total free cash flow, we are now projecting 2023 free cash flow per share to increase by 33% to approximately $2 per share before any future share count reductions that may occur during the remainder of the year.

To conclude, we are confident that the sustainable business model that we have created will continue to deliver value to our shareholders throughout the entire cycle.

Our focus for the remainder of 2023 will remain on safe and compliant execution to develop our extensive natural gas asset base, accelerating free cash flow growth from our new technologies business on consistent and clinical capital allocation to grow our long-term free cash flow per share and most importantly, as always, on ensuring all of our decisions continue to reflect a long-term owner mindset.

With that, I will turn it back over to Tyler for Q&A..

Thanks, Alan. Operator, you can open the line up for questions at this time, please..

[Operator Instructions]. The first question comes from Zach Parham with JPMorgan..

First, just on the longer-term guide. You mentioned the line of sight to getting to less than $500 million of annual CapEx and $25 million plus to hold production flat at 580 Bcfe, you're at 650 this year on CapEx at the midpoint.

How should I think about 2024? Should I just assume kind of the midpoint of those 2 numbers? Just really looking on some -- for some color on what '24 spending could look like..

Yes. We're not going to provide a formal guidance range at this time. But the way to think about it is, ultimately, you're able to step down from a 1.5-rig program to maybe 1.25 or 1 in a month or 2 program next year. At the same time, you have to run fewer completions, so you don't have the full completions crew.

And by the time you get to '25, you're basically just a 1 rig program and kind of a spot completions crew. So that's really what drives it..

Got it. And then just on the new technologies business, you talked about $75 million in free cash flow expected next year from that business.

Could you give us a little more color on the different projects that are going to generate that free cash flow? And maybe some color on the expected CapEx you plan to spend on that business?.

Yes. I think in the near term, as we alluded to in the comments, what's most material right now is the recognition of the environmental attributes associated with the waste mine capture projects we run. You should see that moving sequentially higher.

This quarter, we booked the $8 million, and then that will move sequentially higher, but that will be the bulk of the driver in the near term, including '24..

The next question comes from Leo Mariani with ROTH MKM..

I wanted to just delve into the production a little bit more here in 2023. Just kind of looking at second quarter, production was down kind of a couple of percent versus 1Q. I think you guys had 13 turning lines this quarter. So kind of turn lines were up and production was down.

Obviously, you detailed some of the reasons why you kind of lowered the guide here a little bit, but you've got a pretty big ramp on production in '24 from kind of where it is today. So could you give us a little bit of color on kind of how the second half of '23 breaks down.

Do we see pretty significant growth in 3Q and 4Q to get to kind of a higher exit rate that kind of gets you more to that, maintenance level and sort of '24.

Can you just kind of help us bridge the gap here on the production between kind of second quarter, which was moving lower and kind of a big jump next year?.

Yes. What's important to remember on the second quarter is because of the April 1 effective date on the non-op sale, you're missing about 3 Bs where we otherwise would have been. So if you add that back sequentially were higher, and as we talked about going into the year, we started the year at the low point.

We're moving up to kind of the run rate we want to be at in Q3, and then you should see that kind of exit through Q4 to hit that 580 for next year..

Okay. So just to clarify, it sounds like you're going to get to this much higher run rate in Q3. And then I guess, are you kind of saying that it's sort of flattish from there into the run rate for next year? Or do you see kind of continued growth into kind of year-end and then more flat as you get into '24.

I'm just trying to understand the cadence for the rest of the year..

You'll see a tick up in Q3 and then by the time to get to Q4, you should be around the run rate that you would extrapolate for the rest of '24. ..

Okay. So up a little bit more here in Q4. Okay. That's helpful..

Start to build..

Okay. And I guess, just for the asset sales, I mean, I saw that your LOE was kind of down this quarter per Mcfe.

Just trying to get a sense, was that part of it due to the asset sale here? Could you see some kind of cost benefits, maybe these were some kind of older, higher cost wells that you kind of shed and is kind of second quarter LOE kind of the right run rate to think about going forward? I know it will fluctuate a little bit on a quarterly basis..

