Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad streets in New York city, you're inside the ICE House. Our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSC an indispensable institution of global growth for over for 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now at the NYSC and at ICE's 12 exchanges and six clearing houses around the world. And now welcome inside the ICE House.
Peter:
It may not feel like it, but winter is coming. It's a fact every year. And while we're recording this on the official week of the start of winter, the weather outside has not been that cold. Some may say it's even balmy here in New York, but Northeast winters are anything but predictable. Preparing for the season means making sure our homes and businesses are warm and equipped to protect us from the elements. Many also right now have holiday lights and other decorations, and perhaps a couple new toys under the tree that will need some energy to get them powered. Behind all that energy we're using natural gas. A growing percentage of America's energy now comes from natural gas and across the country, we rely on it to literally power our lives. Natural gas touches agricultural and chemical settings keeping our economy humming. Today's guest has been at the forefront of powering America's energy future for more than 30 years. Nick Deiuliis is the president and CEO of CNX Resources Corporation. CNX's history spans back more than 155 years, and is the premier independent natural gas development and midstream company. Nick, a Pittsburgh native, is an evangelist of the importance of American energy markets and the pivotal role gas plays in maintaining and providing mobility in our communities. Our conversation with Nick is right after this break.
Speaker 3:
Ice is home to liquid global energy markets, including the broadest range of natural gas benchmarks from the US and Canada to Europe and Asia.
Speaker 4:
Natural gas markets are globalizing driven by new L&G dynamics. The relationship between Europe and Asia that is taking center stage in natural gas price formation. In Europe, we provide access to the two leading benchmarks MVP, and TTF.
Speaker 3:
In Asia, the Japan Korea marker is the benchmark for pricing Northeast Asia markets focused on south and west Asia. ICE's west India marker L&G futures contract supports growing natural gas demand in India and the middle east.
Speaker 5:
Against The backdrop of the US shale revolution, market participants have become refocused on regional, physical and financial gas markets. In North America, we offer the most comprehensive collection of locations and liquidity in the physical and financial gas markets.
Speaker 3:
Ice offers the most comprehensive complex of global natural gas benchmarks. These deep and diverse markets allow for transparent pricing across the globe.
Peter:
Our guest today, Nick Deiuliis, is the president CEO of CNX Resources Corporation. That's NYSC ticker CNX. Nick has over 30 years of experience within the company and has held positions of president CEO, COO and senior VP of strategic planning. Earlier in his career he served in various engineering positions and is a member of the Pennsylvania bar. Welcome Nick inside the ice house.
Nick Deiuliis:
Hey, thanks for having me, Pete.
Peter:
So we're going to drill deep into CNX soon, but I wanted to start on an article you published the morning of this recording to set the record straight on the 10 greatest rock guitar players. I wish we had time to go down every single one on the list, but there was one I'm going to ask you a question about. Did you consider Johnny Winter instead of Billy Gibbon for his work on the slide guitar?
Nick Deiuliis:
Yes I did. And Billy Gibbons obviously is a very well known guitar just because of his success with was ZZ Top. But like I said, at the beginning of that endeavor, probably, and you hear this with these lists all the time, sometimes it's matting, there is no right ranking of these 10 grades, et cetera. But from a personal perspective, that's how I saw it. And even getting into, I listed the honorable mentions of 11 through 20 in no particular order. And when that was concluded, I thought, boy, there's three or four names I could have easily not just put on the 11 through 20 but the top 10 list and still had an objective basis for it. So I hear you and that's the beauty of something that's an exercise like that. It just leads to constant discussion and debate, which is awesome.
Peter:
Yeah. And constantly reassessing it as new musicians come into the fold. I personally we're talking slide guitar, I'm a Derek Trucks fan, but he's not quite old enough yet to get on that list. But your article-
Nick Deiuliis:
He's still a work in progress, yes.
Peter:
He's an ongoing process though he's put a few years in, started so young. Your article pointed out that the great George Benson was not eligible, because this was a rock list, but he, like you, is from Pittsburgh. What brought your family to the city of bridges?
Nick Deiuliis:
Well, it's a common story for Western Pennsylvania and the city of Pittsburgh, which was economic opportunity. The more things changed. The more they stay the same through the years and generations. The Pittsburgh story is a very special one and a unique one when people look at it geographically or industrially, but it's a common story across a lot of the industrial centers of the United States. So my family was Italian American and whether it was Italians or different areas of Europe, Eastern Europeans, Southern Europeans, making their way to the United States for economic opportunity. But it's a story when you're in the fabric of Western Pennsylvania in the Pittsburgh region, is a very common story. And if you look at the team that we've got at CNX Resources today, what brought them back, right? We went through a massive Exodus in the region when the economic downturn to manufacturing occurred in the late seventies, early eighties. What brought a lot of the families, next generation so to speak, back to the region and what keeps them here is still those standbys of manufacturing and particularly energy with respect to natural gas.
