Good morning, and welcome to the CNX Resources Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your telephone keypad. To withdraw your question, please press Star then two. Please note this event is being recorded. 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 third quarter conference call. We have in the room today Nick DeIuliis, our President and CEO, Don Rush, our Chief Financial Officer, Chad Griffith, our Chief Operating Officer, and Yemi Akinkugbe, our Chief Excellence Officer. Today, we'll be discussing our third quarter results. This morning, we posted an updated slide presentation to our website. Also, detailed third quarter earnings release data such as quarterly EMP data, financial statements, and non-GAAP reconciliations are posted to our website in a document titled, "3Q 2021 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 in our previous Securities and Exchange Commission filings.
We will begin our call today with prepared remarks by Nick, followed then by Don. We will then open the call for Q&A, where Chad and Yemi will participate as well. With that, let me turn the call over to you, Nick.
Thanks, Tyler. Good morning, everybody. Similar to the last quarter, we had another clean and easy-to-understand quarter overall. Slides two and three, I think, sum that up. They both are highlighting our theme, which has been steady execution that puts us in a position to manufacture our free cash flow. Whether it's safety or environmental compliance or overall field operations, all of these things are the areas we focus on. The sequence is a simple one. It's consistent, methodical execution that results in significant free cash flow generation, and then the free cash flow allows for capital allocation opportunities, where we're primarily focused on balance sheet strengthening and share count reduction. The net result of all that's intrinsic per share value growth.
As we continue to trade at a material discount to our intrinsic per share value as we see it, and with net debt declining and leverage improving, we steadily increased our attention on share count reduction. In Q3 was a good example of this. Approximately 60% of our free cash flow is returned to shareholders in the form of buybacks, and most importantly, at discounted prices. As slide two highlights, we continue to see a significant opportunity to retire additional shares at what we believe to be currently attractive prices. As a result, on October 25, earlier this week, the board has increased our share repurchase authorization by $1 billion. Now, having a sizable share repurchase authorization at our disposal, that's normal course for CNX. That's part of our toolbox, so to speak, in terms of how we allocate capital.
We recently extended our CNX and CNX Midstream credit facilities, also extended a bond maturity. These actions were opportunistic, and now they provide an even longer maturity runway and more flexibility and capacity for future capital allocation moves. We plan on making such moves as the facts and circumstances dictate the internal rate of return math of capital allocation and free cash flow per share growth. Now I suppose in many ways our approach might be a little bit different than what's in vogue today in our space. Our path is really pinned to optimizing intrinsic per share value by looking at the long term, by methodically executing, by de-risking, and obviously by astute capital allocation. We don't necessarily care about scale or size or things like industrial logic that hinges on what's trendy or the herd mentality.
Instead, we're committing to the impactful math of good old-fashioned per share value creation. We want tangible actions that are gonna be backing the words and the math, and we are going to embrace the most local-centric capital allocation you can find, which of course is acquiring and betting on yourself. Now, we use these, words tangible, impactful, and local, and I think you've seen those with our ESG effort. Those words tangible, impactful, local, they're not just buzzwords, and they're not only applicable to ESG. They permeate everything we do on behalf of our owners, our employees, and the regions that we operate and live within.
I don't know if you guys are fans of history, but there was a historian, Oswald Spengler, and his claim to fame was coming up with a theory that national survival requires keeping a nation internally fit and being ready for external events. If you take that approach or that view from that historian, we basically embrace that with how we built CNX. We built this company internally to not just survive, but thrive as external events play out, whether it's macro or pricing or industry-centric. Those are gonna be the facts and circumstances that drive that rate of return math of capital allocation. For third quarter, the cliff notes, free cash flow and free cash flow per share were up. Net debt and leverage were improved.
Share count was reduced at deep discount pricing, and we increased our 2021 free cash flow guidance to $500 million or $2.37 per share. We're gonna keep closely following the market. Pretty simple. I'm gonna turn it over to Don now, who's gonna go into a little more detail.
