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CNX Resources Corporation (NYSE:CNX)
Q3 2021 Earnings Call
Oct 28, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the CNX Resources Third Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

Tyler Lewis -- Vice President of Investor Relations

Thank you, and good morning to everybody. Welcome to CNX's third quarter conference call. We have in the room today, Nick DeIuliis, our President and CEO; Don Rush, our Chief Financial Officer; Chad Griffith, our Chief Operating Officer; and Yemi Akinkugbe, our Chief Excellence Officer. Today, we will be discussing our third quarter results. This morning, we posted an updated slide presentation to our website. Also detailed third quarter earnings release data, such as quarterly E&P data, financial statements and non-GAAP reconciliations are posted to our website in a document titled 3Q 2021 earnings results and supplemental information of CNX Resources. As a reminder, any forward-looking statements we make or comments about future expectations are subject 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, all then by Don. We will then open the call for Q&A where Chad and Yemi will participate as well. With that, let me turn the call over to you, Nick.

Nicholas J. DeIuliis -- President, Chief Executive Officer & Director

Thanks, Tyler. Good morning, everybody. Similar to the last quarter, we had another clean and easy to understand quarter overall. Slides two and 3, I think sum that up. They both are highlighting our theme, which has been steady execution that puts us in a position to manufacture our free cash flow. Whether it's safety or environmental compliance or overall field operations, all of these things are the areas we focus on. The sequence is a simple one. It's consistent methodical execution that results in significant free cash flow generation and then the free cash flow allows for capital allocation opportunities where we're primarily focused on balance sheet strengthening and share count reduction. The net result of all that, that's intrinsic per share value growth. As we continue to trade at a material discount to our intrinsic per share value as we see it, and with net debt declining and leverage improving, we steadily increased our attention on share count reduction. And Q3 was a good example of this. Approximately 60% of free cash flow was returned to shareholders in the form of buybacks and most importantly, at discounted prices. And as Slide two highlights, we continue to see a significant opportunity to retire additional shares in what we believe to be currently attractive prices. And as a result, on October 25, earlier this week, the Board has increased our share repurchase authorization by $1 billion. Now having a sizable share repurchase authorization, at our disposal. That's normal course for CNX. That's part of our toolbox, so to speak, in terms of how we allocate capital. We recently extended our CNX and CNX Midstream credit facilities also extended a bond maturity. These actions were opportunistic and now they provide an even longer maturity runway and more flexibility and capacity for future capital allocation moves. And we plan on making such moves as the facts and circumstances dictate, the clinical rate of return math of capital allocation and free cash flow per share growth. Now I suppose, in many ways, our approach might be a little bit different than what's in vogue today in our space, our path is really pinned to optimizing intrinsic per share value by looking at the long term, by methodically executing, by derisking and obviously by astute capital allocation. We don't necessarily care about scale or size or things like industrial logic that hinges on what's trendy or the herd mentality. Instead, we're committing to the impactful math of good old fashion per share value creation. We want tangible actions that are going to be back in the words in the math and we are going to embrace the most local-centric capital allocation you can find, which, of course, is acquiring embedding on yourself. Now we use these words tangible, impactful and local. And I think you've seen those with our ESG effort. Those words, tangible, impactful local, they're not just buzzwords, and they're not only applicable to ESG, they permeate everything we do on behalf of our owners, our employees and the regions that we operate and live within. I don't know if you guys are fans of history, but there was a historian [Indecipherable], and his clean was coming up with a theory that national survival requires keeping a nation internally fit and being ready for external events. If you take that approach or that view from that historian, and we basically embrace that with how we build CNX. We've built this company internally to not just survive but thrive as external events play out, whether it's macro or pricing or industry-centric. And those are going to be the facts and circumstances that drive that rate of return math of capital allocation. So for third quarter, the cliff notes free cash flow and free cash flow per share were up. Net debt and leverage were improved. Share count was reduced at deep discount pricing, and we increased our '21 free cash flow guidance to $500 million or $2.37 per share. We're going to keep clinically following the pretty simple. I'm going to to Don now who's going to go into a little more detail.

