Appalachian Basin pure-play CNX Resources Corp. is aiming to lock in elevated natural gas prices and protect itself from market swings through an aggressive hedging strategy, CEO Nick Deluliis said Thursday.

Deluliis hosted a conference call to discuss fourth-quarter and full-year 2022 results for Canonsburg, PA-based CNX. 

He said “from a macro perspective, we expect the recent pricing volatility to continue in 2023 as the US domestic markets continue to fluctuate with shifting weather expectations, uncertain domestic production levels,” and growing liquefied natural gas demand from around the world. “How gas prices unfold in 2023 will depend on a difficult to predict combination of those three core elements.” 

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The CEO said “while the extreme volatility in the natural gas markets will significantly impact near term results, prices along the strip are still materially higher than in recent years and as such, the rates of returns on previous capital investments remain not just high, but improved in this environment…” 

As a result, “the future business plan not only remains intact, but even stronger,” he added.  

CNX is forecasting capital expenditures (capex) of $575-675 million in 2023, including $430-475 million for drilling and completions. Total capex in 2022 was $566 million.

Plans are to run one to two drilling rigs and one continuous, all electric hydraulic fracturing crew throughout the year, Deluliis said.

‘Modestly Lower’ Output

CNX is expecting “modestly lower” production in 2023 versus 2022, he said. Management expects production levels to be at their lowest during the first quarter, then to accelerate as the year progresses.

Production “is a result for us, not an objective within our strategy and business model,” he told analysts.

“Most importantly, we’re expecting to return to our 2022 production level run rate around mid-year 2023 plus or minus, and from there return to more elevated annual levels in 2024 and beyond,” the CEO said.  

Deluliis said “this annual capital budget assumes a full year of the increased inflationary cost environment that we experienced during the latter part of 2022 and reflects our desire to use the highest quality crews and products and to make the best long-term focused decisions to help derisk our plan.” 

The company expects to bring online 30 wells for the year, including 27 in Southwest Pennsylvania (SWPA) and three in Central Pennsylvania. The SWPA wells would comprise 23 in the Marcellus Shale and four in the Utica Shale, with average lateral lengths of 14,500 feet and 13,600 feet, respectively.

Deluliis noted that “today’s higher capital costs are more than offset by the increased pricing outlook that we continue to hedge into.” The company has hedged 82% of its expected natural gas volumes for full-year 2023.

The company “will continue to add higher priced hedges in what is an elevated natural gas price environment compared to when a lot of the hedges were originally put on,” Deluliis said. He added, “Locking in these increased pricing levels translates to significant future margin expansion that will add material free cash flow compared to the original seven-year plan that we put out in 2020.” 

In other words, “we believe that the volatility that we’re seeing in the commodity markets [is] simply noise as it relates to our sustainable business model and long-term plan,” said Deluliis. “Despite the uncertainty in the gas markets we are currently seeing in 2023 along with the uncertainty around the broader economy, we are confident in the sustainable business model that we have created.”

As to the potential for mergers and acquisitions (M&A), Deluliis said, “I think the kind of bolt-on opportunities are fairly reduced at this point. There’s not a lot of private equity operators left and we always compare any potential M&A opportunity to the opportunity of doing M&A on ourselves through our buybacks, so it’s a pretty high hurdle when you come at it from that perspective. There’s currently nothing kind of on our radar from that perspective given where our share prices are trading.” 

CNX generated a company record $707 million of free cash flow in 2022, Deluliis highlighted.

The company fetched an average realized gas price after hedging of $2.76/Mcf during 4Q2022, versus $2.54 in 4Q2021. The full-year average price was $2.92/Mcf in 2022, up from $2.57 in 2021.

Realized hedging losses totaled $360 million during the fourth quarter, compared to losses of $400 million in the corresponding 2021 period.

Production averaged 1.53 Bcfe/d in 4Q2022, down from 1.72 Bcfe/d in 4Q2021. Full-year 2022 production averaged 1.59 Bcfe/d, compared to 1.62 Bcfe/d in 2021.

CNX reported net income of $1.17 billion ($6.64/share)  for the fourth quarter of 2022, up from $630 million ($3.02) in 4Q2021. For full-year 2022, CNX posted a net loss of $142 million (minus 75 cents/share), versus a loss of $499 million (minus $2.31) in 2021.