Yeah. Thanks, Nick, and good morning, everyone. I'm gonna start on slide four, which highlights our balance sheet and liquidity strength. We reduced net debt again in the quarter and also completed a couple of important capital market transactions that reduced our interest expense and extended maturities.
Specifically, during the quarter, we opportunistically completed an 8.5-year, $400 million senior notes offering at 4.75% due in 2030, which was used to pay off our 6.5% CNX Midstream notes due in 2026. The new notes issuance and partial tender for the 2026 notes closed in September, and the complete redemption to pay off the remaining 2026 notes not tendered closed later on October 15, per the indenture. This resulted in the September 30th balance sheet showing a temporarily high cash balance as approximately $234 million of the 2026 bond was ultimately retired on October 15. Slide four represents the current maturity schedule as of October 15, after we repaid the remaining balance of the 2026 notes.
Also, during the quarter, we used the CNX credit facility to repay and terminate the $161 million Cardinal States loan, resulting in a net interest savings moving forward as we paid off the 6% loan at par with our 2% revolving credit facility. Lastly, we completed an amendment and extension to our CNX and CNX Midstream credit facilities after the end of the quarter. This extended the maturities to October 2026, essentially giving us a five-year credit facility. Our liquidity remains robust as we have over $1.5 billion of undrawn capacity on our revolvers, and our borrowing base increased compared to the prior facility as well. Let's now shift to slide five, which highlights progress on our two main capital allocation priorities since the third quarter of 2020.
As we have discussed in the past, we have focused on reducing debt and returning capital to shareholders through share buybacks. Since last year, CNX has repurchased 14.7 million shares for $175 million. During Q3 2021, we repurchased 6.5 million shares for $78 million. On the debt side, we have reduced net debt by $523 million since year-end 2019, which includes a $235 million in debt reductions since the third quarter of 2020. Our capital allocation priorities continue to focus on reducing debt and returning capital to shareholders through share buybacks. The magnitude and pace of these decisions will ultimately be determined by the facts and circumstances as we move forward quarter after quarter.
We have clear visibility and confidence in our cash flows moving forward, and our leverage target remains at 1.5 times. The share price and free cash flow allocation math will dictate when we reach that target. I will end on slide six with guidance. Through continued plan optimization, cycle time compression, and pulling forward the timing of some activity, we increased our production guidance to 570-580 Bcfe. This higher expected production, along with higher assumed gas and liquids prices in the period, have resulted in our adjusted EBITDAX increasing by approximately $160 million based on the midpoints of guidance. This all occurred within the previous capital guidance range, which we have simply tightened for the year.
As you can see, our free cash flow increase did not go up dollar for dollar relative to our EBITDAX increase. This is because we include working capital changes in our definition of free cash flow, which, as a reminder, is simply cash flow from operations minus investing cash flows. I would like to spend a minute explaining the mechanics of one of our key working capital items, cash timing of our hedge settlements versus physical sales settlements. In particular, December hedge settlements will impact 2021 reported free cash flow since we cash settle the December financial hedges in early December, while cash receipts for the December physical sales aren't received until January. This 30-day dynamic doesn't impact our EBITDAX projections, nor does it impact the long-term free cash flow generation of the company.
It does cause free cash flow to slide between reporting periods as the underlying settlement price fluctuates during the quarter. Typically, the effect of this is not material. However, as we enter a volatile December natural gas contract, we want to make investors aware of this near-term working capital dynamic and its potential effect on estimated 2021 free cash flow. To summarize, if December first of month pricing goes higher, it will reduce Q4 2021 free cash flow versus our guidance, but increase Q1 2022 free cash flow. The reverse is also true. If the December first of month contract falls from current levels, CNX will have a lower December hedge settlement payment and a higher Q4 2021 free cash flow with a lower Q1 2022 free cash flow.