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. Thanks, Nick, and good morning, everyone. I'm going to start on Slide 4, which highlights our balance sheet and liquidity strength. The reduced net debt again in the quarter and also completed a couple of important capital market transactions that reduced our interest expense and extended maturities. Specifically, during the quarter, we opportunistically completed an 8.5-year $400 million senior notes offering at 4.75% due in 2030, which was used to pay off our 6.5% CNX Midstream notes due in 2026. The new notes issuance and partial tender for the 2026 notes closed in September, and the complete redemption to pay off the remaining 2026 notes not tendered closed later on October 15 per the indenture. This resulted in the September 30 balance sheet, showing a temporarily high cash balance as approximately $234 million of the 2026 bond was ultimately retired on October 15. The Slide four represents the current maturity schedule as of October 15 after we repaid the remaining balance of the 2026 notes. Also, during the quarter, we used the CNX credit facility to repay and terminate the $161 million Cardinal States loan, resulting in a net interest savings moving forward. as we paid off the 6% loan at par with our 2% revolving credit facility. Lastly, we completed an amendment and extension to our CNX and CNX Midstream credit facilities after the end of the quarter. This extended the maturities to October 2026, essentially giving us a 5-year credit facility. Our liquidity remains robust as we have over $1.5 billion of undrawn capacity on our revolvers and our borrowing base increased compared to the prior facility as well. Let's now shift to Slide 5, which highlights progress on our two main capital allocation priorities since the third quarter of 2020. As we have discussed in the past, we are focused on reducing debt and returning capital to shareholders through share buybacks. Since last year, CNX has repurchased 14.7 million shares for $175 million. During Q3 2021, we repurchased 6.5 million shares for $78 million. On the debt side, we have reduced net debt by $523 million since year-end 2019, which includes a $235 million and debt reductions since the third quarter of 2020. Our capital allocation priorities continue focus -- continue to focus on reducing debt and returning capital to shareholders through share buybacks. The magnitude and pace of these decisions will ultimately be determined by the facts and circumstances as we move forward quarter after quarter. We have clear visibility and confidence in our cash flows moving forward, and our leverage target remains at 1.5 times. The share price and free cash flow allocation math will dictate when we reach that target. I will end on Slide six with guidance.

Through continued plan optimization, cycle time compression and pulling forward the timing of some activity, we increased our production guidance to 570 to 580 Bcfe. This higher expected production, along with higher gas and liquids prices in the period have resulted in our adjusted EBITDAX increasing by approximately $160 million based on the midpoint of guidance. This all occurred within the previous capital guidance range, which we have simply tightened for the year. As you can see, our free cash flow increase did not go up dollar for dollar relative to our EBITDAX increase. This is because we include working capital changes and our definition of free cash flow, which, as a reminder, is simply cash flow from operations minus investing cash flows. I would like to spend a minute explaining the mechanics of one of our key working capital items, cash timing of our hedge settlements versus physical sales settlements. In particular, December hedge settlements will impact 2021 reported free cash flow since we cash settled the December financial hedges in early December. While cash receipts for the December physical sales aren't received until January. This 30-day [Indecipherable] doesn't impact our EBITDAX projections nor does it impact the long-term free cash flow generation of the company, but it does cause free cash flow to slide between reporting periods as the underlying settlement price fluctuates during the quarter. Typically, the effect of this is not material. However, as we enter a volatile December natural gas contract, we want to make investors aware of this near-term working capital dynamic and its potential effect on estimated 2021 free cash flow. To summarize, if December one month pricing goes higher, it will reduce Q4 2021 free cash flow versus our guidance, but increase Q1 2022 free cash flow. The reverse is also true. If the December one month contract falls from current levels, CNX will have a lower December hedge settlement payment in a higher for 2021 free cash flow with a lower Q1 2022 free cash flow. So net-net, the company is slightly better off if December gas prices go higher since we do have some open volumes that benefit from it but we will not see the increased free cash flow from December physical gas sales until January of 2022. And that leaves me with a few final points that I wanted to make in regard to our hedge book. How we think about it and how mark-to-market gains or losses affect the future cash flows of the business. We fundamentally believe that natural gas prices are impossible to consistently predict. You might guess right every once in a while, but not each and every year for decades. So we believe in the long run, you will catch any gas price upside in the forward markets. And over long periods of time, you will not miss out on gas price upside and we'll still protect the downside for consistently forward hedging over decades. We view our hedging philosophy is right way risk mitigation, meaning that our free cash flow and our capital investments are protected should prices fall for a few years. And on the opposite side, if we have a mark-to-market loss on our hedge book, that means the future annual free cash flow generation of the company has actually increased as we still have a significant open volumes in the future, not to mention lots of other ways to create incremental shareholder value in a sustained high gas price world. Case in point, our previous guidance of $3.4 billion in free cash flow from 2020 through 2026 and hedge book position at that time was based on the approximately $2.50 NYMEX strip that existed at that time. Thus, our hedge book was significantly in the money mark-to-market. Since then, our mark-to-market hedge book has moved to a significant out-of-the-money position, which is due, obviously, to the average NYMEX strip moving to over $3 as it stands today. While higher gas prices have a negative impact to the mark-to-market of our hedge book, net-net, it is a positive dynamic for the future free cash flow potential of the company. While we will not be providing updated guidance at this time, we would like to remind everyone that our previously issued 7-year guidance was based on a much lower strip pricing environment at the time of issuance. As such, it is no longer current, given prices are materially higher in the forward markets today. With that, I will turn it back over to Tyler for Q&A.

