CNX Resources Corp (CNX) 2021 Q4 法說會逐字稿

Good morning, and welcome to the CNX Resources Fourth 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.

Thank you, and good morning, everybody. Welcome to CNX's Fourth 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 fourth quarter results. This morning, we posted an updated slide presentation to our website. Also detailed fourth 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 4Q 2021 Earnings Results and Supplemental Information of CNX Resources.

As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.

We will begin our coal today with prepared remarks by Nick, followed by Don. We will open the call up for Q&A, where Chad and Yemi will participate as well.

With that, let me turn the call over to you, Nick.

Thanks. Good morning. Like a string of recent quarters in the past couple of years, we had yet another clean, easy-to-understand quarter. And just allow me to spend a couple of minutes on a few highlights.

In the fourth quarter of '21, approximately 80% of our free cash flow was returned to shareholders. And that was in the form of buybacks at very discounted prices. And while taking advantage of bringing in shares at those attractive free cash flow yields, we also put the remaining 20% of free cash flow to debt management, which, in the fourth quarter meant really 3 things.

First, we paid call premiums and fees for a positive rate of return bond deal where we issued $400 million of 4.75% notes that are due in 2030. And we used those proceeds to retire $400 million to 6.5% notes that were due in 2025. The second thing we did is that we paid the fees to extend both of our upstream and midstream RBLs to October of '26. And then third and finally, we reduced our net debt. In fact, we paid down, I think, over $0.5 billion, $508 million of debt, over the last 8 quarters or 2 years.

Now all 3 balance sheet strengthening moves that we saw in the fourth quarter, when you couple those with the cumulative free cash flow allocation toward debt reduction, that was recognized by another upgrade in our credit rating by Fitch. That places us 1 notch below investment grade.

This year, we expect a marked improvement in free cash flow generation relative to what was effectively a stellar 2021. And we issued 2022 guidance of approximately $600 million in free cash flow. That's about $3 a share. And that's assuming, of course, the current share count, just over 200 million shares.

The past 2 years, the most challenging, I think, that a lot of companies and industries and people have seen in decades, it really tested and proved out CNX's brand of a sustainable business model in action.

So what did we do? We invested heavily in our people, in our regional communities to set the best team possible on the field of play. We were steady, safe and compliant in our execution, that the team was able to deliver and -- in that region where we operated, and we manufactured our free cash flow. The significant free cash flow that we generated, that allowed for capital allocation opportunities that went towards strengthening our balance sheet through debt reduction or maturity extensions and also reducing our share count through the acquisition of our discounted shares.

So those moves, they deliver impressive free cash flow per share, compounded growth rates and intrinsic per share value growth, 2 things that we're absolutely focused on. In 2022, our path continues to be pinned to optimizing intrinsic per share value, by long-term-ism; by methodical execution; by derisking; and of course, by astute capital allocation.

So again, going back to sort of the cliff notes for fourth quarter 2021. Our free cash flow and free cash flow per share, they were up. Net debt was reduced. Maturities were extended materially. Share count was reduced at deep discount pricing. And we beat our 2021 free cash flow guidance. We're going to keep clinically following the math when allocating free cash flow. Rest assured, our actions are going to continue to match our words and is true for 2022 and beyond.

So let's hear from Don.

Thanks, Nick, and good morning, everyone. I'm going to start on Slide 3. This chart highlights our steady execution and continuing commitment to our free cash flow plan. The fourth quarter of 2021 marks the eighth consecutive quarter of generating significant free cash flow, with the expectation of adding 4 more strong quarters in 2022.

Slides 4 and 5 highlight our significant undrawn revolver capacity and our extended maturity runway that provide us considerable flexibility and allocation of our free cash flow. As you can see, our focus has been on balancing shareholder returns and improving our balance sheet by reducing net debt, extending our RBLs to October of 2026 and by refinancing near-term debt with longer-term debt at lower interest rates.

This quarter, we allocated more of our free cash flow towards share buybacks as we repurchased 8.6 million shares and then an additional 1.3 million shares after the close of the quarter. On the debt side, through this quarter, call premiums and transaction fees associated with the 2 major balance sheet-enhancing transactions executed late in the third quarter were cash settled early in the fourth quarter. And the remaining free cash flow for the period reduced a modest amount of debt.

Looking at the bigger picture, though. Across all of 2020 and 2021, we had generated approximately $860 million of free cash flow. Of which, we used $540 million for debt management and $320 million for shareholder returns. This shows a prudent risk-adjusted blend over an extended time period. And as we have previously stated, we remain committed to reducing our net debt to get our leverage ratio down to 1.5x.

