CNX (CNX) Q2 2025 Earnings Call Transcript

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DATE

Thursday, July 24, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

President and Chief Executive Officer — Nick DeIuliis
Chief Operating Officer — Alan Shepard
Chief Operating Officer, Upstream — Navneet Behl
Vice President, Investor Relations and Public Relations — Tyler Lewis

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TAKEAWAYS

45Z Tax Credit Eligibility: Management stated that 2025 marks the first year of eligibility for the 45Z tax credit, with the associated $30 million annual run rate potentially realized starting in 2026, pending final rulemaking.
Maintenance Drilling Program: Activity levels will remain unchanged for the remainder of the year, and management confirmed the continuation of a one-rig drilling schedule.
Capital Efficiency: Management cited a capital efficiency ratio of $0.85 per Mcf, calculated from 580 Bcf of production over $500 million in CapEx, and indicated the company expects to maintain this 'mid-eighties range' for capital efficiency (approximately $0.85 per Mcf) going forward.
Production Outlook: Sequential production declines are expected in the third and fourth quarters due to front-loaded turn-in-line activity and a brief lull before additional wells come online in late Q4.
CapEx Trends: Capital expenditures will be lighter in the third quarter of 2025 and are projected to increase again in the fourth quarter of 2025 as drilling and completion activities resume.
Utica Well Performance: Management stated that "latest, tilts that we got in Q2 are slightly, you know, above our expectation," with all Utica wells performing within internal expectations as of the second quarter of 2025 and costs currently below target.
Environmental Attribute Free Cash Flow Guidance: underwritten using prevailing market prices for Pennsylvania Tier One renewable energy credits, which are in the "mid-twenties" per megawatt-hour in the current market.
Market Access for RMG Volumes: RMG gas volumes may qualify for both 45Z credits and Pennsylvania Tier One RECs, but management clarified "the volumes don't qualify one for one," so eligibility varies and depends on final regulatory guidance.
AI/Data Center Demand Engagement: The company is actively marketing its RMG product as a sustainable energy solution to data center operators and third-party marketers, specifically targeting the zero-carbon profiles valued by technology sector clients.

SUMMARY

CNX Resources (CNX -3.72%) is positioned to benefit from the newly available 45Z tax credit starting in 2025, with up to $30 million in annual run rate impact starting in 2026, pending final regulations. Planned production will temporarily decline during the third and fourth quarters of 2025 as the company executes a steady one-rig program, resuming higher activity in late Q4. Utica wells delivered results in the second quarter of 2025 that exceeded expectations, which management considers competitive on an IRR basis with Marcellus opportunities, reflecting current REC market pricing. The company continues to evaluate long-term marketing opportunities for its RMG product in both compliance and voluntary carbon markets, with potential uplift from future data center demand yet to be fully realized.

Management stated, "We're really pleased with the performance so far, but we're not satisfied yet." and signaled continued efforts to drive operational improvement and cost reductions.
According to the company, "our production outperformance was basically, like, four things coming together" including strong new well results, efficiency gains, operational execution, and base production uptime.
Regarding the pathway for renewable gas marketing, Alan Shepard said, "At some point, you can only sell into one market. ... they might not be stackable. ... but you’re not gonna get beyond that," framing the limits on environmental attribute stacking.
The company characterized the AI/data center-related demand for Appalachian natural gas as a long-term positive but emphasized a "wait and see" stance on taking hedging or capital allocation actions until major data center-linked offtake contracts are signed.

INDUSTRY GLOSSARY

45Z Tax Credit: A federal incentive for qualifying clean fuels produced from waste or renewable sources, affecting free cash flow for eligible gas producers.
RMG: Refers to "Remediated Mine Gas," a low-carbon-intensity natural gas sourced from capturing and processing methane emissions from coal mines.
Till / Turn-In-Line: Industry term for bringing a drilled well online for production.
PA Tier One REC: Pennsylvania’s renewable energy certificate for qualifying resources, including certain renewable forms of natural gas.

Full Conference Call Transcript

Operator: Certainly. We will now begin the question and answer session. And your first question comes from Zachary Parham with JPMorgan. Please go ahead.