Net-net, the company is slightly better off if December gas prices go higher since we do have some open volumes that benefit from it, but we will not see the increased free cash flow from December physical gas sales until January 2022. That leaves me with a few final points that I wanted to make in regards to our hedge book, how we think about it, and how mark-to-market gains or losses affect the future cash flows of the business. We fundamentally believe that natural gas prices are impossible to consistently predict. You might guess right every once in a while, but not each and every year for decades. We believe in the long run, you will catch any gas price upside in the forward markets.
Over long periods of time, you will not miss out on gas price upside and will still protect the downside by consistently forward hedging over decades. We view our hedging philosophy as right way risk mitigation, meaning that our free cash flow and capital investments are protected should prices fall for a few years. On the opposite side, if we have a mark-to-market loss on our hedge book, that means the future annual free cash flow generation of the company has actually increased, as we still have a significant open volumes in the future. Not to mention lots of other ways to create incremental shareholder value in a sustained high gas price world.
Case in point, our previous guidance of $3.4 billion in free cash flow from 2020 through 2026 and hedge book position at that time was based on the approximately $2.50 NYMEX strip that existed at that time. Thus, our hedge book was significantly in the money mark-to-market. Since then, our mark-to-market hedge book has moved to a significant out of the money position, which is due, obviously, to the average NYMEX strip moving to over $3 as it stands today. While higher gas prices have a negative impact to the mark-to-market of our hedge book, net-net is a positive dynamic for the future free cash flow potential of the company.
While we will not be providing updated guidance at this time, we would like to remind everyone that our previously issued seven-year guidance was based off of a much lower strip pricing environment at the time of issuance. As such, it is no longer current, given prices are materially higher in the forward markets today. With that, I will turn it back over to Tyler for Q&A.
Thanks, Don. Operator, if you can open the line for questions at this time, please.
Yes. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Zach Parham with J.P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my question. First, just wanted to ask on the buyback. You know, you were much more aggressive this quarter and also flagged buying back an additional 1 million shares in the first two weeks of October. You know, the board raised the buyback authorization by $1 billion. A number of your peers have laid out more formulaic cash return programs. Maybe could you talk a little bit about the pace of the buyback going forward and just, you know, your thoughts on allocating free cash flow between the buyback and debt reduction in 4Q and in 2022?
Sure, Zach, this is Nick. A couple different things maybe to put out there. One, the billion-dollar increase in share buyback authorization, as we said in the comments, that's just one of the tools that we always wanna have in our toolbox to be able to efficiently and quickly allocate capital where we see opportunities. We're solving right for the long-term intrinsic value per share. I think from a principal perspective, there's sort of two big drivers of what we're doing in terms of what we think reflects a sustainable financial business model that works over time. One is we always want a component to return capital to shareholders. We've been doing that for a while, to your point.
Two, we wanna be reducing, even though it might be nominal amounts of debt, we wanna be reducing some level of absolute debt on a consistent basis. Beyond those two principles, now you're getting into sort of the tactics and those facts and circumstances that we spoke about. We're very almost just clinical with respect to how we look at the share buyback rate of return and wanting a margin of safety with respect to it. If that rate of return has a significant margin of safety tied to it, that's where we'll pursue our avenue via returning capital to shareholders. That's what we see, you know, with respect to where the shares are at today. This is not prescriptive. Okay?
In many ways, if you're following the facts and circumstances, it's almost the opposite or the mirror image of what we're doing with hedging, with the programmatic hedging approach. There we are very consistent. I would expect flexibility to be the buzzword here on capital allocation when it comes to returning capital to shareholders. That's a good, I think, approach to have with considering the space that we're in and the commodity and everything else, and the twists and turns that it takes. You know, what that means for Q4 and what that means for 2022 and beyond, I think you just follow the rate of return math and you'll see, at least in terms of where we're currently at, allocation of capital to further improve balance sheet as well as to reduce share count.
Got it. Thanks, Nick. Just wanted to follow up with a question on 2022. I know you don't have guidance out there specifically for 2022, but you talked about the maintenance program being in place from 2022 through 2026 at around 560 Bcfe.