And as you can see on Slide 2, achieving that target is not a difficult task as 1 year of our free cash flow gets us there. And as a reminder, that free cash flow is mostly protected by our hedge book and peer-leading cost structure due to owning our midstream systems. These facts give us the wherewithal to do both over the next several years. And while we are not giving any guidance on this topic, we will continue to do what we have been doing: Following the math and ensuring we have a low-risk balance sheet. In other words, we will do both materially over the next several years, and we'll continue to follow the capital allocation math with the blend of each changing as the variables around us change.

Let's shift to Slide 6. In the beginning of 2020, we put out a 7-year free cash flow plan. This slide highlights our outperformance against several key metrics for the first 2 years of that plan. On the left side of the page, you can see that we have exceeded our original production guidance by a total of 41 Bcfe. And our CapEx during that same period was lower than our guidance by $67 million.

On the right side of the page, you can see that our combined 2020 and 2021 free cash flow finished above guidance by $162 million, an approximately 23% increase.

So after seeing how we handily beat 2020 and 2021 guidance and now seeing the increase in free cash flow for 2022 guidance from $500 million previously to $600 million -- approximately $600 million as it sits today, let's wrap up by talking about the fundamental reset we've experienced within the company.

Basically, our operating efficiencies in the field, from drilling rigs to completion efficiencies, have improved so much in the past 2 years that the old way of thinking about MOP and the free cash flow that goes with it are now obsolete, and obsolete in a good way.

Our efficiency step-change improvements have now placed us at a 590 Bcf run rate starting point in 2022, not the old 560 guidance from the initial. And as a reminder, our 2021 production was closer to the 590 number, too. And basically, what has changed is the 1 rig, 1 frac crew that we used to use to run a maintenance of production plan now grows production without adding any new crews. That's materially better than how we thought about the typical MOP plan back in 2020. And as we always say, we'll follow the math and strive to maintain high efficiencies.

So today, you see our '22 guidance on Slide 7 culminating in a free cash flow target of $600 million or about $3 per share at the current share count. And looking beyond 2022, although we are not issuing new guidance today, we can tell you, our old plan was based in a different world, from low gas prices to different efficiencies, and is now sort of irrelevant with how we're thinking about the future.

Instead, think of low single-digit production growth at a 1 rig, 1 frac crew kind of pace. And the free cash flow at closer to a $600 million level with the opportunity to improve on that, assuming gas and NGL prices remain healthy. And of course, this boosts free cash flow per share, we should see impressive growth depending on future free cash flow allocations.

With that, I'll turn it over to Tyler for questions.

And operator, if you can open the lines for Q&A at this time, please.

(Operator Instructions) Our first question is from Neal Dingmann with Truist.

My first question is for you, Don. Just a question on hedging. You guys now continue to have one of the better -- just looking at the balance sheet, you guys have very strong, obviously, with a great free cash flow behind that. So my question is, is it just more into the strategy, you guys continue to hedge quite a ways out? Could you just talk about sort of what drives that? Is -- as I mentioned, is the balance sheet and now free cash flow obviously have tremendously improved.

Neal, this is Nick. I think our programmatic hedging approach does not change moving forward. It's really premised on being able to derisk the top line and create a better level of certainty with the free cash flow generation and basically lock in those rate of returns that are quite attractive when you couple it with our cost structure.

So I think during the different twists and turns that the commodity cycle is inevitably going to take, we continue to programmatically hedge on out into the future. So I think that's a safe assumption to keep that in place if you're looking to model us out into '22 and beyond.

Okay. And then maybe a question for you or Chad. You might want to take this again, Nick. Is just, again, looking -- you guys continue to have -- to say ample is an understatement, locations out there. And so my question is -- given you all and most other of the better gas players continue to have run a very disciplined strategy.

So I'm just wondering -- given that and given the big inventory you have, do you think you're getting credit for that full inventory? Or is there something else? I don't know if I'm suggesting to monetize some of that or something like that. But I'm just wondering, for guys like yourselves that are running such a disciplined program, that have obviously ample inventory, do you think you're getting full credit for that in your stock price out there?

I'll maybe approach that from sort of 3 sub-answers. I don't think we're getting proper credit for our free cash flow generation and the sort of the runway of it. So thinking through the question, right, I think I then break it down into 3 sections.

One, no, absolutely 0, inventory concerns from my perspective to continually, efficiently operate at these rate of returns and generate the free cash flow into the far-distant future.

Two, the monetization effort of noncore assets, and sometimes a lot of that, right, will be in acreage pockets that aren't key or core to what we want to do over the coming 10 or 20 years, that's a regular course of business. It's been in our guidance numbers for years now. And there is a certain degree or extent of that in the $600 million free cash flow number that we just issued today for '22. So that's normal course.

