CNX Resources Corporation
Q2 2017 Earnings Call Transcript

Published: 1 Aug 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to CONSOL Energy's Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to Vice President of Investor Relations, Tyler Lewis. Please go ahead.

[Tyler Lewis:]

Thanks, Allan, and good morning to everybody. Welcome to CONSOL Energy's second quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Dave Khani, our Chief Financial Officer; Tim Dugan, our Chief Operating Officer; and Don Rush, Vice President-Energy Marketing. Today, we will be discussing our second quarter results, and we have posted 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 in our previous Securities and Exchange Commission filings. We will begin our call today with prepared remarks by Nick, followed by Dave, and then Tim. And then we will open the call for Q&A which Don will participate in as well. With that, let me turn the call over to you, Nick.

[Nicholas J. DeIuliis:]

Well, good morning, everybody. CONSOL Energy is at a really interesting point in its history and in its transformation. You can see a lot of this at play when you look at our recent results and our future projections. So I'm going to start by reviewing the key drivers of our performance, and when I'm doing that, I'll be jumping backwards and forwards in time a bit to kind of paint a picture of how much has and how much is changing within the company. The main highlights and variances of the quarter compared to the first quarter, they'll be summarized on slide 3, so you might want to be looking at that while I walk through this. So let's start with the underlying drivers of our financial performance, the E&P and the Coal segments. On the E&P side, we've been posting some pretty impressive continuous improvement milestones over the past two years. Comparing today's drilling efficiencies and completion designs and well type curves to even just a year ago shows a substantial improvement which culminates and reduce capital intensity for our (2

[David Michael Khani:]

Thanks, Nick, and good morning, everyone. I'd like to start off with our quarterly results, highlighted on slide 4. In the second quarter, CONSOL reported adjusted income and adjusted EBITDA from continuing operations of $39 million or $0.17 per diluted share and $178 million, respectively. On a GAAP basis, the company reported net income from continuing operations of $170 million or $0.73 per share attributable to CONSOL shareholders, primarily reflecting a $127 million gain on asset sales, $116 million unrealized gain on commodity derivatives, and $35 million in other non-recurring fees. Flipping over to slide 5, you can see that, in the quarter, we generated $273 million in total free cash flow, including the $326 million of asset sales that Nick mentioned. We continue to focus on reducing debt and generating free cash flow with the proceeds from asset sales that closed in this quarter. As a result, we've increased our cash position substantially. During the quarter, we repurchased $19 million of our 2022 maturity bonds at an average price of $99.51. And after the close of the quarter, we used $95 million of cash to redeem the total outstanding balance of the 2020 and 2021 maturity bonds. Lastly, you'll notice that on the slide, that our capital expenditures were up slightly this quarter compared to the first quarter of 2017, primarily driven by addition completion activity in the quarter. This will set up strong production growth in the second half of 2017. Now let's move to slide 6, which highlights the company's leverage and liquidity profile over time. Since year-end 2015, CONSOL has steadily focused on reducing leverage and increasing liquidity through the old-fashioned way of growing production, cutting costs, and selling non-core assets. Since then, we've seen a 40% decline in our leverage ratio and a $1.1 billion increase in liquidity. As of this quarter, we are 3 times leveraged in $2 billion of liquidity, a sequential half a turn decrease and $300 million increase from first quarter of 2017, respectively. For the full year, we project year-end leverage ratio to be about 2.6 times, a modest change from last quarter, reflecting lower commodity prices and using $400 million in asset sales. Now, I want to caution you that we still have a large bucket of asset sale processes going on, so we can hit the higher end of the asset sales guidance or even higher, but some of these will carry EBITDA generation. So our year-end leverage ratio could come down meaningfully from the 2.6 times. Moving over to slide 7, we have been showing and updating this slide for some time now. And as a reminder, this slide represents our legacy liabilities associated with the Coal business. These Coal-related liabilities, legacy liabilities, are reflected in the recent filing of a Form 10 regarding our intent to spin off our Coal business, which will consist of our PA mining complex, Baltimore terminal, certain coal reserves, and these legacy liabilities. We continue to expect that these liabilities will decrease over time naturally with the underlying demographics of the personnel, and our goal will be to continue to find ways to shrink them even faster. We also show this at a higher discount rate, given our view that the discount rate should more closely match our weighted average cost of our debt of around 6.5%. Now let's shift over to our hedging program on slide 8, which lays out our hedging strategy as we continue to derisk revenues with our systematic hedge program and our other innovative marketing strategies. In the second quarter, CONSOL added NYMEX natural gas hedges of 88 Bcf for the periods of 2018 to 2020. And we also added 101 Bcf of basis hedges for 2018 to 2021. As shown on that slide, approximately 73% of our guided 2017 production is completely hedged on both NYMEX and basis. We're also more than 50% fully hedged for 2018 and continue to layer in consistent with our hedge program and opportunistic moves in the market. As of July 31, our $2.7 billion hedge book is modestly in the money. Before turning it over to Tim, I want to provide some quick highlights regarding guidance. If you look at slide 9, which walks through our updated 2017 segment guidance, for production, we are reaffirming our previous production guidance of 420 Bcfe to 440 Bcfe, while slightly taking down basis guidance by $0.08 per Mcf, resulting from widening differentials. As for capital expenditures, as Nick already mentioned, we are increasing our E&P capital range for the year by approximately $80 million. Tim will go into more details of this, but the main drivers are the increase due to service cost inflation and in continuous improvement initiatives, which include additional drilling activity for the year. As per unit operating cost and other expenses, we are reaffirming guidance on the previous quarter. I will note that over the second half of the year, we expect a substantial number of Monroe County wells to get turned in line. This area has been more favorable – has more favorable gathering rate. As a result, we expect to see a meaningful decrease to gathering transportation line over the course of the third and fourth quarter. Now as for 2018, with the exception of the full year production guidance, we've removed more the detailed guidance for next year since some of the details are fluid. Tim will touch more on this. While we will provide updated guidance later this year, we continue to expect improving basis differentials into 2018, as well as continued improvements in per unit operating expenses. Lastly, turning to slide 10. We are reducing our 2017 EBITDA guidance by 6%, compared to the first quarter earnings release. The change to the E&P segment is driven by lower spot prices and slightly WAIR (17

