Good morning. Welcome to CNX Resources' third quarter 2020 earnings conference call. Our participants will be in listen only mode. Should do 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 a questions. Please note this event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Go ahead.
Thank you, 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, and Chad Griffith, our Chief Operating Officer. Today, we'll be discussing our third quarter results. In a continued effort to simplify our message to reach a broader investor base, we have modified our earnings press release this quarter and provided an updated investor slide presentation, which is posted to our website. This slide presentation is focused on what we believe are the metrics that matter most to our investors. Also detailed third 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 3Q 2020 Earnings Results and Supplemental Information of CNX Resources Corporation.
One other change this quarter is that in conjunction with the recently closed merger of CNXM, the company has changed its reportable segments to shale, coalbed methane, and other. The other segment includes nominal shallow oil and gas production, which is not significant to the company. It also includes various other items managed outside the reportable segments. More information will be available in our 10-Q, which we plan to file today. 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 materials 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 Don, and then we will open 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 want to start with two simple themes. I think these themes sum up how we view CNX's future and the investment opportunity that it presents. First one is we do the right thing. We define doing the right thing as making capital allocation decisions to optimize the long-term intrinsic value per share of CNX for our owners. Second theme, it's just math. Our decision-making and investment thesis comes down to simple arithmetic. I want to go over to slide two in the deck that we made available this morning. I think slide two highlights the four crucial metrics that sets us apart from peers. I'm going to start at the top left of that slide with inventory. The inventory chart that you see there highlights how CNX has the deepest and the longest-lived inventory under a $2.50 gas price.
That's an inventory more than double the peer average. When you look at our total inventory, we're sitting at 49 years, which is more than three and a half times the peer average. This independent analysis from Enverus is a ground-up technical assessment from a very well-respected third party, and the study confirms exactly what we've been saying for some time and should put to rest any concerns when it comes to CNX having best-in-class and the deepest inventory of future locations that works at a $2.50 gas price or lower. More importantly, the steep inventory, that's the feedstock for the free cash flow-generating factory that extends way beyond our seven year outlook. You also see on the slide there are other metrics that we think are crucial, three in particular. As we've discussed before, CNX has the lowest cash operating cost in the basin.
Our all-in cash costs, which are approaching $1 in the fourth quarter and for 2021, are going to drop even lower and start to approach $0.90 in 2022. That's soon going to make us the lowest all-in cash cost player in the basin, which is an awesome thing. We also offer the highest free cash flow yield when compared to our peers. We talked about that in the recent past. Last, we've got one of the best balance sheets. The balance sheet's only getting stronger as time goes on and as debt level is reduced. In all, we think these four metrics, they clearly set us apart. They illustrate the significant potential upside. We are a free cash flow per share factory that offers de-risk returns for our owners.
If you go to the next slide three, you see a graph there also from the Enverus study and report that I referenced on the last slide. This one goes into more detail on what that economic inventory for each peer at different gas prices looks like. As you can see, we've got the best inventory at low gas price levels, we've got the best inventory at the strip pricing, and we've got the best inventory at high gas price levels. We've got over a decade of inventory at a $2 NYMEX price deck, over 20 years at today's $2.45 strip, and 50 years at $3 gas. Our industry, it is always full of chatter about the metric or strategy of choice for the quarter of the year, sort of what's the color or the flavor du jour.
In the end, and over the long haul, there's really three things to truly get excited about in our industry. That's inventory that works at a $2.50 or lower gas price, that's being a low-cost manufacturer of natural gas, and that's posting consistent and significant levels of free cash flow per share. We hit the mark on every single one of those. As mentioned, we've got multiple decades worth of core inventory that's economically advantageous at that $2.50 pricing level or $2.25. We've got an asset base that's delineated, and we've built an industry-leading low-cost structure coupled with a multiyear hedge book. All those things generate substantial free cash flow per share through all phases of the commodity cycle. Our low-cost structure is made possible by several competitive advantages that create the moat, and which our peers can't easily replicate.
One of the most important and non-replicable of those is that we own our midstream assets. When you're a commodity manufacturer, being the low cost, most reliable manufacturer of that commodity, core and crucial. We're fast approaching all-in, fully burdened cash cost of $1 when the peer average is somewhere around $1.70. We expect to generate consistent quarter-on-quarter, year-on-year free cash flow for the next seven years, somewhere to the tune of $3.4+ billion on a cumulative basis. That's genuine, substantial free cash flow that's nearly one and a half times our current market cap. Our business model should quickly drive our debt leverage ratio lower. Our competitive advantages, they should lead to our free cash flow per share outperforming peers and staying strong for years to come.
This has been many years in the making to create this simple but compelling story, and it's a straightforward one. Again, this is just math and doing the right thing under proven capital allocation methodology. Our free cash flow yield is not only industry leading, but more importantly, market index leading across a wide spectrum of different industries and sectors. Thus, we're shifting our messaging and our focus to appeal to a broader investor group beyond the traditional E&P investors. Now let's talk a little bit about the state of the world. There's a topic you could spend an inordinate amount of time on today, and how it impacts our thinking. Clearly, right, we all know this, the world is faced with challenges and uncertainty, and we think there's a significant risk that those are going to escalate over the next 90 days.
If you reflect on what's happened so far in 2020, this year, of course, has proven to be completely unpredictable. We've had COVID, we've had oil prices collapsing, economic volatility, all kinds of calamities. What gas prices are gonna do next year, that's partly a function of all those things we've already dealt with this year. We recognize this unpredictability, and we've built our company not just to withstand volatility, but to thrive under it and the potential challenges that come with it. We think the next 90 days present elevated risks, given the recent rise in COVID cases, the election that's looming, uncertainty on how winter weather shapes up or whether it does strongly or weakly in the economy, as well as how, frankly, the producers of oil and natural gas are gonna respond to all that.
However, despite this unstable world, we've got a stable platform to continue to execute our plan and adjust to the new realities. We expect to produce a significant amount of free cash flow regardless of what happens in the next 90 days. Given all the uncertainty that exists currently, we plan to use that free cash flow over the next 90 to further reduce debt. It's the prudent thing to do in the near term, given the uncertainty that we face. As we enter into 2021 and beyond, our main priority is still gonna be to delever. In rough math, we expect to pay down approximately $1 billion of debt through 2023. You assume the adjusted EBITDA stays around $1 billion a year, that gets us to about a 1.5 times debt leverage ratio.