I think last year, just to put it in perspective, I want to say we transacted over 300 individual-type monetization efforts. So this is something that we've got a team to do regularly. They're not all acreage positions, right? They can be service, they can be different types of assets. But that will be just normal course for us. And we follow the math there, just like we do everywhere else.

And then the third piece of this is I think of sort of the company looking to the future and what we should be getting credit for, what we should be focusing upon, is really the free cash flow generation level, particularly free cash flow per share, and then the annuitization of that. And this gets into the ability to efficiently operate year in and year out, decade in and decade out, and generate that type of a trajectory of free cash flow and a growing trajectory of free cash flow per share, right, depending on our capital allocation that gets warranted and properly valued in the market.

So that's where our attention is. That's how we think of something like our deep inventory depth and how we approach our business.

Next question is from Leo Mariani with KeyBanc.

A couple of things for you. So could you maybe talk a little about the kind of trajectory of production here in 2022? It's obviously up sharply in the last few quarters, in 3Q and 4Q. Looking at the guide for the full year in '22, it has volumes coming lower off of fourth quarter '21. So do we expect kind of volumes to tick down a fair bit in the first half and then maybe stabilize? What can you tell us about kind of the trajectory of production?

Yes. So just generally, I'll start and then maybe I'll kick it over to Chad here for a quick follow-up on just the pace over the year. I don't think much, frankly, about the quarter-to-quarter production variations or exit rates. To me, looking more free cash flow and free cash flow generation over a longer period of time.

But with respect to 2020 and 2021, Leo, I think that was a good -- those 2 years were great examples of how we sort of approach our decision-making within the philosophy that we embrace.

So right, 2020, we basically made conscious decisions to curtail production because we were following the math of what the forward curves and the rate of returns were telling us.

In 2021, we made a decision to accelerate some of that production. We were able to do so because of our efficiencies, once again, because of the math and what the rate of returns and the curves were telling us. I expect the same in '22 and beyond.

What I don't know is what those curves, what those metrics and assumptions are going to tell us, right? I don't have that crystal ball. But I do know we've got the operational flexibility with the right sort of philosophy in terms of how we make our decisions to take advantage of it.

But those things aside, right, that flexibility, that surge and pull-back of size to optimize for free cash flow and free cash flow per share, I think in terms of just overall production, looking at our 1 frac crew sort of activity pace that Don outlined, low, modest production growth over time. Low, modest being like single digit, low single digit, but nevertheless, some material level of production growth in that zone.

Beyond that, I really can't say at this time. But Chad, maybe just a little comment on what we see on '22 quarter-to-quarter.

Yes. '22 quarter-to-quarter, as we currently view it, based upon the 1 rig, 1 frac crew schedule, is roughly flat quarter-over-quarter. I mean, there's a little bit of variance, plus or minus 1 or 2 Bcf a quarter. It's relatively flat over the course of the year.

But to Nick's point, though, in a highly volatile commodity business such as natural gas, we're constantly evaluating opportunities to either accelerate or time production to take advantage of the price curve. Obviously, the price isn't flat over the course of the calendar year. And so timing your tills and timing your production to maximize the value from your assets is always in our best interest. So it's something we'll continually assess and pivot on a real time basis.

And look, we acknowledge that it makes us incredibly difficult to model and certainly apologize for that. But at the end of the day, we're solving for maximized value creation. And I know that does make it challenging at times for you guys. But at the end of the day, that's how we truly create shareholder value.

Yes. And just sort of just a quick add to the back end of this. Like it's -- our new pads are so -- like the production we get from a new pad is phenomenal. So if it ends up coming on a month early or a month later, it doesn't matter for 7 years, but it can really shift some things materially in 1 quarter to the other. But it balances out.

Got it. Maybe just to kind of approach it a little different way. So I mean, it looks like you guys accelerated a pad from early '22 into the fourth quarter of '21. So maybe just as you look at the schedule as it sits today, are your tills that you've got planned in '22, maybe coming on a little later in the year? I'm just trying to get a sense if maybe that acceleration of activity caused your first quarter '22 activity to maybe go down a little bit here on tills.

This is Nick. We can follow up maybe on this after the call. But just generally speaking, right, the way I look at it, we are basically at a new base production level of about 590 Bcf rate. And that when you look at this 1 frac crew spread activity pace over time without any sort of major disconnects in commodity curve that we would want to take advantage of, like we did in '20 and '21, you should expect, like I said, sort of modest, but nevertheless, some level of single-digit production growth moving forward.

And in the end, like all this matters in my mind to equating to about a $600 million a year average free cash flow generation per year. That's what I'm predominantly looking at.