Annual production. Just given a little higher volumes in 2021, does that change things at all or rebase that program a bit higher? You know, really just looking for any color on production trajectory going forward from here.
Yeah. Well, we're not gonna get into sort of any kind of new guidance or information for 2022. I mean, we are still in a kind of one rig, one fracs environment. The production will kind of bounce around a bit, but no new further information from what we're doing going forward.
All right. Thank you, guys. That's it for me.
The next question comes from Leo Mariani with KeyBanc. Please go ahead.
Hey, guys. Just wanted to follow up a little bit on in terms of capital allocation, which I know is something that you guys you know emphasize you know quite a bit. I guess it would just seem to me that in the current environment might make sense to maybe drill a couple more wells given that you know the futures prices here in 2022 are just the best they've been in a number of years. I would certainly think that returns on a couple more wells in a program, for example, you know might look you know very very strong you know today. I know you're very focused on buyback you know as well, and I understand that.
Just any thoughts on the potential to do a little bit more, just given that we're at a multi-year high on natural gas here?
I think obviously to your point, you look at the rate of returns for incremental activity, that they're certainly at a level that on a risk-adjusted basis are above our thresholds, Leo. I would also say that the same is true, when it comes to things like share count, reduction opportunity for the same reasons and same drivers. The bigger issue though to us is that, and Q3 was a good example of this, as well as 2021 overall, we found ourselves to be in a really good operating rhythm.
That in a world today of the twists and turns on commodity and inflationary pressures and everything else, on top of, right, the safety and compliance aspects of our business that we remain hyper-focused on, we like where we're at with sort of this effective one rig, one frac crew array, and that's generating a substantial amount of free cash flow where we've got a pretty good game board of allocation opportunities, including what you brought up, but others as well. I think we stay within that one rig, one frac crew operating plan for the foreseeable future, recognizing your point with respect to what commodity has done to some prospective rate of returns.
Okay. That's helpful. Then just in terms of capital, certainly noticed that you bumped up the midpoint on CapEx a little bit here in 2021. Correct me if I'm wrong, but I don't think there was necessarily additional activity, so not sure if that's you know perhaps maybe a little bit of an inflation that maybe wasn't expected when the budget was originally set. Then obviously just looking at like third quarter CapEx, the number was down quite a bit from the prior quarter. Maybe some of this is timing, but I guess should we be expect spending to maybe tick up a little bit in 4Q. Just looking for some incremental color on the capital.
Yeah. I'll start, then Chad sort of could kind of finish. I'll start, like, you know, we don't look at the company quarter to quarter or calendar year to calendar year. You know, that's so we're not as focused on sort of what those sort of metrics are at a given time. We're focused on the rate of returns and stuff over much longer time horizons. As far as, you know, you go a little faster, you spend a little more, you go slower, you spend a little less. Chad can give you a little bit of color on like how great the team's doing.
Yeah. I mean, it's particularly with respect to the production gains that we've seen. The team, you know, all the credit goes to the team out in the field. There's, you know, the consistent plan that we've been talking about for a number of quarters now, the consistent goalposts that we've given to the team just allows those guys to plan ahead, plan further in the future, and just continue to execute at an extremely high level. That allows continual gains in efficiency, continual reduction in downtime, and you're just gonna see, you know. Just really excited by what's going on with those teams in the field.
I, you know, massive credit to those guys for being able to bring some additional production in the year and just gaining, continuing to gain efficiency out there.
Okay. You're saying nothing really on the inflation side of note, just to be clear on that?
We're fairly contracted, you know, for the near term. You know, what it does over the long term, I don't know. It's anybody's guess. We stay fairly contracted in the near term.
Yeah, that's a good point. Like, so the bulk of our expenses are fairly well contracted for a future time period. It's no secret, I think everybody's seeing inflation in all parts of the economy, right? But that's that also helps our top line as well, right? We sell a commodity, so there's a certain amount of inflation. You're seeing that inflation not only on input costs, but also on the revenue line. I think in the situation we're in, we're a one frac crew, one rig sort of activity level.
