Q1 2020 Earnings Call
Thank you for standing by does the conference operator.
Welcome to the Intrepid potash first quarter Twentytwenty <unk> results conference call.
As a reminder, all parties it comes out in listen only mode and the conference is being recorded.
Sure you need assistance during the conference call you May see garden, operator by pressing star and theater.
I would now like to turn the conference over to my Preston Vice President of Frighten US. Please go ahead Sir.
Thanks Claudia.
Good morning, everyone. Thanks for joining US you discussed Intrepids first quarter 2020 results.
With me on the call today's and tried this co founder executive Chairman, President and CEO Bob journalists.
As we announced yesterday in our Q1 press release due to the stay at home restrictions so in effect for Denver County.
Will not be able to hold a question and answer session during today's call.
We have scheduled another call for Monday May 11 to 12 PM eastern time to respond to investor questions.
We will accept email questions before the call and then hold alive question and answer session on Monday to answer both email and live questions.
Please see yesterday's press release for more information.
Please be advised that are remarks today include forward looking statements as defined by U.S. Securities laws. These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.
These statements are based on the information available to us today, and we assume no obligation to update them.
These risks risks and uncertainties are described in our periodic reports filed with the Securities and Exchange Commission, which are incorporated here by reference.
During today's call will refer to certain non-GAAP financial and operational measures reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's press release, our SEC filings and press releases are available on our web site at Intrepid potash dotcom.
I'll now turn the call over to Bob.
Thank you Matt good morning to everyone before I get started on my review of the business I want to take a moment to address the current environment and how intrepid is addressing the challenges presented by the covered 19 pandemic flu.
First and foremost our thoughts go out to those directly impacted by the virus, particularly those who are sick or on the front lines treating patients. That's why does that was continuing to work and essential services to ensure the well being of our communities. We acknowledge the many challenges the United States and the world spaces.
In light of this pandemic and that's an essential service provider, we endeavor to be a part of the solution as the world navigates through this unprecedented disruption.
As a pandemic has unfolded our focus has been on managing the restaurant called at night chain and ensuring that we're taking the necessary steps to protect our employees to support the community and manage through this challenging period.
In early March we took decisive action to safeguard our employees contractors and visitors essential to our operations.
Our support staff, we close quickly established work at home policies across all locations, we implemented social distancing measures at our mine sites supported by staggered staffing schedules and appropriate hygiene measures and cleaning protocols in accordance with the center for disease control prevent.
Sure.
We continue to provide all of our employees with the resources to support their wellbeing.
In addition, we have looked for ways to support the local communities in which we operate.
In in March we donated our stockpile personal protective gear to the local hospital NOLAD, Utah.
Secondly, I want to explain the format of the conference call.
To allow for a complete and robust discussion we have changed the format of our question and answer session for this call.
Moving it to Monday allows our team to more effectively answer both your email and live questions, while still complying with Denver's extended stay at home or.
I hope to change will not be too much of an inconvenience for our investors.
Please refer to our press release and Mats final comments for more detailed information.
Further because our new trend in oilfield solution businesses are characterized as essential by the state governments of new Mexico, and Utah. We have continued to operate in those states through this unusual time.
We take seriously our role as an essential supplier to the agricultural.
Animal feed and oil and gas industries, and our focus is steadfastly on supporting the efforts to ensure adequate food supply through the production of essential crop nutrients.
As we manage through this period and uncertainty our diversified revenue streams business model strengthened balance sheet, our to our benefit we will survive this pandemic.
First is very nature of our solar solution mining does not require the same level of staffing and maintenance as traditional room and pillar mining, particularly now as we exit our annual potash harvest season.
Our solar solution mines transition to the summer evaporation season in early April which naturally lowers the overall cash cost to operate these mines for the next several months likewise, an important aspect of our oil field solutions business has been the minimal head count in fixed costs it requires to operate.