[Timothy C. Dugan:]

Thanks, Dave. I'd like to begin by highlighting where we are at for this year. As Nick and Dave said, we've recently increased our capital for 2017, we're maintaining our production guidance for 2017, and we're increasing our 2018 production by 30 Bcf. We did this because we continue to see improved production performance through optimization of our completion programs, well spacing and landing points. Although we did have a decrease in production this quarter due to two operational anomalies which resulted in turn-in-line delays on two Monroe County pads, we continue to see outstanding efficiencies with increased stages per day and improved water logistics resulting in decreased turn-in-line times. Now flipping over to slide 11, I'd like to focus on the results from this quarter. Prices were down due to the commodity pulling back while basis further widened. That decrease was partially offset by additional cost improvements. Production during the quarter was 92.2 Bcfe which is a 3% decrease from the first quarter. There are two drivers for the slight decline which Nick has already highlighted but I want to expand upon. The first was due to the 3 Bcf production that was part of the asset sale package in West Virginia which was retroactive to January 1 of this year through May 31. The second reason had to do with two operational delays we saw during the quarter. If you recall, last quarter we stated that we expected to turn in line three pads, one Marcellus and two Monroe County dry Utica pads. One of the delayed dry Utica pads was due to a fishing operation related to frac plug drill out which delayed the turn in line by 39 days. The second pad was delayed due to pre-frac well prep issues on the switch 5D lateral (19

[Tyler Lewis:]

Thanks, Tim. This concludes our prepared remarks. Allan, can you please open the line up for questions at this time?

[Operator:]

Thank you. Our first question will come from the line of Holly Stewart with Scotia Howard Weil. Please go ahead.

[Holly Stewart:]

Good morning, gentlemen.

[David Michael Khani:]

Good morning.

[Nicholas J. DeIuliis:]

Good morning.

[Timothy C. Dugan:]

Good morning.

[Holly Stewart:]

Maybe the first one for Nick. Nick, you mentioned spin-ready versus the time when you actually hit the go button, and I didn't quite follow the difference there. Is this market dynamics? Just trying to better understand kind of timing and sort of thoughts around timing.