If you look at those next three years that I just talked about, I think those next three years are a great illustration of how our de-risk cash flow per share factory is poised to allocate capital into very intrinsic value per share accretive ways. The great thing about generating approximately half a billion dollars in free cash flow per year is that it gives you some flexibility without sacrificing the debt reduction goal that I laid out. If our free cash flow yield stays around 20%, we're gonna have the wherewithal to return capital along the way through share buybacks while still achieving our debt leverage target of 1.5x. We kept around $1 billion of pre-payable debt on our revolvers that are due in 2024, and we expect to generate approximately $1.5 billion in free cash flow before they expire.
You can see that we got the ability for opportunistic capital returns via share buybacks along the way if we so choose. If we continue to hover around a share price that reflects a 20% free cash flow yield, I suspect we'll use some of that $1.5 billion in free cash flow over the next three years and between now and a one and a half times leverage ratio to do just that. In the near term of 2021, budgeting a portion of our free cash flow towards share repurchases if our stock continues to yield 20% on a cash basis, that gets us off to a really good start. Where we actually land is gonna depend on all the facts and circumstances, and comes down to, there's that term again, the math.
You can see the optionality and the value creation potential that are presented by doing the right thing under sound capital allocation and following the math. I'd like to talk a minute about M&A. We always remain open-minded to considering M&A that makes sense for our owners. For CNX to acquire something, it's gonna have to have a risk-adjusted rate of return that beats our other capital allocation options. With our stock at a 20% cash yield, acquisitions are gonna have a really tough time competing. Larger M&A, as in merging with basin peers and the like, you're gonna need to find someone who's not gonna dilute or weaken our best-in-class attributes that harken back to slide two that I covered a couple of minutes ago. M&A that dilutes our best in basin inventory, that wouldn't be attractive.
As we've established, we don't need inventory, and since we lead the basin on inventory that works at $2.50 gas prices or lower, both in terms of locations and years at maintenance activity levels, there's really a compelling case there that the inventory we've got is fully within the grasp of what we own and control. M&A that increases cash costs, that wouldn't be attractive. As I said, we've got the lowest costs in the basin. Those costs are guiding even lower. Any merger that would increase our go-forward costs would be difficult to rationalize when we're in a commodity manufacturing business. M&A that dilutes our free cash flow per share, that can be a problem. Avoiding dilution of free cash flow per share and having a clear path to long-term growth in free cash flow per share, those are essential for the creation of long-term shareholder value.
M&A that would harm balance sheet through high debt and/or off-balance sheet commitments like unused FT, that's probably the wrong direction. Balance sheet strength and the ability to delever organically and avoiding burdensome long-term gathering, processing, and transportation contracts, those GP&T contracts, those are critical factors to future success in our industry. To sum up these points, again, always open to considering moves that improve shareholder value. We're not interested in value-eroding M&A that takes our industry-leading metrics and balance sheet and degrades them to improve someone else's metrics and balance sheet at the expense of our shareholders and employees. Pretty simple approach. In summary, consistent with our long-term multi-year plan, we intend to invest our free cash flow in the right places to optimize the long-term intrinsic value per share of the company.
We expect our sustained and competitive advantages to create enhanced value for our shareholders. We remain committed to our strategy. We've never been more excited about the opportunity we've got in front of us. I'm going to end where I started. We do the right thing under sound capital allocation theory. It's just math. With that, now I'm going to turn things over to Don Rush.
Thanks, Nick. Good morning, everyone. I would like to start on slide four, which highlights our quarterly results in a much simpler, concise format. As you can see, in the quarter, we continued to generate strong cash operating margins, driving $121 million of free cash flow. We also expect to generate a significant amount of free cash flow in Q4 and in 2021, which results in our industry-leading free cash flow yields. Our trailing 12-month leverage ratio was 2.6 times, and we continue to expect this to improve to approximately 2 times by year-end 2021 as we move closer to our 1.5 times leverage ratio target. Year to date, we have fully retired approximately $900 million of our 2022 senior notes through a combination of debt refinancings and organically generated free cash flow.
We were able to accomplish this while shutting in one-third of our volumes to take advantage of seasonal price contango, while simultaneously increasing our projected 2020 and 2021 free cash flow throughout the course of the year. Slide five shows our strategic plan in action, a plan that is delivering substantial free cash flow. Year to date, the company has generated over $270 million in free cash flow, and we expect this positive trend to continue in Q4 and beyond. With a projected annual average of approximately $515 million in the 2022 through 2026 time period, which assumes an average NYMEX commodity price of approximately $2.50. Our ability to generate substantial, consistent free cash flow at low commodity price levels is a testament to our competitive advantages.
One final point to note is that our current free cash flow calculation takes into consideration working capital changes, whereas many of our peers exclude these and other items. We believe this all-in approach more accurately reflects the current funds available for potential debt repayment and shareholder returns. As we transition into 2021 and beyond, we plan to provide additional discussion around these working capital changes to help investors more clearly compare the free cash flow generation potential of our company relative to our industry peers' reported numbers, as well as those in other industries. For reference, our 2020 free cash flow would be well over $400 million if we excluded working capital changes like our peers do for a more apples-to-apples look. Slide six shows how we have not been satisfied simply with good results.
Since we have started discussing our 2020 and beyond guidance in the second quarter of 2019, we have been steadily increasing our free cash flow estimates for 2020 and 2021. We believe we have built this seven year plan with conservative assumptions and will work to continuously improve the plan. Slide seven shows how our costs have come down in Q3 despite the shut-ins and how we see them continuing to decrease in Q4 and beyond with all of our volumes back online. The operating margins shown on the slide include non-cash DD&A. As we have said in prior calls, our go-forward capital intensity is much lower. Moving forward, we expect that these numbers will be even better with cash margins over 50%. Slide eight illustrates our new capital structure, which has ample liquidity with our RBL recently reaffirmed at $2.5 billion between our two facilities.