As a result oilfield solutions is uniquely positioned to weather the sudden change in demand brought on by this pandemic and recover quickly once demand re materializes, we've taken steps to ensure our workforce remains intact trained and ready for this recovery.
Second we have invested appropriately in our potash and trio assets such that we have the flexibility to temporary pulled back on our capital program without sacrificing safety standards or production.
Like most other companies. We also continue to focus on cost reductions across the organization.
And lastly over the last several years, our commitment to driving greater balance sheet health and lowering our overall leverage profile as well as the very nature of our lenders transitioning from large insurance companies to banks, such as bank of Montreal, which left us with a relatively healthy.
Debt to EBITDA ratio of 1.6 at the end of this quarter, which slaves appropriate availability under our credit facility.
This combined with the cash position, we have established through recent cash preservation efforts puts us in a more stable position and many other small and micro cap companies looking to manage through this pandemic.
I want to take a minute to tank.
Bank of Montreal.
For their strength of guidance and reliability as a lending park.
Intrepid continues to closely monitor on a daily basis called the 19 disease progression testing trials therapeutics.
It is impossible to predict how or when the world economy will recover we encouraged by the global support and goodwill we had seen as the world looks to eradicate the impacts of called the Nike.
Our came together, we look forward to sing the United States and the world emerge from this pandemic stronger than before.
Turning to our results.
First we encourage our listeners to please read Intrepids 10-Q, which will be issued later today for more detailed discussion, especially in the M&A section to provide a more complete and robust understanding of the many issues.
Further we delivered double digit year over year sales growth and strong cash generation in the first quarter as we capitalized upon market opportunities presented by good weather across each of our key regions during the quarter strong execution drove potash and trio volumes up 13 30.
6%, respectively, while water sales were a record $8.5 million. This in turn drove better than expected cash generation, which position us to repay and retire our series I know it's in April.
Immediately after this pay down we had $26 million in cash on hand, 44 million of borrowing capacity and the total borrowing of $60 million split evenly between our senior notes and our credit facility.
As a result, we now have a stronger balance sheet Saba liquidity and a long runway until our next required debt repayments in 2023.
All factors that put us an acceptable position as we navigate the current economic downturn.
During the first quarter or oil field solutions business delivered double digit revenue growth and margin expansion as completion activity increased significantly under new 2020 budgets.
Water sales in the quarter were a record $8.5 million, resulting from strong demand and higher volumes of water to sell owing to our acquisition of in trap itself.
This strong performance is a testament to the value of our diversified revenue streams and the strategic moves we've made to not only expand our water rights, but also improved our water transport infrastructure, allowing more dollars from the increased water sales to fall to the bottom line.
In fact, our February South branch water book was Oversold had good solid margins and we had significant increases in total water demand as produces producers operated under their 2020 budgets.
Let's not forget that in January and February Intrepid made incredible progress in execution of its growth and diversification as our February water book reflect.
We also made progress in diversifying water resources at Intrepid south by utilizing intrepid water don't levered through the select Jira pipeline serve customers on the north end of the Intrepid himself ranch since then demand and oil commodity price destruction as a result, as a cobot 19.
Endemic has resulted in the postponement of completions and we expect a significant decrease water demand.
We're still in discussions with operators regarding completion schedules and are working to maintain our margins on the south ranch despite decreased demand.
As intrepid looks to the future and continues its growth and diversification into oil field solutions, we believe our timing could not be better intrepid faces. This challenging time with confidence and is uniquely positioned to take advantage of the generational opportunities. These challenges will provide in a market that has been.
Acted by the Cobot 19 related loss of oil demand.
Rig count in the entire Permian Basin has dropped from 403 rigs on January 1st 2020.
The 219 rigs as of May 1st 2020 in completions are expected to drop significantly during this crisis with completion crews Rd being dropped from 134 to 39 over the same time.
