Good morning, and welcome to the CNX Resources Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw from the question queue, 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, Investor Relations. Please go ahead.
Thank you. Good morning to everybody. Welcome to CNX's second quarter conference call. We have in the room today Nicholas J. DeIuliis, our President and Chief Executive Officer, Donald W. Rush, our Chief Financial Officer, Chad A. Griffith, our Chief Operating Officer, and Olayemi Akinkugbe, our Chief Excellence Officer. Today, we'll 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 "Q2 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 by Yemi, and then Don. We will then open up the call for Q&A, where Chad will participate as well. With that, let me turn the call over to you, Nick.
Thanks, Tyler. Good morning, everybody. I'm gonna keep my remarks brief this morning, as we had another simple, clean, easy-to-understand quarter, and our investment thesis remains intact. If you look at slide two in our deck, the theme that I'd like to highlight, once again, is that of steady execution, and that's the same theme that we've been hitting upon in recent prior quarters. For sure, second quarter is another quarter highlighted by successful execution of the long-term plan that we laid out in April of 2020. The second quarter marks the sixth consecutive quarter of significant free cash flow generation, where we produced $117 million. We used that free cash flow to continue doing what we said we'd do, and we reduced net debt by $89 million and opportunistically bought back $23 million worth of shares at what we consider to be attractive prices.
We currently have approximately $215 million left in our existing stock repurchase program. As we said in the past, we're gonna continue to use the future free cash flow to reduce absolute debt until we achieve a leverage ratio of around 1.5x . While we're doing that, if our stock continues to trade at a discount, we'll have the wherewithal to repurchase shares along the way while reducing debt, which is what we've been doing since the fourth quarter of 2020. We'll utilize both our liquidity and timing flexibly and use that flexibility to adjust the free cash flow allocation between debt paydown and share repurchase weightings week by week. We'll look at that month by month, and we'll look at it quarter by quarter. What'll guide us, it'll be the math of the risk-adjusted returns and per share value.
That's what we'll use when we decide how and when we change our weightings. In the quarter, we increased our 2021 free cash flow guidance again by another $25 million to $475 million or $2.18 per share. This compares to the previous guidance of $450 million or $2.04 per share. Looking at the Cliff Notes version of where we're at, for the second quarter, free cash flow was up, free cash flow per share was up, debt was reduced, share count was reduced, and then for 2021, our free cash flow guidance was raised. Let's hear from Yemi.
Thanks, Nick. Good morning. I'm going to focus my attention on the topic of ESG to highlight our leadership efforts as well as the significant opportunities we see for free cash flow generation and per share value creation in this area. Last week, we released our annual Corporate Responsibility Report that provides comprehensive look into our unique ESG accomplishments and our strategy moving forward. I want to take a minute today to highlight this company's value and our ESG leadership, not just in the oil and gas space, but in corporate responsibility across all America. If you haven't already, I encourage you to take a deep dive into the full report, which can be found on our website at responsibility.cnx.com.
In a world where similarly every public company is racing to announce a net zero target years into the future, CNX has not only achieved net zero, but net negative status today, and that's highlighted on our slide three. We believe this is the first among natural gas upstream and midstream companies. When you look at the amount of methane we prevent from being vented into the atmosphere from the extraction of steelmaking coal on an annual basis, which is approximately 300,000 metric tons of third-party methane, we capture around 7x more CO2 equivalent emission than we produce via our Scope 1 and 2 emission footprint from daily upstream and midstream operations combined.
Additional opportunities exist to further deepen our net negative Scope 1 and Scope 2 emissions profile by continuing to eliminate fugitive emissions from oil and gas operations, making additional investments in coal mine methane abatement for third parties, and leveraging our extensive surface acreage footprint for alternative energy and other carbon abatement projects. Each of these three avenues offer new, exciting opportunities for free cash flow generation and per share value creation. Most importantly, certain of these tangible drivers of our net negative carbon footprint are practically non-replicable, and they are unique only to CNX. An energy company that is carbon negative may seem counterintuitive, but we accomplish this through the same values and priorities that have driven our business and allowed it to thrive in this region for generations. It is important to note that CNX has not changed.