It's also important to note that we have significant runway as it pertains to our maturity schedule, with our first unsecured bonds not coming due until 2026. All this is even more impressive when you consider we expect to produce over $500 million in free cash flow per year, which gives us the ability to control our own destiny. Our liquidity position, coupled with our assets, low cost, and hedging strategy, are all working towards a balance sheet that is strong and strengthening and gives us leeway to navigate periods of uncertainty in any macro environment. Slide nine is our guidance slide. For 2020, we are tightening up the guidance ranges for production and capital with one quarter to go. We expect our EBITDA to be around $900 million, the high end of our previous guidance.
For 2021, we have increased our 2021 EBITDA to approximately $960 million on improved pricing. We are currently leaving our capital and free cash flow guidance the same for now. As we have indicated in the past, we always try to shape our activity set to better match the price curve if there are material differences to take advantage of. Depending on how the winter and 2021 gas price strip shapes up, we could move some completion activity up into 2021. However, we do not plan on adding incremental activity to our seven year plan, just optimizing the shape of our production profile to match short-term pricing events. As we have demonstrated, we can do this while increasing both near-term free cash flow and long-term value. Our primary focus will continue to be increasing our free cash flow per share over the seven year plan.
We believe that our cash flow projections are low risk. To provide a sensitivity, even if NYMEX gas prices were to average $2.25 from now until the end of 2026, we project that the business would still generate approximately $2.9 billion in free cash flow, even when holding our costs the same. Which, in a world like that, they would likely come down and improve that number. This is primarily due to our best-in-class hedge book, leading inventory position, and low-cost structure. That is extremely impressive for a $2.25 NYMEX downside sensitivity case. Like we have said many times before, if gas prices get to and stay at $3 for the long term, there's a massive amount of additional free cash flow and value creation for CNX. Everybody looks good at higher gas prices, though not many do at low ones.
Slide 10 simply reiterates how strong our 2021 numbers are, not just within the E&P space, but against the market in general. For instance, our free cash flow yield and operating margins are within the 93rd and 88th percentiles when compared to the S&P 1500 index. Not only do our 2021 metrics look strong, but our 2022 and beyond look even better, even with commodity prices currently below $2.50 for the long term. To repeat, these leading metrics indicate CNX's exceptional results versus the S&P 500 index will persist at a sub $2.50 NYMEX gas price. To sum it up, we are excited about our future. We have ample inventory to produce for decades, and our plan will create substantial value for our shareholders no matter what gas prices do and without the need to go to the capital or debt markets or resort to M&A for it to work.
With that, I will turn it back over to Tyler for Q&A.
Thanks, Don. Operator, if you can open the line up for Q&A at this time, please.
We will now begin the question-and-answer session. To ask a question you may press zero and one on touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Leo Mariani from KeyBanc. Go ahead.
Hey, guys. Just wanted to follow up a little bit on the 2020 production guidance. Looking at the range for the full year, if I'm doing the math right, it still implies maybe a $100 million a day range in Q4, if I look at the full-year range. Just kinda wanted to get a sense of what's, you know, going on there. Obviously, we've seen much wider Appalachian gas price dips of late. Is there any wiggle room for potential shut-ins, or is this more just to allow for shifting activity, maybe from Q4 to Q1 if winter doesn't 100% cooperate? Just trying to get the sense of the range here.
Yeah. Hey, this is Chad. I'll start off. Maybe Don can add in on the back end if he wants to add anything. You know, we talked previously about the shut-ins over the course of the summer. We are moving towards having basically all of our production online now. We're in the process of flowing back, really our last pad that we had shut in. Or I'm sorry, opening up the last well, last pad that we had shut in. We should be up to full rate, basically within a couple days. You know, we're going into the winter season with our production going strong.
We have one more pad to TIL before the end of the season or before the end of the year. Things should be good. I think the range on the production number was, yeah, there's probably gonna be a little bit to give us a little bit of flexibility to optimize on the revenue line. I think the biggest thing we need to focus on here is that at the end of the day, a little bit of shift in timing or a little bit of shift in production from month to month or quarter to quarter or a little bit of shift within this range, is really, you know, I don't want to call it noise, but it's sort of, you know, what we need to focus on, I think, is our free cash flow that we continue to generate, you know, year over year over the seven year plan.
A little bit of production here, a little bit of production there, we're gonna optimize that every day as the market conditions change. We're gonna continue to try to, you know, pull out every little bit of value that we can from our molecules. But even with conservative assumptions, assuming we don't squeeze that extra last, you know, penny or half a cent out of each of our molecules, this company continues to generate phenomenal amount of free cash flow over that seven year plan.
Okay. That's that's helpful for sure. Just wanted to ask a question on the inventory chart that you guys showed here. When you guys look at the inventory kind of below 250, talking about 22 years, does that assume, you know, I'm assuming maybe a fixed number of wells, you know, per year kind of over that whole period. Is that largely just comprised of Marcellus? Is the Utica also competitive at 250 or less? Any comments you can provide around that?
Yeah. The Enverus report, you know, which I encourage folks to get, we've talked about our inventory for a while now, and it's good to see third parties verifying what we've seen for a long time. The basic mechanics reports out there to get is they take what your run rate is over the 2022, 2023 timeframe, and they just use that as the proportionate amount of wells you would need to drill a year. Going through on a high level, it's roughly three quarters on the Marcellus side as far as how they're thinking about it, so 250.
Okay. Very good. That's helpful. Then just lastly, wanted to see if you guys could clarify your stock buyback commentary. Obviously, you've got some really nice debt reduction targets over the next couple of years. Certainly, to your point, if we don't see, I guess, commensurate stock appreciation, you guys would look at the buyback pretty hard here. Is that something that realistically could show up in 2021, or do you kind of want to get the debt down before we could look at that buyback more seriously?
I think, Leo, as we discussed, the primary focus will continue to be to reduce debt, but when you look ahead to 2021, there is the wherewithal, and when you look at the next three years, the $1.5 billion of free cash flow generation, $500 million a year, there is the wherewithal to reduce share count. And at a 20%+ free cash flow yield, if that remains, I would be shocked to get through 2021 and not see some reduction in share count. As to how much, as to what we budget between that free cash flow on debt reduction versus share repurchases, that'll all be driven by the facts and circumstances at those moments in time. That's a quarter-by-quarter unfolding story.
