CNX Midstream Partners LP (CNX) Earnings Call Transcript

Good morning and welcome to the CNX, CNX Midstream Transaction Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tyler Lewis. Please go ahead.

Thank you and good morning to everybody. Welcome to this morning's CNX and CNXM transaction call. I have in the room today Nick DeIuliis, our President and CEO; Don Rush, our Chief Financial Officer; and Chad Griffith, our Chief Operating Officer. Today, we will be discussing the details of the transaction. We have also posted a prerecorded video as well as an updated slide presentation to our website. 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 our previous Securities and Exchange Commission filings. We'll begin our call today with prepared remarks by Don and Nick, and then we will open the call for Q&A, where Chad will be available to participate as well. With that, let me turn the call over to Don to start things off.

Thanks, Tyler. Slide 3 walks through the details of the transaction. Under this agreement, each unitholder of CNXM will receive 0.88 shares of CNX common stock upon completion of the merger, which is expected to close in the fourth quarter of this year. This ratio represents a 15% premium to the 30-day average exchange ratio. We believe that this transaction represents a highly attractive and accretive value proposition for both CNX shareholders and CNX Midstream unitholders. The newly combined shareholder base will benefit from a simplified corporate structure, an enhanced credit profile and increased operational and financial flexibility. The transaction solidifies CNX as a premier low-cost operator in the Appalachian Basin and enhances CNX's ability to generate significant free cash flow year in and year out for a single unified shareholder base. CNX is now a non-replicable, best-in-class E&P company. With that, I'll turn it over to Nick.

Good morning, everybody. First, I'm going to spend my initial comments on Slide 4. But before I get through these 6 and cover them briefly, we'll dive deeper on them in a minute, I just wanted to point out that one of the most important attributes of the transaction and the biggest advantages that we saw was the ability to basically offer the unitholders of CNX Midstream the chance to become owners of CNX Resources. So in other words, structuring the transaction in a way where all of these wonderful upside opportunities and where we see the company moving into the future is available not just to the current CNX Resources' ownership but also to those unitholders, and we welcome them into the fold. Don mentioned the non-replicable nature of what we are now as well as the best-in-class attributes that we're going to display pro forma. Those really boil down to the 6 investment reasons that are shown on Slide 4. And you can see them, and we're going to go through those in that order. This is a commodity business. Costs are imperative. That is the most strategic position you can have if you are the low-cost producer. On a production cash cost basis, we're going to show you that we currently are and have only gotten better with this transaction. And on a fully burdened cash cost basis, we're going to show you where we're going into the near future, and it's pretty exciting to see how those fully burdened cash costs are going to continue to drop year after year. Capital efficiency being high, capital intensity being low, that's also crucially important in a capital-intensive industry like E&P. This transaction and the company moving forward is going to be best-in-class when you look at capital efficiencies and capital intensity levels across a range of metrics. So we're going to talk about those. We're going to look at what our drill and complete capital efficiencies are going to post when you look at things like finding and development costs. We're going to look at how our other investment on midstream and water and land, basically, the build-out is completed and wrapped up, and how we enjoy the fruits of that effort and that investment for years to come now. And then we're going to look at where we're at with respect to decline curve and how low our capital intensity is to maintain production, especially on the back end of our 7-year investment horizon, all those things crucially important to the third point, which is driving free cash flow generation. So free cash flow is what it's all about in this industry. And when you look at our cost structure and our capital efficiency has been very high and you couple those 2 things with our hedge book, it is not surprising that we're generating free cash flow each and every year and a substantial amount of cumulative free cash flow over the investment horizon. And we're going to put that in context of how that cumulative free cash flow compares to things like our aggregated debt load as well as our market cap and also what those free cash flow yields are looking like and why that's such a great investment opportunity when it comes to CNX Resources. We're going to talk about balance sheet and how we're rapidly delevering because of that free cash flow generation and what that means over time over the coming quarters and years. And we're going to talk about the low-risk nature of our business model. This is another crucially important attribute of the company moving forward. Whether we want to ramp down, ramp up, adjust, looking at the different levers that we've got to pull when it comes to allocating capital, we've got complete flexibility to allocate capital where we see the best returns to drive the best intrinsic value per share, which brings me to the last point we're going to cover, which is that intrinsic value per share. We're going to look at that across a range of different metrics, but they all lead to the same conclusion, which is a significant amount of investment upside exists for CNX Resources owners. Now we're going to start with that first attribute and first investment reason, which is the low-cost position that we enjoy. Again, as I said, that's strategic and crucial in a commodity business. Some of this is already a work in progress. When you look at our production cash costs, we're already the lowest cost in the basin. And the second part of this is a rapidly developing story when you look at our fully burdened cash costs and where they're going over a very short period of time. So I'm going to turn it over to Don to go through some of the cost data in detail.