Tyler Lewis -- Vice President of Investor Relations

Thanks, Don. And operator, if you can open the line for questions at this time, please.

Questions and Answers:

Operator

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

Zachary Parham -- JPMorgan Chase & Co -- Analyst

Hey guys, thanks for taking my question. First, just wanted to ask on the buyback. You were much more aggressive this quarter and also flagged buying back an additional one million shares in the first two weeks of October. The Board raised the buyback authorization by $1 billion. A number of your peers have laid out more formulaic cash return programs. Maybe could you talk a little bit about the pace of the buyback going forward? And just your thoughts on allocating free cash flow between the buyback and debt reduction in 4Q and then 2022?

Nicholas J. DeIuliis -- President, Chief Executive Officer & Director

Sure, Zach, this is Nick. So the couple of different things maybe to put out there. One, the $1 billion increase in share buyback authorization, as we said in the comments, that's just one of the tools that we always want to have in our toolbox to be able to efficiently quickly allocate capital where we see opportunities. And we're solving right for the long-term intrinsic value per share. I think from a principal perspective, there's sort of two big drivers of what we're doing in terms of what we think reflects a sustainable financial business model that works over time: One is we always want a component to return capital to shareholders. We've been doing that for a while, to your point; and two, we want to be reducing -- even though it might be nominal amounts of debt, we want to be reducing some level of absolute debt on a consistent basis. So beyond those two principles, now you're getting into sort of the tactics and those facts and circumstances that we spoke about. We're very almost just clinical with respect to how we look at the share buyback rate of return and wanting a margin of safety with respect to it. And if that rate of return has a significant margin and safety tied to it, that's where we'll pursue our Avenue via returning capital to shareholders. And that's what we see with respect to where the shares are at today. This is not prescriptive, OK? So in many ways, if you're following the facts and circumstances is almost the opposite or the mirror image of what we're doing with hedging, with a programmatic hedging approach. There, we are very consistent. I would expect flexibility to be the buzzword here on capital allocation when it comes to returning capital to shareholders. And that's a good, I think, approach to have with considering the space that we're in and the commodity and everything else in that in terms that it takes. So what that means for Q4 and what that means for '22 and beyond, I think you just follow the rate of return math and you'll see, at least in terms of where we're currently at allocation of capital to further improve balance sheet as well as to reduce share count.

Zachary Parham -- JPMorgan Chase & Co -- Analyst

Got it. Thanks Nic. I just wanted to follow up with a question on 2022. I know you don't have guidance out there specifically for '22, but you've talked about the maintenance program being in place from '22 to '26 at around 560 Bcfe annual production. Just given a little higher volumes in 2021, does that change things at all rebase that program a bit higher, really just looking for any color on production trajectory going forward from here?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. We're not going to get into sort of any kind of new guidance or information for 2022. We are still in a kind of one rig, one frac environment. The production will kind of bounce around a bit, but no new further information from what we're doing going forward.

Zachary Parham -- JPMorgan Chase & Co -- Analyst

Right, thanks guys, that's it for me.

Operator

The next question comes from Leo Mariani with KeyBanc. Please go ahead.