Yes. And just to add and to follow up from, I think, commentary I made last quarter around this. So if a pad gets online in the 1st week of January versus the last week of December, it doesn't matter sort of for the business, but it matters for which bucket -- year the tills fall in. And it's sort of similar this year. I think you'll see, there's no -- it's a consistent program. It's just going to be a week here or a week there. It can flip some tills from 1 quarter to the other, which is just hard for the quarter.

Okay. I totally get that. And I know that you guys clearly are raising your kind of multiyear base production forecast from 560 to 590 as you've discussed. Just looking at the capital associated with that. When I looked at your old plan, I think you guys had $300 million in capital kind of per annum over that multiyear plan. And just looking at '22, it looks like you're around $485 million, kind of at the midpoint.

So presumably, is there some higher level of CapEx you're seeing associated with that long-term plan? Is that $485 million in '22 a good number going forward or after that? Or does that start to come down after '22? What can you tell us about that?

So again, going back to like the script and what we're saying in the context of '22 guidance. The old sort of multiyear plan that we issued back in 2020 envisioned, as you said, the $300 million CapEx, the 560 production level, give or take. That's obsolete, as Don said.

There's been a new normal that's been set within the company because of our operational efficiencies. You put that toward a 1 frac crew program. As you said, we're starting at a 590 base production level. The CapEx that you see guided in '22 does include capital in the non-D&C bucket for some water and pipe infrastructure that will set us up nicely for this new sort of operational efficiency level that Chad's team has hit. And when that all washes out, whether it's for '22 or beyond, the average sort of free cash flow generation, after deducting for CapEx, what that will result in is in the $600 million a year neighborhood.

So we're really not in a position now to sort of talk about '23 CapEx or '24 CapEx. But net-net, when you take in all the cash coming in, less cash out, including CapEx, we're around a $600 million bogey for free cash flow.

And again, this year's CapEx number for '22, it does contemplate an incremental bump in sort of water and midstream infrastructure, correct?

Correct That's right, that's right. There's really 2 main drivers in '22 capital that's putting that '22 capital number where it is. Look, there's a certain component of inflation that's year-over-year baked into the D&C capital, predominantly in the D&C capital. And then there's some incremental activity on the non-D&C side Nick pointed to. There's some water and pipe infrastructure that sort of -- look, the water and pipe -- the infrastructure projects are lumpy from a capital perspective, so that's not necessarily going to be smooth over any long-term plan. And it's just the way that the timing has fallen. We've got a little bit of chunkiness right now in '22 on that infrastructure side.

The only thing I'll add-on top of that, just for clarity. When we put out the initial plan, that it was an average over '22 and '26. And we were very clear that as our base decline rate happens and lowers in those outer years, you sort of need less capital. So the relative nature is still similar. So the point being, we'll spend significantly less by the time we're out in 2026 than we will in sort of 2022, but it'll be lumpy along the way.

All right. It's a very thorough answer. And I guess, could you just tell us roughly what that extra water and pipe CapEx here is in '22?

It's -- there's no new stuff. It's just when it gets done. Like that's not a new project, that's just what year stuff falls in. So we were under capital...

You basically need the midstream and water to catch up to the frac crew and drill rate. So you're moving projects forward that were normally in outer years.

Yes. No, I get that. I was just hoping you could maybe roughly quantify that number in '22.

So sort of over the long-term plan, we generally think, I don't know, call it, 20% to 25% of your total capital cost is going to fall into that non-D&C bucket. I'd say as we look into '22, that percentage is probably closer to 30% of the total capital. So that should give you a general magnitude of what the swing is.

The next question is from Nitin Kumar with Wells Fargo.

Maybe I'll take a step back. And one thing, you've been very persistent in following the buyback route, so 2 questions on that. One, almost $3 of free cash flow per share. Why not introduce a dividend? It seems to be kind of where the industry is headed.

And then two, we couldn't help but notice that a lot more money was spent on buybacks and debt management this quarter. That leaves you around a 1x net debt to EBITDA. I'm just curious, is this the right level of debt, given your hedging, given your plans as you're seeing them today? Or should we expect more debt reduction from you?

So great question. This is the big capital allocation of the free cash flow issue, which we spend just an inordinate amount of time looking upon, and to a certain extent, obsessing on. Not just the management team, but also our Board. So it's important, right? It's front and center. It's just sort of 1 of the 2 key components of our strategy and what we think makes us special.

When you look at what we are sort of faced with here when it comes to free cash flow allocation into '22, we've got 2 issues here. One, we've got a definite desire to continue to strengthen the balance sheet. And predominantly, right, that correlates to reducing the absolute level of debt. But that also includes, and Q4 was a good example of this, this also includes some opportunistic moves to either reduce our interest expense with the debt that's still in place via refis, right, or to extend out maturities or both. And we did both of those types of things in '22 Q4 -- I'm sorry, '21 Q4. So we'll continue to look for those types of opportunities as well.