Thanks, Nick. Slide 6 shows CNX's cash production cost relative to its E&P peers on a trailing 12-month basis. As you can see, the $0.73 per Mcf referenced on this slide is substantially better than our peer average cost of approximately $1.37 per Mcfe. This is significant -- the significant low-cost advantage ensures we generate strong margins during both the highs and lows of the gas commodity cycle and allows us to generate attractive returns on new D&C at lower prices than our peers could. And subsequent to the announcement of today's transaction, we expect to reduce it even further. Slide 7 walks through how our non-SG&A corporate cash cost declines over the next 7 years. It's important to note that these numbers include all of the cash income and expenses of the company that are not related to SG&A, capital or production costs. Most importantly, as Nick mentioned, unused FT, processing and equipment costs dropped dramatically as our existing legacy contracts expire over the next few years. Additionally, our cash interest expense is expected to materially decline as we generate free cash flow and pay down our debt. Lastly, as the chart highlights, CNX has several other areas of our business that generate meaningful income streams, including third-party midstream gathering, third-party water sales, sales of unused FT and various non-op royalties we receive. These income stream projections are based on historical results and existing assets and contracts. They are significant and an important component to understanding the expected total cash flows of our company. Ultimately, under the base free cash flow plan presented here, our non-SG&A corporate costs would effectively be reduced to 0 under these conservative assumptions. We are now positioned -- on Slide 8. We are now positioned to go from the lowest-production cost company in the basin to having the lowest fully burdened cash cost in the basin. This slide shows how and why. As you can see, even with the conservative forecast that holds production costs and SG&A essentially flat and simply adjusts our corporate cash cost for the contract roll-offs and interest expense reductions discussed on the previous slide, CNX's fully loaded cash costs are expected to be below $0.90 per Mcfe. What is remarkable about this number is that it's nearly $0.50 lower than the average production-only cash cost for our peer group. So our fully burdened cash cost is significantly better than the production cash cost of all but one of our peers. Now we can turn our focus to the capital side of our cost structure. Nick?

Yes. Thanks, Don. Number two -- reason number two is, as Don said, our low capital intensity, high capital efficiency. As I said earlier, absolutely critical in a capital-intensive industry like E&P. And why are we posting these metrics of very low capital intensity and high capital efficiencies? Well, it's a combination of factors. It's because we've got great rock. It's because we've got now a fully integrated midstream and upstream model. It's because we're employing and utilizing stacked pays with all those economies of scales that it brings. It's because of our high NRI interest that we enjoy, and it's because of our use of technology from electric frac to our real-time data operating centers to our quality management systems. And all of those things work in concert together when you've got a great team that's able to perform and execute in a very orchestrated and efficient manner, which, of course, the team has been doing. So this view and this metric and the strength of the company often gets missed by the market. One of the reasons why I think it gets missed, perhaps the biggest reason, is that this is a rapidly developing story. If you look at our EURs and if you look at our drill and complete cost efficiencies and just look at what they've done over the past couple of years, it's amazing the rate of improvement that we've seen and how that translates into things like capital efficiency and capital intensity. Our other investment with, as I said, water and midstream and land. That build-out rapidly completing at the end of '19 and into early 2020 was something that happened quickly, and it's easy to miss that and what that means for the coming years, where we enjoy that investment over the long haul. So we're going to look at this with Don on the upcoming slides across a number of different metrics, but there's really 3 that drive how good our capital efficiencies and how low our capital intensities are. One is our finding and development costs. So this speaks to drill and complete activities, of course, and we'll look at that from a Marcellus, Southwest PA core area as well as our CPA Utica area. We're also going to look at that other investment and show you how midstream, land and water, the build-out has been completed, and our intensity has been drastically reduced in that other component. And then third, we're going to look at our PDP decline rates and how they've been reduced and how that basically reduces capital intensity when you're looking at maintenance production plans, especially in the back half of our investment horizon. Don?