Peter:
And you're talking about the story of Pittsburgh and my understanding is actually your first job was helping share that story as a paper boy for the Pittsburgh press. What did you learn from that first job?
Nick Deiuliis:
Being a paper boy, which was an outstanding opportunity for kids back in the day, right? I guess I'm showing my age now that that's a thing of the past, but what an opportunity for a kid or a young adult to learn some basics, right? Everything from yeah, the obvious of work ethic, but basically how to become an entrepreneur. I mean, you had to do everything from deal with logistics and supply chain, right? If that paper truck was late in its delivery, you had issues and you needed to manage that, you had the need to be able to interact with the public so it was retail with the individual houses and customers when it was time to collect each week or when there was an issue with the delivery. And then you had to deal with all kinds of intangibles, whether it was weather or different types of events seasonality with the Sunday editions getting quite large near the holidays and retail season busy season.
Nick Deiuliis:
So it was a great training ground I felt for just thousands and thousands of kids that became ultimately business leaders or entrepreneurs or innovators. And if you look at all the issues you hear about and that all of the NYSC companies are dealing with today, supply chain and inflation and retail and demand and evolving technologies, right? When you think about how media has just changed through the years, you learned all that front and center at the face of the paper route back in the day and I miss that. Again, that's progress and that's evolution. I know there's advantages to the way we distribute news and media today, but I miss that because I think that was a great training ground for just thousands of future leaders.
Peter:
When you became the CEO in 2014, you helped transform CNX into a gas driller talking about that next step and evolution. Did you see the tea leaves that made you believe that the shale basins were worth exploring and where did that come from?
Nick Deiuliis:
Really interesting story. And some of this, we would like to describe all of it to a hundred percent of intention and focus and just foresight and the genius of management, right? But a lot of that was I think the foresight was definitely there, but a lot of this too was a bit of happenstance. And what I mean by that was in the late 1970s, early 1980s at the time, the company was a pioneer when it came to coal mining. And one of the things that it got very good at was being able to extract methane from coal scene before mining occurred. So methane was always the enemy of the coal miner. And if you could remove the methane before the mining units came through with the workers, then that made it for a much safer operation and effort. So we got really good at liberating methane from coal scenes.
Nick Deiuliis:
And at some point in the eighties and the 1980s, the management team thought through this and said, "No, wait a minute. If we're doing all this to extract a product, a saleable product of coal, what if we also, instead of venting that methane or flaring that methane, what if we captured it in a pipeline and then sent it to a market and trade it to saleable byproducts?" So our Genesis in the natural gas space was actually with coed methane and trying to again, make the mining operations safer and more efficient. And then as time went on, of course we evolved into what became the shale revolution with Marcellus and eventually the Utica shales up here in Western PA in West Virginia and Eastern Ohio. And yes, to your point looking at that innovation and frankly that disruptive technology that was occurring with how much more repeatable and more prolific and efficient the extraction technique and process was becoming.
Nick Deiuliis:
So the Wells kept getting better and better, policing techniques got better and better, the efficiencies went higher and higher. And we basically looked at that and said, natural gas is becoming such a repeatable and plentiful commodity because of this innovation and disruptive technology. It's inevitably going to have the ability to capture market in things like our power generation grid. So from that perspective, I think we saw a bit of the future where natural gas was going to undergo a significant growth in demand and that the methods and processes and technologies were applying to extract it and provide that widget so to speak, with a methane molecule, we're getting better and better and we're sustainable. And that's where we made the vet to take the next step in that company's evolution to become a natural gas player.
Peter:
And thinking about that coal and methane customers when you started to the customers today, how have your customer base evolved over that time? Are these the same people using just different energy sources or are you also tapping into new customers?
Nick Deiuliis:
We don't simply produce, as I said, the widget or the commodity or natural gas. Think about what we're doing. We're impacting quality of life and providing quality of life to a whole bunch of different customer sub segments and across the globe. So someone that goes to work in this industry today, let's say in Northern Appalachia or the Pittsburgh region, they're going to do something that is a key link in the development chain of generating that methane molecule. And then that methane molecule will be a natural gas. It can end up doing anything from staying in region, right? So it can be used to generate electricity which used to be generated largely by coal. So you're generating more reliable, cheaper forms of electricity with much less of a carbon footprint. It can be staying in region and some of that feed stock can be used to feed manufacturing effort that you mentioned the intro such as petrochemicals.
