Q2 2021 Intrepid Potash Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Intrepid Potash, Inc. Q2, 2021results conference call.
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I would now like to turn the conference over to Matt Preston Vice President of Finance. Please go ahead.
Thanks for East and good morning, everyone. Thanks for joining us to discuss Intrepid second quarter 2021 results.
With me on the call today as Intrepid co founder executive Chairman and CEO, Bob for novice also available to answer questions. During the Q&A session. Following our prepared remarks will be our president, Brian Stone, and our vice president of sales and marketing Zachary items.
Please be advised that our 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 the risks and uncertainties that could cause actual results to be materially different from those currently anticipated. These.
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 here by reference.
During today's call, we 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 website at Intrepid potash Dot com.
Now I'll turn the call over to Bob. Thank you, Matt and good morning, everyone. Our second quarter was highlighted by another strong performance in our fertilizer segment as strong demand and increasing prices resulted in strong bottom line results. We reported second quarter adjusted net income of $7.4 million in it.
Adjusted EBITDA of $16.9 million significant improvements over both the prior year in the first quarter of 2021.
As expected cash flow from operations was impressive with $32.3 million in cash flow in our second quarter alone and $51.4 million for the first 6 months of 2021 already exceeding our cash flow from operations for the full year 2020.
In addition to strong results, we received notice of full forgiveness on a paycheck protection program loan from the SBA and paid down the remaining $15 million on our senior notes our balance sheet is clean and strong and will allow us to execute on the significant opportunities in front of us in the oilfield market.
Second quarter results also benefited benefited from $6 million received for the sale of another small 320 acre tract of land located adjacent to our 60000 acre Intrepid South ranch and the associated saltwater disposal permits with it.
Writing a satisfactory gang, considering we purchased the assets about 2 years ago for $3 million.
We ended the quarter with $55 million in cash on hand, and approximately $30 million outstanding on our revolving credit facility and expect to pay that down in the third quarter.
Earnings for our nutrient business improved dramatically in the quarter as we continued to layer in sales at increasing price levels potash.
Potash pricing has continued to improve in both the U S and global markets since our third quarter price announcement, and we're currently layering in spot agricultural sales at $250 per ton above the 'twenty 'twenty summer fill price levels, we expect to continue to layer in spot sales during Q3.
That increased pricing levels, leading to another quarter of higher average net realized sales prices in the quarter.
Solid agricultural economics across the global cornucopia of crops from coffee sugar cotton palm oil soybean corn wheat, and other commodities helped boost and further strengthen the global farming economy, which in turn provides a foundation for firm potash pricing.
Good application rates across our markets, but most distributors low on inventory at the end of the spring season, and buyers have been eager to restock depleted inventory levels. We expect good demand will continue through the second half as increased farm income levels combined with the potential for.
For an on time harvests remain supportive of fertilizer application.
Our oilfield solutions business improved compared to the second quarter of 2020, although margins were slightly reduced as we intentionally high graded and deferred to later scheduled water sales on our south ranch in anticipation of higher margin sales in the second half of the year from tracks that are closer to our wealth and <unk>.
Just on a sliding scale pricing tied to west Texas intermediate.
Water sales are already picking up in the third quarter with approximately $1.5 million in sales in July alone and we have a great outlook for the rest of the year.
Oil price, who remains supportive, particularly for the northern Delaware Basin, and our South water rights are fully committed in the second half for the year and the runway into early 2020 looks very promising.
Other revenue sources, which include a produced water royalty caliche, Brian sales in surface use agreements improved significantly in the second quarter compared to the prior year highlighting the improved oilfield activity near our operations. We continue the pivot to ESG friendly full cycle full cycle water management system.
Investing in additional recycling equipment during the second quarter, and we look forward to expanding on the full cycle of water management products and services, we offer in the Delaware.
We expect to mobilize our first 70000 per per barrel per day barrel recycle unit in the next few weeks with the potential to steadily increase volumes to over 200000 barrels per day over the next few quarters as we bring additional recycled units online.