Thanks, Nick. I'll jump right into how our finding and development costs have changed over time and how investors should think about the go-forward DD&A rate for new wells on Slide 10. Fortunately, GAAP DD&A and D&C looks backwards and thus is a poor indicator on what our D&C capital efficiency is today or is expected to be moving forward. I said fortunately because our current and anticipated future F&D is substantially better than historical D&C DD&A. For instance, this slide lays out how lateral lengths have tripled in size, EURs have almost doubled and costs per foot have been cut in half. It is really quite remarkable to look at how different the capital cost per Mcfe is today versus when we are just getting started. With all that said, the right way to think about our D&C DD&A rate on a go-forward basis for new wells is around $0.30. Additionally, we expect our go-forward DD&A rates to be even lower in both Southwest PA Marcellus and the CPA Utica. Slide 11 lays out our non-D&C investments. And as you can see, our major infrastructure build-out is substantially complete and sets us up for low operating cost and optimized production over the life of our wells. Our new dual gas line midstream systems allow us to flow our wells at the optimal pressures throughout their life without being impacted by a second or third set of wells being drilled on that same pipeline. Our water infrastructure investments have reduced our reliance on water trucks and has led to our best-in-class, all-in water management costs. Additionally, our land investments and our acreage footprint provide us with a methodical, predictable drilling runway for several years to come. These historical investments translate into a significantly reduced future spend of approximately $70 million per year going forward under our free cash flow MOP plan. The D&C and non-D&C spends are clearly lower going forward. And the other reason why our free cash flow plan capital intensity is so low is because of shallowing base decline rates, which I will talk to on Slide 12. To start out, I want to explain that exit-to-exit PDP base declines are primarily a function of how much of your underlying PDP base is comprised of legacy wells versus wells turned online within the prior 12 to 18 months. On this slide, you can see an illustrative example of how this works if a company like CNX pivots from a growth plan to a flat production model. Walking through the chart at the bottom, you can see how the decline of our legacy PDPs prior to 2020 decline less and less each and every year as we move towards 2026 and how the new wells drilled each year that turned into PDPs, the light blue bars, contributes to building the space. Finally, the gray bars at the top show how the replacement production you need each year from new TILs declines every year between now and 2026 as the PDP base builds. This is why our base decline rate, shown as approximate with green dots on the secondary axis, reduces from the mid-30s in 2020 to less than 20% by 2026. The 5-year average of 25 TILs per year to carry out our free cash flow plan is structured to match this reality, with slightly more TILs needed in 2022 and slightly fewer TILs needed in 2026 when compared to the 25 per year average, all driven by the fact that the replacement production needed becomes less and less each year going forward. It is important to note that you need efficient, high-pressure, low-pressure midstream system, like the one we've already constructed, for this to work, so your legacy wells can flow at much lower pressures than what new wells flow at. All these factors together lay out why our capital intensity going forward and our flat production, free cash flow plan is so efficient. With that, Nick will pool both cost items together and get into what this means for our free cash flow.

Investment reason number three is our substantial free cash flow. It's the third reason to be excited about the investment opportunity with CNX Resources. And as Don said, you take the cost structure on the cash side that we just spoke about, couple it with the capital efficiencies that we're realizing, and then you put on top of those 2 things our hedge book and our programmatic hedging approach. That's what drives -- those 3 things really drive the substantial free cash flow generation. And we're going to go through not just the magnitude of that, the $3-plus billion, but we're also going to cover that in the context of how that compares to our market cap and how that compares to our aggregated debt levels. And you can see that the cumulative free cash flow stacks up very well in a very exciting way, I think, compared to those 2 metrics. Last, we're also going to talk about free cash flow yield and how this company is yielding a tremendous amount of free cash flow, what that means and how to think about that in context of not just E&P but industries beyond E&P where free cash flow yield is a metric that's valued and focused upon.

Thanks, Nick. Slide 14 is really the easiest way to understand how we can generate significant free cash flow even at these historically low forward NYMEX strips and brings together all of the cost items we have discussed in our previous sections. These numbers are 5-year averages between 2022 and 2026, and I will walk through them. Starting on the left side of the page with our cash production cost, which you can see are a peer-leading $0.67. Next, we add on to that our corporate and other charges. This column represents every other cash expense of the company except for capital. The next column gives us credit for the other income the business generates going forward. And as we've previously said, this estimate is conservative and assumes we only gather the third-party volumes we have currently flowing today with a nominal amount of third-party water and royalty income. This nets us to an all-in company expense cost of $0.87 per Mcfe. The next gray column is an illustration of the most conservative way to count our capital expenditures. It basically expenses them all within the calendar year and divides that amount by the annual average production. Using this approach adds a $0.54 capital charge to our annual cash flows to keep our production flat. So if you look at the all-in cash expenditures for the entire company, you would get a per Mcfe cost of approximately $1.41, which is well below the current gas realizations we receive under the current forward strip, generating a substantial margin. And what is even more remarkable is looking at this every dollar spent cost method relative to our peers. As you may remember, we showed previously that the average cash production cost of our peers is approximately $1.37. So our everything-and-anything, all-in cash expenditures for the year on an Mcf basis are basically equal to the average cash production costs of our peers. Let me say that one more time. Our fully, fully burdened costs are in line with our peers' operating cash cost. Once you add in interest costs, SG&A costs, other operating expense costs and the capital our peers need to spend each year to maintain flat production, our all-in cash cost per Mcf is substantially below our competitors. This cost advantage ensures that CNX can operate successfully and produce substantial free cash flow at price strips where the peers cannot afford to hold their production flat and be cash flow neutral. This creates a moat for CNX that ensures we maintain a competitive advantage over our peer group for the long haul. This build-out gives us the conviction of our free cash flow plan that is laid out on Slide 15. The numbers speak for themselves, but I would like to provide a bit more context as to why we feel they're so impressive. Number one, as we have laid out, the free cash flow plan is underpinned by conservative assumptions. We are currently achieving the operating cost projections we are using. We're actually performing better than the capital cost assumptions we are using. The other corporate expense assumptions are mechanically improving because of unused FT and process contracts -- processing contracts rolling off. Our interest expense reductions are realized as we pay off our debt. Our other income assumes no additional future success in developing third-party business. And for conservatism, we have kept SG&A costs the same. And to top all this off, we are using the current forward gas strip that has NYMEX prices below $2.50, which is a historic low. In fact, the vast majority of banks and analysts have their consensus forward price decks much higher than this. So this plan is based off of conservative numbers across the board with plenty of upside to further improve upon it. And number two, as Nick mentioned, when you look at these annual free cash flow numbers relative to our debt, you can see how our balance sheet is rapidly deleveraging, and relative to our equity, gives you a consistent annual average free cash flow yield of 26%. This repeatable free cash flow yield is basically unheard of in the capital markets, especially when coupled with the current strength of our balance sheet, which Nick will discuss next.