Nick Deiuliis:
We now have a petrochemical cracker facility just outside of Pittsburgh that Shell has constructed. And they built that here because they figured that, Hey, from a rate of return perspective, over 20, 30 years, you want to put that facility very close to a low cost feed stock that is repeatable over decades because the supply of that can feed that plant and really help drive its margins and efficiencies, or that methane molecule may end up going out of region and this gets into pipeline infrastructure and the build out that occurred because of what's going on with this disruptive technology. And now you look at areas like the Southeastern United States, they completely retooled their economy to basically run off of natural gas produced here in Appalachia. Or it wasn't too long ago that this country was capitalizing hundreds of billions of dollars of infrastructure to be able to import natural gas from foreign sources because we've fear that we were running out of natural gas domestically. Here comes at disruptive technology with the shale revolution and all that recapitalization was reversed 180 degrees.
Nick Deiuliis:
And now that methane molecule is produced in this region it could end up going to Poland to create some geopolitical security for Poland relative to say, Russia, it could end up going to Japan to create some geopolitical security for Japan relative to say, China, India, Sub-Saharan Africa, Latin America, to pull almost 2 billion people in the developing world that don't currently have access to reliable and affordable electricity to pull them out of the poverty state that they currently have to toil and bring them to a better place in life.
Peter:
Yeah. And we're definitely going to get into the international aspect of how Nat gas falls into that later on. But I wanted to go back something you mentioned talking about getting the gas from where you are to where it needs to go. Last summer CNX announced it would acquire all outstanding units of CNX Midstream partners, which was the master limited partnership that owned and operated the gathering in midstream assets in the Marcellus Shale for review. Why was acquiring CNX Midstream important to creating value for the long term for your shareholders and also to reduce the cost?
Nick Deiuliis:
Peter, it was very much a contrarian move. What I mean by that, a lot of the entities and companies that developed out of these disrupt shale revolution in our region and in other basins frankly, they started out in large part either owning the midstream assets that were tied to their development plans upstream, where they were drilling and completing the wells and then through structures like massive limited partnerships, MLPs, there became a capital arbitrage. There were different valuations were ascribed to say a dollar of cash flow between an upstream entity that was drilling and completing wells versus a midstream entity that was transporting and pressing the molecules. So a lot of our peers took advantage of that arbitrage and created these separate entities and then ultimately spun them out completely to raise capital basically. So they issue an ownership interest to the public markets, whether it was a massive limited partnership or a C corporation, and then it would take those proceeds and then invest it into drilling more wells.
Nick Deiuliis:
We were going to explore and we were interested in seeing what that valuation proposition might look like. So we did, as you said, created our CNX Midstream standalone entity, but we retained control of that. And we made the determination, and this is one of the things I think that might make us unique in the space. We take a very long term view of things. You mentioned that we're 155 plus year old company. You get to that point by being able to take a long-termism approach to things versus short-termism. Sometimes that's challenging in the public market. But to the extent that we looked at that we felt strategically and tactically having midstream integrated with your upstream operations. So having your drilling and your completions and your pipeline and processing all integrated, it effectively presents a moat defensive position when it comes to cost. You become the low cost producer. And if you're the low cost producer in the low cost basin in a commodity business, that's going to put you in a position to take that long term view and really do some tremendous things when it comes to creating per share value.
Peter:
ICE is no stranger to the natural gas market. We offer liquid global energy benchmarks for US, Canada, Europe, Asia. How do you think about hedging risk? You talked about the moat you've built by combining your midstream with the upstream, but how do you think about hedging and how has that been credible to the success you've seen?
Nick Deiuliis:
Very familiar with ICE by the way. And I look at that not so much for the day to day and hour by hour changes in the markets, which can be very dizzying these days, right? So ICE has become a very interesting place to see some of the volatility that we're experiencing and some of it normal with just any type of commodity in global markets and some of it, unfortunately self-induced by maybe some new informed policy. But what we look at with respect to hedging and how we think about these different pricing points for natural gas, it goes back to that low cost producer position. So if we're taking a long term view and I think another unique aspect of CNX as a company it's that we are also very clinically focused on creating long term per share value. So we think we do that two ways.
