Q3 2019 Earnings Call
This is the conference operator.
Welcome to the Intrepid potash Inc. third quarter 2019 earnings conference call.
All participants are in listen only mode and the province has been recorded.
The presentation, there will be an opportunity to ask questions to join the question Q you May Press Star then one.
If we keep bad should any of this that's that's sort of the conference call. It may sit on an operator, let's say star and zero I would now like to turn the conference over to my question Investor Relations. Please go ahead.
Thanks, Steve Good morning, and welcome everyone.
I remind you that parts of our discussion today will include forward looking statements as defined by the U.S. Securities laws.
These statements are not guarantees of future performance and our base on a number of assumptions, which we believe a reasonable.
These statements are based on the information available to us today, and we assume no obligation to update them.
You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the FCC.
During today's call will refer to certain non-GAAP financial and operational measures reconciliations of these non-GAAP financial measures for the most directly comparable GAAP measures are included in this mornings press release.
<unk> SEC filings and press releases are available on our website Intrepid potash dotcom.
Presenting on the call today or Bob your novice, our co founder Executive Chairman, President and CEO , and Joseph Montoya, Vice President and Chief Accounting Officer, Mark Mcdonald, Vice President of sales and marketing is also available for questions.
I'll now turn the call over to Bob.
Thank you, Matt and good morning to everyone.
We executed well again this quarter delivering double digit sales increases across all of our business segments inclusive of a 54% increase in water sales compared the same quarter one year ago.
For potash and trio segments, we successfully captured summer fill sales as customers look to replenish soil nutrients after delaying purchases in the first half of the year that saw record wet weather and flooding throughout much of the United States.
Overall, we believe we're well positioned to capture opportunities as they arise the diversification of our revenue streams.
Our oilfield solutions business continues to perform well against our expectations with the addition of Intrepid South and our joint marketing agreement with NGL to our operating portfolio, we were able to deliver a 28% increase in water revenue, including byproduct water sales compared to the second quarter of.
This year.
Sales from other revenue streams of colleague she produced water disposal royalty rights of way easements and surface use agreements also increased this quarter, yielding 58% more revenue than they did in the sequential second quarter.
Further the area in which we operate the northern Delaware Basin remained strong despite the pullback in frac activity elsewhere in the Permian Basin.
As we look at the business today, we're confident in our ability to continue to deliver study volumes in Q4 based on plan completions in the area.
We currently expect water sales to be between 25 million and 28 million for 2019.
We've accelerated our capital investments and expenses incurred by third parties in and around our south facility as we work to optimize our infrastructure and mobility around the property and establish long term relationships with our operators.
Through these investments thus far we believe weve increased our available marketable water by approximately 25% since the date of the Dinwiddie acquisition.
The added operational upside from these investments underscore the value of the South acquisition as it is providing to be valuable to the development of the business. In addition to giving us access to two opportunities in the region that can paved the way for future growth.
As we move towards 2020 early talks with larger operators suggests strong demand for water not only on our south ranch, but also from our cap rock and I guess water sources as total basin infrastructure is improving despite longer permitting times in new Mexico.
As a result, we're setting our initial guidance for 2020 water sales between 32 million and 45 million.
Looking at our margins for this business, we're not immune to the developments in the Frac environment and the greater Delaware Basin, where in response to overall pressure on the industry to operate within cash flow, particularly for mid and smaller operators oil and gas companies are pulling back on frac activity as they choose.
To operate within published budgets for 2019.
This is pressured water pricing across the Delaware basin in the short term.
Likewise, as we optimize our pipeline infrastructure, we will not need to continue to rely on third parties to transfer water from our ponds to end users. This expense weighted weighed heavily on our oilfield solution margins.
During the.
During the third quarter.
As we move into 2020, there's room for future growth has midsized and larger operators in the area begin to execute on new 2020 budgets and as overall based infrastructure, including our own comes online in the first half of the year.