Investment reason number four is that balance sheet and really looking at it from 2 perspectives: one, where we're at right now, which is a very strong balance sheet; and then second, where we're heading into the not-too-distant future, which is a rapidly approaching best-in-class balance sheet within the Appalachian Basin. Now this situation, this investment reason, when it comes to balance sheet, has been a work under progress for a number of years now at CNX Resources. And it's exciting to see how it's shaping up when we're sitting here in mid-2020 with the new CNX Resources. And that's in spite of the gloomy gas price forwards that we're looking at when we look into 2021 and 2022. And in many ways, when you compare CNX Resources to the peers in the basin, it's a situation of 2 ships passing in the night, where even with those forward prices being where they're at, CNX Resources is going to significantly delever over the coming years, where many, if not all of the peers, because of the gas price forwards, if they don't strengthen, are going to see significant increases in their leverage positions and their leverage ratios. And last point on balance sheet before we get into the details with Don is that this balance sheet and the strength of it, it doesn't just allow us to navigate and survive the challenging times of the commodity cycle. It allows us to navigate those times and create optionality in a way where we can thrive and take advantage of those down cycles and the disconnects that inevitably occur in them when you're going through those. So again, not just a navigate-and-survive, it's more and much more of a situation of navigate, create optionality and then use that optionality the balance sheet gives you to take advantage of situations and then to thrive.

Yes. Thanks, Nick. And Slide 17 shows our free cash flow profile relative to our maturity schedules. As you can see, the approximately $400 million remaining on our 2022 maturity can be easily addressed multiple times over with free cash flow from the business, and the remainder of our debt maturities are spaced out over time proportionately. This clean maturity runway provides the ultimate safety net and allowing us to be able to simply pay off all of our debt prior to their maturities if we choose with our free cash flow generated by the business. And as you can see on Slide 18, our leverage ratio is going down because we are paying down our debt. That is the only way to organically reduce your leverage ratio in a world with flat-to-declining prices and flat production. The ability to do this organically at the pace in which we are doing it is unique to CNX. As Nick mentioned, most of our peers will have increasing leverage ratios under the current forward strip. And their only hope of reducing it is with chunky asset sales or selling off net royalty interest. Our situation is different. And as you can see, even at historically low gas prices, we expect that our leverage will be under 1.5x in early 2023. And if we choose to, we could be debt-free by 2025, increasing our liquidity well above the $1.5 billion it is currently all along the way. This organic deleveraging ability is rare in today's E&P space and one of the key reasons for our low-risk business profile that Nick will comment on.

Thanks, Don. Investment reason number five is that low-risk profile of the business model that we're employing. So it's not just a situation with respect to low cash costs and good capital efficiencies and a free cash flow that's driven by those in the balance sheet, it's also the risk profile associated with delivering on those metrics. And we've been hard at work at derisking the variables and the metrics and the ability to deliver on those financial parameters that we think drive the intrinsic value per share of the company. And that's been from a host or a portfolio of tactics that we've employed. We've talked about our hedge book and programmatic hedging. We talked about our high NRI interest. We've talked about using the NYMEX forward gas prices and not an inflated gas price to take a conservative approach to when it comes to things like free cash flow and balance sheet. And we also talked about our core inventory. For us to be able to execute off of this plan, we basically set up a rig and a frac crew in our Southwest PA Marcellus area and our CPA Utica areas, both of which have inventory that extend far beyond the investment horizon that we're laying out today. So we don't need to go far afield from what is core to us, where our experience and our operating teams are comfortable performing within, and we've got an extensive data set with respect to.

