? Process of separating shale gas drilling assets from coal segment began 10 years ago.
? CNX looking ahead to the next horizon of shale opportunities.
? 'Sooner is better than later' for separating CNX Midstream Partners LP from its upstream sponsor.
CNX Resources Corporation CEO Nick DeIuliis has worked at some iteration of CNX Resources for his entire career, watching the company morph from CONSOL Energy Inc., a coal company with a gas business on the side, into a pure-play shale gas producer with an affiliated midstream master limited partnership, CNX Midstream Partners LP, where he is also chairman and CEO. At 36 years old, he was named the CEO of CNX Gas Corporation after CONSOL spun the gas division off into a separate company in 2005. A Pittsburgh native, DeIuliis is a Penn State graduate with a degree in chemical engineering and holds an MBA and J.D., both from Duquesne University. He sat down with S&P Global Market Intelligence at the end of the company's Analyst Day, and the following is an edited transcript of that conversation.
CNX Resources Corporation and CNX Midstream Partners LP CEO Nicholas DeIuliis
Source: CNX Resources Corporation
You've been going through this split for five years. Did it start with when CONSOL bought Dominion Energy Inc.'s Appalachian gas assets in 2010?
It probably began in earnest, at least with the strategic goal of having two stand-alone, healthy pure-play companies … about 10 years ago. It was really the culmination of a couple of different things. … One was the recognition that the [exploration and production] segment within our company had the potential and opportunity to grow… we looked out into the future and said, "There’s the opportunity to really be standalone and healthy. Now what needs to happen?" So that led to, for example, the acquisition of Dominion’s Appalachian [shale gas] business in 2010, which really took the footprint that we were excited about and just doubled down on it in a big way.
The cultures of gas and coal must be pretty different. What did you keep from the coal heritage at CNX and what did you get rid of?
They were different cultures … there are some similarities, though. The first similarity in the legacies that we take with us from our coal experience is really the emphasis on the values of safety and compliance. … That was just ingrained within the culture of the coal segment and something I think we were fortunate enough to inherit. …
In Appalachia there's also just this general sense of community and that what you're doing for stakeholders beyond the shareholders and beyond what I'll call the employee base. That matters in Appalachia much, much more than it does elsewhere. … That's also one of things that I think we were able to borrow from our coal legacy.
[Exploration and production] is much more dependent upon … aggressive, continuous improvement, whereas on the coal side … you go with what you know historically has worked and you stick to that. … You really had two cultures, and they had to peacefully co-exist.
CNX says its seismic data and computer modeling shows a 300-foot-thick Utica shale layer as the shale moves east from Ohio into central Pennsylvania, but it seems like Chevron Corp. could be competing with you for land. Do you think they've discovered what you've discovered?
I can't speak for Chevron, but in the [exploration and production] business I do know there are no secrets. … With this type of geologically rich basin with all the plant material and dinosaurs that were running around and created all of this years ago … it makes you wonder three years from now, would any of us would be shocked if there is yet another horizon, whether it's the Rogersville [shale in Kentucky], the second horizon of the Utica, or …the Trenton Black River. …
Under these types of disruptive, technology-driven industries … the world is going to look different.
What's the trigger for the midstream buildout in central Pennsylvania?
It's going to take 18 to 24 months to get that in place. … Right now the ownership of all that midstream is within CNX Resources. … [Central Pennsylvania] is all upstream, so midstream is basically the consulting engineers for how we build that solution. They'll be working in concert with the upstream team. … And then over time the two teams will talk about the timing of those drop-downs.
CNX Midstream is entering the energy pipeline sector during a pretty turbulent time for MLPs. Are you frustrated by the disconnect between lagging midstream stock prices and operational performance?
The share price in the end is what investors and ownership get rewarded off of, so it matters. Now over the long haul, if we're doing a good job of doing what we say and executing and articulating that story, that gap between what you think you're worth and what's recognized in the market closes. I will say that when you look at CNX Midstream, it's an entity that's been around for a number of years under a different name, but it is a brand new entity in terms of what we laid out today. You start with what would be the value proposition for CNX Midstream. … Investors did not understand because we didn't tell them what the five-year, 15% distribution growth looks like, how the risk profile is tied to it. … That now has been accomplished as of today. …
When you get to the [incentive distribution rights, or IDRs], the good news is that … we're young when it comes to MLP years, so where we are on our growth trajectory … it's a couple of years to three years behind where our peers in the basin and elsewhere are, so right now IDRs are playing a positive role to motivate the drops to be done in a timely but not rushed fashion. … We've seen, and we're seeing it now, that over time that math changes with the IDRs. It creates a problem, so we are now watching and looking at what are the best practices … and I think over the next 12 months we're going to have a series of moves or decisions from peers all across the MLP space that are going to give us a great data set.
If and when you do eliminate IDRs, do you have any thoughts on converting to a C corporation versus an exchange for common units?
I'm not sold on one or the other avenue, but I do recognize as this thing continues on its growth journey, two years down the road we will have the opportunity to solve it … so that unit holders come out ahead.
At what point do you decide to split your midstream from your upstream?
It's at some point and I don't know when just yet. … If you go back through our history … every time that we had the opportunity to create standalone [companies], [with] truly dedicated management, brilliant things happened. Back in the day when CONSOL Energy went public … performance got better. When CONSOL in 2005… IPO'ed CNX Gas … things got better. After we spun coal and [exploration and production] at the end of last year, I have no doubt that the singular focus of the coal management team is better today than it was in October 2017 before the spin, and the same for the E&P team. I see a trend there developing when it comes to midstream. The sooner we can build a true standalone management team at CNX Midstream … sooner is better than later.
Do you foresee the upstream-midstream split penetrating the Appalachian region in coming years?
I think the likelihood is [midstream companies] will be stand-alones. It's the natural evolution of things. … I think that [sponsor-MLP] relationship works tremendously well in the early decade of growth for these kind of entities.