Zachary Parham: Hey, thanks for taking my questions. I wanted to ask on the 45Z tax credit. Could you just give us a little detail on the timing and ability to claim those credits? And as the rules are laid out today, would those credits just run through 2029?

Alan Shepard: Yeah. Hi, Zachary. Good question. So the way the program is set up currently, right, as the initial rule got answered, you point out, there needs to be final rulemaking. As long as everything comes in line with the initial guidance, the first year eligibility to claim credits would be in 2025. So if you saw in our materials, we were talking about 2026 would be the first potential opportunity to get some of that $30 million a year run rate. And then, yeah, the program got extended under the OBB through 2029. It'd be the first time that it'd be up for reextension.

Zachary Parham: Thanks. And also just wanted to ask on activity levels at the E&P business. Any plans to grow volumes here? I know at one point, you all talked about having optionality to add some activity back in the second half of the year. And if not, can you talk about what a maintenance program might look like in 2026? Would that be flattish CapEx year over year? Just trying to get a sense of what activity level might look like.

Alan Shepard: Yeah. So maybe on the first one, you know, we were positioned with some optionality had we seen sort of the end-of-year storage levels stay low. I mean, at this point, it's pretty clear that we're gonna creep towards kind of 4 TCF in storage. And under that scenario, we're just gonna maintain the initial set of activity that we'd planned for the beginning of the year. So no changes expected at the current time. When we think about sort of capital efficiency levels, I think the way to do that is to sort of tie back to what we guided to a few years back or a few quarters back.

The two numbers that stand out are sort of the 580 million production or 580 BCF of production over the $500 million CapEx. That ratio is about $0.85 per million in terms of capital efficiency. I think moving forward, if you set aside the actual production we'll target, which we always talk about as being a function of optimizing free cash flow per share, that's the right ratio to kind of think about the business's capital efficiency moving forward, kind of that mid-eighties range, and it'll wiggle plus or minus a little bit in any given quarter, just with the lumpiness with the one rig program, but that's the right way to think about it moving forward.

Zachary Parham: Thanks, Alan. Appreciate the color.

Operator: And your next question comes from Leo Mariani with KeyBanc. Please go ahead.

Leo Mariani: Yes. Good morning here. Wanted to see if you can get a little bit more color on drilling and completion activity levels in the second half. I know you all had said that CapEx was pretty front-half weighted in 2025. But just looking at your turn-in-line schedule, the vast majority of turn-in-lines, I think they happen here in 1Q. So if you could kind of maybe speak to whether or not there's a bit of a lull in activity here in the second half, and maybe that activity kind of picks up a little bit in the winter, and could you also kind of relate that to CapEx trends?

I mean, it looks like CapEx is down a little bit in 2Q versus 1Q, and maybe just kind of help a little bit with trajectory on CapEx in the second half?

Alan Shepard: Yeah. Sure. Sort of similar to what we talked about last time, Leo. Basically, the bulk of the tills were weighted toward the front half of the year. Our next batch of deals would be towards the latter part of Q4. So what you'll see on the production front is kind of sequential declines. So it'll be lower in Q3 and then lower in Q4 until that next batch till comes on. And then CapEx will track that. Right? So CapEx will be lighter in Q3 and then pick back up in Q4 when, you know, we get back to it on the activity front.

Leo Mariani: Okay. So it sounds like there's a bit of a hiatus in activity, then it kind of picks up late this year to get you all ready for kind of the winter in 2026. Is that kind of what you think about?

Alan Shepard: Yeah. That's the right way to think about it. You know, we're gonna continue to run the one rig program on the drilling side, and then completion activities will hit a bit of a lull, and then those will pick back up in the fall as we get ready for the teals that I talked about in the December time frame.

Leo Mariani: Okay. That's helpful. And then just on the Utica, obviously, y'all seem excited about that. Sounds like the costs are already below your target here on the wells. It's nice to see. You know, at this point, given you've beaten the target, you think there's more room to go on the cost side, or maybe that can kind of come down, and apart from the cost, could you kind of speak to the actual well results, production performance? How are the results trending versus your expectations, and maybe just overall, how do you see this kind of competing with the Marcellus?

