Q2 2019 Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Intrepid potash Inc. second quarter 2019 earnings conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
Hey, good presentation, 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 may signal, an operator by pressing star and zero.
I would now like to turn the conference over to Matt Preston Investor Relations. Please go ahead.
Thanks Carl.
Good morning, and welcome everyone.
I remind you that parts of our discussion today will include forward looking statements as defined by the U.S. Securities laws.
These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable.
These statements are based on the information available to us today, and we assume no obligation to update them.
You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the FCC.
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 included in this mornings press release.
Our SEC filings and press releases are available on our website at Intrepid potash Dot com.
Presenting on the call today are Dr. novice, our co founder executive Chairman, President and CEO and Joseph onto <unk>, Vice President and Chief Accounting Officer.
Mark Mcdonald, Vice President of sales and marketing and Alex Wagner Vice President business development are also available for questions.
I'll now turn the call over to Bob. Thank you, Matt and good morning to everyone and thank you for joining us.
This quarter, we delivered a solid second quarter as our diversified revenue streams provided a solid boost overall results and potash and trio produce good margins. Despite a first half of the year that saw record wet weather and flooding throughout much of the United States.
As we detailed in two press releases last week, we recently took additional steps and expanding our oilfield footprint.
On Intrepid South partnering with NGL energy partners in a joint marketing agreement of our water and jointly acquiring land in Texas, but the development of produced water disposal facilities.
Under the joint marketing agreement Intrepid will be responsible for the development gathering transportation and sale of the combined water from the Intrepid South property in Ngls neighboring Bakken and Mccloy ranchers.
Together these branches cover a contiguous 185000 acres servicing approximately 20 oil and gas operators in the heart of the Northern Delaware Basin.
By combining the water systems of our two companies, we will improve the efficiency of our operations and expect to reduce the operating costs of our overall water operations together with NGL. We also acquired land in Texas for the purpose of building a produced water disposal facility to gather and transfer produced water from our three collective ranches and the neighboring oilfield activity, we have already permitted five disposal wells and we'll begin construction in the third quarter.
Once complete we expect facility will have a capacity of 100 to 125000 barrels of produced water disposal per day, we expect the first wells to be completed in the first half of 2020.
Intrepid South got off to a great start during the second quarter with water sales ramping up considerably towards the end of June and strong sales from other revenue streams of colleague a produced water disposal royalty right of ways easements and surface use agreements. This provided a boost to our off till solution segment revenue in the second quarter as we saw another quarter of steady water sales from our expansive legacy water rights despite decreased activity in the Delaware Basin.
Fluctuating oil prices during the second quarter led to a decrease in frac crews and completion activity as operators pushed frac schedules to later this year, although we expect increased sales in the second half of 2019.
Despite the volatile market environment of the past few days Intrepid has numerous positive developments, including.
The recognition of oil inventories being back to their approximate five year averages frac crews increasing in the northern Delaware, increasing infrastructure projects like the select energy pipeline being completed which select recently announced has increased capacity to 150000 barrels per day. So we are fortunate to have the ability to meet this growth.
On top of that we are seeing an approximate 15% increase in water used per completion compared to last year and pipeline takeaway.
Capacity is rapidly improving and expected to exceed production in the first half of 2020 alleviating another bottleneck in the region.
We have already seen significantly reduced basis differentials, which increase each operator's profitability.
With these numerous positive tailwinds, we maintain our full year water sales guidance towards the high end of the previously announced range of $20 million to $30 million and look forward to anticipate and anticipate substantially increasing that number for 2020 .
Moving to our fertilizer business, both potash and trio delivered a solid quarter in the face of record wet weather across the country that prevented us from making up all the tons that were pushed back from the first quarter.
Higher pricing and cost containment drove improvements in both potash and trio gross margins compared to last year.
The recent summer fill.
Price announcements for potash and trio got us off to a great start in the third quarter and we have a full order book for both products.