Nick Deiuliis:
We want to methodically execute and manufacture free cash flow. So being a low cost producer is key to that ability to do so. And then we want to be really smart capital allocators of that free cash flow. We want to put it and invest it in the right place and at the right times. And if you can do that, whether it be via debt pay down or share buybacks or dividends or in some instances reinvesting into capital or M&A, then you can do some tremendously positive things for owners over the long haul. So when it comes to hedging, if we're the low cost producer in the low cost basin within the United States, then we're going to want to take a very programmatic approach to hedging. We're going to want to continually methodically be hedging from front year in front of us on out to maybe four to five years into the future.
Nick Deiuliis:
And that'll be tiered, of course, we'll be more heavily hedged entering say 2022. You want to enter a calendar year somewhere between 80 to 90% hedge going into a calendar year. Less hedge, right? For two years out and less hedge, three years out and so on, but we're always going to want to maintain that ladder as the months and the years progress. And again, the low cost producer being the low cost producer that really puts you in the driver's seat to be able to do that. If we weren't the low cost producer, then we'd have to take a different approach to hedging. We wouldn't be programmatic hedgers because we would need to be picking the right pieces or parts of the cycle to be able to lock in a good margin. But we are and we feel if you've got a business model that allows you, and this is one of the unique things about the natural gas space, you can't do this if you own a restaurant, right?
Nick Deiuliis:
I can't sell forward tomorrow's customer base, but you can do that in natural gas. You can lock in those revenues. And if we see great margins and rate returns tied to that, then we're going to be a bit agnostic when it comes to gas price views. We don't know the market, we're not that smart. ICE proves us wrong every single hour of every single trading day. But what we do know is this is our cost position, this is where the forward curve is, we can lock in a very attractive cash margin, thus generate a very attractive rate of return on a fully loaded basis. That's how you create free cash flow that you can then smartly allocate that creates per share value over the long term.
Peter:
And to back what you just said, you've consistently ranked in the 80th or 90th percentiles for your operating margin and free cash flow yields looking at your competitors. What are the opportunities do you pursue with that? You're the strong free cash flow, what are you looking at?
Nick Deiuliis:
We're looking under just traditional capital allocation avenues. This is intelligent investor 101 with Ben Graham or just the general concepts taught in economics 101, finance 101. Well, a sustainable business model from our perspective would be one where A, it all starts with a foundation of being a low cost producer, being able to methodically, execute in a safe and compliant manner, looking at a balance sheet that's strong. That, and those are the types of things that programmatic hedging approach that will generate free cash flow consistently. So you'll be able to generate free cash flow in up cycles and in down cycles, whether they're macro or whether they're natural gas centric. When you generate that free cashflow, now it's time, to your point, to allocate it. And we go through, I think almost a prioritization list of how we do that.
Nick Deiuliis:
First thing we do of course is we invest in our employees. If you look at our all in average compensation per employee across our company, we've got the highest average all in compensation package of any public company in Western Pennsylvania. There's a study that's done every year by a regional newspaper that looks at that and we come in number one when you look at that metric. And that's by design, because we've got a lot of bet that we're making, right? A large bet that we're making when it comes to the ability employees to execute on that first fundamental step. We then take the next allocation of free cash flow and we say, "How can we invest in our community that we've been operating within in 155 plus years? And that we all in and our families were typically from, and that we want our kids to remain in."
Nick Deiuliis:
So we take a community investment approach that looks to be tangible. So we want some measurable quantifiable metrics to hit, impactful of course, and local. So you're not going to see us investing into something that's a national effort or global effort. You're going to find us at Davos, you're not going to find us doing those types of things, but you will find us in the communities and in the municipalities that we live and operate within investing where we see a tangible impactful of local return. Then we go to balance sheet and we want to say that each and every quarter, a good fundamental sustainable business practice is to pay down some gross portion of your debt. So it might not be a lot of debt to be paid down that quarter, right? But to just do that as a check the box type of an approach is a good thing.
Nick Deiuliis:
And that is not a point of no return. In other words, we view it as almost storing capacity liquidity. We're putting that in the bank that we can then redeploy when opportunity presents itself in a volatile field. And then when that's all done, when you do all those things, you've invested in your employees, right? You've invested in your community, you've paid down that debt to make that balance sheet that's strong just even bit stronger, now it's time to figure out, all right, how do I return capital, create value for shareholders? And there's three big avenues, right? There's the increase your activity capital investment pace, and that'll create longer term value if the big great rate of returns tied to what you're investing in, retire some shares if you think your shares are deeply discounted relative to fair value, be a share buybacks.
Nick Deiuliis:
That's currently where our focus and our attention is because we think our company shares are undervalued. Or three, look at something like a dividend with respect to returns. And I guess that would be an option once we would see a share price where the risk adjusted rate of return of a share buyback isn't as attractive, let's say, as it is today. And then of course there's M&A with all of its upsides and all of its risk that it presents. And we view it as offering both that we want to see where there's opportunity when is appropriate, but also be very cognizant of the risk of M&A.