Navneet Behl: Yeah. Good morning. This is Navneet. So just wanted to kind of, you know, outline on the Utica. We've done a really, you know, team's done a really great job over on optimizing our, you know, drilling and completion operation over the last couple of years. We're really pleased with the performance so far, but we're not satisfied yet. So we are aggressively, you know, trying to improve the performance over the next few quarters. So stay tuned on where we can, you know, get down, increase our operational efficiency, and reduce our cost. So that's one. Second, on the performance, all our Utica wells are performing within our expectations.

And our, you know, latest, tilts that we got in Q2 are slightly, you know, above our expectation. So we are really, you know, excited about the deep data play. And we look forward to kind of, you know, continuing to kind of, you know, get more wells in there.

Alan Shepard: And then Leo, maybe I'll address the last part of your question on how we think about the Utica and the Marcellus sort of mix. So we've been very intentional in giving Navneet and the operating team a nice runway here to really demonstrate, you know, their prowess and being able to drive these costs down. Moving ahead, obviously, you know, we're gonna continue to develop our core Southwest PA field over the next few years. But we also, as Navneet pointed out, we want to keep getting him reps at the Utica Wellhead there so he can continue to work on, you know, cost efficiencies.

Leo Mariani: Okay. Appreciate all the detail. Thank you.

Alan Shepard: Thank you.

Operator: And your next question comes from Noah Hungness with Bank of America. Please go ahead.

Noah Hungness: Good morning. I was hoping to ask on 45Z again. When do you think you'd be able to reach that $30 million a year run rate? And when you do realize the full $30 million of additional free cash flow from 45Z, should we think that all of your RMG gas would be sort of shifted to qualify for those 45Z opportunities, or will some of it still be used to qualify for the PA AEC tier one credit?

Alan Shepard: Yeah. So a little bit of thinking about timing. Like I said, so 2025 is the first year of eligibility for the program, but the cash associated with that when the current till you file your tax return for 2025 and 2026. Right? That's when you would create the tax credit that would be fungible, and you can convert that to cash in the market. In terms of volumes that qualify, I mean, bigger picture, our initial read on the guidance is that it's stackable. So you're able to take advantage of both programs in terms of 45Z and the PA tier one rec. But the volumes don't qualify one for one.

So some volumes might qualify under tier one racks, and some volumes might qualify under 45Z. So it's a blend of which ones do and which ones don't. And, you know, at this time, it's all still subject to that final rule. You know, we're optimistic as long as things follow the initial guidance. There's still a bit of a wait and see on that.

Noah Hungness: Gotcha. That's helpful color. And then for my second question, could you maybe talk about what credit price is underwriting the revised environmental attribute free cash flow guide of $65 million?

Alan Shepard: Yes. It's sort of where the market's at now. We treat it very similar to how we report kind of the open prices for the rest of the year. Just kind of look at the PA tier one strip. That's in the mid-twenties right now for the megawatt hour.

Operator: And your next question comes from Jacob Roberts with TPH. Please go ahead.

Jacob Roberts: Good morning. Maybe a bit of a follow-on to that last question. Should we be thinking about the $30 million as a function of the RMG input or the result of some sort of downstream output?

Alan Shepard: The tax credit is for the incentivizing the collection of waste gas off the backside of coal mines and creating a saleable product into the pipeline. If that makes sense. So that's why it's thought about more as remediating or abating an emission source.

Jacob Roberts: Oh, okay. That's helpful. And then I just wanted to give you guys the opportunity to talk a little bit about the AI and energy summit. I know you mentioned it in the release. And specifically, we're wondering how much the RMG product is factoring into those conversations with any counterparties, maybe in particular, the tech guys, and ultimately, do you think there is a pathway for RMG to get better economics on some of the potential deals there relative to the current pathways you've laid out?

Alan Shepard: Yeah. Great question. No. We're super excited. You know, our mantra around here is Appalachia first. All of this AI stuff is gonna be great for the region, great for the industry. And in particular, you nailed kind of our lane that we're super focused on right now, which is, you know, offering the RMG product to the market as a true sustainable energy solution. To get folks that are using that gas down to a zero carbon sort of profile on these new data centers. Obviously, we're having discussions with folks.