Excess potash inventory from our Canadian competitors that couldn't get to ground in the spring because of the wet weather is clearing out we're seeing farmers figure to replenish nutrients in the soil. After two consecutive application periods in the Midwest hampered by adverse weather.
Overall, we delivered solid results in the second quarter and believe we are extremely well positioned for a good second half of the year. Our recent partnership with NGL for water sales in the joint acquisition of land for the development produced water disposal facility are significant steps and expanding our oilfield footprint to grow our produced and recycle water offerings capitalizing on the diverse opportunities available on and around Intrepid South.
As we said on our last few calls we plan to continually and thoughtfully pursue additional opportunities across our business segments. We look forward to updating you on their progress on future calls I'll now turn the call over to Joseph who will discuss our financial results and our outlook.
Thank you, Bob and ill add my good morning to everyone and thanks for joining.
During the second quarter, we generated net income of $5.6 million or four cents per diluted share.
As higher realized prices and increased sales of by products drove an improvement of $6.6 million or five cents per share over the prior year second quarter.
Our potash segment generated $8.2 million and gross margin during the quarter, a 2 million dollar improvement compared to the prior year due to increased average net realized sales price and more diverse targeted marketing to higher end customers.
Looking to the third quarter, so the summer fill pricing announcement, which reduced potash price $45 per ton for AG sales is expected to lower our overall net realized price by 35 to $40 per ton.
Our solar solution mines are wrapping up this summer evaporation season, with our HB mine beginning production this week and Moab and Wendover expected to start early in September .
Trio also saw improved results in the second quarter with $1.5 million of gross margin being generated this compares to a gross deficit of $2.2 million in the prior year second quarter.
$3.7 million improvement was driven by increased byproduct sales improved production costs and higher average net realized sales price per ton.
Second quarter sales volume increased slightly compared to the prior year as we saw good demand to domestic markets for most of the spring season and increased international shipments as expected international shipments offset higher domestic prices and lowered our overall average net realized sales price compared to the first quarter of this year.
In early July we matched our competitors summerfield pricing announcement for letting the night and similar to potash, we saw great subscription with the nutrient content of trio, representing a compelling value for farmers.
We expect our average net realized sales price in the third quarter to be similar to the second quarter.
Oil field solutions delivered a good quarter with $3.5 million in gross margin as a $1.7 million increase in sales was offset by startup expenses related to the acquisition of intrepid sales and costs related to our high speed mixing and trucking services.
As we've discussed before the oil and gas activity and resulting demand for water on the intrepid south property outgrew the existing infrastructure and we are actively and aggressively upgrading and installing more permanent infrastructure to meet this demand. This infrastructure will improve our operating efficiency and is expected to cut our water transportation cost significantly over the next couple of quarters.
Turning to liquidity on August 1st we entered into a new revolving credit agreement with bank of Montreal, moving from a 50 million dollar asset backed facility to a 75 million dollar cash flow revolver with improved interest rates and less restrictive covenants.
The new facility also includes an incremental $75 million accordion available to us.
This facility reflects our improved financial performance in recent quarters and positions us to pursue additional growth opportunities across our diverse businesses.
Cash provided by operations was $24 million during the second quarter of 2019 and cash spent on investing activities was $62 million, primarily due to the intrepid South acquisition in May.
We expect our capex, excluding acquisitions for 2019 to be approximately $25 million to $35 million, which includes the opportunity capital investment related to our newly acquired assets.
That concludes our prepared remarks, operator, and we are ready to take questions.
Thank you we will now begin the question and answer session.
To join the question queue you May Press Star then one on your telephone keypad.
You will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
We will pause for a moment as callers join the queue.
The first question comes from Mark Connelly of Stephens, Inc.
Please go ahead.
This is Joe on for Mark Connelly, a couple of questions on the water side.
Can you just tell us what STI contributions revenue contribution from dinwiddie in the quarter.
[laughter] as you know we took over the first week in May.
On Dinwiddie and so Joseph do you have those numbers handy.