But really, our primary focus, at least from my perspective, on the balance sheet side, is to continue, as we said in the past, to methodically reduce the absolute amount of debt through some portion of free cash flow allocation. And we think, if nothing else, not only does it reduced interest expense, right, and sort of boost free cash flow into the future, it creates for more optionality to be able to take advantage of volatile spaces like E&P is and like public markets are.

But then two, right, the other thing we're faced with is these shares that are basically offering up. And we used to talk in the old days of early '21 about high-teens free cash flow yields, and now we're looking at 20-plus percent free cash flow yields. And we said we'd like high-teen free cash flow yield, so we're going to love, right, 20-plus percent free cash flow yields. And we want to take advantage of that as well.

So right now, it's, to a certain extent I suppose, a bit of a capital allocation Nirvana where we've got sort of a number of really attractive opportunities. And in '22, I think the plan when it comes to the $600 million is to sort of allocate that mix between those 2 that I just outlined. Strengthening balance sheet continues on, and taking advantage of discounted shares with some pretty juicy free cash flow yields continues on.

With respect to dividend. Not averse to dividends. Our Board and management team understand that can be a very efficient way to get capital returns to shareholders. But once again, we go back to that clinical approach. Right now, the risk-adjusted rate of returns of share buybacks are so compelling. What we're doing with respect to free cash flow generation, that the dividends for the time being, until something changes materially, are not the most efficient way to return capital to shareholders. They're not the best way to create the long-term intrinsic per share value.

And I do understand, to your point, right, the rest of the industry is talking about and doing it. Like we sort of pride ourselves on taking a bit of a different approach. So until that math changes, I think it's going to be debt reduction and share count reduction.

Got it. Nick, I would just say dividends are also a way to make the market recognize your cash flow generation. It looks good on paper, but that can be one way. I do have a very quick follow-up for Don. You talked about inflation, maybe Chad wants to opine as well. Could you talk a little bit more about where you're seeing that inflation? Is it in your CapEx lines only? Is it in supplies? Is it in rig rates? Just a little bit more color on the inflation commentary, please.

Yes, I'll start it off. This is Nick, and then kick it over to Chad and Don. Inflation, everybody in the country is experiencing it across a whole bunch of different fronts. We're no different. And that was contemplated, baked into the '22 guidance that we issued, specifically to things like CapEx.

With respect to '23 and beyond, I really don't have a view -- we don't have a view on future gas prices beyond the strip; no view on interest rates, right, beyond where they're at now; same with inflation. Interestingly, all 3 are probably tied or correlated to one another. But with respect to the specific components, right, that we're experiencing the most -- I'll sort of defer over to Chad.

But I will conclude by saying one of the things that's special, I think, about this concentrated footprint and the integrated footprint that we've got with this 1 sort of frac crew array, we're able to, much like our revenue side, we're able to basically contract services in a way where we, again, programmatically can take a lot of the volatility of inflation off the table.

But with that as an aside, I'll turn it over to Chad.

Yes. Thanks, Nick. So that's correct. On the service side, on the rig and the frac crew side, because of the way that we've contracted out those services, we've been somewhat isolated so far in any kind of cost inflation along those lines.

Where we've seen the bulk of the inflation so far in our business has been really materials, particularly with respect to steel-related material. Probably half of the inflation that were -- that we've baked into the '22 forecast is almost entirely in either steel or tubulars. The rest of it would be spread across the multitude of materials that we use in our business. So I would say the bulk of it's in steel and the rest of it would be sprinkled across the many other buckets of materials that we rely on.

Great. Would you care to share what percentage inflation have you baked in for D&C?

Yes. So it's roughly 5% to 10% year-over-year.

Yes. Similar to what we broadcasted kind of earlier in the year, so it's in that ZIP code.

The next question is from Holly Stewart with Scotia Howard Weil.

Chad, maybe we could start out just talking a little bit about basis. 4Q was hopefully an anomaly in terms of this divergence that we saw between bid week and spot. Any comments on what you guys saw during the quarter? Your basis of $1 was a bit wider than expectations. And then maybe what you're seeing so far in '22 and how you expect this to play out. I know that you do have strip in your guidance, but just any kind of color you can give us on the quarter and your thoughts around '22.

Yes. So I guess a couple of things to tease out there. So the way that we look at sort of spot exposure versus first-of-month exposure, and certainly, the volatility that we see in the gas price, so that's something that we assess each month. As we're going into the bid week, we look at where is the index at relative to what we think the weather may be for the given month, what the volatility could be in that given month and what our existing hedge position is for that given month.

