The uncertainty facing natural gas producers in the Appalachian region due to low prices, the COVID-19 pandemic, and a move away from fossil fuels has been the subject of much study and speculation.
Nick DiIuliis, CEO of CNX, which is based in Washington County and has a large presence is the region, spoke to a virtual audience about the challenges facing the industry at the recent DUG East/Marcellus-Utica Midstream conference.
“The Coming Reckoning in Appalachia” focused on three areas that DiIuliis believes are “crucial” in today’s environment.
While touting the development of the Marcellus and Utica through hydraulic fracturing technology as an “epic success story” that has revived the middle class and spurred manufacturing, he noted that “success leads to a re-equilibrium that needs to be established.”
He first focused on the financial challenges facing many producers in the region. He urged companies to develop financial plans based on the reality that that natural gas prices will continue to be in the sub-$3.00 range for a number of years, rather than hope for a rebound. That will require companies to operate at a low cost, especially considering the “capital intensity” or level of drilling activity that companies will have to do to maintain present levels of production. Several large producers, including CNX, have said that they plan to keep production at “maintenance levels” for the forseeable future.
“Free cash flow is ultimately the metric that matters in this business,” DiIuliis said. Free cash flow is the amount of cash a company generates from its operations minus the cost of capital. It allows companies to pay dividends to stockholders and to reduce debt. A recent analysis by the Institute for Energy Economics and Financial Analysis found that a number of Appalachian producers had negative free cash flow, spending more on drilling and capital expenses than they realized in sales.
Mergers and acquisitions, or M&A, are also a reckoning facing operators, as the economic downturn has resulted in several large companies being bought by other operators. Most recently, EQT announced it is purchasing Chevron’s Appalachian assets for $735 million. There have also been rumors that EQT is attempting to buy CNX. He did not address that.
DiIuliis urged operators to be cautious, noting that “the early movers in M&A trends are typically the losers” and that mergers can “gloss over” challenges facing a company.
The final reckoning is ESG, or environmental, social and governance goals that companies are increasingly focusing on, as decarbonization, renewable energy and sustainability become bigger issues. While natural gas is much cleaner than other fossil fuels, methane is a powerful greenhouse gas and companies are taking steps to ensure than leaks do not occur. CNX has reduced is carbon footprint by 90 percent, he said.
DiIuliis said that natural gas is not a “bridge to something else” and will continue to be an important part of the energy future. He takes the position that a zero-carbon future is not possible, and noted that renewable energy sources, such as wind and solar, have a carbon footprint in the manufacture and development of the equipment.
As a long-standing, locally based company, he said CNX is committed to its communities and urged companies to focus on the social responsibilities of ESG in hiring, spending and other areas.
“This is where we start, this is where we want to end,” he said. “We constantly think about this.”