And now I'll turn the call over to Matt for a review of our financial results.
Thank you Bob as Bob noted earlier strong fertilizer demand and rising prices kept the momentum going in the second quarter driving significant improvements on our consolidated results and across all segments.
The potash segment generated $10.1 million of gross margin in the second quarter as higher net realized sales price and increased volumes drove significant increases compared to the prior year second quarter production saw the benefit of an above average 2020 evaporation season is increased pond production allowed us to extend the harvest season compared to the prior year.
[noise] enabled us to sell additional tons.
The last few months saw steady increases in potash pricing a strong commodity prices across all industries and good weather led to above average demand as farmers were eager to make up for below average application seasons in the past 2 years.
We announced a 20 dollar increased potash price in May and booked historic volumes for third quarter delivery at distributors restocked warehouses after a busy spring.
Since the May announcement potash pricing has moved up considerably in the barge in England warehouse markets as buyers compete over limited supply for for third quarter delivery.
We expect third quarter average net realized sales price will be between 355 and $365 per ton with additional upside into the fourth quarter 2021.
Our trio segment recorded a great quarter generating $3.2 million on gross margin on higher volumes and price compared to the second quarter of 2021st half trio sales volume exceeded the prior year by 5000 tonnes of strong customer relationships and robust demand led to record domestic deliveries, which more than offset reduced.
International volumes.
We increased trio price $20 per ton in may and another $35 per ton in June as the potash market continued to move higher we began taking orders for third quarter delivery. After the $35 per ton price increase in June and expect to realize all of this increase in Q3 with an expected net realized sales price of between 300.
10, and $325 per ton per.
The price is now up $135 per ton compared to the summer fill levels and were mostly booked through the third quarter.
Total second quarter water sales were $2.8 million similar to the prior year as we manage our south ranch in order to meet higher demand higher margin demand later in the year as Bob mentioned, our other revenue sources increased in the second quarter, and we expect improving margins in oilfield segment results as our water sales increase in the.
Half.
As Bob discussed our debt position decreased to $30 million outstanding at quarter end, all of which was under our revolving credit facility with BMO as of today, we have paid back all but $10 million under the facility and expect to pay down the remainder in the coming weeks with the senior notes pay down and improving EBITDA. We now have full availability under our credit facility.
<unk> and we'll look at possibly expanding that facility in the coming quarters, we spent $6.6 million on capital investments through the first half of the year and now estimate 2021 capital investment of between $20 million to $30 million.
That concludes our prepared remarks for today, we're ready to take questions.
We will now begin the question and answer session.
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The first question comes from Joel Jackson with BMO capital markets. Please.
Please go ahead.
Hi, This is for your Murphy on for Joel Thanks for taking my question.
Where are we just seeing a surge in potash benchmark sleep and day to day.
Now around $600 per ton in the Midwest, but it's been a lot of global producers Orange transaction transacting at these levels. How liquids do you think these benchmark prices are and are you booking business at these levels in the fourth quarter.
That's a great question and I'll, let Jack.
Answer that we've been very methodical in which are in and the timing of the orders that we take.
We're seeing in our region very strong demand, but I'll, let zack give some color to that.
Yeah. Thanks for the question you know I think as far as the first part around the liquidity at the current levels.
You know most buyers in the market in the Midwest had the tons in place are on order already for what Theyre going to need to get started this fall. So we don't see a lot of liquidity at those levels of day, we certainly has transacted on some spot tons from our from our from our mine.
Non stop at that point looking ahead to Q4.
Not booked any times for Q4, yet on the potash side.
We're going to hold off from booking tons there and.
You know the market remains tight and.
And we go from we feel comfortable that we have for Q3, and we'll we'll address queue for later.
Yeah.
Okay. Thank you and then in oilfield solutions revenue was obviously down year over year in the first half, but you pointed to.
The potential for steady growth in the second half, which I believe in anticipation of higher margin sales in the second half what level of growth do you expect to see.
Yeah, Yeah. It's a good question certainly Q2 was down considerably from.