Yes. I would say the non-op sale had little to no impact on kind of that. The majority of those were really interest in kind of lower cost working interest wells. What we did see during Q2, we talked about the operational success. Nav team has done a great job controlling LOE. Moving forward, we expect that trend to continue.

And then there were some things on the marketing side with some rate settlement cases that impacted the quarter as one-offs as well. ..

The next question comes from Bertrand Donnes from Truist..

It looks like your operational efficiencies may allow you to have kind of a faster pace of activity than you were previously expecting. And I just wonder understand the CapEx range for this year.

On the prepared remarks, it sounded like maybe the low end was just raised due to the current state of service cost, but I just wasn't sure if maybe there was some sort of allowance for maybe some activity being pulled from '24 into '23? Or could you just talk about maybe the optionality that you could do that later in the year?.

The bulk of the reason we're pulling up the low end was because the service costs haven't materialized. We've seen some green shoots as we discussed, but that kind of the low-end cases off the table as costs haven't come down as quickly as they have in other parts of the cycle.

But you're right on with the kind of the completion efficiency and other stuff. We have been able to pull in a couple of TIL this year, which will push capital up incrementally, but it's not as material as kind of the service cost adjustment pulling up the bottom end..

I assume minimal production impact from those late year TIL?.

Yes. We're just talking about sliding those in a couple of weeks..

Great. And then the second question on -- on the buyback strategy, I mean, you guys continue to execute on that. And I think a lot of people probably appreciate that even noncore sales count towards your free cash flow and that you -- that trickles into repurchases.

I guess just on the percentage base, 1Q was probably an anomaly where you repurchased almost your entire free cash flow balance, you did around half of that.

Is there a percentage that you guys are looking to target on an annual basis? Or is it opportunistic? Or what's the strategy there?.

It's opportunistic, right? We always talk about we continually run the clinical allocation mass and depending where the share price is kind of dictates our pace. And right now, we see it well below intrinsic value, but we do try to optimize around the edges where we're picking up shares..

We'll say, too, that when you're running the math currently on the share repurchases versus other options for that free cash flow allocation, share repurchases are extremely difficult to beat..

For the reasons we talked about there, the 3 key themes we see comments as well..

Makes sense. So don't think about it as a percentage of your free cash flow more of just, hey, you're going to make share repurchases because the shares look attractive and you'll just do that when you feel best..

Yes, exactly. We got a lot of flexibility with the way the balance sheet is structured. So we don't necessarily need to tie exactly the free cash flow in any given period. ..

The next question comes from Michael Scialla with Stephens..

I wanted to ask again about the 2025 maintenance capital getting below $500 million. I think you mentioned that you would go down to 1 rig and less than 1 full-time frac crew.

Just kind of wanted to try to understand a little bit better what's driving that? Is it the decline rate continuing to shallow or better efficiencies? And if you do go down to, I guess, less than a full-time frac crew are you worried about losing some of those efficiencies?.

Yes. I would say it's a combination of factors, right? It's your decline rate, we've kind of reset the maintenance of production level here at 580. We had some bumps last year, and we're now -- we're back to where we need to be on an efficiency rate.

So it's really you just don't need as many pads each year, right? And this is the kind of what we set out to do in 2020 was to be able to continue to push that capital efficiency down by just picking a level and holding it until the market sends a call for more gas in this region. ..

And on the well performance side, all the wells are performing at or above what our expectations are..

Okay.

And any concern about losing efficiencies if you're not going to run a full-time crew and even, I guess, worried about losing the crew altogether?.

Yes. No. I mean we certainly consider that, but that's the operations teams, that's their goal is to make sure they're running as efficient as possible. Obviously, it's easiest with the continuous operations, but that would result in continued growth year-on-year, right? And that's not the model we're running right now. ..

And as far as efficiency is concerned, we kind of look at efficiency from 3 different buckets, right? One is what our operational procedures are. So no matter like when we pick up our crews, we know exactly what to do, how to run those operational procedures.