Peter:
And you talk about taking the long term view, but I mean, as you also mentioned, you are also in a business has a very short term view at times. I want to switch gears a little bit so to talk about the larger picture and your prices last year, saw some historical volatility and there was a lot to do with OPEG plus role and the disagreements between Russia and Saudi Arabia, ongoing use of things like Russia's natural gas as you mentioned earlier, to push not just economic policy, but policy policy. What is the oil and gas market look like to you on the global scale today end of 2021?
Nick Deiuliis:
I look at it from two perspectives, what it could be, what it should be versus how it is and how it might be. And that's a good, bad contrast and I'll explain here. I think on what it could be should be, it is amazing. And again, ICE brings us to bear every single day with working at these different market points across the globe. This was not too long ago the natural gas global market was an extremely fragmented vulcanized market. It was impossible to get molecules from one regional market to the next, let alone from one continent to the other. And it didn't make much sense, right? Because the technology existed in the wherewithal existed, but it just wasn't there. But once again, with this disruptive technology, just fundamentally changing the supply dynamic, you then saw capitalization taking over to match it up with demand dynamics.
Nick Deiuliis:
And now with liquified natural gas and with what's going on with L&G exports from the United States, you're seeing stabilization, I will call it, of these global markets. And that's a really good thing because as I said, it affects everything from GDP and economies to democracy, to geopolitics, to frankly again, poverty in the developing world. One almost 2 billion people, as I said earlier, that don't have access to electricity. So it's really big, important stuff to be able to normalize and steady what was a very fragmented market not too long ago. And that's how I look globally at those markets. And then you start to think about, we talk a lot about externalities, the concept of externalities when we're assessing things like energy development, most of that attention historically had been on environmental externalities. Well, if you take that theme and apply it even wider, natural gas, the United States natural gas industry is I can't think of anything that has a larger positive benefit when you start to encompass all of the different aspects from an externality perspective.
Nick Deiuliis:
So if you look at what's going on in the world today, and it can be Iran and volatility in the Persian Gulf, it could be China with respect to Taiwan, it could be Russia with respect to Ukraine and or Nor too and Western Europe's energy security. It can be any of those. US natural gas to me is as much of a strategic deterrent as an aircraft carrier fleet would be, and we've got the wherewithal and the ability to help our allies and to help things like individual rights across this globe if we deploy it in very obvious, logical ways where the infrastructure and the technology and the capitalization of that is either there or there for the taking. So I see that what it could be should be from that perspective, I see abject poverty helping to be eradicated by this, I see despots and tyrants and in certain regimes being checked because of this without military conflict and I see economies in middle class and job growth across all kinds of different economies growing because of this, which also helps address of course, some of the unsustainable natures of those budgets and that levels cetera.
Nick Deiuliis:
But then I look at what actually is occurring right now. And like a lot of things it's been heavily politicized, I think to the point where the science and the logic have been superseded by the political science and the ideology. Even environmentally, when you look at something like climate and carbon dioxide, the move and the embracement of natural gas, natural gas demand growth glow globally is a wonderful thing for climate and for CO2 if you're concerned about those types of things, because it will largely supplant and replace things like coal fire power generation.
Nick Deiuliis:
And I would argue that natural gas on a life cycle scope one through three basis fundamentally has a lower carbon footprint than something like wind and solar, again, on a scope one through three life cycle basis. So I view it as a fundamental win across the board. But today everywhere you look, sometimes it feels as if where there's an opportunity to invest in pipeline infrastructure or to invest in something like liquified natural gas for power generation or petrochemicals that are all tied to natural gas development and reliability and affordability of it, you're just meeting resistance. So I worry about how it is versus how it could be and how it should be.
Peter:
Well, after the break, we will get into how it should be and how it's going to be with Nick Deiuliis, president and CEO of CNX Resources, and we'll be right back after this.
Speaker 7:
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Peter:
Welcome back. Before the break, Nick and I were discussing his career CNX Resources and the natural gas landscape. We had Dan Jurgen on this podcast just about a year ago and he's been a real strong proponent of the energy and oil interplay with geopolitics and how that is, he's written several books on it. And he was talking to us about how China imports 75% of its oil, and really has now envied the US' ability to be so energy reliant. How do this international play impact what's happening basically outside your window there in Appalachia?