I do so we sold in in the quarter well, let me just look at that here today, because that's what I have handy and obviously it will include the piece that we captured in in with Dinwiddie.
I was told a comparable amount year over year and with some of the issues and scheduling.
Fracking scheduling issues that Bob mentioned, we're at comparable amounts to 26 million barrels year over year.
Of that about 2 million barrels was from.
The South branch.
Okay.
And then that's going to ramp up significantly as we take over we build out the infrastructure to use the first call. It 30 or 45 days as any kind of a benchmark is way premature.
We fully anticipate selling out of water increasing.
The water down down at the Intrepid South the thing to focus on Joan is not necessarily barrels, but one of the reasons. We acquired south is because of its proximity to the oil and gas activity and what we are enjoying is increased dollars per barrel and so if you look at our revenue year over year quarter to quarter, although barrels were comparable water sales were up significantly.
I see got it got it and then if I want to think about Neil.
Sort of like although bottom right you have right now after obviously this new NGL JV and by the way congratulations on that.
How much coverage you actually have now in comes off like servicing the need in the area. I remember you used to say that like you know, 20% to 25% up last year in the past in terms of coverage I'm just trying to gauge like how much more opportunities you still have there.
Well as we said we cover 185000 acres in the most productive part of the Northern Delaware Basin, we have over 20 plus operators that we're servicing.
So we fully anticipate on the three ranches selling the water out that's produced on those three ranches and one of the.
The beauty of our select agreement its select your pipeline.
Comes down from the north from our minds and brings our water down that that.
Basically that ends at the beginning of those three ranches that we now are doing the marketing on on that on that area. So our footprint has expanded dramatically in the northern Delaware.
Towards the end of the week, we'll be putting out a set of just water deck slides that show you.
The immense amount of infrastructure that we can now connect into and can deliver water into so we've got the whole southeast new Mexico portion of of the northern Delaware now covered with infrastructure and our water.
Okay got it got it and then switch over on the access side you know that just looking at potash, obviously is a tough quarter for everybody given the ablate planning and but on the cost side. It just seems to me that it's a little bit higher than.
Last quarter like you know given maybe there was some volume issue there but are you in general pretty happy with where you are in terms of cost that potash production operation Yeah, Joan I would say that our costs are are flat on a comparable basis on increased.
On increased sales and relatively comparable production. So this is this is a.
An improved situation, where we were seeing costs, increasing we're now seeing them.
Flat to decreasing so I would say, yes, we are.
I'm happy with the results of our of our operators and the production facilities and I would also add to that the that are one new Mexico strategy with our employee workforce in Carlsbad, we now have.
Employees that were taking down to the Intrepid South branch that are participating in the construction projects.
So we have the ability to utilize our vast workforce that lives in Carlsbad in a very unique way. Unlike many.
It was in a row that you are you saw some profitability in that business and if I hear it correctly I think you mentioned that the price realization for the third quarter is similar to the second quarter is it like a normal trends because I'm just wondering if the quarter is seasonally weak and you are still maintaining a good pricing realization are we seeing strengthening in that particular business and can you talk a little bit about maybe the mix going forward, how should we think about international versus domestic thank you.
Oh, we're really focused on the domestic market and so our goal is to.
To really focus on the higher netback opportunities in the domestic market.
And and leaves the some of the lower priced or lower netback pricing on to other folks and focus on the United States, where we've great Mark has done a great job of expanding our footprint are one competitor did take the price down for no apparent reason and so weve responded to that and and that was a fill a theoretical fill program and the price is already coming back up. So that's why we anticipate third quarter pricing.
Being similar to second quarter pricing I don't know just if you want to add anything to that yeah. I was just going to say Joe on that I would not say that our pricing is cyclical it's more.
Strategic in is as Bob mentioned, the strategy that Mark has laid out.
We will be to really focus on the domestic customers.
Which has just.
A matter of execution and not necessarily correlate to a time periods.