For our potash and trio businesses higher year over year pricing and volumes benefit it benefited both segments, starting the third quarter.
In addition for both potash and trio, we saw solid improvement in byproduct sales, which were up 1.4 million or 28% compared with a third quarter of last year, demonstrating the strength resilience and diversity of our revenue streams.
Subsequent to the.
Summer fill programs for potash and trio respectively.
List prices are currently posted at levels above the summer fill values. However, the late harvest in a delay in the 2019 2020 annual supply contracts for India, and China continued as pressure pricing domestically and abroad and sales are currently transaction transacting at the lower.
<unk> summer fill rates.
This environment will prevail into the fourth quarter, and we will continue to be selective in the markets. We sell into as we see multiple tailwinds heading into 2020 that may allow the market to quickly rebound.
We believe North American fall applications, South American planting progress the conclusion of supply contract negotiations and the previously announced production curtailment of roughly 3 million tons will have a positive effect on north American and global inventory positions and lead to a good spring season.
Before wrapping up I'd like to step back and consolidate some commentary we've had over the past few quarters and hopefully go back clear sense of our capital strategy moving forward.
Over the last six months, we've been opportunistically, adding to our asset portfolio acquiring intrepid south.
Entering into a joint marketing agreement with NGL to salt water across our combined three ranch footprint and completing the joint purchase of land with NGL for the development of produced water.
For a produced water disposal facility as well as entering the recycled water business.
Uninterested south we're adding complimentary pipeline infrastructure and have already added the necessary experienced staff.
Notably we made these moves predominantly using cash on hand with manageable additions to our overall borrowings.
Through these acquisitions and a continued focus on topline growth we've strengthened our position in the Delaware basin added to our water delivery capacity and further diversified our revenue streams.
Our focus now turns to execution as we integrate these new assets and relationships to do this we've said that we expect to spend between 7 million and 10 million to expand the infrastructure on south while also working to double the amount of permitted water from existing south water rights.
We also expect to spend about five to 7 million in the next year to build a produced water facility with NGL near Intrepid South.
We think these are the type of lower cost low risk capital investments that makes sense for us over the next 12 months when complete these assets should start to generate cash flow immediately through additional revenue.
We believe that we're in a good position to make these investments with $38 million in cash from operating activities year to date 13 million in cash on hand, and more reasonable rates on our senior notes that allow us greater flexibility to deploy cash.
What's more these results do not reflect the full annual upside from the assets. We've added this year, which we believe will add meaningfully to our future results as we invest in optimizing the output and delivery of our saleable assets at those process properties.
Having put in a great deal of work over the last several years to strengthen our balance sheet. Our intent is to maintain this healthy position long term to do so we will be cognizant of our sustaining capital needs for our potash and trio and all fill solutions facilities as well as the investment needs to optimize our new and legacy.
Assets.
Similarly, we acknowledge the price and demand pressures that impact our commoditized products will keep us ever diligent at maintaining our strong balance sheet position.
After considering these capital investment needs there could be room to invest in growth through smaller acquisitions or partnerships as we plan to remain opportunistic and take advantage of value opportunities when available and highly synergistic.
Overall, we believe we're comfortable leverage position today, we look forward to executing on our vision, while navigating the inevitable ebbs and flows of the larger fertilizer and oil and gas industries simply said, we will conserve our balance sheet and are ready to make hay when the sun shines.
Lastly, I want to take a moment. Thank Joseph for his service to Intrepid as we announced previously Joseph Montoya will be leaving and trumpet shortly to pursue another opportunity with his departure, Matt Preston has been appointed to our Vice President Finance and will assume the principal accounting and financial roles, Matt has been within trop It for us.
Over 11 years and has been an integral part of our finance and Investor relations operations ever sense Congratulations to Matt.
Ill now turn the call over to Joseph Who'll discuss our financial results and our outlook.
Thank you, Bob and I'd like to add my congratulations to Matt and thank you everyone for joining.