That said in both rig count in completions the decline in the Delaware Basin is expected to be less pronounced then other oil and gas regions that are currently an estimated 2050 drilled but uncompleted wells or ducs in the Delaware basin up to now DUC count ups.
Year to be relatively steady as rigs in completion crews bounce.
Oil commodity price destruction has resulted in the postponement or rescheduling of completions.
At the beginning of the year.
Intrepids waterborne was sold out at solid per barrel margins at current commodity prices and due to volatility in projections, our forecasts volumes will be affected negatively the degree to which remains to be saying.
Although these reductions in demand are painful there are much less severe than in other oil and gas basins. The Delaware basin in southeast New Mexico is highly perspective and cost efficient for oil and gas producers.
We believe that the resiliency of the basin.
Coupled with the high quality of oil and gas operators will shield intrepid from some of the more drastic effects of the oil and gas turned out.
Indeed, it is a testament to the quality of the basin that some completions are still schedule.
Now the where one year out since the acquisition of the Dinwiddie rants, let's look at some of the results.
A year ago Intrepid purchase the Dinwiddie ranch in southeast, New Mexico, which included 60119 gross acres of land of which.
22154 of those acres for fee and 37965, well about state and BLM.
And associated property rights Ranch has sent but since then we titled Intrepid South branch.
Around the same time intrepid purchased a 50% undivided interest in the Ross track, which is 640 acres just across the border in Texas.
Intrepid purchase the Dinwiddie ranch for $51 million, which was later adjusted for a $1.6 million purchase price reduction or a net 51.4 million dollar purchase price equivalent to $2320 per acre.
Put it in the ranch were 1111 acre feet of immediate commercial water rights, but a significant additional rights in the process.
Permit there are also a significant deposits of sand galici and other valuable renter revenue generating items, all of which are essential to the oil and gas industry.
Intrepid also purchased an undivided 50% interest in the Ross track for 50 for $3 million, which NGL is our partner.
A year ago, we believe the acquisition or the ranches would be highly accretive to intrepids legacy operations and large water rights in southeast New Mexico and that has decidedly proven to be the case.
Over the past year Intrepid has moved quickly to integrate the ranch's into its new Mexico operations that integration, coupled with onetime legal and transaction fees represented significant but nonrecurring expenses and skewed one year profitability. During the first 12 months the ranches generated approximately.
$16.6 million revenue and other income as well as an additional 1.6 million in cash from the purchase price adjustment.
Net income from the first year of operation was just over $10 million because of the synergies with legacy operations in southeast New Mexico, Intrepid has been able to redeploy its existing labor force from fertilizer operations without hiring additional employees for the ranch is the shared labor costs.
And other nonrecurring expenses, such as legal cost permit additional wells totaled nearly 2 million over the past 12 months.
In the first quarter, we made a highly in March or the first quarter. We made a highly restricted sale of 320 of the ranch's 22154 fee acres to one of our operators to $4.8 million the equivalent of $15000 per acre.
While reserving many of our economic and access rights to the acreage with specific emphasis on retaining the water rights.
In the last year Intrepid has invested in revenue generating projects that include construction of water pits pipelines roads source water trucking stations brine trucking stations and water disposal facilities on the Intrepid South ranch, which are now paid for and completed and Stan.
Ready to generate revenue.
We've also recently partnered with an operator to treat hydrogen sulfide through an acid gas injection wells system and participated in our first produced water recycling and blending job.
Myriad other midstream opportunities I present, including oil and gas storage gathering processing and treating sand glitchy sales and expansion of intrepid core minerals sales magnesium chloride potassium chloride and sodium chloride into the Delaware basin oilfields and tribe.
Its initial investment in the ranches and subsequent investments have built can support a significant midstream book of business with high quality producer operators, including Concho LNG, Meredith Caprock, Matador Marathon, Devon, Apache Caza or.
Alex and others.
Our area of mutual interest with NGL has brought an experienced operator to manage the produced water side of the business uninterrupted south.