We've got the wherewithal, and with the rate of returns we see on share count reduction, we see the ability to get to one and a half times over the next three years on debt reduction, coupled with the reduction in share count as well.
Yeah.
Okay.
When you look at the magnitude of free cash flow that the businesses produces a quarter, over $100 million a quarter. If you allocate $100 million to share count, just hypothetical, it moves your leverage ratio target date by a quarter. Net net, with the cash flow that this business produces and the certainty behind those cash flows, like I mentioned, even in a $2.25 NYMEX or seven year cash flow plan would generate $2.9 billion. There's a lot of wherewithal to allocate that cash along the way. Rest assured, the debt pay down is important, and we recognize that the industry and the ecosystem, it's more difficult to have debt and access to capital markets and access to the bank facilities the way the world used to be. Fortunately for us, like we've said many times, we got $2.6 billion in debt, roughly.
$3.4 billion is way more than the debt we carry. We have the wherewithal to control our own destiny and pay down all of our debt if we choose, and still have plenty of money left over for interesting things like share repurchases. Where we sit with inventory and cost structure and balance sheet and cash flow generation just opens up the ability to do things along the way. As Nick mentioned, we'll be smart. Debt paydown's prudent. We don't have much to do and feel very good about being able to be thoughtful while still accomplishing the 1.5 leverage ratio without creating any risk to it.
Very helpful. Thank you, guys.
Our next question is from Neil Dingmann from SunTrust. Go ahead.
Morning, Nick. Nick, I just want to compliment you all on the team for the new reporting format. I think it looks really good. My first question is around your second slide. You all clearly mentioned, definitely on the prepared remarks, talked about your strong inventory life. Just wondering, do you all believe that you're being adequately rewarded for this? If not, is there things you would consider to unlock some of these significant upstream assets? Even, you mentioned that given the solid midstream assets as well, anything you could do on those side to maybe realize some of that?
Yeah, no. A couple of answers to that. I'm glad you asked the question. On one, we've heard a lot about our inventory maybe not being what other peers have. First off, I hope this puts that issue to bed, that CNX's inventory is best in class, peer-leading. If you look back over the last five years, we're really the only peer that has sold substantial amounts of undeveloped locations. There's been some people that sold royalty interest, there's been people that sold PDPs, but if you look purely at undeveloped acres, we've sold more than any of the peers. Most of them are buying stuff, which I think tells you where the inventory positions really sit, who's selling acres and who's buying acres. Historically, we've sold a lot of acres. Going forward, this is something, as Nick said, we follow the math.
If there's an opportunity to cash in some acres for money, for acres that we're not going to drill for a while, we'll do it. We'll invest those dollars into places that are more appropriate. No, I don't think we're getting credit for our inventory as it sits today. I think we have a track record of being thoughtful and smart around where we choose to sell acres if it's something that we're not going to get to for a while.
No, great details. Just one follow-up. You all have done a great job on the free cash, I think three quarters more now in a row. Nick, you were stressing, and again, you guys have done a great job of highlighting the debt repayment. I guess my question is, if gas prices remain high and, given you are so highly hedged with some nice hedges, I'm just wondering, in order to take advantage of continued higher prices, you guys have mentioned further debt pay down, Leo was asking on, and I know you guys had talked about share buybacks, but would you consider even potentially further growth given how just efficient you've been on operations in order to maybe get some more volumes beyond what you have hedged next year if prices remain high?
Yeah. The two pieces, and like I said, I think one of it's the inverse of what we did this year. We shut in some production in low gas prices for a couple of quarters to take advantage of the arbitrage for the high gas prices seasonality. You could see potentially how the price strip unfolds, the opposite occurring. Pull up a little bit of completions to take advantage of a high 2021 if it doesn't flow through 2022 and beyond. The one side of this is just call it a near-term gas price increase, which will just optimize production, cash flow go up net-net, but capital over one to two-year period, no new activity shows up.
For new activity to come into the equation, which again, the inventory chart shows we have a tremendous amount that we can get online in an efficient manner, we'd need to see the forward strip change, not just a one year anomaly. There's a lot of bull cases out there that think, a lot of consensus, folks have gas prices beyond 2021 being $3 or $3.50. That's great. We'd love that, we're not going to bet on it. We follow the math, as Nick said. If the forward strip changes materially and gets to that level, we'll do what we've done historically, which is take some of the risk off the table via hedges, then go ahead and add activity once you have that price locked in and the rate of return for incremental activity is warranted and locked in.
We watch it, but we're going to use the strip and follow the strip as opposed to, call it drilling and hoping that the gas prices in the future turn out good.
Neil, just to even take a further step back from Don showing you how the process and the math works. When we talked about, you referenced slide two. You got the inventory pole position, you got the cost pole position. That does great things for your free cash flow per share and your balance sheet. If we just follow the math to do sound capital allocation, if we do not add activity in this seven year plan, you can look at the next three years, you can look at the seven years in total, pick whatever time cut you want of that. If we do not add activity from that seven year plan, then say three years out, debt will be materially lower, share count's going to be materially lower, and free cash flow per share is going to be significantly higher.
We're going to be insulated from the capital markets and all the twists and turns it takes, and we're going to be insulated from gas price volatility. That's a really, really good base case. For me, just looking at the bigger picture, the math that we follow, I think incremental activity outside of, like Don said, a multi-year change, step change in NYMEX forward, is going to have a really tough hurdle to meet when you compare it to these other things that we're able to do with the base case.
Yeah, agreed. Thanks, Nick. Thanks, Don.
Our next question is from Michael Scialla from Stifel. Go ahead.
Yeah, good morning, everybody. First question, just a clarification, Chad. Based on your comments around timing, it sounded like some of the capital that was maybe originally intended for third quarter went into fourth quarter. That was a conscious decision based upon where gas prices are on management's part, or was there something operational that contributed to that as well?
Yeah, I'll start, then Chad can add to it. One part is, you got the non-D&C side, and one of the land type situations that was forecasted for Q3 is going to hit in Q4, which, again, it's a good thing. Anytime you can keep your cash for another month or two without having an impact, that's a good thing. The other, which we've talked a lot about, and just to emphasize again, it's hard getting quarter to quarter annual cut-offs perfect. That's why we try to look at things as a project, and then Chad's team has more of a project management approach, and the way we run the business is more on each one of these pads or a project. Developing them that way and tracking them that way have been very successful in our execution and plan.