Okay. Thanks, Nick. Slide 20 walks through some of the reasons why our risk profile is so low. I will start on the revenue side. Our plans and decisions have less risk in them because we live in reality and use the forward strip in our decision-making and utilize extensive hedging to lock in our projected revenues. Next, operationally, as Nick mentioned, we are drilling high NRI Tier 1 acres in areas where we have extensive experience and a deep inventory, and we're using cost assumptions we have already achieved. This, along with the fact that we only need to run one frac crew and one completions crew, allows us to be hyper-focused and efficient in our operations. Last, our balance sheet, cost structure and low fixed costs allow us to change plans quickly and efficiently when warranted. The flexibility to reduce activity during downturns is a must in the commodity business. Long-term financial commitments, such as firm transportation commitments, MVCs and gathering contracts and processing commitments, coupled with large debt loads and expiring lease positions, can force the company to drill to survive instead of optimizing returns, which can destroy shareholder value in a depressed pricing environment. Slide 21 highlights our best-in-class hedge book. As you can see from the slide, not only is it best among our peers in the near term, 2021 and 2022, it is significantly better than our peers in 2023 and beyond. This highlights the consistency of our approach and philosophy of using hedging as a risk management tool. I personally believe the ability to hedge and lock in your revenue is a huge tool and advantage in E&P space that is underutilized. I'm sure there are countless companies in other industries that would love to lock in a price for their product for the majority of their anticipated capacities and volumes years in advance, and even better, to be able to sell and fix the price on your product before you spend the capital and OpEx to produce it. As a capital allocation company that operates in the E&P space, we love this ability, and we'll continue to take advantage of it. However, the ability to take advantage of it consistently through up and down cycles means that you have to be, by far, the low-cost producer, which we are. Because if you're not, hedging at low forward gas prices in the future doesn't help you because your capital doesn't generate returns at the low price levels and your business doesn't generate free cash flow at the low price levels if you're not, by far, the lowest cost. So what we can do cannot be duplicated by our peers at the same efficiency as we can do it. This view on hedging is not to say we are not optimistic on future gas prices. In fact, we think the future for natural gas pricing is very bright. We just recognize that commodity markets are impossible to predict and that cycles can happen both up and down due to external factors outside of anyone's control or predictability. We will continue to methodically chip away at risk, dollar cost averaging, as we build our hedge book even at depressed future gas prices in the strip today. The last part of our low-risk nature of the company is our acreage position. It really is the foundation of our ability to run the company how we are running it. We have decades of Tier 1 Southwest PA acreage with high NRIs, and we have over 1 million acres across Appalachia that is mostly held by production. This quality footprint and NRI advantage is another reason we can generate significant free cash flow each and every year at gas prices that are at historic lows. Our NRIs are our competitive advantage over our peers that they will never be able to match. And in fact, some have been forced to sell overriding royalties, eroding the economics of their wells forever. We also have an extensive CPA Utica inventory that adds to our core Southwest PA Marcellus position. CPA Utica is now core, perhaps even better than Southwest PA Marcellus, and this acreage adds multiple decades of additional opportunity. Rolling all these items together sets CNX up with the ability to create substantial shareholder value, which Nick will get into.

So investment reason number six, and last but certainly not least, is the most exciting because I think it lays out a compelling rationale for the upside that exists today when you look at where our shares are trading at versus the intrinsic value per share of the company. So this is our true north, solving for optimizing intrinsic value per share, whether it's a transaction, whether it's our execution plans or whether it's our capital allocation decisions. And we're going to walk through this with Don, looking at what the potential upside is when you compare intrinsic value per share to share price across a range of really 3 different metrics that are pretty straightforward. One is just a straight enterprise value analysis as debt gets reduced within that enterprise value and equity takes a bigger share of it. The second way is to look at where those cash flow yields are and what would happen if the cash flow yield suddenly approaches where cash flow yields are for free cash flow generators across a range of industries. And then third, we're going to look, of course, what the sensitivity is to gas prices if gas prices are to strengthen and what that means for intrinsic value per share.