[Nicholas J. DeIuliis:]

Sure. I break this into sort of two timeframes. One will be all the things that we need to accomplish, whether it's the SEC process or the internal moves that we need to make to separate payroll and management teams, et cetera, to get everything set up as two independent companies. All of that will be concluded by year-end this year. That gets us to what I call that point in time of spin-ready. The second timeframe, or the second decision, is when we actually hit the spin button. And being NAV per share driven, and looking at that as our primary filter, we've got a situation where a couple of things are happening. One, of course, would be spin-ready. Two, the balance sheet for the consolidated company, as well as the two separate companies, Coal Co. and E&P Co., will be in very strong position with or without additional asset sales, as we said, and we plan on additional asset monetizations. Three, the E&P segment, based on what Tim and Dave lined out in the new guidance numbers, will be growing quickly and significantly. And the last remaining factor is where we see opportunities for either incremental activity set on E&P side or share count reduction, and that's a function, of course, what our shares are trading at versus what we think the NAV per share of the company is when you look at our going concern. So if we're free cash flow positive and all those things are present and we're spin-ready, we may want to take advantage of what I'll call the discount or the misunderstanding in the market, if it's still there as we get to year-end, and wait a modest amount of time, whether it's a quarter or two quarters, versus hitting the spin button immediately.

[Holly Stewart:]

Okay.

[Nicholas J. DeIuliis:]

Either way, whether it's – now or later, the company will be situated and positioned to spin and separate sometime towards the end of this year.

[Holly Stewart:]

Okay. Got it. And then, maybe just taking that a step forward on the balance sheet and – of kind of Gas Co.-Coal Co. spin is the best way to think about that, like balance sheet-neutral in best case, both situations, depending on the free cash element?

[Nicholas J. DeIuliis:]

Yeah. So the balance sheet on a consolidated basis as we approach year-end is going to be, as we said, we got it towards a mid-2s range, with really no additional asset monetizations. If you assume we get to the higher end of our guidance range of $400 million to $600 million of monetizations by year-end, that would effectively be lower, approaching probably something around 2 times or maybe even lower than that. And, under any range within that spectrum, either Coal Co. or E&P Co. should be in very strong position, depending on how we want to map the debt between the two entities to go out on their own and do what they need to do. Both we would also expect to be free cash flow generators.

[Holly Stewart:]

Got it. Thank you. And then maybe just one final one on the 2018 rig count addition. I know you haven't broken out more details on the 2018 guide. But is the bias here adding a rig early in the year and kind of Marcellus versus Utica thoughts, at least at this point?

[Timothy C. Dugan:]

Well, I – all we've said is, we're going to add a rig, we're still evaluating some things. The Marcellus-Utica mix depends on several factors. Our delineation program is going to continue, and we've got a plan for our Utica delineation, but there will still be a mix of Marcellus. But the final mix, I think, is yet to be determined, but there will certainly be a mix.

[Holly Stewart:]

Okay. Thanks, guys.

[Nicholas J. DeIuliis:]

Thank you.

[Operator:]

We'll go next to the line of Neal Dingmann with SunTrust. Go ahead, please.

[Neal D. Dingmann:]

Good morning, gentlemen. My question's probably for Tim. Tim, looking at – guess it's, let's see, slide 13 and 14. And my question is, looking at these, and certainly it appears the decline curve of these wells are holding up very nicely. How would you compare either one of these as basically just the general southwest PA wells to your Monroe County wells, when you start talking economics these days?

[Timothy C. Dugan:]

The economics are similar. Monroe County right now is, from a rate of return, is top of our list, but they all are in excess of 50%. Monroe County, I think, based on the activity you've seen there over the last year, kind of highlights that, but all are generating good rates of return. Type curves, there's certainly some differences in type curves between Utica and Marcellus, but at the end of the day, when you look at the rates of returns, they're all competitive. But they – the Monroe County, we're still doing a lot of work trying to continually optimize completions, see if we can extend that flat period of initial production, see if we can extend that out longer, and we've had some success with that and we'll continue working on that.

[Neal D. Dingmann:]

And then, Tim, the delays that you saw in the completion, will that cause you to change any of the pad design to do either more wells or less wells on the pad or change anything? I just wonder, do you just look at that as just sort of – abnormal sort of one-time event and you feel pretty good about the pads going forward in Monroe?