Nick Deiuliis:
You mentioned Dan Jurgen, I'm a big fan of Dan Jurgen. I've read all his books, starting with the prize was the first one I read, but he does just a tremendous job when it comes to tying together looks to be individual stories and data points into a big global view that he stretches that over time projects it forward even in terms of where we're going. So he's just an awesome asset for this country and the energy space. Largely of course, there's this push to move towards so-called renewables, whether it's wind or solar or some variance or hybrid technologies tied to those. And the argument is that those are zero carbon sources of electricity. There is this push and need to reduce carbon intensity under tackling climate change, that banner right? And wind and solar will basically be zero, electric vehicles will be zero sources of carbon dioxide.
Nick Deiuliis:
The problem with that is it's fundamentally not true. The carbon dioxide intensity of a windmill farm or a solar farm or an electric vehicle is tremendous. And if you think through the links in the chain of how say a wind farm gets built in somewhere like Pennsylvania, let's say Pennsylvania and it's Ridge lines. To replace a natural gas power plant in Pennsylvania, by the way that would be fueled by wells that are literally a couple of miles away, so very short supply chain, you would probably need somewhere between 250 to 300 state of the art onshore wind turbines. And those turbines if you think about how they will end up being on the Pennsylvania Ridge line, all of the material or the bulk of the material needed to create those will be mined in places like Mongolia or China because that's where things like the rare earth elements and graphite, et cetera, that's where they mostly exist.
Nick Deiuliis:
So that mining approach, that mining effort is basically surface mining, extremely disruptive to the environment, very carbon intensive. Then all that has to be processed, right? Into purified components and feed stock materials, very carbon intensive. Then it all has to be manufactured into components, whether it's blades or whatever the case might be. And that will largely be done again in places like China. Now, if you look at those first three steps of the extractive mining and then the processing of the minerals, and then the manufacturing of the components all done in places like China, China's industry is 80 plus percent carbonized. It's 80 plus percent powered and fueled and will continue to be fueled by carbon. So right off the bat, before you even have anything showing up on shore in United States for this wind farm, you've got a tremendous carbon footprint tied to these turbines.
Nick Deiuliis:
Then they got to be transported, plane, ship, train, whatever the case might be largely on the back of carbon one way or another. And then you got to clear trees for the pads and then you got to clear right aways for these transmission lines for the 250 to 300 turbines. And then once they're all installed and the concrete is poured, which also requires carbon, then you're going to need a backup form of generation for when the wind isn't blowing, which is largely going to be fossil fuel based and redundant, which has its own carbon footprint. And then in seven to eight years, you're going to need new turbines and there's really no effective way to recycle these wind turbines. So again, adding up scopes one through three, a tremendous carbon footprint, because of just the nature of how these things have to be made, where their feed stocks come from and looking at who's making them and who's mining them and who's processing them.
Nick Deiuliis:
They're going to continue to use carbon from here on out. So it's odd to me that we would set policy that would forego the embracing of domestic natural gas let's say, which again, on a scope one through three basis has a lower carbon footprint, CO2 equivalent footprint than something like wind. And then outsource was energy independence into an energy dependence on somewhere like China, and then hope as a strategy that China will not use that against us from time to time when strategically or geopolitically it favors them. I just sense that they might not do that. So that's one side of this. Now, the flip side is, as we've mentioned earlier, if you look at the natural gas supply coming out of a basin like the Marcellus and Appalachia and the Utica, the ability and the capitalization to deliver, deploy that natural gas to not just United States markets, but to others.
Nick Deiuliis:
And then you start to think about the impact it has on GDP and on balance of trade and on jobs, right? And tax revenue and the middle class. It's defies logic. And this is how you come up with some really strange scenarios that we've seen recently in the world. Right? I mentioned Boston with importing Russian L&G 4,000 plus miles away from Putin. That doesn't make much sense when you've got Pennsylvania natural gas 400 miles away. But that's the conscious policy results, right? That's the symptom of the policy that's been embraced. Everybody's talking about what happened in Texas last winter with a deep freeze. And to me, that again is a symptom of what these types of policies will lead to.
Peter:
And let's talk a little bit more about that environmental carbon. In a recent podcast, you talked about how the timely and accurate environmental reporting is crucial and likened it to how companies today report financial statements, and also, and to use your quote, the copying and pasting that process would make entities more comfortable with what energy companies are bringing to the table. What does responsible environmentalism look like? You've touched it in several of your answers, but if you get to go to the SCC today and explain what that reporting needs to look like, what is responsible environmentalism?