On the contrary, the world has changed around us and began prioritizing the ESG-friendly work we have been doing for decades. The methane abatement operation that led to our net carbon negative status are the same operations we have been perfecting for many decades and that have led to the birth of the company you see today. From innovative leadership on the environmental front that has the potential to translate into significant per share value for our shareholders, let's pivot over to the social front, which is a hallmark of our tangible, impactful local ESG brand. We have led, and we are determined to continue to lead our industry and the broader corporate community there as well.
That's why, in addition to initiatives within the company designed to foster an inclusive corporate culture, we have challenged ourselves with an aggressive diversity target for our internal workforce of 40% over the next five years. We will tackle this challenge through strategic opportunities to increase the diversity of our workforce rather than one-size-fits-all policy designed to simply meet a target. We believe a diverse workforce yields innovative ideas and important diversity of thought and opinion. These internal initiatives tie directly to the $30 million philanthropic commitment we have made through the CNX Foundation, as well as the mentorship academy we are working to establish for young adults in disadvantaged areas.
By investing in urban and rural underserved communities and population in our footprint, we'll generate return for the company through an expanded, diverse hiring pool and return for the entire region through prioritization of the empowerment of the most marginalized among us. Encouraging progress in our communities, while at the same time increasing the local pool of diverse talent, is what sustainability means to CNX. Beyond the signature items of our net carbon footprint and our diversity leadership, many of our tangible, impactful local ESG accomplishments were continuations from prior years. We were the first mover in the adoption of an all-electric frac spread, and we recycle over 90% of our produced water. Our employees worked the entire year accident-free despite the operational challenges of the pandemic. CNX delivered family-sustaining median compensation level that exceeded over $150,000 per year, top among Pittsburgh region public companies.
Half of the direct reports of the CEO are diverse. We are a large net provider of tax revenue to the local communities and the state governments. Long-term focused, optimizing intrinsic per share value, being the low-cost producer of our product, and pay-for-performance culture are the guideposts of our board of directors and our corporate governance. Again, I encourage you to review our Corporate Responsibility Report and see for yourself how we continue to position CNX alone at the intersection of ESG leadership and performance, low-cost operation, astute capital allocation, and profitability that presents the best-in-class option for ESG-focused investors. Thank you. I'll turn it over to Donald W. Rush.
Thanks, Yemi, and good morning, everyone. I'm going to start on slide four. This is a slide we have shown before and compares some of our main financial metrics to the four indices listed on the page. As you can see, CNX screens very well across the board. Slide five highlights our cost advantage relative to our peers, which is structural and gives us an advantage versus our peer group. Given that CNX is a low-risk, free cash flow annuity that is supported by our low-cost advantage, asset base, and hedge book, we believe that we are trading at a significant relative discount in terms of free cash flow yield, which is highlighted on the bottom right graph. As Nick highlighted, we will continue to pay down debt and reduce our shares under these conditions.
Over the past three quarters, we have bought back $84 million worth of shares. Slide six highlights our cost structure by quarter. As expected, our second quarter costs were up slightly due to two Shirley-Pennsboro wet pads coming online in the quarter. However, as you can see, we continue to expect our full-year 2021 fully burdened cash costs to be around $1.05 per Mcfe. Also, I think that is worth noting that if you look at our income statement for the quarter, you will see that we had a loss on commodity derivative instruments of negative $539 million. This consisted of an unrealized loss of $529 million and a realized loss of just $10 million in the quarter.
We mark to market our entire hedge book each period, with the recent increase in future gas prices, this has resulted in a loss for the period, with the vast majority of it being unrealized. Slide seven highlights the plan in action. With six consecutive quarters of free cash flow generation in the books, we have a high degree of confidence in continuing to execute our long-term $3+ billion free cash flow plan that we laid out last year. This confidence is supported by our low-cost structure, hedge book, and operational proficiency. Slide eight highlights our balance sheet strength. As you can see, we paid down approximately $89 million in net debt this quarter. We have a significant runway and a lot of flexibility before our nearest term bonds mature in 2026.