Q1 of 2020 is really just held back water.
And opportunistically scheduled debt for that for the back half of the year.
We expect to sell out of our of our acre feet of water on the South Ranch I'm, sorry, I can't give you a a margin number but we will see significant growth in revenue towards the second half of the year you really hopefully in line kind of with where we had been pre COVID-19.
Okay. Thanks, that's helpful. And then just the last 1 back on I guess potash and trio pricing is expected you're right in the third quarter, how do you expect margin to trend well call.
Also right or do you expect margin to expand.
Yeah, Yeah, so we're in kind of.
Middle back half of the evaporation season, right now yeah, our cost structures as a pretty similar those tons are in inventory right now that will be selling you were going to start up our production here at H B. This week in our Utah facilities.
Late August early September so the cost side is going to stay pretty consistent obviously with some adjustments just based on where we are selling out of and you know when we see higher pricing.
See a lot of that for the bottom line, you know roughly 5% 5.5% royalties.
So with the 10 dollar increase we see 95 per cent of that follow the bottom line and in most cases and so we expect that in Q3.
Okay. Thank you.
The next question comes from Vincent Andrews with Morgan Stanley. Please.
Please go ahead.
Hi, guys. This is well hang on for Vincent.
Thanks for taking my question I'm wondering if you guys can comment on your potash inventories and how youre thinking about sales versus production as we go through the year on exit all season.
Yeah.
I'll, let Matt address the inventory issue, but as you know, we're we're a relatively small producer regional producer. So we've always had the ability to sell out our inventory.
I'll, let Matt address the current levels and how we've tried to.
Manage our book.
The strength of the agricultural commodity markets. There is no no. There's no reason to believe that we're not going to see continued strength in the fertilizer markets. So we've been trying to manage our sales book.
In anticipation of the really strong agricultural economy, So Matt I'll, let you talk to the specific inventory levels yeah.
Yeah sure you know, we certainly coming off of a very strong 2020 evaporation season, we had above average tons in inventory combined with those those down application years that we've been able to sell you over the past 12 months as demand is just really kept going since really October of 2020, certainly I'd say, we're in the kind of.
Middle half to back half of evaporation in 2021 and so we don't have any updates as far as production and inventory for for next year, but you certainly we continue to.
So we are pretty smart about holding back ton supply and historic volumes to our high net back customers and holding back tons for our fall season, and hopefully early 2021 or 2022, excuse me, which we expect will continue to see some price appreciation from where we are today.
Got it and then 1 more question if I may I'm wondering if there's any concern.
With given how high potash prices are right now that our farmers might turn to mine the soil.
Applications. This fall on next spring I guess in other words do you.
CA for C.
See any like demand destruction happening.
Weighted to worsening affordability.
We all lived through the price increases about 7 O 8.9 and watched the demand destruction that occurred on potash prices got up in the $800.900 range.
I don't think we're remotely near pricing, where we're going to see a demand destruction.
On.
I think when you look at that farmer economics.
They're doing extremely well right now globally.
We tend to look at all commodities that use significant amounts of potash and we're seeing strength across the board. So if you look at coffee prices hitting the prices they have sugar cotton all too often people focus on corn and we'd like to remind people to look at everything else.
Because it provides such a solid foundation for where we are so given the strength across the entire spectrum.
We believe that we're finally at what is reasonable market pricing.
I think when you look at farmer economics.
We've got plenty of room, and we should not see any demand destruction at these levels Zach I'll, let you add some color I think I think Bob covered it well I mean, I think as long as we're at these levels of economics for growers.
Even at these heightened input levels for potash specifically.
It still makes financial sense from a from a rate of return perspective for potash on the ground in a bushels and.
And I think we're seeing that with just the.
The increase we saw for this fall around the.
Fall demand from growers and just things, we're picking up from visits with our customers as well that they're not seeing a downtick in demand yet from growers.
Got it thank you.
The next question comes from John Roberts with UBS.
Please go ahead.
Thanks, and congratulations to Brian on promotion.
