Q4 2020 Intrepid Potash Inc Earnings Call
Thursday
Thank you for standing by. This is the conference operator. Welcome to the Intrepid. Ink and your end 2020 results conference call as a reminder. All participants are in listen-only mode and the conference is being recorded after Iraq. There will be an opportunity to ask questions to join the question queue. You may press star then one on your telephone keypad. Should you need assistance during the conference call you Monday Operator by pressing star and zero.
I would now like to turn the conference over to Matt Preston Vice President of Finance, please go ahead.
Thanks for using. Good morning. Everyone. Thanks for joining us to discuss and trip its fourth quarter 2012 results with me on the call. Today is Intrepid co-founder executive chairman president and CEO Bob tornados also available to answer questions during the Q&A session following our prepared remarks. We are Chief Operating Officer Brian Stone and our vice president of sales and marketing director Adams. Please be advised that our remarks today including answers to your questions include forward-looking statements as defined by us 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.
Do you 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 SEC which are Incorporated herein by reference during today's call. We 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 interested in yesterday's press release our SEC filings and press releases are available on our website at Intrepid Potash, I'll now turn the call over to Bob. Thank you Matt and good morning everyone else solid cash flow and ibadah highlighted our fourth quarter and put a positive end on a unique gear the encouraging Trends. We saw emerging in the fourth quarter are continuing into spring as a commodity Market shows strength across both our fertilizer and oil field segments the last couple of months. We have seen gradual yet sustained improvements in our ability to combat the COVID-19.
Demek, we're optimistic that the good news will continue as cities begin to relax restrictions. Now that significant portions of our most vulnerable populations are protected. We wish the world. Well our nutrient business ended the year was significant momentum and hasn't slowed down in the first quarter. We called the bottom in the potash Market on our November earnings call and recent pricing and demand has exceeded our expectations. We announced another product price increase in February up $50 per ton increasing are posted product prices $150 per ton about Summerfield levels. Trio has also seen strong demand and it's currently posted $60 per ton higher than the summer fill values customers who are eager to secure product as prices continue to move up and have locked in some volumes through second quarter with additional spot buying occurring throughout the spring and farmers who are eager to rep.
Nutrients at today's crop prices strong commodity pricing and soybeans corn wheat palm oil sugar cotton and bottoms and the cocoa Market off the coffee Market all in strength to continue and Global demand during the fourth quarter. We continue to position ourselves to capitalize on the return of the oil fields in the Delaware Basin leading ESG initiatives with a clear emphasis on full cycle Water Management full cycle Water Management means minimizing traditional Source water use and produce water disposal with environmentally-friendly treated produced water recycling with environmental and sustainability sustainability goals Pack & Center for so many oil and gas management teams regulatory bodies and governments the need for responsible and Innovative Innovative. Use and reuse of water is the key to life.
the full potential of
The Delaware Basin Intrepid is uniquely positioned but it's variety of assets and water rights Southeast, New Mexico to become a leader in the space touching every aspect of the market from fresh and brine water delivery to recycled and produced water handling and Disposal. We are in the early stages of construction of a produced water Disposal system adjacent to our South Ranch and should have our first produced water. Well drilled in the first half of this year as we finalize our Capital plans. We're also working on minimum volume commitments with operators provide a solid base of demand to support our investments. We expect to produce water well will cost approximately two million bucks and will complete incremental capital for the surface facilities at the appropriate time total capital for our first well and surface facilities is estimated at 7 million dollars. We expect additional Wells can be added Ed.
man in volume commitments require at a cost of approximately 2 million dollars each
In addition to produce water, we're investing in recycling infrastructure and expanding our capabilities to deliver the services and products necessary to operate in an increasingly Eng focused environment. We're currently in talks with multiple companies about partnering and new and exciting areas of oil field and full cycle Water Management business that will leverage our unique position and inherit optionality of our Intrepid freshwater and brine water assets across the northern Delaware Basin. The northern Delaware is a is full of long-term focused well-capitalized operators, and we're seeing many of these operators revisit their expectations for 20 21, as oil prices have improved significantly in recent months off Frank demand is increasing and Source water demands per completion are higher than ever during the first quarter. We sourced water from third parties at positive margins to suck.