During the third quarter, we delivered a 24% increase in sales driven by higher realized prices higher volumes and increased sales of water and byproducts.
Net loss for the quarter was $200000 as margins contracted driven by below average evaporation across our facilities, which increased per ton production costs.
Increased costs associated with delivering water and the lower cluster market adjustment related to trio as we chose to lock in an international shipment for the fourth quarter.
Our potash segment generated $4.6 million in gross margin during the quarter down 35% compared to the prior year. This was the result of several factors, including sales mix changes.
Higher production cost related to a wet evaporation season, and reduced magnesium chloride production and sales as a result of August screens at her wendover facility.
Potash sales volumes were up during the quarter. Following a successful summer fill program has agricultural customers expressed interest in replenishing soil nutrients after the wet spring.
Offset by lower industrial sales.
As Bob mentioned, we expect fourth quarter potash prices will remain similar to the third quarter.
Our solar solution mines began production in August and early September is planned although we anticipate production will be lower this year as a result of the significantly wetter and cooler weather during the 2019 Eve apps season.
As a result of the lower production, we will push some sales from the fourth quarter of 29 team into the first half of 2020 as potash demand strengthens in the key spring selling season.
For the trio segment sales increased 35%, primarily due to increased pricing and the strong subscription to the summer fill program after the wet spring.
In addition, byproduct water sales increased 8.7 million during the quarter.
The trio segment generated a gross deficit of $1.1 million, primarily as a result, I mean $1.5 million lower of cost or marketed adjustment on product, we expect to ship internationally in the fourth quarter, both directly to customers and to Recharger distributors warehouse.
We decided to move these times earlier than we had other ways planned to avoid increasing ocean freight rates and to secure more direct customer shipments therefore for going costs associated with warehousing product with a distributor.
With this shipment we don't expect to export as many times in 2020, instead, focusing our energy on the higher netback domestic market.
In early October we matched our competitors fall fill pricing announcement for langbeinite for delivery through the end to 2019.
This program set the price for fourth quarter deliveries at the summer fill price levels with a $20 per ton increase in effect for times over that after the fill window.
Oil field solutions delivered a good quarter with $3.5 million in gross margin driven by increased water sales as other as well as other sales of clean energy produced water disposal royalties and rights of way or damages revenue associated with in trip itself.
As we've discussed before the oil and gas activity and the resulting demand for water on the intrepid south property outgrew the existing infrastructure.
We are actively and aggressively working to add more permanently infrastructure to meet this demand.
Its infrastructure will improve our operating efficiency and should reduce our third party water transportation cost when placed in service over the next few quarters as we continue to shift more of this work back to our own resources.
Turning to liquidity, we ended the quarter with $13 million of cash and $54 million available to borrow under the new $75 million cash flow revolver as we discussed last quarter.
Year to date cash provided by operations was $38 million cash spent on investing activities was 77 million primarily due to the intrepid South acquisition, we expect or Capex, excluding acquisitions for 2019 to be 25 to 30 million, which includes opportunity capital investment related to.
Our newly acquired assets.
That concludes our prepared remarks, operator, we're ready to take questions.
We will now begin the question and not to session to join the question Q You May Press Star then one identify keypad.
Our town acknowledging your request.
We're using speakerphone. Please pick up you had said before pricing any Keith.
During the question. Please press Star then too.
Well pause for a moment as Paul is trying to Q.
The first question comes from Joe Tashan with BMO capital markets.
Hi.
On for Joe Jackson, Thanks for taking my question. So in oilfield solutions you alluded to it in your prepared remarks, but margins are community pressured in the quarter on higher third party delivery costs.
Can you quantify the exact margin impact in the quarter and how do you expect these trends.
Plant and 2020 .
Well as we tried to make clear and are in our remarks by building out the infrastructure, we won't have the need for third party transfer costs anywhere near to the degree.
Those costs can be anywhere from 10 cents to.