No.
You also added up energy board member during the quarter as well as you know Brian's background and the addition is energy knowhow to the board signal any kind of step change plans here and advancing the watering oilfield strategy.
Absolutely.
This is Bob and John Thank you for the question and I'll, let Brian take a victory lap here in a minute.
We're really proud of the addition of Laura Lancaster, and really want to stress for her financial expertise in the oil and gas energy space. So it's not just the energy experience, but the financial experience.
We've clearly been been describing and trying to articulate our pivot.
In the full cycle of water management.
Our increased emphasis on recycling the units that we've picked up the unit.
That's where the process of putting to work.
We're working on some interesting projects on the disposal side and so.
We just continue that pivot that we've been describing over the past several quarters and lining up the expertise to execute on that.
Brian if you want on add anything to that.
Thank you said that very well Bob I just think.
This pivot to full cycle water management management.
I think that there is a yeah.
Willing market there from an ESG standpoint, we think it's politically and from a regulatory standpoint.
The market is asking for and we think it is highly synergistic with our with our business in Carlsbad and you know what the work force for 300, plus employees and so we think we're really well positioned in that market.
And then on the land sale in Texas does that mean debt all water growth is gonna be recycled water or would you be expecting to just grow the disposal wells elsewhere.
Youll grow both disposed water as well as recycled water.
Well clearly grow it.
Not through <unk>.
We'll talk about that in the upcoming quarters.
<unk>.
But with.
We currently have plans to go out to grow our ability to handle.
The disposal opportunities.
And so what why the land sale in Texas.
Well it was adjacency.
We just have better opportunities when we look at the disposal market. So it was 320 acres adjacent to our 60000 acres.
We have bigger plans for it so.
It.
If you look at if you look at the southeast New Mexico, It like a giant jigsaw puzzle.
There are people that are trading pieces, so that their jigsaw puzzle.
It makes more sense to them that they have more continuous pieces of their specific puzzle and so if you look at all the different operators all the different pieces of infrastructure.
Trading 1 piece of infrastructure 1 piece of land.
For something else is just a useful.
Allocation of capital.
I wouldn't I wouldn't read anything into it other than it was literally changing trading jigsaw pieces.
Okay, Yeah, I think I'd also add that.
Full cycle water management requires large scale.
Our on demand.
Disposal and we just felt this asset didn't meet those those requirements and we're able to sell it into 2 ex.
Thank you John.
Once again, if you have a question. Please press Star then 1.
The next question comes from Matt Farwell with Roth Capital Partners. Please.
Please go ahead.
Hi, Thanks for taking my question, if you could just step.
Step back and and on the oil services business and.
Give us a picture of what the infrastructure on the business might look like in 'twenty 2 versus 21.
In the sense of we believe <unk> been talking about full cycle water management the source water delivery.
Cycling blending disposal.
You know what what might that look like.
How does the business going to evolve over the next 12 months.
That's a great question on throughout the entire southeast New Mexico portion, we now have the ability to deliver source water.
Whether its freshwater or Brian or brackish water to operators throughout the entirety of southeast New Mexico.
We've got.
3 for recycle units ready to go up and running and are currently under negotiation.
For the significant customer that debt that we hope to announce literally any day on.
On the disposal side, we've got a very creative project that we've been working on with the state of New Mexico that we'll be talking about in the upcoming quarters.
That'll put us smack in the middle of the disposal business, given our location and calm.
The location of our facilities.
Within the footprint of some of the <unk>.
Biggest units Poker Lake unit, and the Big EDA unit in southeast New Mexico, So our goal.
Hopefully by if not fourth quarter, but the first quarter.
Is to be able to deliver in the hundreds of thousands of barrels I mean right now we've got the capacity on the freshwater side or source water side.
To be delivering.
3 to 400000 barrels a day.
And recycling at those same levels.
And hopefully disposing of those same levels.
Going into 2022.
Did that answer your question, yes. It did yeah. That's that's very helpful. Thank you.
In terms of the.
How you're funding that.