Nick Deiuliis:
I think a couple things. Consistency and transparency would be the two bedrock hallmarks of what makes sense. Anything that improves and it stays true to consistency and improves and stays consistent with transparency I think are good things. So the thought about, and again, the industry that we operate within, it's a great industry, it is not a perfect industry. We can always get better, we can always do better. There's no doubt about that. I think there's wide acceptance of that. And one of those arenas is with environmental regulatory reporting. We've got standards as public companies throughout various industries, right? On how the rigor needs to be set and the discipline needs to be set when it comes to financial reporting, whether it's through 10 Ks and 10 Qs or non gap measures in all the rule rules and rigor and discipline that goes into the way you go about that so that investors have confidence that when they see a number stated or spoken or reported, they know that that number has a rigor and a level of scrutiny behind it that they can have confidence in making investment decisions with perspective.
Nick Deiuliis:
I think it's the same when it comes to environmental regulatory reporting. A lot of it is very technical, a lot of it is very nuanced, but whether it's nuanced and technical or whether it's in the aggregated summary form, being able to take an approach that we've already developed and know very well under financial reporting and just super imposing it over onto the environmental reporting side to me as a no brainer. And that's something that we did within CNX recently here coming into year end, where basically we've created the position and a team underneath it of a controller of environmental regulatory reporting, just like we have a controller of accounting. And they're developing the same types of processes, technologies and workflows, where you see the same rigor and the same scrutiny that's heavily borrowed from the financial reporting side.
Nick Deiuliis:
Now where we're lacking I think on this front of transparency and consistency, it is really when it comes to, again, these issues related to things like carbon footprint. Now we put out our corporate responsibility report this past summer as we do every year. And this year, we basically came out with an accounting of our scope one and scope two carbon footprint as a company. And our scope one scope two carbon footprint is net negative. And the reason it's net negative is we're doing, as I said earlier, collecting and investing capital for a tremendous amount of methane capture across different sites and locations in Appalachia. So we're investing in the types of wells and pipeline infrastructure to collect methane where if it wasn't for us, that methane would be emitted into the atmosphere, which is a very damaging greenhouse gas compared to CO2.
Nick Deiuliis:
So as soon as we issue that finding that's a very unique position to be within energy. It's the only energy company that's scope one and two net negative, not zero and not in 10 years or 20 years by the way, but today. Well, the immediate response was one of yes, but what about scope three? You're scopes one through three net negative. And the answer of course is yes, we're not scope one through three net negative. We have a positive carbon footprint when it goes through scopes one through three, but so does every single business and endeavor in the United States, especially wind and solar type entities. So to say we're warrant, right? That wind and solar is zero carbon that's where the consistency is failing. It's almost again, I keep using the financial reporting parallel, nobody would go out as a public company and say that next year or today we're going to generate a billion dollars, we're going to be free cash flow positive if they weren't, right? If they knew that they weren't because they would be facing serious sanctions and expectation that there's a rigor and scrutiny and consistency to that statement when you make it.
Nick Deiuliis:
But yet people today... And it moves stock price, it moves capital investment decisions. There's going to be actions taken off of that. Yet today in the environmental arena, which is by the way, becoming more and more of interest, of course, in capital markets and moving investment decisions and impacting those types of things, people feel free to throw around a zero carbon tag, whether it's today or five years from now or 20 years from now, and they never seem to feel a responsibility to transparently show the math as to how that is going to work. How are you going to get there?
Nick Deiuliis:
And I really do question and frankly challenge someone. When I hear a smartphone manufacturer saying that they're going to be carbon zero or they are carbon zero, I don't understand how that works under math and science scopes one three. When I hear a clothing retailer that, that offers products and maybe they don't offer those products to companies in the fossil fuel industry hypothetically, but they say they're carbon zero or their climate advocates moving towards zero, I don't see how that's possible when their products themselves are petroleum based. When I see an e-commerce retailer talk about zero carbon electricity use or zero carbon footprints in now or the future, I don't see how that happens, whether the vehicles are going to be EV vehicles or not. So I think there needs to be an acceptance that this stuff matters more than ever. It is moving investment decisions, it is moving things like stock price. And as a result, we should adopt these hallmarks as I said, of consistency and transparency in a way where you've got to show your math, just like if you report an EBITDA number or a net income number or a cash flow number, you have to show your math and you have to foot it to some generally accepted accounting principle. And if we did that, I suspect Pete, that a lot of the statements would be modified.
Peter:
We've been talking now for almost an hour. And so you have a lot of great insights of... I want to give a plug to your podcast. You're host of The Far Middle, which the first 14 episodes focused on dissecting the chapter of your upcoming book Precipice, but you've explored a wide range of topics from the need to invest in more stem to the role of the federal reserve, to the Pope. Where did the title of the podcast come from and why did you start on this project last summer?