Meant our own water rights and existing infrastructure to meet the increasing volume requirements of operators are strong relationships with those operators and our ability to meet significant reform rights sets us apart from any other source water providers in the Delaware basin.
The next few quarters are pivotal for Intrepid as we will execute on our strategy to expand our oil and gas Midstream business in the Delaware Basin and tap into the significant opportunity off the full cycle Water Management offers proper water management and the ability to provide operators with a single Source capable of meeting both their operating and ESG goals wage would be essential in unlocking the potential value of this business over the coming months and now I'll turn the call over to Matt for review of the financial results and Outlook. Thanks, Bob wage was highlighted by strong improvements in earnings and ibadah compared to the third quarter as good fertilizer fundamentals and an improving oilfield Outlook drove increased gross margin across all our business segments. We recorded fourth quarter adjusted ebitda of nine point seven million dollars an increase of over 8 million dollars compared to the third quarter of 2020 as Bob noted the potash Market.
It really took off in the fourth quarter.
With three announced price increases good weather across the country and Rising commodity prices customers. Look to replenish potash inventories after a strong fall application season that was evidenced by the 6,000 tons of potash sold in the quarter up significantly from the prior-year looking towards 20-21. We still expect first-half potash volumes to exceed prior-year by about five to ten thousand percent despite the large volumes in the fourth quarter average not realize sales price will continue to increase into the second quarter as we've layered enact sales at varying price levels throughout the spring. We have fully realized the fourth quarter price increases in our second quarter volumes and expect some additional spot tons at our current pricing all said we expect our net realized pricing to increase from $205 per ton in the fourth quarter of 2022 $300 to $310 per ton for the second quarter of 2021 with the first quarter net realized sales price about halfway between the two
Going forward we continue to focus significant effort on expanding our specialty potash sales specifically into the premium memory and feed markets areas where we saw significant growth in 2028 for the trio segments are domestic markets are great. Early-season demand in the fourth quarter as we continue to grow sales and key markets throughout the US total fourth-quarter sales volumes were down slightly compared to last year due to large International sales in the fourth quarter of 2019 are posted price is now up $60 per ton compared to the Summerfield levels and we are seeing good subscription at current pricing into the spring. We expect our net rely sales price will increase to approximately $220 to $230 per ton in the first quarter and 2:30 to $240 per ton in the second quarter of 2021.
The oil fields segment improved significantly over Q3 is water sales increased from our higher-margin sources and contracts benefiting the bottom line total water sales, including byproducts, 455 million and queue for an increase of two point two million compared to the third quarter of 2020 operators are adding more Cruise than they expected just a few months ago and commodity pricing is clearly support of the world class reserves and the northern Delaware Basin our position is unchanged since the third quarter with fifty-five million outstanding of which ten million relates to the PPP loan. Our forgiveness application is being reviewed by the SBA with our 90-day review period ending in April availability under our credit facility was $20 at year-end cash flow from operations was twelve point seven million in the fourth quarter and 31 million for the full year.
20/20 capital investment end of the year at sixteen point four million. We estimate twenty Twenty-One capital investment of twenty-five to thirty-five million of which twelve to Fifteen million will be sustaining Capital with the remainder of potential opportunity capital projects. We have significant discretion over our opportunity Capital investments in 2021, and we may adjust our investment plans as our expectations for 20 21 change with a strong early start to the spring season. Our cash position today is twenty-eight million dollars with no change in our outstanding debt from your end that concludes our prepared remarks for today operator. We're ready to take questions.
We will now begin the question-and-answer session to join the question queue. You may press star then one on your telephone keypad off. If you were using a speaker phone, please pick up your handset before pressing any keys to withdraw your question, please press star then we will be joined the queue.