60 cents, depending upon which operator and how far you are trying to go with that without specific sale.
And so as we.
Put together the three ranch's the two branches of Ngls in ours and entered into a multiyear contract within an operator down there.
We had to bring on a third party water transfer service to help us meet that first a first piece of that long distance water Hall I can't give you an exact number but Matt can get back to with that exact transfer cost up for that but the good news is that that's a multiyear relationship.
Yes.
And so it was worth the initial upfront investment to use a third party water transfer as we've built out our own infrastructure to be able to capture higher margins in the second and third years, if that water contract.
Okay. Thanks, and then just switching to potash quickly.
Spoken about higher potash inventories and I spoke about.
And your prepared remarks, but what do you currently seeing and how do you expect that players through the year ended and 2020 . Thanks.
I'm, sorry, I'm not sure understood. Your question are you talking about our potash inventory, you're talking about global potash inventory or how we see the global potash market exactly yeah.
Well I think now that we have India behind us as you know the fall of 18 was was less than optimum. This spring of 19 was a.
Was terrible in terms of of applications. So if you look at the just the simple mathematics of the soil nutrients required and the production capacity that's been taken offline I think there's approximately 3.3 million tons offline.
Supply and demand should be much closer being back in balance and given some of the remarks that we've heard from our competitors.
They intend to.
To strive for higher pricing and so as a price taker we.
We intend to watch and see what happens in the market, but I think there's there's good tailwinds and if you're to look at a variety of crops globally.
As you know we've been in a secular bear market for quite awhile and there are several crops trying to a pop their heads up and in come out of that secular bear so we'll see.
Thank you.
The next question comes from Mark Connelly with Stephens, Inc.
Good morning.
Right.
Question.
Hi.
I'm just wondering.
Hello.
The wendover weather impact is going to roll.
Oh.
Okay.
Hey, John this is Matt.
You can see the results in Q3, just just on the in its aggregation of revenue table. When it relates just the Matt chloride production and sales we were able to achieve in the quarter.
And lot of it will just depend on evaporation starting in the spring of 2020.
They were certainly be down here for for Q3 in Q4, just due to tons available for sale.
Okay.
And then.
Full year trio.
I'm just wondering if your decision on the international Trialed cells.
Is it a decision to stop trying to expand like trio overseas over the long.
Sort of like a one time Jeff.
Well as we've described many times before we've done a great job of expanding our domestic footprint.
And our Netbacks domestically are significantly higher so I'm not going to say, we're we're giving up on it but as you know there's going to be an increase in 'em freight rates starting January 1st do a different fuel requirements. So we were able to get a good fuel right to restock, our port Klein warehouse.
And given that sort of the present value calculations that we went through to ship. It now versus ship. It later at a higher fuel cost. It made more sense to go ahead restock that inventory. So that we would have plenty of product for for southeast Asia, and and our Chinese customers.
I don't say were abandoning the market.
Internationally, but it's a it's got extremely competitive and we have found better ways to to capture higher netbacks and so.
I will leave some of those lower netback sales to others.
Okay got it and then.
Obviously everybody.
No that you sell quite a bit in California, just wondering if the buyers that are happening.
Now in California would have any meaningful impact.
And or potentially even.
Even.
Yeah. Thank you.
John This is mark.
Just a quick simple answer no.
Thank you guys.
Once again, if you have a question. Please press Star then one.
The next question comes from Josh Spector with you've yes.
Hey, guys first congrats Matt on the new World.
And for the question. So you talked about pressure on water pricing in the quarter I was curious if he can give kind of the magnitude of how large that was there a percentage wise how big that lies and in your opinion, what leads that to turn to improve or do you assume that pressure to continue.
Is on into the guidance that you gave into 2020.
There's so many factors at work, let me to take a stab at naming just maybe four or five at the different factors.
There's a fair amount of water that has begun to come across from Texas.