You get a little bit of wiggle between quarters, but nothing materially on slowdown on operations side. Just happens that way sometimes.
Okay, got it. On the 2021 EBITDA guidance, you increased that by $40 million. Was that strictly due to improvement in the 2021 strip, or is there anything else that contributed to that?
No, we just, again, not to hit it perfectly every time. I think, want to call it the pros and cons. We're one of the only companies that are giving guidance out there in 2021 and beyond, and we try to do it to help folks understand what our business looks like and give some transparency on that stuff, but it's hard to keep it continually a little bit moving here and there. We tried to market- to- market it with where gas prices moved. That gave you where we're sitting there. For, like I said in my remarks on the D&C, the capital side, and on the free cash flow side, we left it alone for now. You can see those moving a bit, and as we transition into the year, we'll try to help bracket it a bit with ranges.
We're giving these as insight to what the business looks like as a helpful tool. These things change daily and weekly as gas prices change and slight timing differences change.
Understood. Last one from me. You look at your slide six, and you guys have been focused on it for quite some time now, but you look at that free cash flow projection for the seven year plan. I guess, as you think about it, outside of gas prices, what do you see as the biggest risk to achieving those targets?
I think there's the obvious need to execute on a consistent quarter-in, quarter-out basis, which we've been able to do to date. We get more and more confident moving forward. Our programmatic hedging tried to address one of the biggest risks out there, which is at least the front couple of years' commodity exposure risk. The capital allocation methodology de-risks doing something silly or bad with the proceeds, the free cash flow that we do generate. If we're following the math and using sound capital allocation methodology, we should protect against that. I think last but not least, the ability to control.
The flexibility on your capital allocation decisions because you own and control your midstream. That's something else that we work hard in 2020 to address and resolve. From my perspective, the big drivers of risk and the ability to mitigate that risk have largely been addressed or embraced as a philosophy or approach within the company. Our expectation is to generate a $3.4+ billion over the seven years, and to use that math and that methodology to put it in the right places at the right time.
Our next question is from Kashy Harrison from Simmons Energy. Go ahead.
Good morning, everyone. Thank you for taking my questions. I definitely appreciate that you're trying to transition away from industry jargon towards simple financial metrics, and definitely appreciate the emphasis on operating margins. I was just wondering if you maybe provide an update on where leading-edge Marcellus and deep Utica well costs are trending, given that has implications towards DD&A, which eventually impacts operating margins?
Yeah, no, for sure. I'm glad that you asked this question, and I'll flip it over to Chad to give you some more details, but I'll kick it off at first. The way we look at this, and there's been an overemphasis, in my opinion, on just the D&C per foot metric. On the ultimate how good is a well, and what's the breakeven and what's the inventory? There's a whole bunch that goes into that equation. I think on the D&C side, what you end up seeing is, we all use the same vendors, we always use the same service provider. You see convergence on it. You don't see a sustainable advantage from one to the other. Case in point, we moved to an Evolution, frankly, two years ago, and that was an advantage for us.
Now a lot of our peers are kind of following suit and getting into that same zone and working that same thing. The plan we've laid out, the D&C per foot, as we've mentioned before, we're already beating it. We expect to beat it. When you look in the grand scheme of things, it's not just D&C per foot, it's what are you getting out of the ground per foot? What's your EUR per foot? How much of the dollars are you spending, does it actually translate into production coming back up? A cheap well is a well you don't do a big completion job on, so it's easy to do a cheap well.
Whenever you look at what the production is for the dollars you're spending for the well, and then triangulate that on the cost that it takes to get the production from the well to the sales point, is really the economic return you get from that pad, that well. When we look at this, we look at those all together. Dollar per foot's something we manage, and Chad, like I said, and teams have been ahead of the curve on where these efficiencies and dollar per foots have gone. Net-net, when you look at it, just to put it in context, like a $10 a foot on a D&C change for a similar EUR well equates to less than $0.01 of F&D cost or the charge of the first five years worth of production from that well.
It's important, but whenever you look at a $0.60 cost advantage on OpEx, a $10 a foot is like a $0.01 whenever you apply it over the production of the well. Chad, why don't you go ahead and walk through some of the things we're doing and stuff we're hitting. Then, like I said, we're happy to share more stuff offline with Tyler, so we're not trying to change it, we're just trying to emphasize what's the big needle movers of the cash flow plan.
Yeah. Just to give you two examples of where we're at. Our two most recent Marcellus pads that we brought online this quarter were. The one pad was at $713 a foot, and the second pad was below $700 a foot. These are right in the core sweep of Marcellus field. The lateral length plays a big role in this. Focusing on NPT, focus on quality control, focus on QMS all play into this. Frankly, there's a lot of innovation that's going on in our teams as well. When you have a very defined footprint activity level, the teams can stay focused on that, they can plan for that, they can see what's coming, and they can focus all their energy on optimizing that activity set, optimizing that opportunity, and deriving and pulling out as much value and efficiency as they can on that opportunity set.
This has led to a lot of leading-edge things that we've done, not only in D&C, but also on facilities and midstream as well. Don already mentioned our move into Evolution, and really, we've made a lot of learnings with Evolution over the last two years that's led to a lot of the efficiencies that we've seen on the C side of D&C. There's also a number of technological advances we've made on the drilling side that frankly, I don't want to disclose publicly because it's so hard to maintain those competitive advantages because as Don said, eventually there's convergence because we're all using the same service providers and crews. Sort of keep those in our back pocket as much as we can.
Another great example of innovation from our team is where we combined upstream and midstream. Our midstream guys got together with the upstream guys and said, "Why are you handling pad separation the way that you guys are? Why are GPUs, why are your gas processing units on each wellhead the same that they've been for the last 20 years? Here's how we've been handling separation on the midstream side. Let's take a look if there's something we can do there." What we've developed is something that we've called the super separator. We've got to work with the marketing team a little bit, maybe on a little bit better brand. We've received a provisional patent for it. We have IP protection for this. It's basically a step change in the way that on-pad separation is going to be conducted.