The first question comes from Joel Jackson with BMO Capital markets, please. Go ahead.
Bria Murphy on for Joel thanks for taking my questions how much spring potash demanded the US was pulled forward to the full The Growers by earlier than usual and how long does that lead or how does that leave the channel for politicians injuries currently things give you a little more color on that that what we're seeing is a very diverse Market because all crops are up. So if we look across our entire distribution chain across the entire United States, we're seeing pretty low inventory. So one of the great things about having strong commodity prices across the board means that the potato Growers wage, um are buying as much product as the cotton growers in the delta, Mississippi. And so when you have that kind of across-the-board commodity price strength you see? Yep,
Draw down throughout the country. The other good news is we're not saying the level of imports come from the European countries. So I think if that were extremely well positioned to see twenty Twenty-One from an entirety standpoint be a very solid Year. I'll exactly and some color to that song. Yeah. Thanks Bob. Yeah. I think we saw the inventories to close 2020 on the field be very low out there just based on the historical fall application season, but even with that sucks and you know, we're really expects, you know continued really strong spring application just due to the as Bob mentioned the the strength in the commodity values out there and you know through through the first quarter so far we've seen the wrong location of that. We think that'll continue with a strong spring well into April and May
Does that answer your question? Yeah, thank you. That's helpful and then just turn to water. How should we think about the trajectory of motor sales in 2021 versus I guess 2019.
We're definitely going to sell a lot more water in 20 21 than we did in 2020. I don't know how how much you follow Department of interior. C New Mexico state land office policy. One of the benefits and Intrepid has is we we also on top of our fresh water rides on very significant non-potable water rights as well. So we have a unique ability to to mix two as we as we mentioned earlier service off the water Market on a full cycle basis, which means taking some fresh water some brown Water also taking produced water and recycling it and reselling the recycling water off and so our full hope is in the in the next 30 to 45 days is to have an investor day where we really walk through the the infrastructure that Thursday.
It's under construction.
Be on the Fly recycling that we're doing the disposal projects that we have underway and give a a much Fuller robust picture of everything that Intrepid has been working on during the 2027 season.
Okay, great. And then just the last name for me. Can you talk about your margin outlook for trio and twenty Twenty-One just given a few quarters of negative margin now.
Sure, as I mentioned on the on the price, we don't see the we didn't see the domestic price. You're really in our results in Q4 for a variety of reasons, you know, the our mix of international versus domestic and expect that to happen in in q1 and Q2 as we realize that full $60 up as far as on the cost of goods sold side. I think we're been pretty steady state here for a while now and so certainly the the nice part about, you know our business with pretty low royalty rates compared to competitors on the potash side, you know about 95% of those those increased prices fall to the bottom line. So it would expect improvements going forward into twenty Twenty-One. Yeah, I would also add on the last potash price increase we did not take a trio price increase and so I think the market is well positioned for additional upside potential in the trail Market as well. So I think we'll just continue to see very continued improvements. Don't forget we've also got dead.
Opportunities at our plant as well. So we're just seeing the overall market for trio improved pretty dramatically.
Thank you.
The next question comes from Mark Connelly with Stephen, please. Go ahead. Thanks. Yeah, I wondered if you could just give us a little more of a sense of the piece of of development, you know, are there bottlenecks and what you can get done quickly as this ramp comes obviously, there's so much uncertainty in terms of how quickly these things are ramping back up, but now it seems to be coming very fast and I'm just wondering are you are you finding yourself racing to catch up now or are you a little bit ahead and is there not just your life obviously the partners that you're working with.
You know, I would say we're we're keeping up with everything. The one thing that that we are seeing is people ramp-up is don't don't forget the levels that were ramping up wrong. And so we're still not back to 2019 levels. And as we as we see the ramp-up, I just can't describe the level of communication with the major partners that were that were supplying too. So there's there's virtually daily. If not twice daily communication around for a cruise availability am working through the current Department of interior suspension what they will allow what they want allow. So there's there's just a tremendous amount of collaboration between the oil companies and the service providers. So I think we're going to be able to keep up with it. Just fine if we continue to collaborate in the FAQ.
