Q3 2020 Intrepid Potash Inc Earnings Call
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Thank you for standing by this is the conference operator, welcome to the Intrepid potash third quarter Twentytwenty <unk> results conference call.
As 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.
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I would now like to turn the conference over to Mike Preston Vice President of Finance. Please go ahead Sir.
Thanks, Claudia and good morning, everyone. Thanks.
Thanks for joining us to discuss and trip its third quarter 2020 results.
Me on the call today is Intrepids co founder 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 Bryan stones.
Please be advised that our remarks today, including answers to your questions include forward looking statements as defined by U.S. Securities laws. These.
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 incorporated herein by reference.
During today's call, we'll for a 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 STC filings and press releases are available on our website at Intrepid potash Dot Com I'll now turn the call over to Bob.
Thanks, Matt and good morning to everyone.
We managed well through another quarter of uncertainty and volatility and are seeing positive trends and about fertilizer and oilfield markets.
We work with the various states and their agencies to maintain our essential business status. So that we can cut could continue to operate.
As we emerge from the bottom of a down cycle and fertilizer and start to produce I'll say, great 2020 summer of operation here, we see numerous positives in front I've been traveling.
Well field activity is increasing water sales are improving and the water market is tightening.
And the outlook looks surprisingly good for 2021.
Lawsuits are behind us.
Wake partners are getting out of the way.
We're teaming up with a strong set of financial partners to embrace transform and truly grow into 2021.
2020 has been and remains a unique year, regardless of the pandemic.
Over the past nine months, we decreased our overall debt by $15 million, which will increase to $25 million.
When we receive forgiveness of RPP pilon.
We settled outstanding litigation.
And continued preparation for the eventual resolution of our Pegas water dispute.
We incurred legal costs significantly above any normal level.
These expenses and cash outflows were clearly onetime events.
Over the past couple of quarters, our earnings have certainly been pressured by the COVID-19 pandemic decreased fertilizer pricing, but when we look at our debt compared to our asset base and our cash flow potential we see a lot of upside potential for intrepid.
As with any downturn.
Then as you may be aware there have been numerous my decades of commodity experiments.
These are the opportunities to strengthen and diversify your business.
If you're willing to be quick thinking and adjust with an ever changing landscape.
To maintain a creative optimistic culture comes.
Companies to keep their eyes up instead of hunkering down can be rewarded and that is exactly what we have done is we continue to expand our relationships in the Delaware basin with strategic partners.
We are thoroughly engaged with our strategic partner select several oil and gas operators and a couple of midstream companies to become a powerhouse in the smart use and development of the environmentally friendly methods to utilize water then.
Then reuse it and finally to innovate creative management systems to beneficial use oil and gas related water.
Intrepid has a laser like focus on smart or full cycle water management.
We ask you to follow as closely as we lead the way.
Our second quarter investment.
And the von Gonten laboratories is also yielding great data and the benefit of using potash or K.C.L. as it's known in the oilfield in certain formations and we hope to improve our industrial potash sales significantly.
As drilling and fracking activity increases in future periods in very specific areas.
Our new turn businesses.
And then the third quarter on a positive note.
That's domestic potash inventories have leveled out over the past few months, which should set us up for a good end of the year heading into the next spring season.
The post summer fill price increase has stuck.
And just last week, we announced an additional 15 to $20 increase bringing our posted price up to 30 to $35 per ton from the summer fill price levels, and clearly, calling a bottom to the potash market.
This is welcome news for the market that has struggled to find its footing over the past year and a great start to the fourth quarter as our potash production ramps up after an above average 20, Tony summer evaporation season.
For trio, we continued to maintain consistent production levels. The prior years as we balance existing inventory and focus sales efforts on growing domestic volume semi.
Similar to potash summer fill price has been accepted.
We announced an additional $10 per ton increased last week effective immediately.
During the third quarter, we continue to position ourselves to capitalize on the return of oilfield activity in the Delaware Basin moving.
Moving most of our transfer equipment topic generators and onto the power grid.
Which will continue to improve our transfer expenses going forward.
Our approach to the oilfield markets today remains pragmatic with a focus on establishing long term relationships with operators as a dependable water suppliers in the Delaware basin that can meet the incredible demand of water delivery and they have Brock.
And then Chris and they require increasingly larger volumes of water per completion and increasingly larger Florence.
We're surrounded by well capitalized and long term focused operators with attractive breakeven drilling economics.
Many of these operators have continued to operate it.
Operator, albeit at reduced rates through the downturn and are indicating plans to ramp up considerably and 2021.
We acknowledge the next couple of quarters could be bumpy due to an uncertain trajectory for the COVID-19 pandemic.
But the rebound in the Delaware Basin is happening as we speak.
As I said last quarter. These pressures are inherently time bound and the attention that companies are focusing in the Permian and specifically the northern Delaware gives us a lot of optimism about the future.
To that end as I stated in the beginning of my comments, we've used the past six months to not just focus on improving our existing business, but to find opportunities to participate in the upside of improving oil fill demand has remained convinced of the value and potential.
Of smart or full cycle water management, and the Delaware Basin.