We're still working through the exact numbers, but it's going to be material savings on what your on-pad facilities will end up looking like and what they'll end up costing. Could potentially change the way that we go about flowing back our wells. These are real examples of innovation that our teams are doing, and how we're driving sort of the cutting-edge cost per foot and all-in capital efficiency that our teams have been able to deliver.
That's helpful. Thanks. We'll look to the Q4 call for those super separator details.
Right.
I was looking through one of the releases, and it looks like maybe there was a CPA Utica well that was turned online. I was just wondering if maybe you could discuss how that well's doing relative to the other projects in the area, or is it just maybe too early to comment?
It's too early to comment. We brought that well online right at the beginning of the quarter. We were basically in the area performing some just general sort of well service, well maintenance. While we had the snubbing unit in the area, we went ahead and drilled that well out and brought it online. We've since shut that well back in line because we are now fracking adjacent wells to that well. We only had several weeks of production. There's not enough data really to be able to speak to how that well's doing.
Got it. Then, if I could just sneak one more in. There was some earlier commentary on potentially shifting projects within the seven year plan. I just want to make sure I understand this. Can you maybe just go into some detail on how we should be thinking about the shift? Specifically, what would you need to see on the strip before you started reallocating capital projects, and would this shift be more related to, say, Marcellus wells, Utica wells, or is it too early to tell which projects you'd be shifting?
No, it's more along the lines of just whether you want a little bit of lag in your drilling-to-completion cycle, or you could shrink some up. We do have the ability. Easiest example is, potentially there's a pad that would come online in December of 2021 or January of 2022. For whatever reason, the 2022 strip comes down, but the 2021 strip stays high. We have some flexibility in our system that instead of trying to get that pad done in December, we'll get it done in April. Net your capital over the 2020-2021 timeframe or 2021-2022 timeframe doesn't change. Some of that completions capital that might have ended up falling into 2022 falls into 2021. Net, you're way better off from a free cash flow perspective for the same capital because you got that well online in a better price environment sooner.
That's sort of the way to think about it. It's just, if there's a little bit of slack to get a pad on a couple of months sooner, do you take it or not?
And just to sort of-.
Yeah.
Again, take a bigger step back, Kashy. The way we think of the seven year plan in total, we keep referencing this as sort of the free cash flow per share factory, right? That requires effectively a rig and a frac crew to set up across those seven years in our core areas with those great sort of inventory metrics at different gas price decks. That generates the free cash flow. We certainly want to either optimize that to grow it within that activity set or de-risk it. What Don is talking about to your question is to do one of those two things, right? You either de-risk it, and you increase the likelihood of the free cash flow coming home to roost, or you create some upside because of some pricing arbitrage within a year or a two year period. The overall activity set cumulatively does not change.
The reason we don't anticipate that changing right now is when you look at what we do with the free cash flow generation, there are some pretty awesome opportunities out there in the form of debt reduction and share count reduction. Again, until something changes on the macro input assumptions, it would change the math that we're following, i.e., multi-year gas price change or share price change or something like that. Our view is we keep that activity pace as is over the seven years. We optimize it pad to pad, quarter to quarter, as we see opportunities to either de-risk it or slightly improve it incrementally, and then we deploy that free cash flow as best we can see today sitting here into debt and share count.
Super helpful. Thanks, guys.
Our next question is from Nitin Kumar from Wells Fargo. Go ahead.
Hi, good morning. It's Nitin Kumar from Wells Fargo. Nick, I appreciate the comments around having the wherewithal to reduce both debt and share count. You really haven't talked about dividends, and I'm curious, how are you prioritizing potential return of cash flow between dividends and buybacks? You focused a lot on buybacks. I'm just really curious, why not talk about a dividend?
I think dividends are, obviously that's an option for enhancing the intrinsic per share value of the company and shareholder returns. We're not against that as a vehicle to consider. I will say when we look at our seven year plan, dividends are probably something that's worth considering on the second half of the seven year plan. The reason I say that is that right now when you look at the rate of return tied, basically the risk-adjusted rate of return tied to a share buyback, it is significant. You also have sort of the other sort of competing advantages with share buybacks where you give the individual owner the choice of whether they want to sell or hold. With that rate of return, I think that's a very difficult hurdle to overcome. Now, again, things change, right?
Not only will gas prices change, at some point share price changes, et cetera, and we've still got this free cash flow factory, right. Free cash flow per share machine that we've built. Dividends, as I said, down the road, probably on the back half of the seven year plan, it's something I think we keep an eye on, and we see where these different metrics and input assumptions go, and it's definitely a tool in the toolbox that we should always be open-minded and willing to consider. Right now, I don't see that front and center being able to compete with debt reduction and/or share count reduction.
Great. Appreciate the color there. I wanted to touch, in your opening remarks, you had mentioned a very volatile next 90 days, and you specifically mentioned the election. Could you help us understand, specific to CNX and maybe the Appalachia Basin, what are the risks that you see from the upcoming election and just maybe the regulatory landscape?
Yeah, I think again, this is maybe somewhat opinion. I don't know if anybody really knows the answers to these things. If you just look at what's going on with the equity markets the last week or so, and probably what's going to be happening for the coming weeks, a lot of it's attributed to COVID. Certainly COVID, and COVID incident rate and infection rate is certainly a driver of all that, and it's ticking up, right? You've also got a lot of election uncertainty. I think it's buried within this volatility. Election uncertainty, just with respect to even the process itself and what happens on November 3rd or the night of November 3rd versus weeks down the road. I think that's spooking and creating volatility across a lot of these capital markets.
I don't think it's necessarily unfounded, but I think we need to be ready for it. I think we've positioned the company to be able to be ready for just about anything. If you look at Q4 as an example, the one right front and center to us, basically, no matter what happens in Q4 with respect to COVID, election, gas prices, global GDP, all those things, we are going to generate free cash flow. When you look at 2021, same story. We position the company not just to navigate through these things, but as I said in the comments, to really thrive in those situations where disconnects may occur. I just sense that when you net everything out, the next 90 days, 2020's already been an unbelievably interesting year. Sometimes that interest has been on the bad side of things.
I think the next 90 are just going to be as interesting as 2020 to date.
Got it. Just to clarify, there's no specific regulatory changes that you're aware of? Like for guys in New Mexico, it's about federal land or something like that. You're not looking at anything for the Appalachia?