Okay, so so but you're still you're still sort of in a good position because because the current demand is is behind 2019. So so you're not racing just to catch up with where you are today. Now I just I see phrack Crews coming on.
Just you know, continually and gradually and continually as we talk to the variety of operators that we're dealing with. We're not seeing for a cruise just quote unquote appear. There's a tremendous amount of planning that's going on this time. I think that they're because they're there because the downturn in 2020 was so vicious. There's a lot more active participation with the operators are Bankers hedging programs the timing of their hedging programs. And so there's just an inordinate amount of collaboration to make sure that that the well-funded operators that did hedge get their timing just right so I'm probably answering wrong question, but I I see very sustained organized thoughtful development occurring in the northern, Delaware.
So that's super helpful. Just a question has has weather affected your expectations for fertilizer production this year. Just wondering if if what we just went through was enough to walk anywhere.
The only place we got thrown off track was the freezing weather in Texas and New Mexico. You know, we had we had some power outages wage. I'd say everywhere else that we we Market fertilizer products. We were just fine. I would say that it provided more of a challenge for you know, four or five brief days in South-East Mexico and Texas is it relates to our water business? So if that's behind us, I think everybody when they saw the weather coming did a good job of shutting things down and you know, we're seeing some of the major operators just turning things back on now making sure everything's in total repair, you know, what happened in the state of Texas in terms of the electrical grid, I'm in southeast New Mexico was pretty much unprecedented. So the good news is the repair has has happened and Ed.
Check things out. Thanks for working. And so we're we're just slowly bringing everything back on.
Okay, and you just one quick question on Trio you had you had a bigger International sales last year. Can you just talk sort of about your thoughts about where the trio Market is not going first domestic versus International, you know, did you you made a lot of changes last year on where and how and you know size of shipments? I'm just curious where you come out in terms of where you think best opportunities are for for that product over the next year or two.
Well, we've got we've got two.
Very specific customers that we really enjoy doing business with in in a certain part of the world given we only have one competitor. I'm not going to tell you our favorite customers off and so it's I would imagine that will continue to service those customers cuz they're they're they really are a joy to work with wage is other markets that we're just choosing not to be a part of till they come back and knock on our door as you know, the last several years were extremely competitive. And so we chose to exit certain markets and and let other people take that business some of those people are coming back and knocking on our door and so we're off we're just going to re-enter the the global market much more thoughtfully than we did several years ago.
It's helpful, and obviously it's not just it's not just Trio that's it's struggling to get paid for for for nutrient value. We've seen a lot of them maybe performance across the Specialties. I appreciate it. Thank you.
The next question comes from Vincent Andrews with Morgan Stanley, please. Go ahead.
Hi, this is Steve Haynes on prevention. Just wanted to ask a quick one on the above average evaporation you talked about in in the press release, I guess as it off, yeah kind of in regards to your expectations for cost per ton in 2021. And then also I think there was a comment about being able to operate a bit longer and spring so any any comments off production box as well. I'll just say we had great evaporation years as you know, we've had you know part of being in the Solar evaporation business office is it you're dependent upon the weather and it is cyclical and it creates variability. And so, you know, they're years where we we have slightly higher costs and years where increased wage operation were able to take advantage and and and achieve a higher margin cuz our cost structure goes down to touch. So I'll let Matt if Matt if you want to add to that with some specificity. Yeah. Yep.
Oil change for Mario previous comments. We touch a little bit on some of the freezing weather earlier in the year and and really no impact on our potash production. It was very cold weather and we didn't operate for a few days but it wasn't a major issue station event that would impact our our pond inventories. So still above average of operation. We we do think will operate a bit longer than normal just to get through the ponds and you know all else equal to how may I help our cost per ton? I'm heading into twenty twenty-one.
Okay. Thank you.