You know, we have third-party marketers having discussions with folks, and we're excited to see that develop and not just on the existing volumes, but enough incentive from the voluntary markets to go out and gather some additional volumes, hopefully.

Nick DeIuliis: And Jacob, this is Nick. Just to sort of follow-up with Alan. The way we look holistically at the AI opportunity and mediated mine gas, RNG, it's another industry pathway, whatever you wanna call it, to get the value of it recognized and utilized. So we started with manufacturing and arm's length transactions that recognized it for manufacturing downstream products. We've got it recognized, of course, in the power grid under the Pennsylvania PUC. We then were able to get it recognized in the hydrogen economy.

With 45E, now transportation of alternative fuels with 45Z, and this would be another critical pathway that I think makes a whole bunch of sense and has a certain level of inevitability to it, but the timing and the magnitude of it, it's still a TBD.

Jacob Roberts: Great. Appreciate the time, guys.

Alan Shepard: Yep.

Operator: And your next question from Michael Scialla with Stephens. Please go ahead.

Michael Scialla: Hi, good morning, everybody. Just follow on the AI topic there. Obviously, a lot of news recently on gas providing power for data centers in the region. Just wanna get your updated thoughts on in-basin demand, and does that have any impact on your long-term view of natural gas prices in your hedging strategy?

Alan Shepard: Yeah. I don't think it has the impact on our hedging strategy short term. You know, our hedging strategy is a function of how we manage the balance sheet and how we manage our overall capital allocation program. I think long term, it's absolutely gonna be bullish. You know, anything that creates in-basin demand given our kind of interstate pipe restrictions that we've experienced over the last decade is gonna help everyone in-basin. So we're more from wait and see mode. You know, from our position is we have the depth of inventory, we have the ability to deliver gas. It's just now wait and see which projects come online and how we can benefit from that.

Nick DeIuliis: Yeah. Michael, I think to the prior experiences that we've had and similar types of opportunities for the industry and for the region. When you're looking at potentially new demand being created, that journey to where we end up actually versus what we're hearing and what people are projecting today is obviously gonna be very different. There's going to be all kinds of factors and changes and twists and turns. So as to which plans get built and, you know, when they're online and what the timing of all that is. There's just a lot of things to be figured out between today and then the future.

And that's why, and I think you saw that too since the summit with what's going on with volatility on pricing. That's why we basically love the opportunity and the developments it would mean for demand for natural gas and what it could mean for the region in terms of sort of a reindustrialization or revitalization of a lot of these communities. But in terms of, you know, taking positions today and speculation of what that's specifically gonna mean when it comes to things like hedge book and capital allocation. Our playbook, our philosophy, our approach remains exactly the same.

Michael Scialla: Yep. Makes sense. Wanna get your thoughts on the second quarter production surprised a little bit. I just wanted to see if you could pinpoint where that came from. Was it new wells outperforming expectations, base decline, anything else?

Navneet Behl: Hi. So our production outperformance was basically, like, four things coming together for us. The first one is our new tilt performance. The Apex Marcellus wells and our Utica wells. They've done really well. And the second part is our operational execution, which has given us the opportunity to kind of move some of this forward. The third part is our production efficiency gains on our base production. So we are doing really well there. And the last part is like, our uptime on base production. So all four combined, it kind of led to this result.

Michael Scialla: Sounds good. Thank you very much, guys.

Operator: And your next question comes from Betty Jiang with Credit Suisse. Please go ahead.

Betty Jiang: Good morning. Thank you for taking my question. Want to go back and ask about the Deep Utica results again. In your view, how much do you think cost will have to come down for the Deep Utica to compete with Marcellus returns? And then broadly speaking, from what we can tell, the Utica wells are fairly concentrated right now. So we'll love to get your thought about the consistency of Utica performance IRA coverage.

Alan Shepard: Yeah, I would say on the first question, where we're at right now on sort of the cost structure, we think that makes us well competitive with kind of best in basin opportunities even on the Southwest PA sort of Marcellus stuff. The longer term, you know, we're gonna step out from where we're at now, but our expectation now is that there's a pretty long runway across our field up there to make these results repeatable.