No. What happens with respect to the regulatory environment long term, that's more of a 2021, as we see what happens in November and then what shapes up for 2021 agendas, et cetera. Time will tell on that.
Thank you for the answers.
Our next question is from Jeffrey Campbell from Tuohy Brothers. Go ahead.
Good morning. My first question refers to slide three. I just want to know, am I reading it correctly that CNX has no inventory above $3 per million BTU? If that's correct, does this illustrate any P.A. Utica inventory outside of Southwest P.A.?
Yeah. I think just the above $3 doesn't have a color code to it. Once you get above $3, you can put all of our CBM locations in there too. This was just to highlight near medium term up to $3. Like I said, that Enverus report's out there. It's a good read. Encourage you to get it. No, we got plenty of inventory up above that too.
Okay. Thinking about future capital allocation, I think you've said in the past that Central Utica can actually be competitive with the Marcellus with significant infrastructure and investment. I was just wondering, is there a variable within the seven year plan to begin that sort of investment, or is that something that's going to happen after the seven year plan?
No. I think it is competitive when you look at the D&C, and you look at the EUR, and you look at the cost. Again, the three-legged stool here. Some folks get hung up on D&C per foot. D&C per foot, EUR per foot, and actually cost to get the gas from the well to the sales point. You put all those together, CPA Utica looks great. Yes, we would need more infrastructure to do a meaningful growth in that region. As we said in the call upfront and in some of the questions, we need to see the forward gas strip justify it. Net, if you look, we did a tremendous build-out in Southwest PA. Hedged a bunch to make sure that we got the returns justified from the infrastructure build-out and the cost position.
A lot of the seven year free cash flow you're seeing here today is because of the investments that we put into the business over the course of several years prior to today. I think you could see something similar there. Net scale-wise, we build out all the infrastructure we need in Southwest PA for, I don't know, $300 million or so for the midstream side. Whenever you're producing 3.4 billion, if you want to do an investment in a midstream infrastructure to unlock the next cash flow manufacturing factory, which could be up there, we got it well within our wherewithal to do in any number of different ways. That could be partnering with another midstream service provider. It could be doing ourselves. The flexibility that we have just opens up a ton of opportunities.
We've been able to partner with some of our midstream counterparts since we got half peers that are midstream and half peers that are upstream. We've cooperated with midstream peers, and we'll continue to do that going forward. We got a lot of interesting opportunities having that midstream as a part of our business, which others don't.
Yeah. We've got the seven year plan that generates $3 billion-$3.5 billion of free cash flow over seven years. It does so primarily utilizing SWPA Marcellus acreage. There's a sprinkling of some Utica in there, but by majority, it is SWPA Marcellus. To Don's point, there's some infrastructure investment that will have to happen to unlock that CPA Utica. That CPA Utica is just sitting there waiting to either be accelerated if justified by gas prices and our capital allocation decisions, or sitting there to tack on at the tail of the seven years and continue generating significant free cash flow year-over-year beyond the seven year window we've already provided. It provides a lot of optionality, a lot of flexibility. It's sitting there as one of our options in our capital allocation decisions.
Okay. Thanks for that color. My last question is, when we combine the presentation slides and Nick's commentary, it sounds like a CNX M&A in Appalachia is fairly unlikely with the hurdles that have to be jumped. I was just wondering, have you guys cast your net outside of the basin in your investigations, or has that already been eliminated by due diligence?
Yeah, Jeff, I think we got too much M&A within our company to get to right now. That, like you said, I think you summed up the in-basin view pretty well. Outside of basin, even riskier. Even more subject to unknowns. We don't give much thought beyond the basin and beyond what we're doing within our seven year plan.
Okay, great. Thank you.
Our next question is from Holly Stewart from Scotia Howard Weil. Go ahead.
Good morning, gentlemen. Maybe just a couple of follow-ups. First, Nick, you made some comments about M&A. I couldn't tell, are those comments really directed at being the consolidator or the consolidatee? It sounded like you were addressing your thoughts on inventory and cost structure as a consolidator, but I just wanted to ask if those applied to being a consolidatee as well.
I think there were two sort of components of the comments, Holly. One was with respect to us acquiring more of what I would call assets within basin. Those acquisition opportunities, right now, we don't see them competing with the risk-adjusted rate of return of something like a share count reduction opportunity or let alone debt reduction. On the sort of putting free cash flow to work or liquidity to work to acquire assets, with what we've got in front of us in the seven year plan and our opportunity set, don't see that competing right now. On the second sort of grouping of the metrics we laid out, that's with respect to combinations. You can call us the acquirer or acquiree, it's basically a combination bot, and under any combination theory, the inventory, you don't want to dilute the cost structure. You don't want to dilute by raising it.
Your balance sheet, you don't want to weaken because of unused FTE and/or leverage or negative free cash flows. Your free cash flow per share and your free cash flow yield, you don't want to damage that. Those are the drivers that put us in the pole position.
Yeah, said differently, our main goal is to create long-term value for our shareholders. We have a base seven year plan that is set up to do just that. Anything that you would look at to put yourself in a better position than your current one. Our ultimate goal is to create long-term value for our shareholders and for the CNX shareholders. We got a lot of work to do to do that in our seven year plan, and you wouldn't want to put CNX shareholders in a place that's not as good as the place you already have.
Yep. Okay. That makes sense. Maybe just one follow-up really on kind of the macro supply dynamics? We've seen some obviously changes happening given the consolidation. No more Shell. No more Chevron. Southwestern consolidating Montage. How do you see sort of the supply dynamics in the basin changing, just given all that consolidation? I say all that, but the consolidation that we've seen thus far.
Yeah, Holly, that's a good question. I think it goes back to some of the earlier comments about sort of inventory and acquisitions and what motivates some of our peers to acquire and what are the factors involved. I think if you're going out and paying a premium or you're potentially diluting your existing shareholders in order to pick up more inventory, you're going to need to derive value from that pickup in order to keep your existing shareholders sort of neutral. I know there's a lot of talk about remaining disciplined and picking up inventory to be able to rationalize supply, but I think there's going to be pressure from some of these folks to be able to show value for what it is that they've acquired.
