How CNX Views the Evolving Energy Landscape

By the CNX Management Team

From ongoing efforts to expand the capture and beneficial use of coal mine methane (CMM) to leveraging our engineering innovation, technology, and deep inventory of natural gas assets to revolutionize the CNG and micro-scale LNG industries, CNX is uniquely positioned to capitalize on macro trends emerging across several key sectors of the economy.

We have a somewhat contrarian view versus the common consensus. Sharing our thoughts will provide our owners a clear picture of the long-term CNX value proposition in the rapidly evolving energy landscape.

First, we agree with certain aspects of the common consensus: ​

• Policy and key sectors of the global economy continue to pursue lower CO₂ emissions.
• Policy is mandating an electrification of everything, resulting in unprecedented demand growth for the power grid. The most recent driver of note is the power appetite of data centers fueled by AI technology advancement. ​
• The ability of wind and solar to deliver uninterruptible, reliable, and low-cost energy at scale to feed the growing grid demand is extremely suspect (to be kind).
• Assessing the situation objectively, natural gas should be the clear winner across energy sources to meet higher energy demand at lower CO₂ intensity. The scorecard from the past two decades shows natural gas has delivered both decarbonization and improved grid reliability on a scale that is unprecedented since the advent of the Industrial Revolution.
• The Appalachian basin, specifically the Marcellus and Utica shales, is the premier natural gas deposit on the planet. It is massive, prolific, low cost, close to energy demand centers, and very low in methane intensity.

If the above agreed-upon points comprised the complete analysis and game board, one would rightly conclude that the Appalachian basin is poised to flourish, with energy demand waiting to take on new supply from the basin, and with in-basin pricing being sufficient to warrant additional investment into new supply. In fact, one would have expected these results to have already manifested in current market metrics.

Yet that has not occurred, for years. And we believe it will not occur anytime soon without a shift in the situational assessment of the industry, capital markets, and policy makers.

Why? To boil it down to a singular root cause: ideology and myths driving nonsensical energy policy instead of physics and reality driving sensible policy. The former is what exists currently in developed economies, and it impacts how one assesses the Appalachian basin. And this is where we diverge from the common consensus.

We believe:

• Policy across government (local/state/federal/international) and between an alphabet soup of associated bureaucracies prohibits the smooth allocation of capital into infrastructure necessary to link Appalachian supply to growing grid demand. Endeavors that attempt to navigate the policy roadblocks are met with a coordinated lawfare campaign to strangle them with litigation. The idea of a new pipeline being built to provide Appalachian energy to Boston is logical to the point of ridiculously obvious. But such a pipe will not be allowed to be built in today’s world; it is counter to that ideology that permeates a system from which approval must be secured to proceed. ​
• Supply from the Appalachian basin is experiencing a step-change evolution with the advent of the deep Utica. CNX has pioneered this horizon, and we see it delivering a new level of supply magnitude (higher) and response time (quicker) for the basin. ​
• When a basin establishes higher potential supply levels, delivers quicker supply response times, and is artificially bottled-up due to the inability to invest in logical infrastructure, there will be in-basin price consequences. Unless something creates new demand or take-away, a sustained upside for in-basin pricing will remain elusive. In such an environment, only the low-cost producer with astute capital allocation will create value over the long term.
• The industry looks to LNG export as being the answer. However, to unlock the next wave of Appalachian supply, LNG requires more pipes to move our product from basin to coastal LNG terminals. Even setting aside the infrastructure constraints, a true step-change in LNG export capacity is a nonstarter over the next decade due to policy and legal constraints, the most recent example being the LNG permit ‘pause.'
• With new LNG export in flux, many point to growing grid demand to power AI data centers as the answer. After all, such demand in-basin doesn’t require new long-haul pipes or large-scale LNG facilities. But the tech industry who buys the power to feed the data center economy will demand the power come from something that offers a low/net zero CO₂ footprint. They don’t want just low-cost and reliable power. They demand low-cost, reliable, and low/net zero CO₂ power.

Our holistic analysis of these dynamics creates a different path from the herd. Our path consists of something we didn’t do that everyone else did and something we are doing that no one else is doing.

First, what we didn’t do. It wasn’t that long ago that everyone was touting the wisdom of ‘industrial scale’ and how the strategic imperative was to get bigger in-basin so that a plethora of wonderful synergies would accrue. But when one digests the realities above, a path of in-basin scale doesn’t overcome the fundamental challenges facing supply growth or price, and in many cases only dilutes the per-share value of the acquirer as acquisition prices inflate and promised synergies fail to materialize.

But what did we do instead?

In 2020, we unveiled a differentiated path: our 7-year plan focused on disciplined production and a hyper-focus on growing per-share value rather than absolute scale. We created a free cash flow machine, and it was exactly what circumstances and clinical assessment called for, creating tremendous per-share value for our owners over the long term. ​

But there is something else afoot, something unique to CNX. Something that will not just create per-share value for owners by shrinking the denominator (share count), but that will also create per-share value over the long term by growing the numerator (free cash flow). ​

Current industrial and market dynamics explain the opportunity.