You look at the potential impact of that inflation on our input costs relative to our operating margin or relative to our free cash flow generation, and it's really just not a big material driver, relative to, like I said, our operating margin and free cash flow generation.
Okay. Thank you, guys.
The next question comes from Neil Dingmann with Truist. Please go ahead.
Good morning, y'all. Nick, I want to dig a little bit more. I think it was interesting what you said about the key being the intrinsic per share value. If so, what do you think about that on just, you know, you were asked earlier about maybe ramping production a little bit versus, you know, what's going on with pricing or hedges. I just, you know, I'd really love to hear how you think in sort of today's, you know, environment, the best way to sort of pull that forward on intrinsic per share value.
Yeah, I think there's a sequential thinking to some of this, right? The field execution that Chad was just talking about is the precursor to everything. If you're able to do that safely and compliantly, and you've got, you know, the geology and the operational efficiencies to bring to bear, then you're going to generate a significant amount of free cash flow with our cost structure. You're just gonna be able to do that. That's what we've been doing for some time now.
When you got the free cash flow being generated, then the next sequential issue is you're putting that balance sheet into a current state of best in class to be able to take advantage of any twist or turn you'd see with volatility or capital markets or commodity or whatever the case might be. We have been hard at work at that for a while, and you know, Don's summation and his comments sort of made the point that's made on one of the slides that we've got a balance sheet now that basically has all of its major issues addressed for the foreseeable you know, coming years in terms of period of time.
That then puts you, I think, in the last stage of this, what we call the sustainable financial business model, to be able to methodically return capital to shareholders. For us, basically share count reduction or dividend, and we're gonna follow that clinical rate of return risk-adjusted math. When you're looking at intrinsic per share value versus share price, there's a heck of a rate of return that we saw in Q3 tied to that. We took advantage of that. If and when those facts and circumstances change, i.e. share price, right? Then we've got options like dividends as the vehicle to return capital to shareholders. We think of it sequentially.
We follow the math, and if you think of it sequentially, one being a prerequisite to the next thing, it sort of lands you where we landed in Q3 and then how we're thinking about the rest of 2021 and going into 2022 and beyond.
Last, I think I know the answer to this, guys, but, I mean, again, given your large acreage position, but just thoughts on M&A. It seems like there's, you know, again, starting to be a few more smaller I consider bolt-on incremental deals for you all. What's your thoughts on that? Thank you.
Yeah. I mean, we're obviously, you know, always looking at everything that could create sort of value. I mean, it's just I think, you know, as we've shown, we're just pickier in our return total thresholds necessary to do things. You know, that's kinda gonna continue going forward. We'll look at stuff. We're just, I think, pickier than most when it comes to M&A.
Thank you. The next question comes from Michael Scialla with Stifel. Please go ahead.
Hi. Good morning, guys. Congrats on a nice quarter. On slide six, you mentioned plan optimization to pull forward activity. What does that entail? I just want to see if you had any color to add around that.
Yeah, Michael, this is Chad. You know, the analogy I like to use is that our plan it's one rig, one frac crew, but it's kinda like an accordion, right? You can sort of compress it, you can sort of expand it. We generally average about one rig, one frac crew through the plan, but with some ability to either accelerate or slow down activity as a function of other opportunities for our capital allocation. When you think about trying to accelerate or bring forward some activity, it's largely driven by, as I already mentioned, just the execution of the team in the field.
By accelerating, by gaining those efficiencies and getting a completion done quicker or by getting a drill completed quicker, that moves up the next set of activity, right? You get pad A finished, you know, a week earlier, you can move on to pad B a week earlier than you originally planned. That contraction of the plan, sort of like an accordion, allows some of the capital and some of the production to sort of move around, you know, between quarters or between years.