What that means long term, I think with the local prices we're seeing, the NYMEX prices we're seeing, and some of these consolidation moves, I think there's going to be some real pressure on some of our peers to be able to sort of grow some supply. Whether or not they have the cash or the capital to be able to do so is still sort of to be determined.
Yeah. I think ultimately, folks seem to be all on the capital discipline, supply discipline. We hope that's where everybody kind of stays and sort of sticks to. That has kind of been something kind of kicked about before, that it hasn't always actually resulted in capital discipline and supply discipline. We hope this time it's different, and the cash flow we generate, if that's true, just goes up materially. As we've found out and everyone's found out, it is really hard to predict what hundreds of companies are going to do, and that's what kind of creates the supply stack if you look across the United States. Couple that with the recent 2021 gas bull thesis was mostly derived by an OPEC fight and a COVID-19 global pandemic. I mean, these things are just really, really hard to predict.
We try to Nick's point, keep it simple. We know if we're by far the lowest cost and best inventory and got a strong balance sheet, we'll do very well at the strip at $2.40, $2.50 gas. We'll do very well at $2.25 NYMEX. If the world gets better at $3, great. We're all for it. We hope that folks stay disciplined and gas prices go up.
Yep. That makes sense. Thank you, guys.
Our next question is from David Heikkinen from Heikkinen Energy Advisors. Go ahead.
Good morning. Holly asked a good question. I had a question on your commentary of the political environment in Pennsylvania that sounded contrary to some of the perspective we've heard from other public and private operators as they're considering really the political risks of Pennsylvania assets could be the next environmental target behind Colorado, and having more Ohio and West Virginia might be better. Do you have any thoughts around that, or is that they're reading too much into your comments on the political environment?
I hope I didn't give you the inference through what I said that there's a concern with respect to Pennsylvania losing the natural gas industry. That's certainly not the case. If anything, if you look at what's.
Oh, no, not that. Being a target. Losing is an extreme, but being a target is a risk that you would try to mitigate. Please don't go down the losing path.
Yeah. I'm still not understanding the question. From a Pennsylvania regulatory perspective, we don't see any material change that's being bannered about or coming down the pipe. If you look at the last 5- 10 years of what's happened within the commonwealth in the natural gas industry, it has grown exponentially. That growth is, I think, more importantly, correlated to a lot of inclusion across different facets of the economy in the state with respect to that growth itself. Initially, right, everybody focused on landowners and multi-generational farms and things like that got a benefit via the land grab phase. When you look at the employment side of things, the employment has become much more organic within the state. Used to have, not long ago, a lot of the expertise and disciplines coming from Oklahoma and Texas, et cetera.
That's now basically taken root in state, and what you're seeing with respect to jobs are kids either coming out of high schools or people already in the workforce, right, the older workforce, getting into the industry. You've seen all the downstream service economies sort of feeding off of this. You've seen a resurgence of manufacturing in Pennsylvania that's feeding off the feedstocks and the low-cost side of the energy side of the equation, which is big for manufacturers. You've seen basically the local governments and the state government benefiting from this through the impact fee. That's up to billions of dollars since it's been created. I think Pennsylvania has sort of been an example of a well-integrated growth story with respect to natural gas and how it's a fundamental sort of building block of an economy.
Okay, West Virginia equals Pennsylvania equals Ohio from a risk assessment, or maybe it's even better.
Yeah, Northern Appalachia pretty much, Western Ohio, Western PA, Northern West Virginia context.
Can you help on some simple math of just reconciling what the market must be factoring in to your $2.9 billion of true free cash flow over seven years versus your market cap and EV? I think you tried to hit that with the Enverus inventory assessment. I'm just trying to see if there's anything other than inventory that you hear that makes people question that gap between $2.9 billion and a $4.3-ish billion EV. Can you help us with that as well?
Yeah, I'll start. Nick can weigh in. I think ironically, the folks that actually spend time on us and study us well ask me sort of that same question all the time. I think two things. The ecosystem hasn't caught up to us on how much we have changed over the last several years in regards to cost and cash flow generation, inventory, you name it. It hasn't caught up to us. Part of it is, if you look at just coverage. We're one of the least covered from research analysts out there, which is absolutely crazy. Since we've been standalone E&P, we're the number one performer. We've built the model that everybody in the ecosystem's clamoring that they want to see built. The ecosystem hasn't caught up to us yet. A lot of the major research shops haven't even started covering us, for example.
When you get into this, the ecosystem hasn't started valuing companies off of free cash flow. You still see EBITDA multiples, which in a high capital intensity business, that you got to spend capital to stay the same, EBITDA multiples are just not an efficient way to look at companies. If you look historically, there wasn't free cash flow being generated by companies. That was the only metric that folks could use to compare separate companies. I think as we move into the next phase, if the ecosystem catches up to the phase that they're trying to say that we're going to move into, which is free cash flow generation and return to shareholders, our free cash flow yield's going to get attention. Your free cash flow yield, ironically, can only be high, trading bad. That's kind of what we're saying.
Yeah, that's a market cap contributor.
Yeah, the opportunity right now is just tremendous for a new investor in the CNX. As Nick said, if folks take a little longer to catch up to it, we'll invest in ourselves. It's there. The numbers are there. The ecosystem hasn't caught up, and we'll keep printing quarters and do good things with the money, and hopefully, the ecosystem catches up to us.
And to the-.
Yeah, then.
Broader picture, over seven years, $3.4 billion of legitimate free cash flow. I look at it this way. If the yield doesn't change, as we talked about this, I think, on an earlier question, if you project out three years of the front seven, our debt's going to be material lower, our share count will be substantially lower, and our free cash flow per share is going to be significantly higher. We're going to be insulated from the various nuanced twists and turns of the commodity space in the capital markets. That's a base case that one way or another, will rectify what we're talking about here.
It is the fixed plus variable dividend at year three plus would be something you might include in your plan just from the peanut gallery. I do think that is resonating, particularly in the larger cap space. Thank you for answering my questions and your perspective.
Sure.
This concludes our question- and answer- session. I would now like to turn the conference back over to Tyler Lewis for closing remarks.
Great. Thank you. We appreciate everyone joining us this morning. If you have any follow-on questions, please feel free to reach out. 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.