Lot of the funding is as I imagine day expense, but is is some of this funding going to flow through capex on the cash.
Cash flow statement and if so what.
But my non MLR looked like in 2022.
On the Great News is a lot of the capital has been spent so if you look at our pipeline infrastructure. If you look at the recycled units.
A big chunk of the capital has been spent.
And so we're talking about bite size pieces that are easily paid for with cash flow or small draw downs on our revolver.
So.
We've as I tried to describe earlier, it's like a giant jigsaw puzzle.
Slowly coming together.
So everything that we're looking at is very much in bite sized capital pieces, it should be able to happen out of either cash flow or small draw downs on the revolver.
Okay great.
And is there any update on the on the litigation front.
As well as the there was a commentary on the 10-Q about a customer deposit.
On an alleged default on a sales contract I don't know if that's just the rent.
For the voluntary disclosure, but any update you can provide on either 1 would be useful.
We're just we're eagerly awaiting the.
The results from judge waxed sort on the adjudication trial.
We can only assume he has taken us time to write a thoughtful opinion.
I wish we had an update for you we are eagerly awaiting that as well.
We've got several significant water permits.
That are in the process of being adjudicated and we would love to be able to announce any day that they're complete the good news is that all the large expenses around procuring those permits.
Fighting the protests adjudicating the water rights are those large legal expenses are behind us.
We're now just awaiting outcomes.
That's great.
And the comment and the the litigated.
Just a follow up on the sales contract does that also.
Assumed in there your commentary.
Yeah.
Yes.
The words say, what they say and I'll just leave it at that.
Okay.
Great. Thanks for taking my questions.
The next question comes from Jason <unk> with Bumbershoot Holdings.
Please go ahead.
Good afternoon, congratulations on the results.
Thank you Jason kind of following.
Kind of following up on the last question been asking you about it for a long time. So I guess no reason to shy at this point, but the answer on capital structure and capital allocation plans for a while has been that it's kind of just too premature to talk about and you need to execute first and then can focus on it but just given that you brought it back to a straw.
Our net cash position now and looking out for next year.
With continued strength in potash and even any improvement in the oilfield that cash position might grow.
Pretty substantially to where you might come into the end of 2022 and you could be looking at a pretty significant percentage of your market cap in cash.
Yeah.
From there would be a champagne problem to have but at what point.
Is it going to be.
Appropriate or maybe even unavoidable to start.
Giving more details on the financial part of the strategy. There and are you willing to kind of do that at all today in terms of the balance sheet, or where maybe where buybacks debt as part of the strategy.
Jess its a great question I would say if anything that we are more inclined to some sort of a.
A special dividend if you will we're looking at it we're very aware of it we would love.
Nothing more than to return capital to shareholders as largest shareholder you know on very much aligned with you.
<unk>.
We're glad to be where we are and so we're now having those discussions very honestly.
We feel like a buyback program would be much more tax efficient and so we're working as hard as we can and eagerly.
So that the next time you asked that question I can I can answer you with.
Timing size and shape.
Okay.
And just last 1 would be the land sales just a quick follow up on that.
I'm, assuming you sold for 50% interest in the 652 acre what did it actually get carved out on 326 or it's just that the loving.
For loving, Texas due in part to the board the piece of the 640 was partitioned into 2 to 320 that we owned 100% and the other company owned 100% and so what.
As I said.
It was a nice return and we virtually doubled our money in 18 months. It was literally just that.
320 track land right next to our 60000 acre track of land that made more sense.
<unk>.
Puzzled pieces, if you will.
Got it okay. That's it for me Thanks, a lot congrats again thanks.
Thanks, Jason.
This concludes the question and answer session.
I would like to turn the conference back over to Bob <unk> for any closing remarks.
We just want to thank you for your interest in Intrepid and your continued.
[noise] willingness to be a shareholder we strive to perform and do our best and once again. Thank you for your interest and hope everybody has a great day. Thank you.
Oh.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Yeah.
Yeah.
Okay.
Yeah.