Leo Paul Mariani -- KeyBanc Capital Markets Inc. -- Analyst

Hey guys. Just wanted to follow up a little bit in terms of capital allocation, which I know is something that you guys emphasized quite a bit. I guess it would just seem to me that in the current environment, might make sense to maybe drill a couple more wells given that the futures prices here in '22 or just the best they've been in a number of years. And I would certainly think that returns on a couple more wells in a program, for example, might look very, very strong today. I know you're very focused on buyback as well, and I understand that. But just any thoughts on the potential to do a little bit more, just given that we're at a multiyear high on natural gas Europe?

Nicholas J. DeIuliis -- President, Chief Executive Officer & Director

I think, obviously, to your point, you look at the rate of returns for incremental activity, they're certainly at a level that on a risk-adjusted basis are above our thresholds, Leo. But I would also say that the same is true when it comes to things like share count reduction opportunity for the same reasons and same drivers. The bigger issue, though, to us is that in Q3 was a good example of this, as well as '21 overall. We found ourselves to be in a really good operating rhythm. And that in a world today of the twists and turns on commodity and inflationary pressures and everything else on top of, right, the safety and compliance aspects of our business that we remain hyper focused on. We like where we're at with sort of this effective one rig, one frac crew array, and that's generating a substantial amount of free cash flow, where we've got a pretty good game board of allocation opportunities, including what you brought up with others as well. So I think we stay within that one rig, one frac crew operating plan for the foreseeable future. recognizing your point with respect to what commodity has done to some prospective rate of returns.

Leo Paul Mariani -- KeyBanc Capital Markets Inc. -- Analyst

Okay. That's helpful. And then just in terms of capital, I certainly noticed that you bumped up the midpoint on capex a little bit here in '21. Correct me if I'm wrong, but I don't think there was necessarily additional activity. So not sure if that's perhaps maybe a little bit of an inflation that maybe wasn't expected when the budget was originally set. And then obviously, just looking at like third quarter capex, the number was down quite a bit from the prior quarter. So maybe some of this is timing. But I guess should we expect spending to maybe tick up a little bit in 4Q? I'm just looking for some incremental color on the capital.

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes, I'll start, and Chad sort of could kind of finish. And I'll start like we don't look at the company quarter-to-quarter or calendar year, calendar year. That we're not as focused on sort of what the sort of metrics are to give in time, we're focused on the rate of returns and stuff are much longer time horizons. But as far as you go a little faster, you spend a little more color, you spend a little less, but Chad can give you a little bit of color, like how great the team is doing.

Chad A. Griffith -- Executive Vice President & Chief Operating Officer

Yes. I mean, particularly with respect to the production gains that we've seen, the team -- all the credit goes to the team out in the field. The consistent plan that we've been talking about for a number of quarters now, the consistent goal posts that we've given to the team just allows us guys to plan ahead, plan further in the future and just continue to execute at an extremely high level that allows continued gains in efficiency, continual reduction in downtime. And you're just going to see just really exciting by what's going on with those teams in the field and massive credit to those guys for being ale to bringing some additional production in the year and just gaining -- continue to gain efficiency out there.

Leo Paul Mariani -- KeyBanc Capital Markets Inc. -- Analyst

Okay. So you're saying nothing really on the inflation side of note? Just to be clear on that.

Donald W. Rush -- Executive Vice President & Chief Financial Officer

We're fairly contracted for the near term movie. So what it does over the long term? I don't know if it's anybody's guess, but for stay fairly contracted in the near term.

Chad A. Griffith -- Executive Vice President & Chief Operating Officer

Yes, that's a good point. So the bulk of our expenses are fairly well contracted for a future time period. It's no secret. I think everybody is seeing inflation in all parts of the economy, right? But that's -- that also helps our top line as well, right? We sell a commodity. So there's certainly a lot of inflation. You're seeing that inflation only on input cost, but also on the revenue line. And I think in a situation where we're in, we're one frac crew, one rig sort of activity level, you look at the potential impact of that inflation on our input costs relative to our operating margin or relative to our free cash flow generation. And it's really just not a big material driver relative to, like I said, our operating margin and free cash flow generation.

Leo Paul Mariani -- KeyBanc Capital Markets Inc. -- Analyst

Ok thank you guys.