Through this say a mine we have drilled our first produced water well and installed the related pipeline on the Ross track to provide produced water disposal to oil and gas operators under long long term tenure contracts.
Our original business case for the purchase of the Intrepid South ranch is even more appropriate and more valid than that are significant investments in the ranch have been made onetime legal and permitting costs have been spent and today. The ranch has been strong foundation to perform.
The acquisition is providing significant revenue from high margin fee based services provided with strong partners to quality producers and operators. Despite recent uncertainty turning to covert 19 pandemic.
There is more room to grow.
The successful acquisition has delivered on its promise and sets intrepid up to be a major player in the oil and gas midstream in the premier oil and gas basin in the United States.
It is also encouraging that isn't traffic continues its growth and diversification with it well field solutions that are finds unique and different business opportunities, depending upon which talking heads you listen to the newspapers you read or the analysts you follow all believed the northern Delaware Basin will see this.
First signs of returned of activity.
[noise] recently during this commodity downturn, we have been contacted by producers and operators to expand our existing midstream services producers looking to reduce overhead at contacted in tropic to utilize it significantly highly trained employee base, it's equipment and resource capabilities.
To provide required essential services on a fee based system.
Intrepid continues to screen these opportunities to provide just stressed oil operators with required fee based services and to work with the debt and equity private providers that support these management teams and asset bases. We believed that the unique opportunities present in this current market downturn our general.
Additional and transformative to well managed companies and forward looking such as in traffic.
Our nutrients businesses, we delivered strong volumes in the first quarter as mild weather accelerated the springs application season.
We estimate spring application to be two to three weeks earlier this year than in weeks past, which likely shifted sales into the first quarter compared the prior year.
For potash margins were pressured in the quarter driven by lower pricing as the industry work to the high inventory levels of our competitors at the start of 2020, we had good reception to our winter fill program, particularly from agricultural customers looking to take advantage of the lower prices and the goodwill.
Either.
This as well as lower sales to industrial customers pressured pricing and margins. We saw early acceptance of higher pricing after winter fill programs in certain regions, but we expect that market disruption due to depend and will likely hold average pricing for the first quarter levels.
In the near term.
We continue to see solid agricultural demand and expect industrial sales to be slightly pressure to the balance of the year.
For trio, we saw solid demand both domestically and abroad during the first quarter.
Similar to potash, we expect pandemic related uncertainty is likely to constrain pricing, but the second quarter.
Internationally, we grew trio sales volumes by 48% in the first quarter focusing on higher margin markets. While domestic subscription was also robust due to higher agricultural demand, resulting from the warm weather.
Byproduct sales were down in the quarter as a result of constraint constrained supply of magnesium chloride. After a wet 2019 in our window that facility and increased competition for salt.
Overall, we believe we have executed well and are well underway to resolving.
Much.
And ending old legacy litigation, which has taken a valuable management time, and drain financial resources, which paves the way to strategic growth and future prosperity. We.
We executed well and put it intrepid in a much stronger position at the right time as we entered this period of considerable uncertainty. These strong results combined with strategic moves we've made to diversify our revenue streams to strengthen our balance sheet put us in a position to be part of the covered 19 solution.
As we continued to provide essential services to our food producers.
Looking forward to the balance of 2020, we have worked to resolve long outstanding issues that have detracted from our growth momentum and work to clear the path to take advantage of the excess exceptional opportunities in the oil and gas and fertilizer markets Intrepid is highly optimistic and realistically focus.
On the potential opportunities presented by the challenges we face inspite of the tragic nature of this pandemic and now I'll turn the call over them out for a review of the financial results.
Thank you Bob.
Well that go Bob's comments regarding those impacted by coven 19, and add my thanks to those on the front lines.
First quarter sales were up 11% driven by record water sales and strong volumes in our nutrients business.