Okay. Got it. You're not really changing, you know, your 37 wells for the year doesn't necessarily change, but when they come online in the fourth quarter might be a little earlier than planned, which could have contributed to the bump in production guidance. Is that the right way to think about it?
I mean, yeah, like Chad, it depends how fast the team keeps going. It's sort of a little bit of self-fulfilling. If you keep going faster, you keep getting things online quicker. That's, you know, the team's doing an amazing job. It feels like every pad they're on, they're setting new records. It's an impressive team we have.
Gotcha. I know you'd been targeting. You mentioned last quarter you're targeting kinda longer term, fully burdened cash costs of $0.90 per Mcfe. Is that still attainable with these higher gas prices or has that moved up now? Maybe just any discussion around cost pressures you're seeing other than obviously your GP&T goes up with higher prices, but any other pressures you're seeing on costs?
Yes. Like I said, we're not gonna get into any new kinda cost information for 2022 and beyond. You know, as sort of Chad said, and you can chime in a bit. I mean, we try to stay well in advance of these sorts of situations, at least sort of in the near term. Feel confident on, you know, the team being able to address and continue to get better going forward.
Yeah, I'd say just to make sure that we're thinking about things the right way, our GP&T rates are largely contractually fixed, so they're not necessarily a function of a commodity price or I mean, there's a little bit of fuel burn there, but it's a very small component of that GP&T line item.
LOE has been very consistent through the quarters, through the years. Maybe the one area where we do see a bump is on taxes, just because of the higher sort of commodity, a higher commodity price. There's a little bit more of a severance tax associated with that. Really beyond that's really the only thing that's really a function of that commodity price.
Yeah. It's just, I mean, another advantage of gathering our own gas like we do with our midstream company. We don't have contracts tied to inflationary indexes in material fashion. It's like our midstream costs aren't the same as peers. The cost advantage actually grows for us if, you know, those contracts of others go higher.
Yep. Got it. Thank you.
The next question comes from Holly Stewart with Scotia Howard Weil. Please go ahead.
Good morning, gentlemen. Just a couple quick ones from me. I think Don or maybe Chad, you mentioned last quarter that you would continue to take a look at kind of that dry liquids mix and adjust. Just curious, given you know where pricing is as we look you know at the forward strip and into the future, how are you thinking about making those adjustments to the program? Then maybe Chad, just from that you know kind of incremental push for Q4 on that optimized activity, is there any you know any thoughts that you can share on just how we should think about that activity mix?
Yeah, certainly on the dry versus wet mix, you know, we're on, as far as existing production goes, it's something we optimize on a daily basis. As we've mentioned a few times in the past, you know, you generally have all the numbers you need to do that math. We are doing that really on a real-time, every day basis to move that gas through that midstream system that we own, whether we wanna take that gas to a dry outlet, blending it with some lower BTU gas and selling it as dry gas or moving it to processing and benefiting from the NGLs. It's math we do every day and optimize that every day.
As far as the scheduled timing, as we look into the future, there is some additional wet pads out there, some additional wet wells that are available to us. We're assessing the right timing for those. Those are available for us, and we are continually doing the math on that to optimize the schedule really every day as commodity prices move around.
Okay. That's helpful. And maybe Don, just on the 2023, it looks like you added some hedges there. I think on our math, you're approximately 70% in 2023. Any just thoughts here on moving forward? I know you keep kind of averaging up on the portfolio. Do you feel like you're good for now going out that far, or is that something you're just gonna kinda keep cost averaging higher?
Yeah, no. Like we've said for a while now, I think going back to 2017 or so, I mean, there's a dollar cost averaging effect to this. So I mean, we're hedging all the time. So we'll continue to kinda chip away at this stuff over the long haul, and you know, build a business that works really well if gas prices are, you know, call it low, moderate, or high. To me, that's like the most sustainable thing you can make and then the most prudent thing you can do to run a very successful company over a long period of time.
