Q2 2020 Intrepid Potash Inc Earnings Call
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Thank you for standing by <unk>.
Operator.
Welcome to the incredible called <unk>.
Q2, 2020 results conference call.
A reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
During the question Q you May Press Star then one what are your telephone keypad.
Sure do you need assistance during the conference call you may signal upgrade up by pressing star and there.
I'd now like to time, the corporate or the true not Preston Vice President of Finance. Please go ahead.
Thanks, Good morning, everyone.
Thanks for joining us to discuss Intrepid second quarter 2020 results with me on the call today isn't trip is co founder and executive Chairman President and CEO Dr. novice also available to answer questions. During the Q and a session. Following our prepared remarks will be our chief operating officer, Brian Stone, and our vice president of sales and marketing Mark Mcdonough.
No.
Please be advised that a remarks today, including answers to your questions 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 and uncertainties are described in our periodic reports filed with the Securities and Exchange Commission, which are incorporating 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 or actually see filings and press.
Releases are available on our web site at Intrepid potash Dot Com I'll now turn the call over to Bob.
Thank you Matt good morning, everyone.
The second quarter, hopefully with the definition of unique in light of the considerable pressure is presented by the pandemic that's economic impacts.
We ended the quarter in a solid cash position, which enabled us to voluntarily and fully repaid the series C tranche of our senior notes in July.
This had the effect of lowering our effective interest right well, providing us with considerable more flexible considerably more flexibility as we execute on our strategic plan can seek opportunities to capitalize on the generational opportunities currently available in the oil and gas space.
With available borrowing capacity of $44 million in a $75 million accordion feature under our existing credit facility.
And 14 million in cash on hand after the July repayment.
We believe were solid solid leverage position as we continue to prudently manage our existing assets well considering unique acquisition opportunities during these unprecedented times.
Our ability to execute during these uncertain times is testament to the strategic moves we've made to diversify our revenue streams.
Maximize our saleable assets improved our leverage position and infuse our business with cost labor efficiencies, which enable us to be responsive to ever changing conditions.
Having entered this challenging period in a stronger position and by continuing to improve our leverage position, we're better able to execute well as we navigate the roller coaster in the oil and gas markets, while providing essential services to the agricultural animal feed and oil and gas markets themselves.
Considering the cobot 19 pandemic, we delivered a solid first half in our nutrients business well the earlier spring application application shifted volumes to earlier in the year.
For potash, we continued to see strong volumes into our agricultural and animal animal feed segments, particularly early in the quarter. The margins continued to be pressured due to lower pricing compared to the prior year.
We finished the spring production season earlier this year due to below average evaporation during 2019, but I've seen a great 2020 evaporation season, so far with minimal rainfall and above average tempered temperatures at all three potash facilities in fact, it's a 100.
And seven degrees in my life today.
In June as summer fill program announced by our competitors lower prices tend to $20 per ton compared to the winter fill price levels. This price supplied to tons ordered in the June delivery window and delivered by the end of September.
After the order window pricing increased $15 for times and we have seen acceptance of this higher pricing on spot sales in the third quarter, although the majority of tons delivered in the third quarter, albeit the fill pricing left.
For trio, we delivered record domestic volumes in the second quarter as we pursued a more U.S. focused strategy in light of favorable domestic weather conditions and solid demand for our granular and premium products.
Our success in driving domestic sales in the second quarter in turn drove a 6% year over year increase in second quarter net realized sales prices in June summer fill program very similar to the potash program was announced bar soap competitor lowering prices five to $10 per ton.
On compared to the first quarter price levels.
Pricing increased $15 per tonne after the fill window.
As we discussed last quarter, our oilfield solutions business remained well positioned even in light of the pressures caused by the ongoing pandemic.
The strategic moves we have made in our oilfield businesses have resulted in low cash operating requirements and a unique ability to deploy our labor force in southeast New Mexico in real time to address our highest business needs.
This gives us considerable flexibility as we manage through the oil and gas down cycle that is in the process of rebounding.
Accordingly, our approach to the oilfield market today is pragmatic, we acknowledge that the pullback and our customers second quarter frocks.
And the schedules in general lack of visibility in the market was painful for our business in the short term.
However, we're reminded that the market pressures, we're seeing today are inherently time bound even in light of considerable uncertainty in the short term, we know that by successfully managing through this part of the cycle. We open ourselves up to taking advantage of all the downmarket can offer including an abundance.
