CNX Resources Corp. plans to tap both the Utica and Marcellus Shales in southwest Pennsylvania using jumbo 20-well pads to establish what executives at the company's March 13 analysts' day called a gas factory, funded by cash from operations and sales of midstream assets to its affiliated master limited partnership.
The plan calls for $1.1 billion to $1.3 billion in capital spending to drill news wells, lease more land and build out water infrastructure in 2019 and 2020, $300 million to $500 million more than analysts expected.
Given the surprise jump in spending, the dozens of analysts gathered at CNX's Canonsburg headquarters on March 13 questioned executives on how much of capital from drop downs to CNX Midstream Partners LP should be used for more drilling and how much should be returned to investors through share buybacks. Share buybacks and dividends have become a focus for upstream equity analysts that want to see drillers becoming more profitable and rewarding their shareholders, and CNX stock suffered a small sell-off on March 13 after the news.
"[The] 2019/2020 guidance likely contributed to equity weakness yesterday, with the stock ending -5% vs E&Ps -1%," analysts at energy investment bank Tudor Pickering Holt & Co. said March 14. "This is due to a shift towards stacked development of the SW PA Utica in 2019 and 2020, with Utica well costs expected to run +$6 million above Marcellus wells but for 2,000 [feet] shorter laterals."
CNX Vice President for Development Andrea Passman said CNX is using technological muscle and better data to build better earth models revealing the Utica Shale thickening into three separate layers beneath the Marcellus as it moves east from Ohio into Pennsylvania.
"It's this methodology [that] drove us to understand that there are really three different Utica plays, maybe even four," Passman said. "Our immense amount of data, it allowed us to look beyond what was right in front of our noses. Everyone jumped into the deep dry Utica, thinking all Utica is created equal. But in fact, they are vastly different."
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Passman painted a picture in their region of the Utica that is similar to the Permian Basin, with thick, stacked layers of hydrocarbon bearing rocks. CNX CEO Nick DeIuliis said the stacked resources will take production to another level.
"Just as the shale boom has been a disruptive force to our region and country, stacked pays are going to take that disruption to the next level," DeIuliis said. "Stacked pays will beat the most prolific standalone Marcellus-only opportunities out there."
Using 20-well pads to drill both shales and throttling the pressure of its wells, CNX thinks it can increase its EBITDAX, or earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses, 20% compounded for the next four years while doubling the useful lives of its wells to eight years.
Despite the science, analysts were reluctant to credit any additional value to CNX based on its plans to drill Utica and Marcellus wells from pads in the counties to the south of Pittsburgh in 2019 and 2020, eventually extending CNX's operations into what it calls the "Central PA" unit centered on Westmoreland County east of the city.
Westmoreland is one of the counties where supermajor Chevron Corp. is restarting its previously sleepy Appalachian operations. DeIuliis said he was not sure what Chevron did or didn't know about the geology in Westmoreland. "I can't speak for Chevron, but in the E&P business I do know there are no secrets," he said with a smile afterwards.
The additional spending weighed on CNX's pitch. "Given the higher than expected CapEx plan the stock is understandably underperforming today," SunTrust Robinson Humphrey Inc. analyst Welles Fitzpatrick wrote in from the presentation room March 13. "The positives came in the detailed drop/ divestiture plans ($4 billion of potential by '20), but were not enough to outweigh the CapEx, which was 32% ahead of consensus through '20."
TPH analysts like CNX's long term prospects but warned away the short-term investor. "Based on management commentary, buybacks still screen as the most attractive use of capital for potential proceeds, and ~$300 million remains on the current authorization for 2018," TPH said. CNX executives said they could envision buying back up to 60% of CNX's outstanding shares without increasing debt but wouldn't commit to a timetable beyond the currently announced $300 million plan.
"We… believe the equity is better suited to those with a longer term (18-24 month) investment horizon as a strategy is in place but timing appears to be fluid," TPH said.