For potash gross margins were down 54% is higher volumes were offset by lower pricing higher cost of goods sold.
And a decline in byproduct sales.
Average net realized sales price for potash was $255 in the quarter down 11% year over year due to lower winter fill pricing and a shift in mix away from industrial sales towards a higher proportion of agricultural sales.
During the quarter potash gross margins were unfavorably impacted by higher per ton production costs, resulting from the below average evaporation here in 2019.
[noise] Hills decline year over year as increased market availability of salt and limited supply of magnesium chloride pressured volumes in the quarter.
As a reminder, wet weather at our Wendover facility in 2019 limited the amount of product harvested and available for sale as we enter Twentytwenty, we expect to return to normal magnesium chloride production and sales towards the end of the second quarter.
During the quarter, we lowered our salt production at our megawatt facility, which increased the number of days dedicated to potash production as a result, potash production was up 25% year over year.
[noise] for trio sales volumes were up both domestically and abroad, the lower pricing in higher costs due to increased sales of premium trio, our highest cost product pressured margins.
We saw success in selling into higher price international markets, though because international sales tend to carry lower margins. The net effect lower gross margins in the quarter when compared with the previous year.
Oilfield solutions segment performed well in the quarter with a 17% increase in sales as a result of record first quarter water sales. This was offset by a $1.8 million decline in sales of potash in our high speed mixing service.
During the quarter, we sold 320 acres a fee lannett intrepid south for $4.8 million with the buyers subject to numerous restrictions yielding a gain of on this sale a $4.7 million.
In the sale, we retained all water rights surface access to the property and limited use of Khalis you found on the property to only development on the subject land in order to prevent any decrease to our other colucci sales.
Given the strategic location of our Intrepid South Ranch, we will continue to explore new opportunities to monetize the ranch, including additional sales of land.
In April we settled outstanding litigation with mosaic, bringing a conclusion to a trial that was again delayed this time as a result of the Cove and 19 pandemic. The settlement allows us to avoid the costly expense of a trial and once the settlement assigned in May the matter will be closed.
As a result of the settlement, we accrued a onetime expense of $10 million, we expect to pay the settlement at the end of May.
Looking ahead, we recognize the unprecedented disruption caused by the pandemic is likely to have meaningful impacts on our results while the extent of the impact to our nutrients business is unclear we've already seen a significant decline in demand for water as oil and gas companies pause there 2020 drilling plans in light of global oversupply.
Given the circumstances in the lack of near term visibility, we're spending or water sales guidance for 2020 [noise].
Turning to liquidity as Bob mentioned, a good start to the spring season, and our diverse revenue streams will help us manage through a considerable uncertainty caused by the coven 19 pandemic during the quarter, we generated 14.8 million in cash from operations and first quarter capital expenditures totaled $5.7 million.
As discussed in our April 16th press release, we have lowered our capex guidance for 2020 to $15 million to $20 million of which approximately $10 million is for sustaining capital.
In April we also received a $10 million alone under the cares Act Paycheck protection program.
We will use alone to fund payroll and other eligible expenses and based on discussions with multiple legal firms. We believe the majority of the loan will be for forgiven pursuant to current guidelines under the cares Act.
We continue to proactively manage our capital plans as we navigate through the challenges presented by the Kobin 19 pandemic and its associated economic impacts.
That concludes our prepared remarks on the first quarter and outlook before we wrap up and for anyone that joined after the call began we're not able to hold the question and answer session today due to the extended stay at home restrictions in effect for Denver County, We will hold another call on Monday May 11 to 12 PM eastern time to respond to investor questions.
In the meantime, we encourage everyone to read our 10-Q, which will be filed later today and to email questions directly to me or Investor Relations team ahead of the meeting.
On our Monday call, we're respond to both email and live questions.
Please see yesterday's press release for more information on Mondays call, including dial in details. We appreciate everyone's interest in Intrepid and look forward to speaking with everyone. Soon.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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