And we look at all those variables and we make a guess or we make a -- we either lean in or lean out of, call it, index versus basis or index versus daily spot price. And so that's something that we're doing to manage production flows; expected production flows; production risk; like I said, our financial hedge position; and what we think the weather and the volatility might be in a given month.

What we're sort of seeing so far is, look, I think the weather has been wildly volatile. I wish I had a crystal ball that predicted weather more accurately than what anyone else has. We all sort of use the same weather reports. It's the single biggest factor. I think like you go from a December that's one of the warmest December on record, to now we're in a January that's almost one of the most frigid Januaries that I can remember. That's just going to lead to wild volatility between not only index but spot prices as well.

So we're continuing to monitor it. We continue to rely heavily on our financial hedge position. And we're going to continue to make those assessments on a month-to-month basis.

Yes. And just to add to that, to remind everybody one thing. Like our in-basin like production profile is predominantly hedged through to '25, which Chad has mentioned in previous calls.

And then sort of to the leaning in or leaning out on first of month versus index, it's on the margins. It's not a -- we're not -- like we said, we can't predict gas prices. It's more like plus or minus a couple -- 10%.

So anyways, that's -- we're going to see it fluctuate. We're protecting our cash flows from potential fluctuations via our basis hedges and trying to do our best to just squeeze out any extra little bit here or there.

Okay. That's helpful, Don. And then it looks like you did some just minimal hedge additions in '23 and beyond. Any updated thoughts there to provide? I know we just talked about basis, but maybe you could incorporate that into your comments.

Holly, I'm sorry. Are you asking more about hedging philosophy moving forward or more about macro view?

Yes. Well, maybe both, but hedging philosophy as you look out at the longer-term profile.

So Holly, this is Nick. I think, again, the hedging -- the programmatic hedging approach that we've used in the last number of years, I think that continues on no matter what the commodity curve twist or turns will end up being.

So what I mean by that is if you're entering a calendar year, I expect that 80%-ish of the front year production coming up will be hedged, also in-basin, right, with not just the NYMEX but the in-basin. And then that laddering, stepping down into the second, third, fourth years. And we continue to methodically, programmatically build that book over the course of the calendar year. So that by the time we get to the following, you're once again at 80%, and the following sort of stair-stepping down.

I don't see that going away. Again, it's driven by cost structure that we couple with it. It's driven by wanting some certainty with respect to revenues, to be able to steadily and methodically manufacture free cash flow, to be able to count on it to allocate it in the right way. It has a lot of ancillary benefits when you're solving for long-term per share value. And that doesn't change much with respect to strong gas price environments versus weaker.

Yes. Just the last nuance on top of Nick. I mean, we use the forward strip to make our decisions. And you could really derisk your rate of return that you're achieving on these pads by following it this way. I'd like to say you can't unspend the capital once you spend it. So it's spend it and hope or spend it and derisk the returns you're getting for it, number one.

And then number two, if the forward strip doesn't support it, we don't do it. So it's -- we follow the forward strip, we lock in returns and follow that.

That's great. And then maybe last question for Nick. I think you had a lot of your peers come out and talk about RSG, whether it's goals or achievements. And I don't think CNX has put much out. So any comments on RSG specifically?

Look, Yemi will get this one, Holly.

Yes. We are -- one of our primary focus is, when it comes to that front, is more so methane monitoring, especially the autonomous methane monitoring. So we are starting to work with some of these entities. And we're also setting up some of our own infrastructure for methane monitoring.

Now some of this will come along with some certification. We are looking into that as well, as it relates to where the opportunity presents itself for us, to actually get return on that investment. But the primary focus for the company is methane monitoring, pretty much abating our methane across our field.

The only thing I'll sort of add on top of Yemi. If it makes sense to get certified, we will, if it's a money-positive transaction. But as Yemi said, we're going to do it anyway. It's a core competency and a skill set that energy companies are going to need over the next decade, and we don't want to completely outsource it. So we want to blend it. We want to understand it. We want to be best-in-class at it. And then we'll flip to Chad and the marketing team if a stamp gets us more money or not.

The next question is from Michael Scialla with Stifel.

It sounds like you baked 5% to 10% inflation into your '22 plan. I'm just wondering if you also built in some additional efficiencies or if there's some potential upside to offset some of that inflation with further efficiency gains.