Thank you.
Thank you.
Our next question comes from Joel Jackson of BMO capital markets. Please go ahead.
Hi, This is robin on for Joel Thanks for taking my questions.
So the overall solution segment has been delivering on gross margin give or take about $3 million to $4 million a quarter over the past year or so I. Appreciate that there has been some acquisitions and partnerships being made there will obviously take some time to ramp but can you give us a sense of how we should think about gross margin growth in second half of this year as well as next year and how we should think about water sales growth and how that translates to a gross margin growth. Thank you.
I would say there there both increasing expected to increase for the second half of the year.
Although not correspondingly in other words, I think our our sales will increase and our cost of sales will not because of the infrastructure things that we've talked about putting in place where we're working on those right now and so.
We expect the gross margin to increase with increased sales and lower cost of sales not only on the water side, but as as Bob mentioned there are other revenue streams that we have on the South ranch and therefore, an oil field solutions collegiate sales right away agree agreements surface use agreements easements.
They're all complimentary to the area in the oil and gas industry and we're executing on as we speak.
Yeah. Most importantly, if he just once again a look at the the select pipeline that went from zero to 150000 barrels of capacity that we have the we have the water supply that capacity. So that one agreement and should see a significant bump in revenue. If you look at the intrepid, south, which which hooks into that system and covers the area of the of the three ranch am I with the NGL gives us an additional opportunity to to market watered down there as well as enter into the produced and recycle water businesses as well.
And then you look at our eastern or western edge of our property with our infrastructure.
Of her run ponds and the pipelines that we've built so we now cover with infrastructure.
Being the entire part that's why as I mentioned earlier.
We're remaining with our 2019 guidance of 20 to 30 million and think we'll hit higher but we look forward in our third quarter call to substantially increasing that number for 2020.
That's helpful. Thanks, and just one last question from me. So what is the expected capex associated with the water system improvements for next year, and how will that be split between 2019, and 2020 that more front loaded.
No I'd say, it's pretty even I think.
Total net to Intrepid right now is sort of in the $7 million to $10 million range and the returns on those on those dollars are pretty prolific.
In terms of the entry that were making into the produced water in the recycled arenas as well as the freshwater arena.
And so just just though.
The one single permanent infrastructure pipeline at the Intrepid South branch.
Should cut our water delivery costs, some almost 60%.
From from one big major pit the back compared to the go to keep that I don't want to get into the weeds, but we're not talking about big dollars for very significant returns.
Thank you.
Our next question comes from Vincent Andrews of Morgan Stanley . Please go ahead.
Hey, guys. This is Jeremy Rosenberg on for Vincent Thanks for taking my questions I wanted to start out on the fall application season, maybe just get your thoughts on what your volume expectations are and in potash and en Ling benign for the for the second half.
Mark you want to take that.
Sure. Thanks, Jeremy.
We had going into the.
The summer fill season, we had a very good subscription on both of those products. We expect a very strong application season, I think as Bob mentioned in his opening remarks I'm a poor fall of 2018, followed by a <unk>.
Challenging spring due to wet weather has led to a nutrient removal.
In the soil or not enough nutrients being applied so to that point, both potash and lend money to applications that should be strong going into the fall and we expect a mid and leading up to that actually I think prognostications are forecast for corn planting next spring.
In the mid 95 or 95 million acre range will also lead to a strong nutrient applications as well.
Okay. That's helpful and just going back on the comment in the prepared remarks on potash prices being down I think it was maybe 35 to $40 a ton was that a comment specifically for the third quarter or is that for the back half that was that was specifically for agricultural tons.
So I want to make that really clear that that is not affecting all of our tons that wasn't that was it.
[laughter].
I don't know if I'm answering your question.
But but that was the decrease that nutrient took down in their summer fill program and they've already bounced it backup 20, which we're we're now saying so we're just trying to to reiterate the fill program that that our Canadian competitors put into place and yes. The the answer to question Jeremy is yes, thats only for third quarter.