We have only approximately $320 million drawn on our credit facilities, which equates to around two or three quarters of expected free cash flow generation. Given our track record of free cash flow generation, we have a clear path to further de-lever the balance sheet. I'll wrap things up on slide nine, which hits on some guidance updates as well as some information on cash taxes. There are no changes to production and capital guidance for the year. However, we did mark to market gas and NGL price assumptions, which improved from our last update in April. As such, we increased our full-year EBITDA and free cash flow guidance by $25 million.
As you can see, due to our share repurchases and our increase in annual free cash flow expectations, we increased our free cash flow per share guidance to $2.18 per share. A few final items with respect to taxes. We currently have a federal NOL balance of approximately $1 billion and an unutilized IDC deductions of approximately $945 million. As a result of these two balances available, we do not expect to be a material cash taxpayer during our seven-year free cash flow plan through 2026. With that, I will turn it back over to Tyler.
Thanks, Don. Operator, if you can open the line for questions at this time, please.
We will now begin the question-and-answer session. The first question is from Leo Mariani of KeyBanc. Please go ahead.
Morning, guys. I was hoping you could talk us through a little bit on the pace of activity here for the rest of the year. Noticed you had kind of 14 wells that you were able to bring online in the second quarter. Do we see that start to drop off quite a bit here in the second half? Just trying to get a sense, is the low point of turn-in-lines gonna be 4Q? I also was hoping you could help us a little bit with CapEx in terms of kind of matching that up. Just trying to get a sense on the CapEx, if you could help us out in terms of how that trends over the next few quarters as well, and anything you can quantify would be great.
Sure. Thanks for the question. This is Chad. I'll get started on that, and maybe Donald Rush can fill in at the end if there's anything I leave out. I think what you're seeing in the capital program, remember, we're generally a one rig, one frac crew program, right? We did add a little bit of activity at the beginning of this year to take advantage of some NGL prices. We added a pad, and what that ultimately ended up doing is it sort of, it added some capital in the first half of the year and added two TILs into Q2.
I think the rest of the year is we're back to that one rig, one frac crew program. It's really just a matter of looking at the guidance numbers for the full-year, and taking out what we've done to date, and then just sort of dividing by two will get you real close to the mark on what to expect in the next two quarters on production, on capital and TILs.
Just to add on to that, Chad, that's an easy way to think about it. Q3 and Q4 should be fairly similar. Consistent capital and sort of production between each one of them, and again, sort of can take guidance and sort of see what those numbers are.
Okay. Number of turn-in-line s is pretty even in 3Q and 4Q. If we take the guide of kind of 37 TILs and just subtract the first half TILs, pretty much kind of gets us there, basically?
Yeah. I mean, it's, again, like Chad mentioned, the one rig, one frac crew. A TIL turning in- line one week early or one week late could put you on edges of quarters. Net as far as the, you know, the number, like, the capital numbers and the production numbers, Q3 and Q4 will be similar.
No, that's helpful. Just in terms of your G&A guidance here. Noticing on your chart here on page six, you guys are talking about full-year cash G&A in 2021 of $0.11 per M, just noticing you came out at $0.15 in the first half. It seems like it is implying a pretty large second half reduction in 2021 on cash G&A. Any color around that?
Yeah, some of it's just mechanical around what kind of rolls through as far as the Q1 and Q2 in regards to how the equity and stock stuff transition across. We're always looking to optimize the business and the company moving forward, but the quarter variability is more mechanical in nature.
Just timing of some of the expenses. All right. No, that's helpful. Obviously you guys decided to accelerate wet gas activity, which seems to have made a lot of sense just given the really high NGL prices. If we continue to see high NGL prices, could we see a little bit more of that later this year in terms of bringing on some of these liquids rich pads? Obviously, NGLs have done incredibly well. Then just, lastly, in a similar vein, obviously the 2022 strip looks great, you know, at this point. Would you guys consider something other than maintenance mode for next year?
Yeah. This is Chad. I'll start on the liquid side. You know, not only are we looking at timing of pads and timing of D&C activity, we're also looking at how to optimize our flowing production.
Now through the midstream system we own in Southwest PA, we have a lot of flexibility with where we deliver those volumes. We have some damp Marcellus volumes. We've got some dry SWPA Utica volumes. We have the option to either blend those together and sell it as a dry gas, or we can reroute the damp Marcellus volumes to processing and extract NGLs and receive a premium. We do that analysis really on a daily basis and try to optimize that existing production stream, to extract as much cash flow as possible. Certainly NGL prices are up, but so are gas prices.