Nick Deiuliis:
The Far Middle, I think the name stumbled into it because inevitably you hear these echo chambers across both sides of the political and ideological spectrum that it feels more and more those are your only two choices, but the middle has become far as an extreme, the middle's become the exception anymore. It used to be the norm. So you have far left and don't like that, got far right there's many attributes to that I don't like and a lot of others feel the same way, but what about the far middle? And first blush it doesn't make much sense. It's a contrast, a contradiction. Far middle, what do you mean? How can the middle be far? But in today's world in many ways, the middle is far. So that's how I fell into the name far middle for the podcast.
Nick Deiuliis:
I've got a lot of fun with it. We do talk about those themes that you brought up. And a lot of the themes emanate also in the book that I wrote that's going to hit the shells in January. Precipice, The Last Campaign to Destroy America. And it basically touches on those themes that you'll hear in the podcast. But energy is one of those industries that's right smack in the middle of this whole ecosystem playing out for better for worse. And I think it's incumbent upon all of us in the energy space and all of us in the business community to start those discussions and have those debates with public discourse in a way where it ends up for better, right? And not for worse. So there's a responsibility there and I think that was a big motivator along with the love for the region and for the energy space for writing the book and for working on the podcast each week.
Peter:
And I should know for our listeners, we are recording this in late 2021, but you are listening in 2022. So that book will be out on Amazon and at Barnes and Nobles. Looking at 2022, you've commented on CNX Resources in a [researnings 00:44:21] call saying you quietly executed through yet another strong quarter generating free cashflow flow of 130 million, repurchasing as you mentioned 6.5 million shares of CNX and reducing debt by 29 million. As we're looking to end of the year and the quarter, what are you looking forward to in 2022 and beyond? As you said, you have a long view for the company.
Nick Deiuliis:
We do. And I think Pete, the way you summed it up for how we approached Q3, our view is I don't want to say ho hum, but we want to be very methodical. We've laid out our multi-year view on things. Clearly our philosophy focusing on that long term intrinsic value per share and free cash flow per share generation and growth and free cash flow per share, that's well established. So for us, we want to just stick to the key principles I just mentioned. And then each quarter, mark the market how our progress is going. What's the free cash flow? What did it look like? What's that on a free cash flow per share basis? What did we make decisions on when it came to that allocation of free cashflow? Process different avenues that we talked about earlier, and then looking forward into a forward period of time calendar year, whatever the case might be, what are our expectations on how the magnitude of those things might change?
Nick Deiuliis:
So we haven't put out 2022 guidance yet. We'll do that when we have our Q4 call here at the end of January of 2022. But generally speaking 2020 was an awesome record breaking year when it came to free cash flow generation. 21, I suspect based on our guidance, we'll beat that. So we should set another record in 21 when you look at our guidance that we put out there for Q4 and year in total. And then if you look at 2022 and we keep executing and performing the same way, I suspect it'd be cash flow generation will once again be substantial and we'll be looking to be smart allocators of that free cash to create more per share value for our shareholders over the next coming years.
Peter:
And final question, as you talk about ringing in that 2022, I understand you're a bit of a homemade wine aficionado. Is that something you started during the pandemic and any bottles fermenting to pop open on that new year's Eve?
Nick Deiuliis:
I know very little about wine, but being Italian, I do enjoy it. So if you would give me a blind taste test of a hundred dollars bottle of wine and a homemade bottle of wine, I'd probably be hard pressed to tell the difference. But I tell a lot of friends and colleagues that are into that, if you've got a run coming up of wine that you've just produced or it's ready, feel free to try a bottle out on me and I'll tell you what I think.
Peter:
Well, I hope you have some lined up for new year's Eve. Thanks so much Nick, for joining us inside the ICE House.
Nick Deiuliis:
Thanks a lot, Pete.
Peter:
That's our conversation for this week. Our guest was Nick Deiuliis, president and CEO of CNX Resources. If you like what you heard, please rate us on iTunes so other folks know where to find us. Got a comment or question you'd like one of our experts to tackle on future show, email us at [email protected] or tweet at us at ICE House podcast. Our show is produced by Stephan Capriles and production assistant from Ken Abel and Ian Wolf. I'm Pete Asch your host, signing off from the library of the New York Stock Exchange. Thanks for listening, talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE, nor is affiliates, make any representations or warranties express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content here in all of which is presented solely for informational and educational purposes. Nothing here in constitution offered to sell a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