So Michael, the views when you're looking at '22, a couple of thoughts there. One, as you said, right, inflation is included in things like CapEx and the other assumptions. B, the new sort of normal, as we're calling it, with respect to operational efficiencies, that is also contemplated within our '22 activity set. And then third and finally, all this, right, inflation, CapEx, operational efficiencies, production, in my mind, that all will manifest, culminate in free cash flow. And we're basically going from a $500 million to $600 million free cash flow level. So that's all good when you net out all these different factors and metrics.

Yes. And the only thing I'd add on top of Nick. Like the men -- the team we have at this company is absolutely phenomenal. And yes, we try to beat everything. So we're always trying to get better each and every day in every aspect of our business. So it's always our goal to get better. And we have a fantastic team that is achieving it every quarter.

Okay. So if I read that right, you have built in some efficiencies, but hopefully, you can, if history repeats...

Yes, we've built in efficiencies [and we keep up to date]. I'd be shocked if Chad and the operation team doesn't find new stuff over the next year. I don't know what it is, but the stuff we know to date is in there.

Makes sense. Okay. I noticed -- it looked like you had $13 million of exploration expense in the fourth quarter. Looks a bit higher than what you've had in prior quarters. Can you say what that was directed to?

So there -- I mean, there was a -- so a portion of that was related to basically an abandonment of a well that we had drilled a number of years ago and ultimately decided not to complete that well for a number of issues. And so that was a big -- that was a significant part of the write-off for the quarter.

Yes. And just like Chad said, a number of issues. And we take safety and compliance very seriously. And some of the casing stuff wasn't the way we wanted it.

Okay. So kind of a holdover from prior activity...

Yes, yes, yes.

And just one last one. You talked about basis and all the factors that go into that. One of the things that [we talk about] it looks like from everything we see, all the publics are really holding the line on capital discipline. Any change on private activity? I know the MVP pipeline looks like it's been further delayed. Any worry about Appalachia becoming constrained here again with potential production coming from privates? I just want to get your read on how you're seeing the supply/demand situation inside the Appalachia.

We watch -- this is Nick. We watch the takeaway capacity closely. MVP is a key piece of that, as you stated. Whether or not it gets built, we'll watch and see. Obviously, our plans are built looking and contemplating the current state of takeaway capacity to get demand set within basin, get demand set outside of basin.

But what you've got right now, not just within Appalachia, but nationally, is you've got policy that is designed basically to not have a natural sort of investment occur to match something like the supply of natural gas to the demand centers. I don't know if that lasts. I think we're starting to see some problems manifest with respect to that type of a policy. And you see this typically during the peak demand periods of winter and summer.

But yes, I think with respect to our plan and what we put forward not just for '22 guidance, but that view beyond, it contemplates the current state of takeaway capacity in basin.

The only thing to add is we're always obsessed with trying to derisk the business and trying to guard the cash flows of the business. So yes, we're always looking at this very thoughtfully.

Next question is from Kashy Harrison with Piper Sandler.

So just one for me. Maybe moving beyond just the regional market and really wanted to ask your thoughts on the broader U.S. natural gas market and how you're thinking about 2022 and 2023. I know you're not interested in forecasting prices and you based all your capital decisions on the strip, I totally get that. But just curious how you're thinking about supply and demand trends over the next few years. Yes, sort of any color there would be great.

Yes. I appreciate the question. So on the supply side, as we moved into December, we started -- U.S. supply started trending up towards basically setting all-time highs. And then as we rolled into January 1, we basically lost 4 or 5 Bcf a day of that supply. And I think there's a lot of folks in the market right now that are scratching their heads at that, and they're trying to figure out.

There's a lot of thoughts if that's related to freeze-offs and other weather-related curtailments. And there are some thoughts that maybe some folks were trying to hit calendar targets, and as a result, were shaping some of their production strong towards the end of the year. So there's a little bit of -- a lot of question out there in the broad market, really, about where did that 4 Bcf a day of gas go? And is it going to come back online as we come out of winter?

On the new supply side, you see rig counts continuing to trend up. You see frac crew counts continuing to trend up. It's clear the industry is responding to the price signal that it sees. And I think that we will continue to see supply response as we move in through 2022.

On the demand side, LNG has been continuing to run strong. It's the single-biggest driver of sort of the growth in demand, in domestic-related demand. As we keep those LNG terminals full, as you see, the prices overseas, we certainly expect those LNG terminals to remain full. And there's a handful of LNG trains that are expected to come online during '23, which will continue to grow the demand for that LNG export.

Yes. And also, Kashy, just -- this is Nick. I'll throw in maybe an even broader view of what's going on. I think from, a demand perspective, the demand for natural gas nationally, globally is going to have to grow. So I guess that may be bullish. The reason I say that in the long term is that, A, renewables are going to be limited with the scale that they can be deployed.