To us, it's about the relative spread between NGL and gas. We have moved some volumes, some incremental volumes to processing to take advantage of that frac spread. Really, the strength in gas has really kept us from going further all in on that move. Local gas prices have sort of recovered and are very strong, and we continue to sell a lot of volumes, blend volumes, and sell them as dry outlets. On the D&C activity or adding incremental or shifting activity to a wet play, it's a lot of the similar math. We look at all-in risk-adjusted rates of return on where we want to spend our D&C capital.
We have additional wells that we can go back to in Shirley-Pennsboro, and take advantage of strong NGL prices. We have to look at the returns of that activity relative to the returns that we have on our base dry gas plan that we have in Southwest PA. We're looking at that. There's two factors. The prices continually move. The cost structure of each opportunity is relevant, but we're looking at how to optimize the schedule going forward based on how commodity prices are changing.
Okay, thank you.
Yeah, you had a second question on
Yeah, I was just trying to get at, do you look at 2022, and if gas stays really strong at $3.50, do you guys still want to stay in maintenance mode just due to the prioritization of debt pay down? Or is there a chance to maybe do a little better than maintenance mode if gas is really strong next year?
I think a lot of times the way we've sort of talked about this, and we think about it in terms of more production sculpting as opposed to just purely call it additive work. If you look across the forward strip and the way we've talked about it, the forward strip moves up meaningfully. I think you can think through things like that nature, but as far as period to period seasonalities or just one year, we'll try to squeeze as much production as you can into the kind of high price points.
That's more just call it trying to get things on the line a little bit quicker versus a little bit slower, but sort of net, not looking for brand new activity, really just trying to pull things up a little bit or like we've done in the past. If it goes the other direction, we'll delay things a little bit to just try to get that front six months of production into the best pricing environments that you can.
That's great. Thank you.
The next question is from Zach Parham of JPMorgan. Please go ahead.
Hey. Thanks, guys. The last several quarters, you've used a majority of the free cash flow to reduce debt, but also bought back some shares. Can you just talk about what else you'd need to see to get a little more aggressive with the buyback? In the past, I think you've talked about a 1.5 turn leverage target. With your hedge book, you've really locked in a lot of the future revenues to get to that level. Are you still waiting on hitting that target before getting more aggressive? Just any color you have there.
I think we've talked about this a lot historically, and we've gone more aggressive historically in certain quarters. As far as what we'll do going forward, there's a lot of different factors that will impact that. I think to your point, the closer you get to the target and the more forward visibility into cash flows that are sort of locked in, the more you could lean into things, as opposed to others. We've recognized that gas prices are very unpredictable. Our equity still sort of trades unpredictable whenever our free cash flows are pretty much locked in.
It's kind of always been puzzling to me personally. We're trying to be thoughtful and prudent and do both at the same time. The weightings will vary by quarter, by situation. Net is the balance sheet, and the debt keeps coming down. You get closer to the target. Clearly, you have more ability to push more towards shareholder returns as the balance sheet gets closer, both just mechanically as of the quarter we're in, plus the cash flow certainty that we have forward keeps growing too as we layer in hedges.
Got it. Thanks for that color. I guess one more from me. Can you talk a little bit about what you're seeing on local basis and your exposure there? If the MVP pipeline is further delayed, how do you see that impacting basis within the basin?
Yeah, thanks for the question. This is Chad again. Certainly MVP timing risk is certainly very relevant to in-basin pricing. We sort of saw the regulatory challenges that were coming along with that pipeline. I don't know, at least one year ago, we got aggressive on the in-basin hedging. Last year, coming into the beginning of this year, we got pretty aggressive on the in-basin hedging. Generally, as part of the programmatic hedge, we try to keep basis and NYMEX pretty in lockstep, matched up.
We saw sort of the risk coming with the MVP and potential tightness in the in-basin market. We leaned into the in-basin hedging program, and got out ahead of it, while that basis price was pretty good. Now we're sitting at a point where we're over 90% hedged on in-basin pricing exposure through the end of 2024. We continue to layer on additional hedges beyond that, where we see attractive opportunities to do so.