Betty Jiang: Okay. Thanks. A follow-up on the Utica. Just as related to the gas power for AI, when you think about your value recognition for the gas, is it fair to think about it on a voluntary carbon credit perspective where you're selling the attributes to tech companies looking to reduce their carbon footprint, or is it through compliance market or other channels?

Alan Shepard: Yeah. On the RMG front, it's gonna sell to whichever market recognizes the highest value. Right? I mean, currently, that is the latter, the one that you pointed out, kind of the renewable energy credit markets. The existing RPS programs. But there is a finite amount of this resource that's available, and we think the environmental attributes should result in some voluntary pricing that rivals the regulatory pathways in the long term.

Nick DeIuliis: Betty, you also bring up another good point with the question. Which is the focus currently, right, is really shifted with the opportunity of AI in places like Appalachia to nat gas demand and the construction of the data centers and power plants to power them, etcetera. But there's also, you know, another issue that's been there from the get-go, that will remain. It just maybe has perhaps fallen a bit below the radar, which is the sustainability solution or the sustainability path to making all this growth occur.

And the ultimate sort of clients and drivers of that, the tech industry, hasn't sort of backed up with regard to sustainability or carbon goals one step since they originally set them. And now this new growth option for them is going to make that even more of a heightened challenge. So I think RMG playing a role in how this ultimately plays out has never been in more demand. And to your point, I think the tech industry will play a key role in that.

Betty Jiang: I'm sorry. If I could just follow-up on that answer. Thank you. In the voluntary carbon market perspective, would that be incremental to PA rack market or 45Z?

Alan Shepard: At some point, you can only sell into one market. So traditionally, the voluntary is depending on which path we are using, they might not be stackable. So it's all very facts and circumstances dependent, so hesitate to give a general answer, but the way to think about it is you can generally get maybe one to two stacking, but you're not gonna get beyond that.

Nick DeIuliis: Yeah. Think of it as another pathway that we compete with your other alternatives. So not generally, not stackable.

Betty Jiang: Got it. Thanks.

Operator: Your next question comes from David Deckelbaum with TD Cowen. Please go ahead.

David Deckelbaum: Thanks, Nick and Alan and team for taking my questions today. I just wanted to follow-up on just the Utica mix. You talked about just giving more at-bats next year. As we just think about the general activity level that you guys have laid out, should we think about the Utica taking more share of the program over the next couple of years? Or is there still some more headway to make on the cost side before it becomes a larger contribution?

Alan Shepard: No. I would go back to what I said on one of the earlier questions. I think at this point in the cost structure, these wells are in the mix in terms of IRR competitiveness. So you're gonna see them in the program moving forward. And what we're really trying to do is balance the harvest southwest PA sort of field that's fully developed with any potential kind of step out in the new CPA area. You know, we look at every project on a kind of cycle IRR basis, and that's how we determine the mix. Said we've been very intentional recently and just given Navneet lots of at-bats to demonstrate repeatability.

But moving forward, I think we're comfortable that we can be super focused on just the best projects at the right time.

David Deckelbaum: Appreciate that. And then just a follow-up on conversations just around marketing and obviously in-basin demand. As you said today, we go into winter. You guys talked about before, kind of hitting tank tops or so as we get into fall and then sort of setting up for 2026. You know, there have been a lot of contracts that seem like they're in the early days of being signed right now. From where you sit, do you think it's sort of best to see this market get appreciably tight over the next few years and see in-basin demand increase before signing long-term agreements? Or is that something that you think is going to be in your relative near future?

Alan Shepard: Yeah. I think the first signal you wanna see is an actual data center connected to some of the Natgas projects. I think once you see the first sort of data center sign up for electricity offtake here in Appalachia, that'll give folks a real sense of how the value is gonna get distributed across the chain. Until you see that, you know, you're a little bit hesitant to lock in your kind of respective ownership of that economics. So there's, as Nick pointed out, there's still a lot of innings here. We're still very early. But there's some definite value in the wait and see how this plays out before locking up anything in long term.

David Deckelbaum: Appreciate it. Best of luck, guys.

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: Thank you again for joining us this morning. Please feel free to reach out if anyone has any additional questions. Otherwise, we'll look forward to speaking with everyone again next quarter. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.