Winds over -- or Pennsylvania is a great example of that today. I mean, at 0 degrees this morning, the winds are not blowing and the sun isn't shining. Unfortunately, the sun doesn't often shine in Pennsylvania, you're going to need something else besides those beyond the scale they can be deployed at. And if you're retiring or shuttering coal and nuke, that basically by default leads you to natural gas. So there's a power grid demand growth story across the nation and world.

I think there's a transportation story, whether it's CNG or whether it's EVs that are largely going to be powered by the grid. So from a transportation perspective, you're already seeing, right, a lot of movement of basically displacing of oil in the transportation network with something like natural gas over the long haul.

And then you're seeing it, I think, with just good, old-fashioned geopolitics. It never went away. And energy security is national security, energy security is geopolitics. If you suddenly sort of jettison your supply of energy and you depend on others who may not be sort of ideologically aligned with you, you end up with situations like we're seeing with Ukraine and Germany and that mess, and all the costs and inflations and security issues that go with it. So I think people are starting to wake up to the reality of energy security today.

And when you look at that over the long term, those 3 factors, right, the grid electricity side and renewables inherent sort of limitations, transportation displacement of oil and then this whole geopolitical reality, long term, the demand for natural gas has to grow nationally and internationally, okay?

So think of things through like MVP that we talked about on the prior question, it's just inevitable. But the question is, how much pain and painful learnings are we going to have to go through to get to that long-term reality of physics and math and science? That might take some time. So there's going to be -- I think the long-term story is very positive, but I think it's going to be quite volatile figuring all this out and learning all this in the shorter term.

And I hear you on a lot of these factors. I guess one piece of my question really as we think maybe a little bit more medium term than 10 years out is, are you guys concerned at all that, with the associated gas rising, the Haynesville guys, they're starting to grow. You're adding maybe 1%, 2%. Are we worried that like, over a 2-year time period, that supply might overwhelm demand, and then all of a sudden, prices come down?

I mean yes, by our nature, we're always worried about any risk that can happen. And the struggle really with it is it's a very kind of knife's edge. So it only takes 2 or 3 Bcf a day of supply swing, which these new pads come online or tremendously volume. So you add 20 pads in a year, you end up with the kind of -- the amount of gas that could kind of really change the dynamics. And then you put weather into this and sort of how much that can kind of shape it.

So yes, I mean, we're always going to be worried about these things just because the variables are very tight on what flips good versus bad, and hence, why we continue to derisk that scenario through the way we run our programmatic hedging program.

The next question is from John Abbott with Bank of America.

A lot of good questions have already been asked. Maybe just sort of like to check the box. I mean, what is the -- what are your latest thoughts on acquisitions and M&A in this current environment?

I think -- John, this is Nick. I think that the pursuit of those are going to continue across the industry. There's probably a number of different factors for that, from privates trying to monetize their investments to the publics still largely subscribing to things like industrial scale or looking to just grow under the nature of just sort of how corporations typically, traditionally have behaved.

For us, once again, I think looking at it just clinically as a capital allocation option or an avenue, right, that's one of the avenues that we've got. We can invest in the asset base we have to grow. We can return capital to shareholders via buybacks and dividends. We can reduce debt or we can look at M&A.

When you look at that game board right now, M&A is a distant, distant #4 on our radar. It just does not compete with respect to those prior 3 options that I just laid out. So when you're running the risk-adjusted returns for us and factoring in all the different metrics, right now, not a real attractive sort of opportunity set for M&A. But I think largely across the industry, I wouldn't be shocked to see more M&A continuing.

Appreciate that. And then one more in the weeds sort of question. A lot of questions have already been asked on CapEx. But when you sort of look forward, how are you thinking about average lateral lengths going forward? I mean, your original plan was about 12,000 feet for the Marcellus. It looks like the Marcellus wells this year and Southwest PA are about 12,700 feet. And how are you thinking about cost per lateral foot for the Marcellus and for the Utica going forward?

Yes. So as far as '22, you're right, that we provide that average lateral footage in the supplemental materials. Really beyond that, we're not really providing any additional specifics other than what Nick has already commented upon, inventory and how we got certainly plenty of inventory in locations, that I don't think we're concerned about the quality of the acreage or the opportunities that we have to go -- to drill lateral footage.

On a cost per foot basis, in the Marcellus for 2022, I am proud to report that we average $620 a foot for the wells that we tilled during 2022 -- during 2021, sorry. During 2021, we averaged $620...

We need to do better than that.

That's certainly the plan. And as Nick said, we plan to get better next year -- or this year, sorry. We plan to get better this year.

Just to add. I mean, the industry, all of our peers, like the operations teams continue to set new records. So I think that is a thing that is great for everybody in sort of around the country on this front.

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

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

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