Thanks, Nick. And I want to start with the lowest risk, most basic way that CNX will create shareholder value. The chart on Slide 24 walks through the simple math of how our market cap and share price should increase proportionately as we pay down our net debt. And in this conservative look, the company will have $0 debt and over $500 million in cash and a share price of over $22 per share if you assume our enterprise value simply stays consistent, which is a very conservative assumption considering all the positive factors we will talk through next, starting with the free cash flow yield analysis on Slide 25. This chart really highlights how attractive CNX is at its current share price not only versus our Appalachian peers and other energy companies but against the entire market. Our expected 21.8% free cash flow yield in 2021 is impressive, but our expected annual free cash flow yield of 26% on average through the next 7 years is even more so. And the simple fact of the matter is that the market has not spent enough time understanding our company and our future relative to the peer group. And as such, we are trading at a similar EBITDA multiple as our general peer group, causing our free cash flow yield to be enormous. This market disconnect cannot last forever, though. And as you can see from the slide, in order to get our free cash flow yield down to a more reasonable average, 6.5% for the energy sector, our stock price would have to increase all the way to $35 per share. Again, this is not an opinion or a conjecture or bull thesis case. This is simply taking our $500 million approximate dollar annual free cash flow number that we have laid out in a conservative manner and turning it into a per share number, which is about $2.30 per share. Next, you simply divide that number by the free cash flow yield you think is appropriate. Our example is just the free cash flow yield of the energy sector. So $2.30 per share divided by 6.5% gets you to a $35 per share valuation. So in essence, our approximately $9 stock price has to go all the way to $35 just to achieve an industry average free cash flow yield valuation. Again, this math assumes no incremental investments with the free cash flow we generate and is very conservative in nature. This doesn't even get into the fact that we feel the company should have a premium valuation, which I will discuss on Slide 26. For most investors, an important trait is whether or not a company has competitive advantages versus its peers and whether those advantages are highly sustainable and allow the company to hold on to its value creation in a highly competitive economy. When most people think about commodity companies, they believe that there are limited enduring competitive advantages. And as such, it is hard to maintain healthy returns and free cash flow over the long haul. Well, for CNX, we have created significant competitive advantages that cannot be replicated in the near term and that will persist for a decade plus, essentially creating a protective moat around our company versus the competition via cost. This has been achieved through years of hard work and long-term focused decision-making. Let's start with the midstream ownership that keeps our OpEx low. Our peers have outsourced their midstream services, driving up their costs, and they cannot unwind those decisions and bring those margins back into the company. The third-party midstream providers will continue to extract economic rent on our competition's gas flowing through their pipes since those pipes are the only way to get their gas to market. Second, our FT decisions have kept our costs low and our flexibility high. Our peers, on the other hand, have fixed FT payments for 10 to 15 years that can cost up to $1 per Mcfe and cost hundreds of millions of dollars each year for little value in return as the majority of recent FT obligations are underwater from a pricing perspective. Third, our gathering systems and water systems required hundreds of millions of dollars and 5-plus years to build. So in order for our competitors to catch up, it will take them hundreds of millions of dollars and half a decade to match those investments. Fourth, our land position goes back over 100 years. Much of our acreage is comprised of high NRI leases that are held by production. Our competitors can't match this, and their positions are eroding as they fail to renew leases and/or sell overriding royalties. Rolling all of these advantages together creates a company that not only survives but generates an expected $500 million per year in free cash flow at the current NYMEX strip with a free cash flow yield that none of our peers can come close to. Our advantages are real and are going to last a long time, especially in the current price environment. These non-replicatable attributes should receive an acquisition premium in our stock since we are the best-positioned company in the peer group. Now let's shift to discuss some of the tremendous upside for CNX, which can be found on Slide 27. As I have mentioned multiple times now, our base free cash flow plans and stock valuations are conservative in nature and have plenty of upside. For example, if NYMEX gas prices returned to $2.75, our free cash flow will increase by $150 million per year in the outer years of this plan. Another example was further potential cost improvements and/or new third-party income that we could generate, not to mention the potential for extra value creation through incremental D&C drilling activity or using our free cash flow for share buybacks or acquisitions. There are a tremendous number of opportunities that can create additional value since we have the flexibility to opportunistically allocate our capital as the industry's variables change. A visual of this can be seen on Slide 28. This is just a basic example of how our substantial free cash flow and business flexibility creates incremental value in almost any environment. Starting off in a high-gas-price, high-stock-price world. It is easy to see how CNX, and frankly any of our peers, would have a plethora of options to create value and free cash flow in that scenario. What makes us different is our ability to, first, generate free cash flow; and second, opportunistically use it in any of the more challenging scenarios, especially with our strong balance sheet. And in the low-share-price and low-gas-price world, we could create tremendous value for CNX shareholders as we use our strong balance sheet to take advantage of a market disconnect and use the free cash flow to buy back shares. Bottom line is our free cash flow will be there in any environment, and the flexibility of our business allows us to invest each incremental dollar in the place that creates the most risk-adjusted value. Slide 29 sums up the bottom line. Our $9 share price is substantially below any conceivable reasonable valuation of our company under a conservative 7-year free cash flow plan that assumes we just pay off all of our debt and build cash on our balance sheet without even reinvesting it in anything additional. In the box to the left, our worst-case scenario is our debt paydown creates proportionate equity value improvements, and the stock appreciates to over $20 per share. In the middle, the NYMEX gas strip stays where it's at. We still simply pay down debt and build cash, but the light bulb goes off about us in the capital markets, and we start getting valued at a 6.5% free cash flow yield. In that world, our $9 share price goes to $35 a share. In the box to the right, again, same conservative free cash flow plan, same simple pay-down-debt-and-build-cash plan but with the $2.75 NYMEX price strip. Using the same 6.5% free cash flow yield, our $9 stock should be worth $45 per share due to the incremental cash flow that would come to the business. So without incremental investments or any kind of share buybacks, our $9 stock is worth significantly more without doing anything but hoarding all the free cash flow we generate. Incremental investments and/or share buybacks have the potential to move these share prices up substantially more. Hopefully, by this point of the presentation, the "why should you invest in the new CNX" question should be an easy one to answer, but I'll take you through the highlights one more time. We are the lowest-cost producer in Appalachia. We expect to generate $500 million of free cash flow a year under conservative assumptions and at the current NYMEX strip. Our business plan is safe and value creation at a $9 per share buy-in price is extremely safe based on the debt-to-equity value math and the fact that, eventually, we will be looked at as a free cash flow yield investment. On top of that, the accompanying gas prices have a tremendous amount of upside. All of our attributes that allow us to do all of these wonderful things are sticky, and it would take our peers a decade to get to the point we're at today. Our company is even more attractive when considering the flexibility we have to invest our free cash flow to create more value over and above our base business value proposition. You add all this up and it becomes clear that CNX is one of the best investments in the entire public market. If you want to invest, I would suggest moving quickly. Our current market disconnect will not last long as we move quarter-by-quarter, year-by-year, delivering on our free cash flow projections, paying down our debt, creating more value and eventually not only getting our stock to a point where our free cash flow yield is reasonable but creating more value on top of that. With that, I'll turn it back over to Tyler.