Operator

The next question comes from Neal Dingmann with Truist. Please go ahead.

Neal David Dingmann -- Truist Securities, Inc. -- Analyst

Good morning yall. Nick, could you -- I want to dig a little bit more. I think it was interesting what you said about the key being the intrinsic per share value. And if so, how do you think about that on just -- you asked earlier about maybe ramping production a little bit versus what's going on with pricing or hedges? I just -- I'd really love to hear how you think in sort of today's environment the best way to sort of pull that forward on intrinsic per share value.

Nicholas J. DeIuliis -- President, Chief Executive Officer & Director

I think there's a sequential thinking to some of this, right? So the field execution that Chad was just talking about is the precursor to everything. If you're able to do that safely and compliantly and you've got the geology and the operational efficiencies to bring to bear, then you're going to generate a significant amount of free cash flow with our cost structure. You're just going to be able to do that, and that's what we've been doing for some time now. You got the free cash flow being generated, then the next sequential issue is putting that balance sheet into a current state of best-in-class to be able to take advantage of any twist or turn you'd see with volatility or capital markets or commodity or whatever the case might be. We have been hard at work at that for a while. And Don [Indecipherable] in his comments, sort of made the point that's made on one of the slides that we've got a balance sheet and how that basically has all of its major issues addressed for the foreseeable coming years in terms of period of time. And that then puts you, I think, in the last stage of this, what we call the sustainable financial business model, to be able to methodically return capital to shareholders. And for us, basically share count reduction or dividend, and we're going to follow that clinical rate of return, risk-adjusted math. And when you're looking at intrinsic per share value versus share price, there's a heck of a rate of return that we saw in Q3 tied to that. So we took advantage of that. And if and when those facts and circumstances change, i.e., share price, right? Then we've got options like dividends as the vehicle to return capital to shareholders. So we think of it sequentially, we follow the math. And if you think of it sequentially, one being a prerequisite to the next thing, It's sort of land you where we landed in Q3 and then how we're thinking about the rest of '21 and going into '22 and beyond.

Neal David Dingmann -- Truist Securities, Inc. -- Analyst

And then last, I think I know the answer to this, guys, but I mean, given your large acreage position, but just thoughts on M&A, it seems like there's, again, starting to be a few more smaller, I consider bolt-on incremental deals for you all your thoughts on that?

Thank you.

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. I mean we're obviously always looking at everything that could create sort of value. I mean it's just -- I think as we've shown, we're just back here in our return [Indecipherable] thresholds necessary to do things. And that's kind of going to continue going forward. So we'll look at stuff. We're just, I think, pick here the most when it comes to M&A.

Operator

Thank you. The next question comes from Michael Scialla with Stifel. Please go ahead.

Michael Stephen Scialla -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Hey, good morning guys. Congrats on a nice quarter. On Slide 6, you mentioned plant optimization to pull forward activity. What does that entail? I just want to see if you have any color to add around that.

Chad A. Griffith -- Executive Vice President & Chief Operating Officer

Hey Michael, this is Chad. So the analogy I'd like to use is that our plan is with one rig on frac, but it's kind of like a core end, right? So you can -- you sort of compress it, you can sort of expand it. Generally average about one rig one frac crew through the plan, but with some ability to either accelerate or slow down activity as a function of other opportunities for accounts. And so when you think about trying to accelerate or bring forward some activity: One, it's largely driven by, as I already mentioned, just the execution of the team in the field, but there's also -- but by accelerating by gaining those efficiencies and getting done quicker by getting a drill completed quicker. That moves up the next set of activity, right? So you get the Pad A finished a week earlier you can move on to Pad B a week earlier than you originally planned. So that contraction of the plan sort of like an accordion allows some of the capital and some of the production to sort of move around on a -- between quarters or between years.

Michael Stephen Scialla -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Okay. Got it. So you're not really changing your 37 TILs for the year doesn't necessarily change, but when they come online in the fourth quarter might be a little earlier than planned, which could have contributed to the bump in production guidance. Is that the right way to think about it?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

I mean, yes, like Chad, it depends how fast the team keeps going sort of a little bit of self-fulfilling, if you keep going faster, you keep getting things online quicker. But it's -- the team is doing an amazing job. It feels like every pad they're on, they're setting new records. So it's an impressive team we have.