And now I'll turn the call over to Matt for a review of our financial results and outlook.
Thanks, Bob we manage well through the uncertainty caused by the COVID-19 pandemic and down cycle in fertilizer during the third quarter highlighted by solid demand across our nutrient segments and a great end to the 2020 summer evaporation season, which will lead to lower per ton potash production costs in the coming months total company water sales were up 42 per.
Then from the second quarter of 2020 as oilfield activity steadily improved over the past three months.
For potash, we saw good engagement during the quarter and believe we've hit the bottom of the down cycle for fertilizer heading into winter and spring season in which we will have above average volumes to sell due to the good evaporation during the summer.
Strong growth in specialty segments helped to offset some of the decline in industrial markets and our third quarter results started to see the benefit of a good evaporation season as our cost of goods sold improved compared to the prior year.
Margins compared to the prior year were pressured by price decreases over the past year and reduced byproduct water and Brian sales to the oil fields.
For trio another quarter of steady demand in the domestic markets led to similar results compared to the prior year.
Sales volume was down compared to the third quarter of 2019, as we continue to narrow our international focus well production remain consistent as we manage inventory levels.
Similar to the potash market, we have seen good subscription at post summer fill values, which we expect will improve pricing in the fourth quarter and into the spring season buys.
Byproduct water sales improved significantly compared to the second quarter 2020, and we're seeing good demand for water in the fourth quarter.
Our oil field solutions segment continued to be impacted by reduced oil and gas activity compared to the prior year as reduced demand for water has also pressured pricing on our south branch on a positive note activity has steadily increased over the past few months as operators focus their attention on the great resource in the Delaware Basin and operators are forecasting continued.
Increases in completions over the coming months.
Turning to our debt and liquidity, we recently applied for forgiveness on our 10 million dollar Cares Act paycheck protection alone we use the entire loan amount to fund eligible payroll expenses and expect the loan will be forgiven, although the timing of a response remains uncertain.
As a reminder, in July we made a voluntary early repayments of the remaining $15 million outstanding on our series C. Senior notes along with the reduced make whole payment.
We now have $15 million remaining on our series B senior notes, which mature in 2023.
As of September Thirtyth, we had 30 million borrowed under our revolver, which matures in 2024 with 30 million of availability remain.
Capital expenditures during the first.
Nine months of the year were $14 million, we continue to manage our capital plans through the cycle and expect to be near the low end of our previous $15 million to $20 million range for the full year.
Although the trajectory of the COVID-19 pandemic remains uncertain the proactive steps, we've taken to reduce our debt and diversify our revenue from our long lived assets have us optimistic about the potential of our business.
That concludes our prepared remarks for today, operator, we're ready to take questions.
Thank you.
We will now begin the question and answer session.
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We'll pause for a moment as callers join the queue.
Our first question is from Joel Jackson with BMO capital markets. Please go ahead.
Hi, This is for your Murphy on for Joe Thanks for taking my question.
So on your first love their peers are also reporting today and they spoke about strength the strength of the U.S. fall application season is this concept, so what you're seeing and what kind of incremental volume could we expect in potash and trio and Q4.
Q4 90.
I'll take the first part of that and let let Matt speak to the incremental volumes.
We're just seeing price acceptance across the board.
As you know we had an early harvest we've seen recent strength in wheat soybeans corn prices sugar has rebounded in South America.
As we look at Coca we look at a variety of commodities that impact the usage of a global product potash production.
We're seeing here in the United States, a strength in the fall application market and in a very very solid acceptance of the price increases I'll, let matt speak to any potential for incremental year over year.
Demand, we anticipate seeing yeah, you're certainly continue to see very good demand in the potash market and just with with our production profile and it really focus our tons into the spring season into the truck markets West, Texas area in California, BMW. So the winter isn't normally or Q4 is a normally our biggest sales season.
Some of the tons were going to see from improved evaporation. During the 2020 season, it will hold off for higher and better margins in a in the first half of 2021. So don't expect a whole lot of change year over year for our potash volumes in Q4.
Okay. That's helpful. And then can you just talk about the expected victory of water sales Twentytwenty, one how should we think about 2021 sales whether thats between 19 level.
I think they should be at least a 2019 levels on depending on permits that weve had under dispute getting resolved.
Covered HM.
We've got several permits that were that are up for administrative approval that are going to the hearing process and unfortunately covered it has created a up a bumpy administrative schedule if that makes sense. So any any additional water that we see receiving the approval permits on.
See full utilization going at 2021.
So we would see total sales in excess of of 29 team.
Okay, and then one last quick one if you're to me to any capex guidance. So for 15 to 20 million.
Yeah, we think we'll be at the low range of that previous guidance of.
15 to 20 million okay.
Okay. Thank you.
Our next question is from John Roberts with <unk>. Please go ahead.
Great. Thank you I'm not expecting you to purchase any more water rights near term, but has the downturn allowed a lot more rights to become available for purchase and what's going on with the asking price for water rights.
If you break the year into covenant related periods, you'll see the second and third quarter. We're we're locking so to speak.