[Timothy C. Dugan:]

Yeah. Those are really one-time events. And if you look back at the last couple of years, we have had very, very few events like this. But when you look at the rate we have changed at, the operational improvements we've made, we are constantly pushing, we're trying new things. And occasionally we will have issues, but we were able to figure out how to overcome those issues, get past them. And actually every time something goes wrong, you learn something that makes you better. So we're very confident in our path forward, our continued efficiency gains and our improvement in the turn-in-line schedule. These are one-time issues and they shouldn't be correlated to any other areas of our Utica or Marcellus development. They are one-time issues that we have worked past.

[Neal D. Dingmann:]

Okay. And then lastly maybe for Khani, just David, hedges, I think you said went out to 2019 and 2020. Was this something you'll continue to add, or are you all kind of full now as far as the amount of hedges you'd like at least through 2018 and 2019?

[David Michael Khani:]

Yeah. We have a program hedge that we generally will go up to 80% in the – as we start the year. So think about right now, we said for 2018, we're at about 50%. So as we continue to get towards December 31, that number will – that 50% number will go up. We also – as we added the $78 million of capital, we also hedged half of that production that we got out for 2018, 2019, 2020, 2021. And so we will, systematically as we add capital, we will also lock in some hedging so that we can make sure we capture the rates of return which we feel very, very good about even as the commodity is pulled back.

[Neal D. Dingmann:]

Excellent. Thank you, all.

[Timothy C. Dugan:]

Thank you.

[Operator:]

We'll go next to the line of Joe Allman with FBR. Please go ahead.

[Joseph Allman:]

Thank you. Good morning, everybody.

[Nicholas J. DeIuliis:]

Good morning.

[David Michael Khani:]

Good morning.

[Joseph Allman:]

Hey, Nick. Just to clarify. So, in terms of Coal Co. and E&P Co., so when you talk about those entities being well capitalized, so you're thinking net debt to EBITDA somewhere between 2 and 2.5 times in both cases would be suitable for both entities?

[Nicholas J. DeIuliis:]

Well, Joe, if you go again, starting with the consolidated companies that sits today, we will be in that range you just articulated as we approach year-end, depending on where the asset monetizations come in at and at what level, right, beyond what we've already – so that's sort of the higher end is the mid-2s, and then lower to the extent that we're successful on monetization. Now, I don't know in particular how the proportional shares will be between Coal Co. and E&P Co. at this point. But I think that's a reasonable assumption and range that you're laying out there. Point being, we want to create two companies that are in very strong position, and when you look at balance sheet are in healthy position that did not just sustain themselves in their stand-alone markets, but actually can thrive And it's a bit of a different opportunity set for the two, of course. But there is, nevertheless, significant opportunities for both entities out there. And so there's the starting point of the balance sheet, and then the acknowledgement and our recognition that both are going to be – should be free cash flow generators as well.

[Joseph Allman:]

Okay. That's very helpful. And then in terms of asset sales, the E&P production guidance currently for 2017 contemplates what level of assets? Is it the $400 million level, or is it the midpoint? And if you were to make, say, $600 million of asset sales this year do you think you will need to adjust your production guidance?

[David Michael Khani:]

Yeah. So, yeah. So, Joe, the guidance that we have in place incorporates the asset sales that we've already done, the $400 million which had some production associated with the West Virginia production that was highlighted by Tim. Going forward, if we go in and we sell something with – that does have production associated with, we would have to adjust the asset sales but then again, we may also offset it with efficiencies as well. So you have moving targets on both sides.

[Joseph Allman:]

Got it. Okay. So potentially, this solves on the upper end or above the upper end. It might impact 2017 production a little bit, maybe even 2018 a little bit but okay, but there might be some offset.

[David Michael Khani:]

That's right.

[Joseph Allman:]

Okay. Great. And then just – when you talked about the free cash flow, I just want to clarify going forward. Are you really specifically speaking about organic free cash flow or when you think about free cash flow, you're also including the proceeds from asset sales on a go-forward basis?