The next question comes from John Roberts with UBS, please go ahead right? Thank you. How much does the transition to Brian water increase the wage sources available to you?
Is your question how many more water rights do we have of Brian or I guess I don't understand. His name is Brian 2x your freshwater availability or you know over time as you develop it or I don't know. I don't have a sense of the order of magnitude of how big Brian is relative to Fresh.
That's a great question. We currently on about half a half the water rights that we do in terms of freshwater wage is Brian but getting an appropriation is much easier and so uh because it's non-potable. Hi TDS brine. It's much easier to get appropriation and get supplemental Wells approved because you you don't have the the protests composition of farmers that are competing or municipalities. So the transmission is it's just an easier transition if that if that makes sense from an appropriation standpoint.
Okay, and then adding full cycle Water Management, what what kind of the revenue opportunity maybe per customer Barrel or I don't know how to measure it but not much. Does it increase your addressable Market by having full cycle capabilities versus what you were doing previously and do you need to partner or require additional capabilities to be able to fully off that? No, that's that's the beauty. We you know part of the capital that was spent in 2020 and and some of the team members that we've brought on we use 2020 as an opportunity to really I had to use word upgrade but acquire Talent it came from significant oil companies with with vast recycling experience. We've already purchased a lot of the equipment necessary. We're under construction right now. We're looking at a matter of months wage.
Up and running from a marketing standpoint. The margins are equal to if not better than freshwater because you can take a produce to take a barrel of produced water and and recycle it several times which means you you resell the same barrel of water multiple times. You have a small fixed chemical cost in a small labor cost and and then they they actually are mobile units and so having a produced water Outlet side that we're developing on the backside month allows us that capacity. So it's having the source water the variety of of of geographically The Source water literally all throughout the base and in different forms having the ability to have modular Recycling and then having the the disposal capacity that we're building out as we speak as well as an interesting project that will be talking about
future months as well
Thank you.
The next question comes from Jason Kirchner with Bumbershoot Holdings, please go ahead.
Thank you. Just following up on the on the last answer there. I guess, you know, you mentioned that the next couple of quarters are going to be pivotal for that business. Is there anything you could point to that investors could be looking for that would either you know signify the success or you know, not getting Traction in that business or is that kind of what the investor day that you have planned would be?
That's exactly what it's planned for Jason. You know, we spent twenty twenty trying to get a lot of projects designed get the right track surround them worked into the Regulatory Agencies. I'll be honest the department of interior suspension was just a touch of a blip the state of New Mexico agencies because we're helping them fulfill their legislative agenda. Um, I think we'll get everything accomplished that we want to so, we really look forward to being able to share with the market the things that we're doing and and and creating a lot more transparency. I think had had COVID-19 on into the first quarter where we are. We thought we'd be having that investor day in this quarter, but, you know COVID-19 it is and so, you know, we're finding certain Regulatory Agencies dead.
Court systems legislative bodies are all still operating virtually and it's still slows things down. So that's just a reality of life that we're dealing with. It is improving week-to-week in terms of being able to get things done either legislatively or regulatory wise. So I hope I'm not in your question that that we know the market is is really wanting a lot more transparency and we have every intention of getting it as quickly as we can and sharing the nature of the projects that that are ongoing.
That is the answer I guess but is it the type of business where you able to you know announced like customer wins or contracts or or it's really just going to be waiting for it to start showing up in the numbers.
Could be a little above, you know, some of the recycling you don't necessarily need a big contract and some of the other projects that were working on. Those were all being discussed need it as we speak.
Okay, and then it's been a couple of quarters, but any update on the lithium reserves or you know the tests that had been going on there?
You know that that is a great question. We've been re-approached Now by a couple of company the original company that did the testing for us lilac has come back with promising results. As you know, the lithium Market has been a bumpy ride. And so, you know, we've got the appropriate personnel retargeted back on a project it it it's interesting to have a lithium opportunity. And so we're you know, yeah, I got to be honest. I'm not as prepared to discuss lithium today. Thank you for asking about it, but I got to be honest off the top of my head and my prepared remarks. I just don't have the numbers with me to share. So I apologize.