All the pricing Summerfield programs that were announced also included announcement to bounce back up in the fourth quarter. So we'll follow along.
Okay.
In terms of just the overall potash pricing level I mean should we be thinking about a more or like for Q1 8 or.
Because I would assume a becoming down versus the sort of the peak, we saw and you know this past quarter.
Well, assuming we have a normal fall weather system, we see every indication that it's going to be a very firm.
Fall season, and then going into the spring season, because of how much did not get put down in the fall of 18, nor in the spring of 19.
So there's there's every reason to anticipate a firmness in the potash market.
Okay got it and then just last one.
In terms of freight expenses do we think that has come down in the back half I know they've been running a bit high the past few quarters UBS just wanted to get your thoughts on that thanks.
I think we see any material changes I mean.
Right now if you look at a rig wall Street journal articles et cetera, there has been a little bit of overcapacity built into the trucking market. So there's we're not seeing a compelling reason be it either diesel prices.
Or fuel prices for for freight rates to change for any substantial reason.
Okay, great. Thank you.
The next question comes from Josh Spector of you BCS. Please go ahead.
Yeah, Hey, guys just on the water side I was curious if you could help us understand maybe some of the economics around the water disposal of recycling side of the business versus the sales side is that something that you see a pretty significant opportunity from or is it more about serving the customer from beginning to end from a lifecycle perspective.
I think you hit the nail on the head, it's providing a diverse set of products for the variety. The produced water side is just a an absolute given in terms of whats the activity they've got to do something with the produced water.
Now, let me back up don't forget that everything starts with fresh water and so we're seeing an uptick of approximately 15% in the wells being completed in 2019 over 2018 in the amount of freshwater that they're using their then taking the produced water and some of that stream is going into recycle pets.
And they're trying to recycle a small portion of that water I would say right now depending upon the operator, it's anywhere from as low as three zero percent it to as much as 12% to 15% and then the rest of that water goes into produced water disposal. So it's a system that enables you to service all the needs of the operator at at the location.
Okay, and then I guess, what I'm trying to go with it is does that become.
It's a meaningful source of revenue for you guys. At some point is that something you expand into or is it about you'll know that incrementally fresh sales for you guys.
Yeah, if you look at the produced water space.
There's an article in the Wall Street Journal literally every day about the expansion of the produced water space as well as just about every oil and gas a journal that you'll read.
Tom is talking about the produced water space and the.
The margin availability on on produced water. So in our next quarter call will will give you a lot more exacting.
Capital forecasts and margin forecasts on on those two parts of the business, but but what's what's most important is to recognize our entre with a really good partner and NGL, It's got a lot of experience.
And we're building pets and we're moving forward on that infrastructure to complement those three products as we speak today.
Okay and the last one kind of in the same area is you talked about the incremental capex spend is there incremental opex that you consider that you're spending kind of now over the next few quarters to build out your network that.
Hi, there drops off or becomes an ongoing part of your cost structure.
I think a lot of that has been spent the infrastructure the permanent water transfer infrastructure that we're building in the automation should dramatically bring down those that opex. So you got to remember we bought facilities that had all lay flat lines that were putting in permanent pipelines were automating all the pumps. We're we're just putting in a tremendous amount of automation will make it much more productive and by definition will will reduce the operating costs.
Okay. Thanks.
Once again, if you have a question. Please press Star then one.
Your next question comes from Jason Ursaner of bumper shoot Holdings. Please go ahead.
Good morning.
And just a few more follow ups on the oilfield service segment, you mentioned the decrease short term activity in the Delaware you know some of the Frac scheduled moving later in the year. It seems like there's kind of been a big change in the narrative for MTS to start living within their cash flow just given the amount of ducs that that have already existed kind of in your backyard in the Delaware do you see this helping.
Sort of moved from a building inventory of Ducs to much higher completion rates.
The next six to 12 months.