[Nicholas J. DeIuliis:]

So I think on a go-forward, probably the – ironically, the best context to start that discussion is what we've done the past couple of years. I think the past couple of years, each and every quarter, we've been in free cash flow positive as a company, whether it's been in the most challenging of market conditions in late 2015 or early 2016 or currently today. But also to your point, when you look at what that means when we look into the rest of this year and then to 2018 and 2019, our contribution of the free cash flow coming from asset monetizations, our expectation and our view is they will be significantly lower than what it's been in prior periods. So generally speaking, when you talk free cash flow positive of CONSOL Energy or Coal Co. or E&P Co. post-spin, our expectation is that would be organic free cash flow.

[Joseph Allman:]

Okay. That's very helpful. And lastly, a quick one. Tim, just – could you just explain, like, what gives you the confidence that the turn-in-line schedule is going to be – is kind of set here and you won't have the delays you experienced in the second quarter?

[Timothy C. Dugan:]

I think past experience and as I've said, the issues we ran into in the second quarter, they will happen occasionally as we push to get better and improve. But they were one-time issues that we learned from, we're moving forward. And as I said, if you look back over the last couple of years, we have had very, very few of these and we continue to see improved efficiencies and ways to pull forward our turn-in-line schedule. And I think that has a lot to do with our – our guidance hasn't changed with production slightly being down and that is because of the confidence we have in our operations, our activity and our planned improvements.

[Joseph Allman:]

Great. All right. Very helpful, guys. Thank you.

[Operator:]

We'll go next to the line of Jeff Robertson with Barclays. Go ahead, please.

[Jeffrey Robertson:]

Thanks. A question, Nick. In your comments about the review of Coal Co., did you see opportunities on the strategic side that therefore consolidates (40

[Nicholas J. DeIuliis:]

Yeah. I think we did. And that was again one of the benefits of going through that process and the rigor that we did. It was an eye-opener, as I've said, for the Coal team. And what we see out there for a standalone coal co-entity that's got the Pennsylvania mining complex in it coupled with that management team, is a very target-rich environment. So I'm sure – one of the first orders of business for Coal Co. once the separation is effectuated is figuring out whether it's within Northern Appalachia or within the United States and beyond, which assets are the best fit when you look at the synergies and value creation versus other opportunities internal to the asset base, including the coal reserves that they'll control within Coal Co. So it's a, like I said, a target-rich environment. I think that came out loud and clear, looking through ironically a sale process and really got us thinking strategically about Coal Co. on a stand-alone basis beyond what its going concern NAV per share proposition is.

[Jeffrey Robertson:]

Would any of those opportunities – I would guess they would need – you would need to complete the spin of Coal Co. before Coal Co. could try to take advantage (42

[Timothy C. Dugan:]

Yes. Yes, yes.

[Nicholas J. DeIuliis:]

Yeah. So, right now, nothing contemplated, nothing on the drawing board. But just looking at Coal Co.'s asset base and its market position, the cash flows it will generate, the balance sheet that it will have, and then what's available and what's out there across the entire coal industry, I think that's an opportunity.

[Jeffrey Robertson:]

A question on the Pennsylvania Utica well, the two Aikens wells. Is there any one thing that you all did differently drilling those wells that resulted in such a big decrease in drilling days? And then second question on that is, in terms of completion on those two wells, what have you learned from the production performance in the way the Gaut well has behaved that makes you want to tweak something as you look to complete these next two wells?

[Nicholas J. DeIuliis:]

Well, on the drilling side, we've got a much better understanding now of the geology, particularly drilling through the vertical section that includes 1,300 feet or so of salt or salt section that can be very unconsolidated and challenging to drill through. But we learned quite a bit drilling through that when we drilled the Gaut, and we're able to take what we learned there. And then we've made some modifications to our downhole assembly, their bit selection, fluid system. I mean, just modifications. No huge changes but we continue to learn and progress from every well we drill. And so that obviously had a significant impact on the Aikens – drilling the Aikens wells. From the completion standpoint, as we do in Monroe County and Southwest PA with our Marcellus, we are constantly looking at how we can optimize our completions through proppant selection, proppant loading, and we're doing that with the Aikens wells, too. We'll probably see an increase in proppant loading in those compared to the Gaut or at least one of them, if not both. And looking at proppant selection, the blend of proppant, the percentage of ceramic versus white sand. So, we continue to model and evaluate that. And our goal is to improve the EUR per foot lateral and we think there is opportunity to improve than what we've seen in the Gaut and we are extremely excited and pleased with what we got out of the Gaut. But we think there's an opportunity to improve on that.