No problem.
does the proximity though with the gigafactory would that matter in the long-term viability of the reserves potentially being uh
Yeah, in terms of the cost to get it out versus some other method.
Well, as you know, you know lithium it's all a function of to what degree do you want to process it too? And so given where we're located. There are companies that would be interested in using our facility to process lithium from theoretically obtainable other sources that are off nearby. So lithium is all about the what degree do you process it too? So we're still focused on that. We understand it, but I don't think we want to be a a full-service lithium processing entity. We'd rather look to monetize the lithium reserves that we have down there through a royalty structure or allowing someone to take that lithium on-site combined. It will let them from other sources and and continue to process it further.
Okay, great. I appreciate the the answers. Thanks.
The next question comes from Matt Farr well with Ross Capitol, please go ahead.
All right. Thanks for taking my question. I was wondering if on the Water Business one. If you could make a point of clarification, I'm not sure if I quite caught it I have in my notes that there's a certain amount of water resources that the company owns. I have thirteen thousand eight hundred acre feet or a half a million barrels. There's also a slide on this in the August 2019 presentation. I understand you may not have this data at your fingertips, but I'm wondering if the Bank Reserves are included or in addition to the reserves you've disclosed to the market.
They're not included.
Okay, great and quite frankly, you know, if you follow New Mexico policy the state land office policy if you follow you know, what's going on in the legislature as we speak today there there are several bills. So we've been very adaptive to not only the ESG requirements of several companies, but we've been adaptive to what's going on with the state land office the the administration change federally as well as what's going on in the New Mexico State Legislature.
Okay, and I'm definitely looking forward to the investor day. I guess I I'm still trying to get a peek into what you might say. So foul ask is the recycling opportunity. How does you know if you see it. Now, how does that compare to the market opportunity? That's a little bit more tangible in fresh water rights suck water disposable to explode. Is it equal or greater or or perhaps early or staged?
I think it's
I'm quite frankly. Every single oil company is trying to move towards a recycling component. But you need you need Source water either freshwater or brackish water to start the flywheel. And so despite operators claims of very high percentages of recycled water. I'd say right now. It's it's in the twenty-five to thirty percent. But we're seeing the technology that can easily take it to 50% and twenty Twenty-One and and grow it from there. So often we see it as as first and foremost where where the regulators and the politicians want to take it so that we're not fighting battles over River water bath. Hoga Wala water Etc. It it enables everyone to get on the same page and move it forward.
Okay, great. And the last question is obviously with the higher prices. There's a high probability of the company generates free cash flow this year. There's the obvious Improvement in financial strength in terms of in the equity markets. Can you give us an idea of what potential uses of free cash and or financial strength might be would it be dead dead or or other initiatives? I would say first it's too you know, right now our leverage ratios in good shape. We don't have any real risks. They're we'd like to offer reduced debt a little bit more on the first one to admit because I'm the largest shareholder that I would love nothing more than to announce a buyback program when we're financially able to and return money to to shareholders as we all know had we done that like many other oil companies in Twentynine Palms.
We did never made it through 2020. So it's it's a good thing. We didn't despite the urging of of many people. So I think we just got lucky on that one, But as we as we do our our goal is to return funds to shareholders as quickly as we possibly can. We we we understand that we hear that I just can't stress how much we appreciate the need to do that if I can say it any more clearly, I will
Great. Thanks for taking my question, Bob.
Want to thank everyone for their interest. I'll go ahead. This concludes the question and answer session. I would like to turn the conference back over to Bob Ross any closing remarks?
Just want to thank everyone for their time and they're interested Intrepid. We hope that everyone stays healthy and look forward to catching up with you. So, thank you and your thank you. Have a great day.
This concludes today's conference calls. You may disconnect your lines. Thank you for participating and have a pleasant day.
Dead dead dead.