Okay. Maybe then just one final one, a big picture for you, Nick. I think several of your peers have said that the forward strip is not supportive of incremental drilling activity. I'm curious where you fall out on this topic conceptually. I think we would tend to agree with it or disagree with this statement outright. We certainly pursued as an industry growth at a lot lower commodity price levels out on the forward curve. Just curious what your thoughts are here.
I think if you look at the forward pricing and certainly on the liquid side, but also with natural gas, there are rates of return to be had with activity. I think what you're seeing, though, is you know, the industry for a long time, probably decades, has been susceptible to a lot of groupthink and herd mentality. What's changed is probably where the popular focus has gone to recently, which is this concept of discipline and right, the free cash flow generation, which we think obviously be a good thing. That's something we've been focused on for a while and things like scale, right? With industrial logic and whatnot. I think the reason you're seeing a hesitancy isn't because of necessarily rate of return math.
I think it's more because it's just not the popular thing right now. Everybody is looking more towards the discipline model, maybe for good reasons, maybe for other reasons, but that can change quickly as you know. When we enter a new chapter of what the next big thing is, who knows? For us, I think you can rest assured we will remain consistent on how we're approaching things.
Okay. No, that's super helpful. Thank you.
The next question comes from Greg Tuttle with Piper Sandler. Please go ahead.
Thanks, everybody. I guess first question, as you think about, you know, let's say tomorrow, your internal ideas of intrinsic value per share are reached by the market. You alluded earlier to a potential base dividend. You know, how do you think about a base or a base plus variable as, you know, in that scenario as a way to return capital to shareholders?
Yeah. As Nick said, I mean, if you're not in super growth mode as a company, I mean, you should be returning significant free cash flow to shareholders. That's something I think that's common sense for any industry, not just ours. When you look at, you know, the how to do it, I mean, I think for us, the way we run the hedge book, and we're really focused on resilient, predictable, recurring free cash flow and kinda growing that free cash flow per share, right, is where we sorta sit. From dividend perspective, it you know base dividend could be on the cards, but for variable dividend, I don't think that'd be something that would be a part of, like, the business that we're running.
It'd be our call. Variable dividend would be potential buybacks is the way we would sorta think about it. Again, it'd be rate of return based. It'd be a you know jump ball competition versus other you know opportunities to grow free cash flow per share for the business. You know net-net you know facts and circumstances change all the time. You know I don't know what the world looks like whenever these sorts of things happens, but you know rest assured that you know the business model we're running is geared to return a significant portion of free cash flow to shareholders and to focus on trying to grow the intrinsic value per share and the free cash flow per share of the company.
Oh, that's super helpful. Thank you. I guess last, you know, following up on Holly's question, you know, maybe not CNX related, but, you know, for the industry, like, what triggers is CNX looking at where you would potentially see industry-wide growth for nat gas? Like, how do you guys think about that dynamic in the market?
We just think it's fickle. I mean, it's a couple BCF a day is the difference between, like, a fast gas price and bad gas price. I mean, there's a reason no one can predict gas prices, 'cause weather and a couple BCF a day can be the difference between good and bad. You know, best of luck if that's your goal is to try to predict what it is 'cause it can just change very quickly. It's very fragile both directions.
That's super helpful. Thanks. Appreciate it.
The next question comes from Noel Parks with Tuohy Brothers. Please go ahead.
Hey, good morning.
Good morning.
Just a couple things. You know, looking ahead to 2022, and I apologize if you touched on this. As far as what you're seeing for service rates, I'm just curious, you know, what sort of inbound inquiries you're getting, maybe from competing vendors and, you know, whether you have a sense that looking in the next year, it's gonna be, I mean, we're gonna see just sort of very little room for negotiation, given sort of the path we're on with prices.
I guess I'm just trying to get a sense of, do you think kinda once and for all, at least for this cycle, the pricing power, you know, has reverted to the vendors. Is your sense that that's where it's gonna stay probably heading into next year?