Michael Stephen Scialla -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Got you. And I know you've been targeting -- you mentioned last quarter, you're targeting kind of longer-term fully burdened cash cost of $0.90 per Mcfe. Is that still attainable with these higher gas prices? Or has that moved up now? And maybe just any discussion around cost pressures you're seeing other than obviously, your GP&T goes up with higher prices, but any other pressures you're seeing on cost?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. So like I said, we're not going to get into any new kind of cost information for '22 and beyond. But as sort of Chad said, and you can chime in a bit. I mean, we try to stay well in advance to the situations, at least sort of in the near term. But feel confident on the team being able to address and continue to get better going forward.

Chad A. Griffith -- Executive Vice President & Chief Operating Officer

But yes, I'd say the -- so just to make sure that we can about things the right way. Our GP&T rates are largely contractually fixed, so they're not necessarily a function of a commodity price or -- I mean there's a little bit of fuel burn there, but it's a very small component of that GP&T line item. LOE has been very consistent through the quarters, through the years. Maybe the one area where we do see a bump is on taxes just because of a higher sort of commodity, higher commodity price, there's a little bit more of a severance tax associated with that. But really beyond that. That's really the only thing that's really a function of that commodity price.

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. And it's just -- I mean, another advantage of gathering around gas like we do with our midstream company. We don't have contracts tied to inflationary indexes and material fashion. So it's like our midstream costs aren't the same as peers. And the cost advantage actually grows for us if the trucks of others go higher.

Michael Stephen Scialla -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Yup, got it.Thank you.

Operator

The next question comes from Holly Stewart with Scotia Howard Weil. Please go ahead.

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Good morning gentlemen. Just a couple of quick ones from me. I think Don or maybe, Chad, you mentioned last quarter that you would continue to take a look at kind of that dry wood mix and adjust. Just curious, given where pricing is as we look at the forward strip and into the future, how are you thinking about making those adjustments to the program? And then maybe, Chad, just from that kind of incremental for 4Q on that optimized activity, is there any thoughts that you can share on just how we should think about that activity mix?

Chad A. Griffith -- Executive Vice President & Chief Operating Officer

Yes, certainly, on the dry versus wet mix, we're -- as far as existing production goes, it's something we optimize on a daily basis, as we've mentioned a few times in the past. You generally have all the numbers you need to do that math, and we are doing that really on a real-time everyday basis to move that gas through that midstream system that we own, whether we want to take that gas to a dry outlet, blending it with some lower BTU gas and selling it as dry gas or moving it to processing and benefiting from the NGLs, it's math we do every day and optimize that every day. As far as the scheduled timing as we look into the future, there is some additional wet pads out there, some additional wet wells that are available to us. We're assessing the right timing for those and those are available for us, and we are continually doing the math on that to optimize the schedule really every day as commodity prices move around.

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Okay. That's helpful. And maybe, Don, just on the 2023, it looks like you added some hedges there. I think on our math, you're approximately 70% in 2023. Any just thoughts here on moving forward? I know you keep kind of averaging up on the portfolio. Do you feel like you're good for now going out that far? Or is that something you're just going to kind of keep the cost averaging higher?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. No, like we've said for a while now, I think going back to 2017 or so, I mean it's -- there's there's a dollar-cost averaging effect to this. So I mean we're hedging all the time. So we'll continue to kind of chip away at this stuff over the long haul and build a business that works really well if gas prices are call it, low, moderate or high. To me, that's like the most sustainable thing you can make and the most prudent thing you can do to run a very successful company over a long period of time.

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Okay. Maybe then just one final one, a big picture for you, Nick. I think several of your peers have said that the forward strip is not supportive of incremental drilling activity. I'm curious where you fall out on this topic conceptually. I think we would tend to agree with -- they disagree with this statement outright. We certainly pursued as an industry growth at a lot lower commodity price levels out on the forward curve. So just curious what your thoughts are here?