Of unique opportunities to further strengthen and diversify our business.
To that end, we continue to evaluate opportunities to organically expand and diversify our existing oil and gas midstream businesses, which include full cycle water management.
Which is defined as source water delivery recycling blending and disposal.
We also continue to evaluate synergistic and sometimes organic opportunities to expand further within the entire midstream and upstream oil and gas space, which includes the gathering a variety of <unk> produced products byproducts and Weiss products.
As we entered the second half of the year, we remain fairly optimistic.
As we speak today, we are delivering.
Water into a 2 million barrel frac.
And believe we're well positioned to withstand the economic pressures presented by the pandemic unrelated downturn in the commodity cycle.
Through diligent execution on our strategy and prudent management of our existing assets. We believe we can opportunistically improve and expand our business and emerge a stronger company wants headwinds abate.
And now I'll turn the call over to match for review of our financial results.
Thanks, Bob.
Second quarter sales are down 26% isn't early spring season shifted fertilizer sales for the first quarter and water and byproduct sales were impacted by pandemic related pressures.
For potash second quarter sales volumes were down 22%, while pricing pressures from summer and winter fill programs and lower industrial sales resulted in a 14% decline in average net realized sales price potash segment gross margins were down 6.2 million in the quarter compared to the prior year.
First half agricultural and feed volumes increase compared to the prior year due to good weather and strong demand in our feed markets.
For trio the record domestic sales volumes, we delivered in the second quarter drove a 6% year over year increase in our second quarter net realized sales prices our focus on the higher priced domestic market resulted in fewer international sales compared to the prior year.
Decrease oil and gas activity do the pandemic also reduced our byproduct sales, resulting in a 10% year over year decline in total sales for the segment. This as well as increased lower of cost or net realizable value.
Value adjustments and lower recovery rates in our production process pressures segment margins in the second quarter.
Byproduct sales across our nutrients segments continue to be pressured and were down 26% compared with a year ago second quarter.
While increased market availability of salt and lower demand for byproduct water due to the pandemic continued impact sales in the second half of 2020, magnesium chlorine production and sales return to historic rates towards the end of the second quarter.
Assuming average evaporation rates at our window, where facility, we expect may need magnesium chloride sales to remain a historic levels through the balance of the year [noise].
During the second quarter, our oil field solutions segment saw 51% year over year decline in sales as a pandemic continues to affect oil and gas markets resulted resulting in curtail drilling plans and lower demand for water and other oilfield products and services.
Looking ahead, we continue to expect the disruption caused by the pandemic will have meaningful impacts on our results and our visibility for the remainder of this year in particular for oilfield solution segment planned reductions in activities from operators are expected to impact our sales of water and other oilfield products and services through the balance of 2020.
We continue to monitor this ever changing situation and are managing our business to comply with changing mandates from federal state and local authorities, while continuing to serve our customers.
Turning to liquidity, we generated 23.5 million in cash from operations in the first half as we discussed last quarter, we receive $10 million in April under the Cares Act Paycheck protection program, which we used to fund eligible payroll expenses, we elected to use the 24 week time period to use the funds and we a sense use the entire.
$10 million for eligible payroll expenses are 24 week period ends in the first week of October.
Capital expenditures during the first half were $10.6 million, we continue to proactively manage our capital plans as we navigate through the challenges presented by the pandemic and its associated impacts and remain on track towards our capex guidance of $15 million to $20 million for 2020.
In July we made a voluntary early repayment of the remaining $15 million outstanding under our series C. Senior notes, along with a reduced make whole payment and accrued interest for a total payment of $17.1 million as Bob mentioned this payment reduces our effective interest rate simplifies our debt structure and gives us additional flexibility to pursue our strategy.
Immediately after the payment cash on hand was $14 million and availability under our credit facility was unchanged at $44 million. Our series B Senior notes did not change remained due in 2023, while our revolver matures in 2024.
As we announced late last week all the proposal set forth during our special meeting of shareholders were approved paving the way for reverse stock split, which we expect to occur in August our board is planning to convene on August 10th to consider the options available to us in executing this reverse split we hope to achieve a pershare stock price sufficient to keep us well within the range.
Compliance with NYSE continued listing standards, while expanding ability to attract new investors, we look forward to sharing more information in the coming weeks.