I'd say, we're saying the fourth quarter strengthened dramatically in terms of water demand and then pricing power going into 2021, we're definitely seeing.
New-mexico's Unix state and that its an appropriation state and so the office of state engineer has begun to have investigations into water being imported from Texas into into Mexico, and as an appropriation state or the water coming up has historically.
Definitely not been permitted accounted for taksta regulated et cetera, and the office of state engineer in New Mexico in the third quarter initiated a pretty intensive Ah investigation into the water that's coming across from Texas. That's on an unregulated basis. So it's going to be interesting to see what state engineer.
Does with the data that they are collecting from the various operators and a pipeline companies that are bringing water across those operators that are choosing to use Texas water.
And.
Any estimates on how much potash unit costs will decline due to the favorable evaporation conditions.
Yeah. It's good question, John we don't have the estimates right now is that we're going to share, but you certainly see some some improvements year over year.
Thank you [noise].
Once again, if you have a question. Please press Star then one on your telephone.
Our next question is from Vincent Andrews with Morgan Stanley. Please go ahead.
Hi, This is actually ask Steve Mooney has done so I just wanted to ask a quick question on potash inventories and.
Finally, he was inventories exiting all recall here.
Matt you want to take that yeah, I think we're in a really good place here at the end of the third quarter started November compared to where we were just three or four months ago.
You've seen it through increased price both on potash and trio that we announced last week and it looks like things are are clearing up nicely along the river and you don't really expect a solid.
First half 2021.
Thank you.
Our next question is from Matt Farwell with Roth Capital. Please go ahead.
Hi, good morning.
Just wondering if you can comment on the margin outlook for the oilfield solutions business given the negative gross margin in the quarter.
How that might trend in the fourth quarter and then 2021.
I think you're you're going to see a continued improvement in the fourth quarter. You. Just you got to think of 2021 is silicon.
Much more like 2019.
Or January and February of 2020, with a continued improvement on the margin pace. So [noise].
I I definitely don't see it going backwards.
I think you just have to <unk>.
Unfortunately, we have to accept what what the last part of the first quarter and in the last six months have been like as it relates to the volatility and Bumpiness in demand. Many times, we will stay Jay Frac for somebody and then there will be a change of mine.
I think we're just saying.
Both practices on the acquisition of water and our sale of water in terms of.
I've actually Oh.
Making that satellite a final sale.
On both sides of the equation. So we're trying to we're both working with each other on the operational side.
On the operator side detect a bumpiness out of it.
Acknowledging that it's just been a unique six months.
Great. Thanks for taking my question.
Our next question is from Jason we're somewhere with Bombardier should holdings. Please go ahead.
Good afternoon.
Bob you sound very optimistic about 2021, obviously investors don't want try to annualize the past three months results. It was a rough quarter and you talked about being hopefully at the bottom of a cyclical downturn, you're also not really providing any guidance for next year, though so.
I guess, how do you reconcile those things and how should investors be framing 2021 from a financial perspective.
Either in terms of earnings cash flow or just Directionally. The company you know.
Where do you see it had in terms of any more specifics on that.
Well, Jason Thanks for the question again.
I'm trying to direct people back to what 2019 looked like and I just made the comment that margins should be should be better than they were in 2019.
Volumes for sales should be Oh.
At a greater level given the permits that are up for administrative approval I'm assuming that the administrative process continues despite cobot.
So it's very hard to to give guidance on around whether or not [noise].
The office of state engineer will be open we're not given the coverage restrictions in new Mexico to actually process approve permits. So that's it that's why it's hard to give guidance.
When the office that actually approves the permit doesn't give you guidance on whether or not they're going to be open or closed to sign a permit I hope you can appreciate that then funnels back into the financial guidance that you're asking for so I'm trying to give you the appropriate color.
As to what we faced in the field.
Matt and the rest of this answer.
Yeah, I think we've been pretty open about where we think prices trending your year over year and.
With potash volumes, increasing I think we've done the best we can right now given the cobot environment certainly on the water side to try and lead folks to where we think the first half of 21 2020 one's gonna look, but yeah, we havent been issuing guidance for a while now and so shouldn't come as a surprise that we're not putting out specific numbers, but hopefully we.
Given enough color given what we know today to help folks model this going forward.
Sure that's fair and.
When do you expect to have a resolution on the PPP.
I didn't hear what the the comment you had mentioned on you applied for it but what do you think the actual timeline is on that.
So.
We just really don't know you know the you know in our discussions with the SP I will not give any guidance on arc with our discussions with them be a mouth. They will not give any guidance. So Jason I would love to give you guidance, but when the government says tells you they have no clue what to expect and BMO has.
The same response is very difficult for me to answer your question.
Sure.
And in terms of the Capex outlook for next year. How are you guys thinking of maintenance capex versus the current year.
So on the sustaining capital side very similar to 2020.
In that $12 million to $15 million range.
Okay, great. Thanks.
This concludes the question and answer session I would like to turn the conference back over to Bob Jordan for any closing remarks.
We just want to thank everyone for taking the time to dial in today, we really appreciate your interest in Intrepid and look forward to speaking with everybody in the near future. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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Yeah.
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