Got it. Thanks for the color, guys. That is all for me.
The next question is from Neal Dingmann of Truist. Please go ahead.
Morning, all. You mentioned about potentially this buying more stock back. Could you talk about what discount you need to do so?
Yeah. We haven't given any public guidance on exactly our buyback plan. We've been buying back shares. We've bought back about $85 million worth of shares over the last three quarters. To Nick's commentary out of the gates, at where we're trading, you can expect us to continue to do two things, pay down debt and buy back shares. Clearly, as we've said before, the higher the free cash flow yield, the faster you want to do it. The, let's call it balance by quarter, will change by quarter. Net-net, the ability to do both and not do both sometime in the future, but returning capital to shareholders today, I think is fairly unique relative to a lot of folks, and you can expect that to continue going forward.
Yeah, no, great answer. I was just trying to determine quarter to quarter, how you decide which way to go, because you do have a great free cash flow. Just one follow-up, maybe more for Chad. You mentioned earlier about taking advantage earlier in the year about NGLs. NGLs continue to be quite high. Obviously, you've got a great footprint to be able to do so. Going forward, would you do more pads on that length? I just was looking at some of your maps out there and know you have certainly availability to do so.
Yeah. Chad touched on that a little bit earlier, and sorry if I didn't quite get it out clear, but when we look at that, we have to look at the return of that next pad in a wet area versus that next pad in a dry area. With the gas price strength and the ability to hedge that gas price for multiple years, the first several years of that new pad's production, when you look at the risk-adjusted rate of return
When you look at those two opportunities, strong gas market with the ability to hedge and a strong NGL market with less of an ability to hedge, a lot of times the scale still land in favor of that dry pad. Look, we're looking at it continuously. As the prices and the forward strips evolve, we update our numbers, and we shuffle the schedule around accordingly to bring forward the best risk-adjusted rates of return first.
Very good. Thanks, guys.
The next question is from Noel Parks of Tuohy Brothers. Please go ahead.
Hey, good morning.
Morning.
Great.
I have a couple things. I was just curious, as you're talking about your first half activity levels and taking advantage of NGL prices being stronger, and I guess I'm thinking in sort of a bull case for gas. I'm curious about just service availability in the basin and whether we're in any conceivable danger of having any capacity issues. I guess I'm sort of wondering, what's the frac spread spare capacity out there as far as high-quality, effective crews and equipment?
Yeah, when you look at current rig deployment, Lower 48, current frac crew deployment Lower 48, we're roughly a third to a half below prior peak. It's still good crews, still good rigs available. I think there's lots of availability of crews, equipment, and on down the supply chain, whether we talk about sand or chemicals or even labor, it's fairly readily available the way they go deploying incremental activity.
Noel, with our position on the rig and frac program that we've laid out, we're in great shape with respect to being contracted and covered on the cost of those services. We don't see any pinch points with respect to our ability to continue to execute like we have.
Great, thanks. My other one, as ESG concerns continue to become more and more on investors' minds, I'm curious for the private operators around you, do you have any sense of sort of the state of their work on or investment in working on their methane emissions? Unfortunately, that is one area where even the really conscientious companies risk being tarred by the brush of sort of the worst actors out there. Just wondering about any insight you had on that.
It's hard to tell about private companies, like you said, the ESG umbrella is widespread right now. Everybody's working towards it. You just get nuggets of information on a few private companies here and there, working to reduce their Scope 1 or Scope 2 as well. In order to get a very clear picture as to what they're doing, it's hard to tell, because again, because they're private. It's only when we're interacting with them and sharing ideas, that's when we get some insight as to what they're doing.
I do think that the regulatory environment is moving in a direction where obviously the rigor and the stringency of methane emissions is only getting tighter. To a large extent, that's not a secret, of course, within the basin. I think many of the different operators, private or public, are trying to develop plans and operating plans and processes that will be ready for that. Like Yemi says, it's tough to gauge individually and company by company.
Thanks. That's helpful. That's all for me.
This concludes our question-and-answer session. I would like to turn the conference back over to Tyler Lewis for closing remarks.
Great. Thank you, and thank you everyone for joining us here today. Please feel free to reach out if anyone has 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.