That concludes our prepared remarks for today, operator, we're ready to take questions.
We'll now begin the question answer session.
During the question can you you May press Star then one when your telephone keypad, you'll hear a total acknowledging our club.
If you are you guys speakerphone, please pick up your handset before Chris Please.
Hey, good question.
So then too.
Well cost for a moment quoted going to Q.
The first question comes from Dole Jackson with BMO capital markets. Please go ahead.
Barry Murphy on for Joe Thanks for taking my question.
I know you spoke about this summer fill program.
So in shale pricing Q3, but based on your goals.
Potash price down 10, 20 proton quarter over quarter in Q3 trio pricing down 15, John.
Yeah, I think you've got those numbers are you I think we in our Q will certainly walk through this in more detail.
It's a little confusing as we talk list prices versus effective prices, but I'll turn it over to Mark to go into a little more detail on on each of those those summerfield programs, but effectively our trio price will be down five to $10 compared to two our first quarter price levels in 2020, and then Mark I'll turn it over to you for potash side sure and I think that.
Takeaway here, a abry would be that I think as Bob and Matt mentioned in their prepared remarks is that Oh, there's been a reset to on the pricing. So certainly some of the Q3 pricing.
It will be a evident in the fill values that were that were discussed but after that order period expired.
Pricing is a has increased and I think we've seen the on some spot and a new business. Some traction on those on this price level. So you know certainly as the harvest and.
Market transcends into the third quarter, I think that where we're looking towards the fourth quarter for for a potential uplift.
Okay, Great and then potash production Bobby lower in the second quarter, how should we think about full year expected production.
Jerry level that the company.
Yeah, we so we're really of right on track to starts start to fall season on time, we're getting ready to start at our HP and.
Facility here this week and ramping up over the over the next 10 days and we'll start to onboard facility on time in September as well as Wendover. The middle of August. So you should see kind of normal production rates for two of our three facilities by mid August and then the other one starting in September which is which is really just our normal cycle given the evaporation season.
Okay, and then just quickly on wall her oilfield services.
Can you talk about your we expect the trajectory.
Sure there.
21 meeting Q2, afrezza floor for water revenue.
Well, we hope so if you look at a several and this Bob Thank you for the question.
We've seen activity in July grow month over month and saw the entire Permian has grown 30% in terms of frac activity month over month.
We're also seeing just a solid uptick so everywhere that we look in the Permian and the Delaware and I wanted to be very clear that we're just talking about the Permian basin and the Delaware Basin.
We're seeing a July grow over June and we're seeing August demand that we're talking about go up over July so.
I think just about every oil and gas analysts has picked up on the on the increased fracked activity.
And we're seeing it out in the field so.
We see 2021 as being in a much more normalized situation.
As we see once again July grow Virgin August Grover July and we have every indication that September will grow over August based on the orders that were taking today.
I hope that answers your question.
Yes, Thank you I'll pass it on.
The next question comes from Mark Connelly from Stephens.
Please go ahead.
Hey, Good morning. This is John lighter on for Mark.
Our first question is how much room do you have in terms of potash capacity before you'll need to open up new underground panels or make other incremental investments.
Well on the potash side as you know a 100% of our potash production is solution mining.
The only a underground conventional mining we have is on the trio side. So.
Right now, we're producing a a thoroughly saturated potash Brian.
So we would have to add additional ponds, if that's your asking.
To increase our our potash capacity, we have plenty of land available.
For additional palms was that your question around potash.
Yeah, I'm, sorry, we got that won't mixed up there, but that's helpful color and then.
On potash again, so we've heard pretty bullish comments on the potash volume outlook for the second half.
In some of that fall application and some being international demand do you have the view on fall application needs relative to normal domestic demand.
Well as you know going into last spring, we had three consecutive.
Very poor application seasons. So the soils are still deficient in terms of minutes. So I think there's every reason to anticipate very bullish demand on the good news in terms of inventories along the river is that we're not saying a lot of imports that have come in so the inventories along the river.
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Our pretty low so unless unless we see.
Pretty quick deliveries into the river system.
Then, it's just going to be primarily the Canadians providing the majority of the potash into the United States. So I think we have a unique opportunity to see very very strong volume as well as from pricing.
Hope that answers your question.
Yeah, that's really helpful. Thank you very much.