Operator, if you can please open the line up for questions at this time.

[Operator Instructions] And our first question comes from Leo Mariani of KeyBanc.

I guess just really wanted to kind of maybe dive in a little bit deeper on kind of the tangible sort of numerical benefits from kind of combining the 2 companies. You guys talked about the $0.40 per Mcfe savings in op costs and the enhanced free cash flow. And just with respect to the $0.40 here, was your -- just trying to understand how we get there. Is there some kind of higher costs that are being put to CNX by CNX Midstream that are going to be reduced in the future? Some kind of cost base that was basically more of a third-party cost and that's going to go down? Trying to understand where the $0.40 comes from. And talk about enhancing free cash flow, and it looks like you guys are kind of using the same over-$3 billion number that you kind of had prior to the deal, so just trying to get a sense of how that translates. Certainly understand that you've got a ton of improvements on the cost structure going forward, but it seems to me like a lot of that was kind of in place prior to this deal. So I'm just trying to get at what the exact kind of numerical benefit was to the deal here.

Yes. So there was an intercompany-gathering contract between CNX and CNXM. So historically and in previous quarters, we've laid out our E&P costs on a stand-alone basis. And those costs, due to the third-party contract with the CNXM business, were higher. So we had our cost. I think last quarter, it was around $1.12 or so, plus or minus, versus the $0.70, $0.73 that they are now that, that intercompany contract is completely kind of eliminated in-house as opposed to going to a complete separate company with those cash flow streams.

Okay. That's helpful here. And I guess just additionally, looking at your projections. If I'm reading this right, I think previously, over the 7 years, you guys were using production of 540 Bcfe, and now I'm seeing 560. Is that correct? Are we kind of producing more? I'm just trying to get a sense what's driving that. Is that just better capital efficiency leading to the higher production? I know it's over a pretty long time of 7 years, but maybe any color you have behind that.

Yes. No, the 560 number is the...

Yes. 2022 to 2026 is the 560, Leo, so there's no change to that. The 540 was over the entire 7-year plan, so it's the same assumptions as last quarter.

And for the $3 billion across the 7 years and in the previous slide deck, we did isolate what was the noncontrolling interest piece of the cash flow streams. So clearly, today, that's all one and the same as opposed to controlling and noncontrolling splits on that $3 billion.

Okay. That's very helpful. And I guess maybe just lastly on the free cash flow. So you guys certainly are probably going to maybe make some tweaks over time to how to use that. But as you look at the plan now, I mean other than debt paydown, what do you see as kind of the primary use for that? Is it going to be the buybacks you referred to? You guys sort of also hinted a little bit at M&A sort of down the road. Just given how you guys view the share price relative to the intrinsic value, should we be thinking kind of more buybacks as you get to the right debt levels in the next couple of years?