There are key industrial sectors of today’s economy that are growing and have an appetite for energy. They are:

• Hydrogen/Inflation Reduction Act (IRA),
• Aviation/Sustainable Aviation Fuel (SAF),
• Advanced Manufacturing,
• Power Grid/AI Data Centers; and
• Ground/Marine/Heavy Equipment Fleets.

Those looking to provide energy to the above sectors must meet certain criteria. The following ‘boxes’ must be ‘checked’:

• Reliable,
• Uninterruptible,
• Low-cost,
• Short supply chain for both manufacturing of the energy as well as delivery of the energy to the user,
• Ready now, not in 15 years,
• Net zero CO₂, and
• Ability to demonstrate no harm to local/regional ecosystems.

None of the touted energy solutions one reads about check all the boxes. ​

Wind and solar? Disasters with reliability; inherently intermittent; high-cost; extensive, murky supply chains; can’t scale now; egregious life-cycle CO₂ footprints; and devastating to local ecosystems, from DR Congo to Xinjiang.

Nuclear? Recent experience is not promising. Ultra-high cost to build, as evidenced by Vogtle; not ready now and will take potentially decades to build.

Natural gas? Many advantages and boxes checked, but one key shortcoming of not net-zero CO₂.

So, what energy solutions would check all the boxes? CNX offers a few. ​

The first is coal mine methane (CMM). As determined by the US Department of Energy GREET Model, CMM is a carbon-negative product that reduces the methane emissions entering the atmosphere. When CMM is custom blended with shale gas from our Marcellus and deep Utica assets, CNX delivers to customers an energy supply with the exact carbon intensity desired. A CMM blend product has a fraction of the cost of new nuclear and offers scalability, reliability, and supply chain benefits that are clearly superior to wind and solar.

But our solutions are not limited to CMM. The technologies now ready for deployment by our New Technologies group allow us to harness the unique high-pressure geobaric characteristics of the deep Utica to manufacture low-cost, low-carbon intensity ZeroHp CNG^TM and Microscale LNG (mLNG^TM) on-pad. Such a product accesses markets beyond those served by existing natural gas pipelines. When blended with CMM, this product can also meet CO₂ intensity levels desired by the customer.

With these products, we are poised to meet the following growing sectors of energy demand:

• Hydrogen/Inflation Reduction Act (IRA) – Hydrogen production at scale requires enormous amounts of reliable energy. The IRA was adopted to provide economic incentives to encourage the development of those reliable energy sources to fuel this nascent industry. CNX’s CMM blended with our shale gas is ready-now to provide a net-zero CO₂ energy source at scale. This will kickstart hydrogen production across Appalachia. ​ ​
• Aviation/Sustainable Aviation Fuel (SAF) – The creation of SAF to decarbonize aviation has remained elusive as emerging alternatives to existing jet fuels have failed to meet scalability and cost challenges. CNX’s CMM blended with our shale gas provides a net zero CO₂ solution for SAF. Our recently announced efforts with project developer Keystate and the Pittsburgh International Airport (“PIT”) are focused on creating the first SAF plant at scale utilizing a CMM blend on-site at PIT. ​ ​
• Advanced Manufacturing – The re-shoring of American industry coupled with the continued growth in the advanced manufacturing sector creates a robust market for tailored CMM blends and CNG/mLNG energy sources. CNX is partnering with NewLight Technologies to provide CMM as a critical feedstock into their manufacturing process that creates revolutionary, net-zero, biodegradable, plastics-substitute products. Manufacturers looking to decarbonize and de-risk supply chains will follow NewLight’s lead in partnering with CNX.
• Power Grid/AI Data Centers – AI will increase energy demand and Appalachia is uniquely positioned to benefit from this growth due to its proximity to CMM, short supply chains to shale gas, and legacy infrastructure. But the AI economy needs energy solutions at scale, today. Data center developers are logical customers for CNX’s CMM blend and CNG/mLNG, whether they are seeking an on-grid or behind-the-meter solution.
• Ground/Marine/Heavy Equipment Fleets – ZeroHp CNG^TM and mLNG^TM are poised to disrupt markets traditionally served by diesel and gasoline. ZeroHP CNG^TM and/or mLNG^TM produced in conjunction with our partners at NuBlu and sourced from our deep Utica provides a reliable, locally focused, ready now solution for any ground, marine or heavy equipment fleet to improve their emissions and their economics by converting away from heavier hydrocarbons. ​ ​

The opportunity for CNX to deliver solutions to growing energy demand is clear. End markets are just starting to realize the value and benefits of our portfolio of CMM, shale gas, and New Technologies products. We are about to experience a transformation of both Appalachia and CNX.

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