And then second, who is like preceding those gaps in our -- we have like preplanning processes, and we are really integrated with all our service providers.

So we do really deep comprehensive preplanning of operational execution before we start, right? So coupled with those 2, and then when we are executing, we kind of like take into account our design and engineering efficiencies in place. We optimize on those.

And then second, we optimize on schedule length is what is the best time for us to scheduling. So with all these 5 different parameters to -- for us to optimize on I think we'll be able to stay at what our efficiency level is or actually improve and beat it..

Great. I appreciate the color there. And Nick, you mentioned the ammonia manufacturing facility working on with [indiscernible] Energy, if you get the support you expect from Washington there, can you just talk about what the timing of that project might look like and would CO2 sequestration there require a classic drilling permit.

Just trying to frame up how that project might unfold..

This is Ravi. So we expect the guidance to come out in the later part of this year from Treasury and IRS on kind of drives the investment decisions on when the construction starts on this facility if everything kind of checks out, we were expecting the construction to start maybe mid of next year.

It's a 2- to 3-year construction project, get it up and running. And we're also waiting on the CCS side of things. A lot of work is happening to figure out where the sequestration is going to happen. We have -- we control a lot of assets that make it successful in that region.

But the Classics UIC well that you're talking about, there is West Virginia primacy issues, whether West Virginia going to have primacy or not, whether we have to petition the EPA to do that. Besides trying to get the primacy for these UIC wells.

So there's a lot of stuff in that arena that we're waiting to see how it all shapes up to see what our next steps are going to be. But in the meantime, based on the guidance from treasury and IRS, the construction for the project is expected to start mid of 2024..

The next question comes from Noel Parks with Tuohy Brothers..

I wanted to just ask for a bit of an update and I understand what you've been saying about just still waiting for guidance around the IRA, but in general, has there been any progress on the specific terms of Adam Fork? I think a quarter ago, there was still quite a lot to be determined. So anything you can tell us on that would be great..

Some of that is still in the flux a little bit. I think like based on the treasury guidance depending on when the investment decides are going to be. I think some of the things that are set is that we're going to provide the CCS services, we're going to provide the feedstock.

I mentioned that in the call last quarter that we have all the assets that are required to make this project successful. We have the lowest carbon intensity feedstock that's available that's going to be required to produce the hydrogen subsequently ammonia. We have the surface and the poor spaces, do sequester CO2.

We have the right of pipeline right of ways to move the CO2 and the feedstock around. We have the technical expertise to drill these deep UIC wells that's required to sequester the CO2. We have the gas processing and handling expertise to move the feedstock and the CO2 molecules around.

So we control a lot of that stuff, but I think the investment decisions on the project is still depending on a lot of external factors such as the treasury guidance, such as the hydrogen hub decision from the DOE.

So stay tuned for more updates, but I think we're relying on some external factors to make some of these concrete decisions in the coming months..

Yes. The good news is that big picture, the intent of Congress is very clear of how this project would sit, right smack in the middle of what was intended with the IRA.

But as we've seen in numerous different industries and with different situations, how the administrative state ends up interpreting that, we need to make sure that the interpretation is consistent with the intention of the law. And that's what we mean by waiting on guidance from Washington..

Great. I was wondering a bit about -- as far as the cost environment, it seems to, I guess, maybe beyond the way to being unanimous that 2023, maybe in Appalachia is not really looking like the year that there's going to be much give back from service providers. And you expressed some optimism -- a little cautious optimism out 2024.

Is this sort of cycle different as far as -- I mean, I guess, between industry capital discipline that's kind of been reflected on the service providers part as well, in some other basins, we have heard a little bit more optimism about frac costs coming down and so forth. So just wondering which factors you think might be basin specific..

Yes. I mean if you think of our basin, we've all kind of been at a maintenance production level, give or take, for a while. So there wasn't as much activity to drop up in this basin and some of the other basins. But we still do see things on the commodity side improving.