Yeah, no. 2022 and beyond, we're not gonna comment on any new information or guidance. In general, Chad did mention earlier just where we stay mostly contracted for, you know, a decent piece of the near future, at least. As far as what happens beyond that, I don't think anybody knows. I do know, though, that you know, our you know, there's advantages of having a smaller capital program than one rig and one frac crew in a world like that. You know, we'll see and expect to see margin expansion that would more than offset kinda cost increases for us. I mean, I think it's more of an issue for larger capital programs with call it, smaller margins.
With our relatively small capital program and our high margins, you know, we feel good about however the future ends up unfolding, which, you know, is anybody's guess what the world is, it is today.
Great. Thanks. Another sort of general question. Just to the degree that you're aware of or in touch with, you know, industrial users in increasing demand and so forth, do you have any sense that this run-up we've seen in gas prices, which of course helped by exports and LNG, do you have a sense of any sort of repositioning on their part in terms of just maybe renewed interest in hedging, where maybe it didn't seem necessary for a long time, or either greater or less interest in trying to maybe lock in supply for the longer term?
Yeah. This is Chad. I'll take a shot at this and certainly others feel free to add. I think for a long time, I think buyers of gas, consumers of gas, utilities, power plants, et cetera, certainly benefited from relatively steady low prices. Those low steady prices disincentivized these consumers of gas to hedge, to invest in infrastructure and invest in storage. Now we're in a situation where, you know, daily consumption of natural gas is, you know, up, what, 80% versus several years ago, yet we've had no material expansion of storage. Pipelines continue to be challenged and it, you know, we certainly have seen historically a reduction in forward liquidity in some of the buy side of the hedges.
I think, my expectation is certainly this volatility is certainly going to encourage some of these consumers of natural gas to come back into some of these areas where they had not participated in for the last several years.
Great. Just to follow up with it is, and again, not trying to ask you have a crystal ball, but is it conceivable you think that at least maybe on a regional basis that could make a significant dent in the backwardation we've seen for so long now?
Yeah. I don't know. It's the easiest sort of answer. Like I said, it's if 2 BCF a day of supply shows up and it's a warm winter, then, you know, gas prices aren't that attractive anymore. If no new supply shows up and it's a cold winter, gas prices are really high. Like, it's just an impossible thing to predict how the future kinda unfolds with this. It's just too thin and too tight of a market.
Right. Fair enough. Thanks a lot.
The next question comes from John Abbott with Bank of America. Please go ahead.
Hey, good morning, and thank you for taking our questions. I do apologize if some of these topics had been covered in advance. I jumped on the call a little bit late. First question is on hedging here. I mean, it looks like you continue to add to your hedge book. I mean, I don't think that ever really sort of changes as you like to reduce your risk. But the use of swaps, I mean, why the preference for swaps over collars at this point in time?
Yeah, no, we addressed the fact that, you know, we're gonna sort of continue to hedge and view it as a risk. Yeah, there's, you know, there's other products out there, but they all, you know, you're not gaining kind of like free, you know, upside. You want more upside, you take more downside. You know, if there's products that we can get the upside without the downside, maybe. I mean, we look at these things, you just ended up just not really gaining ground on whatever product you end up on.
All right. I think you also addressed that the macro is a little bit fragile out there, but at what price, you know, might you know, 'cause given where the strip is and what's, you know, given the potential future cash flow off the strip, at what point does the potential acceleration of a build-out to CPA South make sense? Or is it still not within the time horizon given sufficient Marcellus inventory?
No. Yeah, we look at these things and, like I said, it'd be, you know, facts and circumstances based on what the world looks like. I mean, 6 to 12 months from now, it might be completely different for the better or for the worse. I mean, we're looking at all these things. We'll try to, you know, make the best calls at the time. To me, it still seems like there's a lot of volatility. A lot of volatility, you kinda wait to see how things unfold first before you would think about any of those sorts of things.
All right. Appreciate the color, and thank you for taking our questions.
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, and thank you everyone for joining us this morning. Please feel free to reach out if you have any additional questions. Otherwise, we'll 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.