Nicholas J. DeIuliis -- President, Chief Executive Officer & Director

I think if you look at the forward pricing and certainly on the liquid side, but also with natural gas, there are rate of returns to be had with activity. I think what you're seeing though is the industry for a long time, probably decades has been suspect to a lot of group think and herd mentality. And what's changed is probably where the popular focus has gone to recently, which is this concept of discipline and right, the free cash flow generation, which we think obviously will be a good thing. That's something we've been focused on for a while in things like scale, right, with industrial logic and whatnot. So I think the reason you're seeing a hesitancy isn't because of necessarily rate of return math. I think it's more because it's just not the popular thing right now. Everybody is looking more toward the disciplined model maybe for good reasons, maybe for other reasons, but that can change quickly, as you know. So when we enter a new chapter of what the next big thing is, who knows? But for us, I think you can rest assured, we will remain consistent on how we're approaching. Thanks

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Ok, that's super helpful. Thank you.

Operator

The next question comes from Greg Tuttle with Piper Sandler. Please go ahead.

Unidentified Participant

Thanks everybody. I guess first question, as you think about, let's say, tomorrow, your internal ideas of intrinsic value per share are reached by the market. you alluded earlier to a potential base dividend. How do you think about a base or a base plus variable as in that scenario as a way to return capital to shareholders?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. As Nick said, I mean if you're not in a super growth mode as a company, I mean, you should be returning significant free cash flow to shareholders. So I mean, that's something I think that's a common sense for any industry, not just ours. But when you look at how to do it, I mean I think for us, I mean, the way we run the hedge book, we're really focused on resilient and predictable recurring free cash flow and kind of growing that free cash flow per share, right? It is where we sort of sit. So from dividend perspective, base dividend could be on the cards, but for variable dividend. I don't think that, that would be something that would would be a part of like the business that we're running. It would be our, call it, variable dividend would be potential buybacks. There's the way sort of we would sort of think about it. And again, it'd be be rare return-based, it'd be a jump ball competition versus other opportunities to grow free cash flow per share for the business. And net-net, factoring circumstances change all the time. So I don't know what the world looks like whenever these sorts of things happens, but rest assured the business model we're running is geared to return a significant portion of free cash flow to shareholders and to focus on trying to grow the intrinsic value per share and free cash flow per share of the company.

Unidentified Participant

That's super helpful. Thank you. And I guess last blowing up on Holly's question, maybe not CNX related, but for the industry, like what triggers is CNX looking at where you would potentially see industrywide growth for nat gas? Like how do you guys think about that dynamic in the market?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

We just think it's fickle. I mean you're not -- it's a couple of Bcf a day. There's a difference between like gas price and bad gas price. I mean there's a reason to want to predict gas prices because [Indecipherable] in a couple of Bcf a day can be the difference between good and bad. So best of luck if that's -- your goal is to try to predict what it is because it can just change very quickly. It's very fragile in both directions.

Unidentified Participant

Thats superfly. Thanks. appreciate it.

Operator

The next question comes from Noel Parks with Tuohy Brothers. Please go ahead.

Noel Augustus Parks -- Tuohy Brothers Investment Research, Inc. -- Analyst

Hey good morning. Just a couple of things. Looking into 2022, and I apologize if you touched on this. As far as what you're seeing for service rates, I'm just curious what sort of inbound inquiries you're getting maybe from competing vendors? And whether you have a sense that looking into next year, it's going to be -- I mean we're going to see just sort of very little room for negotiation given sort of the path around with prices. So I guess I'm just trying to get a sense of do you think kind of once and for all, at least for this cycle, the pricing power has reverted to the vendors, and that is your sense that that's where it's going to stay probably heading into next year?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. '22 and beyond, we're not going to comment on any new information or guidance. But in general, Chad did mention earlier, just where we stayed mostly contracted for a decent piece of the near future at least as far as what happens beyond that, I don't think anybody knows. I do know, though, that our there's advantages of having a smaller capital program than one rig and one frac crew in a world like that, and we'll see and expect to see margin expansion that would more than offset kind of cost increases for us. I mean, I think it's more of an issue for larger capital programs with, call it, smaller margins. But with a relatively small capital program and our high margins, we feel good about however the future ends up unfolding, which is anybody's guess what the world as it is today.

Noel Augustus Parks -- Tuohy Brothers Investment Research, Inc. -- Analyst

Great. And other sort of general question. Just to the degree that you're aware of or in touch was industrial users in-basin demand and so forth. Do you have any sense that this run-up we've seen in gas prices, which, of course, helped by exports and LNG? Do you have a sense of any sort of repositioning on their part in terms of just maybe renewed interest in hedging or maybe it didn't seem necessary for a long time or either greater or less interest in trying to maybe lock in the -- lock in supply for the longer term?