[Jeffrey Robertson:]

Then, last question, the third rig that you all are contemplating adding in 2018, is it too preliminary to talk about where you think the drilling activity will be concentrated next year?

[Nicholas J. DeIuliis:]

At this point, yes. I mean, I think it's safe to say we talked about our core areas that we're going to focus on. And it will involve a mix of wells from those areas, but the exact well schedule has not been laid out and confirmed at this point. As I said, we've got a couple things that we're still evaluating and looking at. We certainly have ideas, but that should become a little more firm in the next quarter or two, and we'll be coming out with those plans then.

[Jeffrey Robertson:]

Thank you.

[Operator:]

For our next question, we'll go to the line of Biju Perincheril with Susquehanna. Go ahead.

[Biju Perincheril:]

Hi. Good morning. A quick question on 2018 plans. I know it's still being finalized. But on the revised guidance, can you talk about how many more turned-in lines you are contemplating for next year, or is the increase mostly tied to the better well performance?

[Nicholas J. DeIuliis:]

Well, being that we haven't made our plan public yet, we can't talk about the increased number of turned-in lines. But I think if you look at the changes we're making in 2017, adding rigs there – or adding wells there to the current rig lines because of added efficiencies, you can probably say comfortably, we're at least adding nine.

[Biju Perincheril:]

Okay.

[Nicholas J. DeIuliis:]

But we – obviously with production going up 30 Bcf, there's going to be more turned-in line, but we just don't have the specific schedule to talk about yet.

[Biju Perincheril:]

Okay. That's fair. The essential Pennsylvania, Utica, it is – from the two wells that you drilled, what are the next plans, or are you waiting to see the completion – the rates from these two wells before deciding the next plans there?

[Nicholas J. DeIuliis:]

No, we've got a delineation program that we have laid out and we have, we're really sticking to. Some of that is non-op data points. We've got a – there's a non-op well that'll be coming online here in the next few weeks that will give us additional data. We've got some others that are planned both, – at least one more of ours later this year, and some additional non-op data points. So we're continuing on with our delineation program. We're not going to wait to see the results from the Aikens. We've got a plan that's based on sound geology and engineering data, and we're moving forward with that.

[Biju Perincheril:]

Okay. Great. Thanks.

[Operator:]

We'll go next to the line of Jeffrey Campbell with Tuohy Brothers. Your line is open.

[Jeffrey Campbell:]

Good morning. I was wondering first, could you just update us on your current non-op Utica activity and what's ahead in the second half of 2017? I'm just wondering if there's any specific areas that you're hoping to derisk with these investments.

[Nicholas J. DeIuliis:]

Well, the non-op data point is just, whether there are data points or non-op data points, it's just additional data in most cases. Those data points are confirming what our modeling and our geology work has already shown us. And as I said, we've got a non-op well that we should see first production on in the next two to three weeks, that's down in the, more in the southwest PA area. And then there's another non-op well planned up in – believe it's in Indiana County later this year. We've got an additional well that we'll be drilling later this year. So, we've got several more data points that will be coming in over the next 12 to 18 months.

[Jeffrey Campbell:]

And since you mentioned it, is that Indiana County well the first Utica well that's drilled there, or is this a well control there?

[Nicholas J. DeIuliis:]

There is a well control up there. This will be the first deep dry Utica well drilled up there. But there is – we've got data from past non-op points, other wells that have been drilled deeper, that we were able to get logs and geology on. There's seismic data. So, we've got a significant data set to give us a view of that area.

[Jeffrey Campbell:]

Helpful. And let me just ask two questions that are kind of A's and B's when you (50

[Nicholas J. DeIuliis:]

Pressure pumping, we had seen some increases, not unexpected. We do have some inflation built into our plan in 2018 and beyond, roughly 2%. But we're also starting to see some talk from service companies bringing more frac crews into the area, which – that should help stabilize pricing and keep them more consistent. And some of the increase on the Aikens, just as it is with a portion of our capital increase, is increased pumping cost, but a lot of it is proppant loading and testing of different proppants and increased loading.