And new Mexico is has decided that it's going to attempt to regulate that water and so whether or not that water continues to come across from the state of Texas There've been several Supreme court rulings on whether or not that water needs to be permitted in the same fashion that are our water is permitted given that new Mexico doesn't appropriation state.
Texas is a rule of capture state. So that's one factor that will have an impact on it.
The second factor.
Is.
There have been a couple of people that tried their entry into the water business and recycling business and if you look at recycling as a stand alone without produced water. That's why we're so focused on being on the produced water. We had some new entrants into the water and recycling business.
Recycling by itself unless you're doing it on a fee based.
Basis is not commercial and so.
We saw people come and go.
Theres several other factors that have to do with.
Water availability excess water that was available due to reduced frac schedules. So there were certain.
Parties that had some excess water that chose to fire sales some of their water.
Because some of the smaller to mid sized companies that are equity back beef <unk> equity back to NP companies.
Chose not to execute on their budgets. So there were a variety of factors that influence pricing.
To give you an order of magnitude in some cases up to the north it was a nickel the seven cents I'm down to the south near the border. It was anywhere from 35 to 40 cents. So.
The water is dynamic and entering depending upon where your infrastructure is located in your water resources are located within the northern Delaware. So hope that just gives you a feel for not only the complexity, but the moving parts.
That impact the price.
Yeah, I mean, that's definitely helpful definitely more complicated picture.
All right around that so appreciate the color on and just on.
The capex side of things and that's helpful. You gave the number for 2019, you talked about a number of investments what do you consider kind of the ongoing capex numbers that you to look after the next couple of years to help maintain your growth then asked in the business.
[noise], you're talking about sustaining or opportunity capital.
I guess, both I mean, if you could give us sustaining number and then I mean, there's a number of projects that you know you need to spend or you are spending onto achieve your water guidance for 2020 curious what that number is and just.
Maybe to the range between what sustaining and maybe some ongoing modest growth would be on top of that.
Well to be clear a majority of that capital Capex on the water side is on the produced water side.
As we grow our produced water business, which has a much longer tail on it and those are investments that we're making alongside NGL in our produced water side of the business. So theres very little capital directed towards the what we call the source water into the business or the first part of the water business that infrastructure as.
Largely in and been paid for so the great part about spending money on the produced water side is that you have a ready market.
So it generates it generates revenue literally from day one.
On the sustaining side our goal is to keep it in the $15 million to $18 million range.
And then be very conservative just watch what's happening in the markets.
There are a couple of small acquisitions that are highly synergistic and bolt on to what we're doing that if we pursue we would pursue with NGL.
So.
We're very cognizant of our potential capital budget, and we said that in our prepared remarks and I hope this enough information to answer your question.
Yeah. That's helpful. Thank you.
No.
Once again, if you have a question. Please press Star then one.
The next question comes from Jason Ursaner with bump issued holdings.
[noise] morning.
The third party logistics that weighed on.
Or is the.
Okay. Thank the infrastructure investments is that already in kind of the Matthew profitable slide deck on the water.
Ancillary that additional.
Additional work to what we've seen.
Yeah, I would say very little.
As you know we acquired the ranch in May.
We had some immediate we were able to take on one immediate three year contract.
And that company was farther north up on the Mccloy ranch or the NGL.
North ranch and so in order to get water up to them in the first year.
We had to use a third party transfer service to get water up to them.
We're building our own infrastructure right behind it most of which has been built that will allow us to service that customer over the next couple of years.
So we felt like it was it was definitely worth the reduction in margin to capture a three year contract. So the next two years should be.
Highly profitable as it relates to that specific operator.
Okay and was that one contract the bulk.
Of the.
The third party transfer there was also kind of a bunch of all the smaller ones as well as we talked about in prior calls I'm going from what we call the back into the go to keep it going from the NGL South branch to the Dinwiddie Ranch, which is called the Intrepid South ranch.
That was previously serviced with years old lay flat pipe.