Yes. So first is definitely to pay down debt. I mean the goalpost moved for E&P companies in what was an acceptable balance sheet and kind of leverage ratios. And historically, we always talk to our hedge book, and our go-forward cash flows would allow the business to get to a capital structure if the goalpost changed. And not only did it change for E&Ps, but I think it changed for everybody with the status of the world today. So debt paydowns are, first and foremost, where we want to invest this free cash flow. And the question of what do you want to do with it once you get your debt to a certain level, it's hard to answer unless you know what the variables are at the time. So that's that 4-quadrant box on depending on what share price is and what gas prices are and opportunities are. We'll be in a position to be able to be flexible and put the dollars to work in the place that makes the most sense once the variables change to whatever they are whenever, a year or 2 years down the road.

And that's an important, I think, attribute of this transaction, the new company moving forward. Our flexibility to be able to adjust as the external metrics and assumptions change has gone way up as a result of this transaction. So if you fast-forward between now and 2023, not only will we suspect that our debt levels are significantly reduced, I would also suspect that we'll be able to quickly and nimbly allocate that free cash flow and net capital to whatever opportunity we'd see within the drill bit based on rate of returns and/or share count based on share price versus intrinsic value per share. So -- and flexibility has always been there. That's been one of the hallmarks of how we've prided ourselves on being capital allocators. If you look at the last couple of years, we've grown capital investment in a drill bit, a good rate of returns. We've reduced share count. We've also reduced debt. Right now, as Don said, focus is on debt. But flexibility to continue to allocate capital to where the best optimization opportunities are for intrinsic value per share has gone up significantly.

Our next question comes from Jeffrey Campbell of Tuohy Brothers.

Congratulations on the merger. I'll ask one broad question and one a little bit more specific. The specific one is just I wondered about the outlook for third-party non-gas income that was detailed on Slide 14. I was wondering what gives you confidence in projecting this income up to '26. Maybe another way to ask it is what dependencies do you see in the third-party realm for CNX Midstream that's embedded in the number?

Yes. Great. Great. Thanks for the question. This is Chad Griffith. I'll take that one. Look, the forecast that we are using for third-party gathering income is based off of existing PDPs and a handful of additional well commitments that we have. It's a very conservative forecast. We're not relying on any speculative future drilling or anything along those lines. It's all contracted volumes, PDP-based with one additional sort of pack commitment. We think there's a lot of potential for further upside. We're constantly in conversations with other third parties about additional gathering opportunities. And I think there's opportunities to continue to expand as we start looking at some other areas outside of Southwest PA.

And again, just going back to the optionality and flexibility comment from the prior question, Jeff, is that this transaction and the company moving forward, the flexibility to be able to engage in those types of transactions and contracts with third parties, the ability to do that has gone up substantially because now you're not dealing with 2 separate publicly traded entities with their own individual fiduciary duties and interests and assets. Now you're dealing with one pro forma company that basically is integrated from upstream through midstream, water, ethane, et cetera. So I think our ability to execute with third parties has been improved substantially as a result of this transaction.

Okay. Great. And my broad question is I think you've done a great job of laying out the positives for both CNX and CNXM and the merger. My question is, what makes this the right time to execute this deal as opposed to maybe earlier or later?

That's always a -- that's a subjective call and an art, right, more than a science. But looking at things from a broader industry perspective, I think it sort of sheds some light on why we're excited about the transaction and why the timing was a good one. The basin and really the natural gas industry people, you often hear them lamenting how the industry has become a bust or because this upstream producer has gone bankrupt or that midstream pipeline has been canceled. It's a sign of the gloom and doom of the industry. We see it quite differently. We see it as signs of what disruptive technology and innovation have done to this industry and for society. So we've gotten, as an industry, so prolific and efficient at liberating the methane molecule that things are being disrupted. Things are changing. We've seen this across all kinds of other industries and technologies, from computers and software and microchips to the manufacturing process that Henry Ford created. The natural gas industry is no different. It should be celebrated as a disruptive technology. But when you look at that, right, that means that where you need to be on the cost curve and where you need to be on capital efficiencies have changed substantially from where you felt comfortable 3 to 5 years ago. It's changed that much. So strategically, our approach was, when we see an opportunity or a window to become the definitive low-cost producer on a sustainable year in and year out basis and we see an opportunity to become the best-in-class when it comes to capital efficiencies and reducing our capital intensity, we're going to grab a hold of that as soon as we see that opportunity. And this transaction basically allowed us to do that in a pretty simplified way because we knew CNX Midstream better than any other asset base out there across the Appalachian Basin or E&P and Midstream horizons.