The next question comes from John Roberts from you'd be yes. Please go ahead.
Thank you did your oil field solutions business declined in line with the overall fracking activity in the basin or does market share shifts when we get a sharp correction like this.
I would say was it's definitely proportionate if anything we picked up a few things given our local presence.
But you got to remember that that starting around the middle of March.
Through the third week in June things basically came to a dead stop and then.
The third week in June things picked up a touch and then we saw good.
July July was up I want to say it was a.
About 8% over June and then additional 13% to 14% is what we're seeing in August terms of the order book So.
We're certainly not going to lose any market share if anything.
Given our.
Ability do full water management, I think our opportunity to pick up market shares pretty good so I feel very comfortable with that.
Once again I hope I'm answering your question.
Sure, Yes, and I would ask what's happened to the price of acquiring new water rights or.
As the market become illiquid or frees up in a correction like this so there's really no market price for new water rights.
Yes, I think it's what you're seeing entire oilfield is that the spread between the bid in the ask whether you're looking at actual.
Producing assets.
For a willing seller and are willing buyer, there's a pretty big bid bid ask whereas those that have gone into bankruptcy.
There's some very very unique opportunities and as you know we've seen record bankruptcies. So.
Those that can afford to hold onto their assets are holding onto them. So it's a very unique market that we're saying given that you've got record bankruptcies across all sectors of the oil and gas industry. You've got some that are getting ready to to get into loan base Redetermination that are that are we thinking.
We're going to see it another wave of problems, but all of those assets are being managed and then the well financed a ones that are remaining art as I said are continuing to Frac. We're we're working on a 2 million barrel frac as we speak on this call. So.
It really is across the board.
And we think it's a this roller coaster provides very unique opportunity.
Then on the reverse stock split.
Got a range of one for free up to one for 15.
Why isn't it automatically like one for 15, that's still not really high stock price. So.
Why is it why do you have a range that goes down so that's something so low is one thats right.
Well, we followed the way that hundreds of companies have done it over the past several decades in terms of how the FCC attorneys prepare the paperwork and so I hate to a sound so ignorant but.
We used to.
Highly rated FCC firms that prepared all the paperwork in the document that was their recommendation. We followed so I think at the end today, we'll meet on the 10th and we'll pick the appropriate split number in terms the target range and make it effective.
As quickly after that is practical so hauling says we had great Council that said this the way to do it.
Okay all right. Thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Jason Escena from bumper shoot Holdings. Please go ahead.
Thanks.
Just on the MLP potash business could you walk through the build programs and obviously can't speak for the industry. So can you maybe just explained in your view what is going on there because it.
Hey, kind of seems like.
Tributary inventory.
It should be getting work down, but then we're going to continually offering them a discount.
Replenish that and it almost seems like a double negative in terms of then having less risk to not hold inventory and then giving them lower pricing.
The Jay Jason I think you are right on we certainly we did not initiate fill program and so unfortunately, we had to participate in it I think it was.
Given the demand out there and the need for the mineral deficiency.
I don't have a rational explanation for why the fill program occurred this summer I'll, let mark weigh in but.
I didn't think it was necessary so I'll, let mark way.
And I think maybe the takeaway Jason is that when we looked at this program I think as Bob indicated a we were we're little perplexed in terms of the timing.
<unk> of it as well as the mechanics.
So we made a conscious choice to to look prudently a at our sales.
And our distribution channel business and I'm really tried to focus in on what we felt were businesses that we wanted to.
Participate with some of our loyal and core customers, but certainly didn't want to extend beyond that and really focusing on some or better.
Netback sales opportunities.
Okay.
Just one question for me can you walk through the decision to payback. The series C. Notes. Obviously this was the longest stated maturity.
You guys had and it wasnt, particularly at a very high interest rate, obviously, just given the the situation with cobot and everything else, where you're managing the liquidity position pretty closely.
It doesn't make it a ton a sense relative to the idea holding cash or.
Yes, even relative to these opportunities that could come up.
In other parts of your business so.
You did mention more flexibility with lenders can you maybe detailed specifically what that is.
Yeah, if you'll remember that was a 15 million dollar tranche that had a senior there was a senior note that had a collateral claim on every asset.
Include including newly acquired assets.
And.
If we blank they wanted a waiver fee.
And so.