That we needed to to get that transfer up and running if we built our own pipe. So as we brought in the third party transfer company to use news sufficient pipe to make to transfer the multi mile transfer from one pit to another pet and service to the contracts on the west side of the.
The facility, we did that and at the same time, we're building our own infrastructure right behind it.
Okay, and the the 32 to 45 million dollar.
Lumber.
Just for water sales or that the entire.
Services segment, that's just nesting some bar that that's just water. That's our conservative first look at what we think we can do in 2020.
And just given that Frac scheduled in completions are.
I realize that the northern Delaware, there are less challenge and maybe some other areas, but just given that they are.
At least at a high level from what people read the news or our challenge, what's causing that big increase I guess is just the intrepid south combined together.
Or is there other specific customers that are causing that increase.
Well, there's several things that we think will increase that first and foremost is the addition of intrepid south and how we're going to manage and trumpets out on the second part are the pipelines that weve laid from our Caprock watered down to our pegas water to supplement those sales.
The completion of the select Gerra pipelines and the Gerra Frac ponds, one two and three that are all complete so as we put out our water presentation.
It's the completion of that overall infrastructure within they you know the northern Delaware that we sit in that has now finally complete along with a.
Produced water infrastructure, that's largely complete saw that companies like X T. O can hit the go button on some of their drill drilling plans.
We've tried to focus on the larger midsize companies and the major oil companies that have given us frac schedules, whose suggests that they would drill through a lower priced energy cycle.
Now if every mom and pop chooses to drill in frac through whatever cycle, we may have than than we can do better and so but we wanted to give a.
Very realistic achievable range.
Based on the completion of the overall infrastructure you overall infrastructure. So you've got to look at not only as as a as a major operator goes out and increases there Frac crew count.
They've got to also have the salt water disposal infrastructure in place to take care of that produced water. So as we look at the various consolidations that have occurred the infrastructure. That's been built out to handle produced water the infrastructure to handle freshwater the takeaway capacity for oil and natural gas.
Yes in new Mexico is trying to implement no flaring rules, so theres more natural gas piping going in so when we look at takeaway capacity in the reduction in the basis differential there's just a whole variety of things that would lead us to believe that large size.
Or the larger midsize independence and the majors.
Well, we will execute on the budgets and the forecast that they've given us.
Okay, Great and just last one for me.
Any I.
I guess the rig counts in new Mexico seemed like there kind of staying very steady relative to some of the other.
Yeah, I guess just overall.
Maybe some of your take on the northern Delaware, specifically compared to maybe just general news about leveraging fracking and what's going on with lateral lengths there.
Just.
There has been well in northern Delaware.
The northern Delaware continues to be the.
The bright spot in United States oil and gas exploration without a doubt some of the biggest wells completed and producing in the United States are in the northern Delaware. So if we look at reduced rig counts throughout the rest of the United States Lea and Eddy County continue to stay strong now the frac the Frac counts.
The Frac crew counts have gone down a touch and so.
That we have to pay attention to the Frac crew availability has you know the number of DOCSIS increased in our backyard. So as we watch.
The rig count and Lea and Eddy County, we watch the.
Ever increasing docs.
We we pay attention to it but as you pointed out Jason very well.
Those are moving targets so to give an exact example, as to what's going to happen in 2020, there's a fair amount of variability, but the great news is in the northern Delaware as the primary operators are X T O slash axon.
Oh Gee.
Chevron Occidental Devon.
So some of the larger mid size oil companies as well as the majors. So those are the guys that we would like to have drilling in our backyard.
Okay.
Great that's a great. Thank you.
This concludes the question and answer session I'd like to turn the conference back over to Bob to novice for any closing remarks.
I just want to thank everyone for their interest in Intrepid and if you have any questions or comments or concerns always feel free to call map Preston and we look forward to talk to you in the future. Thank you again.
This concludes today's conference call.
You may disconnect. Your lines. Thank you participating and have a pleasant day.