Chad A. Griffith -- Executive Vice President & Chief Operating Officer

So this is Chad. I'll take a shot at this and certainly others feel free to add. But I think for a long time, I think buyers of gas, consumers of gas utilities, power plants, et cetera, certainly benefited from relatively steady, low prices. And those low, steady prices disincentivized these consumers of gas to hedge, to invest in infrastructure and invest in storage. And now we're in a situation where daily consumption of natural gas is up, what, 80% versus several years ago. Yes, we've had no material expansion of storage. Pipelines continue to be challenged. And we certainly have seen -- had seen historically a reduction in forward liquidity in some of the buyer side of the hedges. So I think my expectation is certainly this volatility is certainly going to encourage some of these consumers of natural gas to come back into some of these areas where they had not participated in for the last several years.

Noel Augustus Parks -- Tuohy Brothers Investment Research, Inc. -- Analyst

Great. And just a follow-up with it, again, not trying to ask you out of a crystal ball, but is it conceivable you think that at least maybe on a regional basis that could make a significant dent in the backwardation we've seen for so long now?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes, I don't know, just sort of answer. Like I said, it's if it's two Bcf a day supply shows up and it's a warm winter, then gas prices aren't that attractive anymore. If no supply -- new supply shows up and it's a gold winner, gas price were really high, like it's just an impossible thing to predict how the future kind of unfolds with this. It's just too thin and too tight of a market.

Noel Augustus Parks -- Tuohy Brothers Investment Research, Inc. -- Analyst

Great. Fair enough, thanks alot.

Operator

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

John Holliday Abbott -- BofA Securities -- Analyst

Hey good morning and thank you for taking our questions. I do apologize if some of these topics had been covered as I've jumped on the call a little bit late. First question is on hedging here. I mean it looks like you continue to add to your hedge book. I mean I don't think that everybody sort of changes as you like to reduce your risk Well, the use of swaps, I mean, what is -- is there -- why the preference over swaps over collars at this point in time?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Yes. No, we address the fact that we're going to order continue to hedge and we view it as a risk. And yes, there's other products out there, but they all -- you're not gaining kind of like free upside, you want more upside, you take more downside. So if there's products that we can get the upside without the downside maybe. But I mean, we look at these things, you just -- you ended up just not really gaining ground on the -- whatever product you end up on.

John Holliday Abbott -- BofA Securities -- Analyst

All right. And I think you also addressed that the macro is a little bit frag out there. But at what price might -- just given where the strip is and given the potential future cash flow off the strip, at what point does the potential acceleration of a build-out to CPA self makes sense? Or is it still not within the time pricing given sufficient Marcellus inventory?

Donald W. Rush -- Executive Vice President & Chief Financial Officer

No. Yes, we look at these things. And like I said, it would be facts and circumstances based on what the world looks like. I mean, I don't -- 6, 12 months from now, it might be completely different and better to the worst. I mean we're looking at all these things. We'll try to make the best calls at the time. But to me, it still seems like there's a lot of volatility. So -- and a lot of volatility, you don't -- you kind of wait to see how things unfold first before you would think about any of those sorts of things.

John Holliday Abbott -- BofA Securities -- Analyst

Alright, appreciate the color and thank you for taking our questions.

Operator

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

Tyler Lewis -- Vice President of Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Tyler Lewis -- Vice President of Investor Relations

Nicholas J. DeIuliis -- President, Chief Executive Officer & Director

Donald W. Rush -- Executive Vice President & Chief Financial Officer

Chad A. Griffith -- Executive Vice President & Chief Operating Officer

Zachary Parham -- JPMorgan Chase & Co -- Analyst

Leo Paul Mariani -- KeyBanc Capital Markets Inc. -- Analyst

Neal David Dingmann -- Truist Securities, Inc. -- Analyst

Michael Stephen Scialla -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Holly Meredith Barrett Stewart -- Scotia Howard Weil -- Analyst

Unidentified Participant

Noel Augustus Parks -- Tuohy Brothers Investment Research, Inc. -- Analyst

John Holliday Abbott -- BofA Securities -- Analyst

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