If you look at our ability to use cash on hand and have the access to the demo facility.
We've got a tremendous amount of flexibility in terms of what now needs to be collateralized, what is sort of senior nature. If you if the difference in who makes up the series B versus the series C.
Theres, just a tremendous amount more.
Rationale reasonableness flexibility in who those specific a note holders were.
And so I just can't stress that.
It was the right thing to do as we continue to look at different ways to expand our opportunities to access low cost credit.
And having someone that was had a first position on on everything as well as everything to be acquired.
Was difficult to manage around.
Okay and in terms of I guess opportunities and acquisitions you spoke a lot in the release about the long term potential.
For the Delaware Basin could you, possibly talk about that strategy in more detail specifically from a capital structure perspective, with with leverage and priorities for cash flow.
Well the good news is the majority of them, our organic and so as you've seen or water presentation. We've explained many times, we've got a great infrastructure that covers the entire southeastern portion in new Mexico, So our ability to.
Not deliver source water participate in the recycling and re blending that is that is.
Going to occur more and more as we as we go through quarter by quarter as well as on the disposal side, which we'll talk about an upcoming quarters.
It just gives us a very unique opportunity to built to build that out we're just.
In a in a special position geographically and with our head count take advantage of of all of those I'm, There's also byproducts and waste products.
That.
Need to be.
Disposed stuff, where in many cases changed in from a waste product or byproduct to an actual product.
[noise] kind of leave it at that they're just are a tremendous amount of opportunities as people fall off the radar and leaves things behind and so.
Im not going to go into any more specifics other than if you really take a look at southeast New Mexico.
Look at at the existing rig count look at the existing Fracs that are occurring on the economics of the basin.
People that had to leave the basin because of a.
That structures in other parts of the United States.
There's been a lot of opportunities left behind.
Okay. When you when you'd be at a competitive disadvantage if you don't pursue these things.
For Dinwiddie, keeping the financial aspects I guess aside for a second it seemed like that did.
Truly expand the capability of what the business you're building there could be with the four corners strategy and that you would have been competitively disadvantaged in terms of selling water overtime, if you didnt.
Secure that position this sounds more opportunistic.
And I don't get a sense it.
That is something that out of necessity, but rather opportunity. So so I guess the question at what point.
You made.
I guess I understand you could make more money overtime, if you pursue them, but at what point do you kind of let someone else have that margin versus focusing on compounding the existing capital base to get the more of a fair value.
Well I guess on if you're in full cycle water management. So that you manage the source water recycling and blending that is going that is occurring as we speak. So if you are able to take a barrel of water and capture Maher.
One off that same barrel of mall of water multiple times and its handling I'm not understanding. Your question why you wouldn't gather every piece of margin off that same barrel of water rather than let somebody else pick it up.
Like I guess on that.
Because I guess to do that relative to.
I mean.
Your stock is trading at 0.3 times tangible book, so relative to doing nothing.
Yeah, Hi, peg, the normalized cash earnings or something to.
$30 million, a year and I'm not asking for guidance on that number now that that's my number one it's not my number that's about half my number.
I'm not trying to be overlap nothing but you'd be debt three in one to two years than you would earn back your entire market cap and four to five years.
The uncertainty I think of what you're doing is clearly weighing.
On how people are valuing the company. So that's what I'm trying to understand.
Getting to a fair value versus pursuing these margin opportunities.
I guess I really don't understand your question, if you and if you really understand where full cycle water management is going in this in the Delaware Basin.
And so.
You really can't be left out.
When you can control the entire system.
So.
I think you in our speaking past each other in terms of of the amount of capital that's required to to enter into all phases.
So once again I just think we're speaking past each other I don't think you really understand the opportunity or the way waters managed in Delaware Basin.
How large of capital requirement to get into that whole system.
You think it would take.
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You know, it's not a lot I'm not going to really go into details on the back side.
I appreciate the question and I understand it and so.
They're not major.
Capital investments.
They are bite size organic capital investments.
Add margin to the bottom line.
And so the key is to grow a diversified revenue stream that generates as much margin as we possibly can.
Okay Awesome I will hop back in queue. Thanks.
This concludes the question answer session I would like to turn the conference back over to Bob Jordan all of it for any closing remarks.
I just wanted to thank everyone for their participation and thank you if you're interested in trap and have a great Dane stay healthy.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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