And like I said, some of the service categories with some of the kind of marginal players, maybe the private guys drop in activity in the sort of price environment have provided a little bit of an uplift certainly not to the magnitude we hope at the beginning of the year, but some of these contracts come up during the Q3 and Q4, we'll see how the very set going to the '24.

..

And this is Nav, so I want to add some color to it, how we at CNX look at cost. So in cost, we divide cost into 5 different categories, right? One is our design and engineering where our engineers really hone on optimizing and continuously improving and driving down costs from an engineering standpoint.

The second phase is our operational and execution efficiency. So we are always optimizing that and trying to increase our efficiency, as you have seen we have done in the last 2 quarters.

The third part of this is our supply chain team where we are always negotiating and trying to work with our partners to increase efficiency and drive down cost per unit basis, right? And then third -- sorry, the fourth part of it is our commodity pricing reps, where we see steel price and diesel price are changing.

And so we are tracking that and trying to drive down the cost. And then fifth part of that is scheduling.

So we are continuously trying to improve on which locations to go to, so we can affect our per unit price cost too, right? So with all of those 5 things in consideration, what we have seen or we are seeing over the next like you asked for completions, so in completions, we divide all of that into -- 1 is frac equipment pricing, where we are driving up efficiency, so our per unit cost is decreasing.

And then your sand cost, and our supply chain team has done a fantastic job of working with our service providers, and we have been able to drive that cost of sand down on a unit per ton basis. And then the third part of it is like water.

So our water team has done a fantastic job of optimizing and optimizing our gathering systems and how we acquire and get water to location to reduce that cost. So overall, we think our completion costs are going to be driving downwards for the next few quarters for sure..

Great. Thanks for the detail. Bye-bye..

The next question comes from John Abbott with Bank of America..

Appreciate the color on the new technology business in 2025 potential spending. Just starting with 2025, I just want to make sure that I sort of understand this. So the -- that CapEx that you're suggesting around $500 million, does that include other discretionary spending. Does that include spending on like technology business.

What is -- how do I think about other CapEx that year?.

Yes. So that number is primarily on the legacy kind of E&P business, right? There's no near-term major capital expenditures like that would materially impact on the new technology side. Like we talked about the the nearest term real positive uplift on that side of the business is with the environmental attributes.

So you have limited CapEx in the next year or 2 with that..

Yes. And just like we've done in the past, we're going to go through the clinical math to decide where the capital allocation is going to occur in once we have a better view of what projects we're going to pursue, we'll update the community with how much capital is going to be required on the new tech side of things..

All right. Appreciate it. And then for the -- for our follow-up question, it's been a while, but you've given guidance in the past, just -- how are you thinking about the trajectory of cash taxes at this point in time.

Given the lower potential spending and the moving parts, how do you think about your future cash taxes?.

It's basically the same as when we went into the kind of the 7-year plan. You kind of get to that $3 billion mark of free cash flow generation is where you start becoming kind of a cash tax payer again. So we're still a few years out. You're still out in that '26, '27 time frame before you see anything material on the cash tax side..

Appreciate it..

The next question comes from Jacob Roberts [ph] with TPH & Company..

Just curious if you could provide some background on how the recent deal came about what the opportunity set for similar or larger deals may be and perhaps if the proceeds are earmarked for anything in particular?.

You're referring to the non-op sale?.

Correct?.

Yes. I mean we're always going through kind of an exercise in determining are we getting the best value in terms of noncore assets. Is there some way to raise proceeds to reinvest in a more accretive manner, this is an asset set that it's all non-op. So it's definitely noncore.

And we ran our kind of internal process and we got a lot of strong feedback from it, and we're able to monetize it at a flowing end number. that relative to our public valuation, if you reinvest all the proceeds into share prices, you're going to come out ahead. That's how we think about that..

So is it fair to assume the proceeds will be heading to share buybacks in their entirety?.

I think we guided to. We're flexible. If the stock were to run up, we'll change our capital allocation strategy. ..

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

Great. Thank you, everyone, for joining this morning. Please feel free to reach out if you might have any additional questions. Otherwise, we look forward to speaking with everyone again next quarter. Thank you. ..

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