[Jeffrey Campbell:]

Okay. Great. Thank you.

[Operator:]

We'll go next to the line of James Spicer with Wells Fargo. Go ahead please.

[James A. Spicer:]

Yeah. Hi. Good morning. Just got a couple of questions. Firstly, can you provide any color on what the potential assets you'd be marketing to get to the higher end of your asset sale range?

[David Michael Khani:]

Yeah. We don't – we do not comment on specific assets. So you just kind of have to wait until we execute and then we'll announce them.

[James A. Spicer:]

But – I guess generally, Marcellus, Utica acreage undeveloped and potentially developed, correct?

[David Michael Khani:]

Again, I think we have a lot of acres in a lot of different categories, and I think in a lot of different type of assets. We still have coal assets; we have E&P assets; we have midstream assets. So there's a whole big bucket of other stuff that – beyond just Marcellus, Utica.

[James A. Spicer:]

Okay. Understood. And then secondly, just trying to understand the mechanics of the spin and the impact on the balance sheet. It sounds like with the spin, you'll raise capital with the Coal entity and then there's probably a one-time distribution that gets sent back to CONSOL. Am I thinking about that correctly? And then I also saw that there might be a specific 2.5 times max leverage requirement at CONSOL but wasn't totally clear on that.

[David Michael Khani:]

Yeah. The mechanics, you're right. Coal Co. will raise capital to get mapped, okay? And there will be a one-time distribution back to CONSOL. And as far as any specific leverage ratio, there really isn't – that is, we have nothing in our covenants specifically really except the ties to stock buyback at a much higher leverage ratio. Beyond that, there's no leverage limits that we have to deal with. That's all self-imposed at this point.

[James A. Spicer:]

Okay. Okay. Thank you. And then finally, the asset sales that you're doing on the E&P side, do you expect this to have any impact on your borrowing base?

[David Michael Khani:]

Very, very minimum to nothing because what we have – as we've increased drilling, we've had cushion building up and so we should be fine. Now, some of the future ones, if we have any associated production with them, that's where we could have potentially have some modest impact. But again, we're – as we increased drilling, we're effectively building up cushion.

[James A. Spicer:]

Okay. That's it. Thank you.

[David Michael Khani:]

Welcome.

[Operator:]

We have a follow-up question from the line of Joe Allman. Please go ahead.

[Joseph Allman:]

Yeah. Thank you. I actually received a question from an investor just about the potential of delaying the spin for a quarter or two. So I know, Nick, you – I know you divided up the process into two parts being spin-ready by year-end and then after that just deciding on when to actually spin. And I know you want to make sure the balance sheet is in good shape. But could you again go over the reasons why you would consider delaying the spin by a quarter or two?

[Nicholas J. DeIuliis:]

Yeah. The reasons primarily would be NAV per share opportunities. So it would not be because of leverage ratio or market conditions or not being ready to spin. And at the end of the day, Joe, I think that the biggest example of this is – and I know you hear this I'm sure from many different entities, but we are firmly in the belief that our current share price is at a significant discount to what the intrinsic value of this company is. And maybe in the past, there were lots of reasons why because of complexity or things like that as to why that was. But those issues have either been completely resolved or largely resolved. On top of it, with our balance sheet approaching, where it's at currently and where it's going to finish at year-end, there's going to be the wherewithal to take advantage of that disconnect. So instead of complaining about it or lamenting about it, we are now entering an area of optionality because of our balance sheet, because of our free cash flow, because of the growth on the E&P side, because of the market position that the Coal team has put in place with the power plant customers, to take advantage of it instead of complaining about it. And we just want to come up with a path and a timing that uses that optionality to our advantage to maybe take advantage of some really value-creating opportunities that might be coming along once in a long time.

[Joseph Allman:]

Okay. All right. Very helpful, Nick. Thank you.

[Operator:]

And we have no further questions in queue. I'll turn it back over to your speakers.

[Tyler Lewis:]

Great. Thank you everyone for joining us this morning. We look forward to speaking with you again next quarter.

[Operator:]

And ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T's Executive Teleconference Service. You may now disconnect.