Well I would say there it's a multitude of factors that are going to enable the activity to take off in our region. The first is the expanded takeaway capacity that shrunk the basis differential from approximately $13 10 months ago to this morning. It was trading at about 10 cents. So that that tend to $13 to go straight to the operators a bottom line and that's a that's a recent phenomenon over the last few months. If you look at the the water infrastructure that is being built and is now coming into service in the third quarter and fourth quarter.
Theres major water and produced water recycle water infrastructure, that's being built that allows those operators to come in and and.
And.
Move multiple rigs in and go to work at wants there's just a variety. We now have a substantial gas pipeline that just got completed came on it comes on service in the third or fourth quarter.
We'll move almost two Bcf a day from the region. So there's there's just there's a variety of tailwinds that are occurring as we speak we're seeing frac crews move back into the area. We have literally staff a sales staff that weve added that's out talking to operators every day for updated Frac calendar years. So.
I don't know if I'm answering your question, but we do have an immense number of docs and the the reduced basis, the takeaway capacity the ability to come in and start working on those Ducs is now been streamlined and so we.
We highly anticipated 2020.
Fourth COVID-19 in 2020 pretty substantial uptick in activity.
Okay.
That does answer in terms of giving confidence for why you expect the pickup but you sort of mentioned earlier and then I apologize for repeating a few of the other really a question, but on Dinwiddie specifically.
Just a reminder, that that ranch chain with 700 permitted acres or that was the potential for its total permitted acres and again thats separate from all the legacy Reits.
Yeah. It's that number has increased I'm going to let Alex Wagner speak to the exact numbers because the more work we do those numbers continue to tick up in terms of the available water to sell but Alex why don't you take that certainly.
The ranch actually came with little over 1200 acre feet of permitted water rights and so we're working to.
Perfect a 100% of that presently I'm, we're able to sell over 1000 acre feet of permitted rights, which is in excess of what we had originally anticipated.
Prior to the acquisition.
We're also drilling wells in permitting new wells to expand we have additional water rights that we will continue to develop so we'll have a rig on location drilling a test well here within the next week to 10 days.
So we're doing a lot of things behind the scenes to to to grow those water rights.
Which we have and that's why we use the word development in our NGL deal is that that we're we're helping on all three branches to to maximize and development develop those additional water rights.
Okay, and you had mentioned anticipating selling through that allocation does the agreement.
Also pertain to I guess some of the water coming through the pipeline that's been constructed east or some of the legacy Reits are that that separate if you sell through the agreement.
[noise] protect briefly mine.
Yes, basically the.
The NGL Intrepid group will buy water at the end of the Jairus select pipeline and so thats, Fortunately, our water coming down that pipeline, so there'll be a point at which it the gerra pit three and once again, we're getting into the weeds in terms locations, but that Jarrett pit three dead ends at the North end of the Mccloy Ranch, which then comes into our 185000 continuous.
Hey, my acres, serving approximately 20 operators so.
Being able to go from selling tens of thousands of barrels on the east side of our of our mind with the opportunity to sell up to 150000 barrels.
Through the Jira pipeline is big step for us.
Okay and for for NGL I know they in their presentation. They disclosed I think 11.6 million barrels, which I think is now 1500 acre feet. So when I think about it proportionally is it kind of a 40.
40, 60 split or so on the.
The initial combined groups water and then anything above that above 3000 feet.
It has a monthly adjustment provision in it because we know what we have in terms of water rights and we also know what we have in terms of pump capacity. So that's a that's an ever changing ratio that we're on top of and monitoring and measuring as we meet or those wells and market water. So.
So you will see slight fluctuations.
But I think the starting point is about 60 40.
I think you'll see that go to 50 50 pretty quick.
I don't know if I'm answering your question, but as we develop those additional water rights on the various properties.
Those numbers, it's provided in the agreement that those numbers will be ever changing.
I guess I'm more asking you know once you sell through the combined allocation.
Then your.
Supplementing that land I mean, there's going to be a lot of activity in that land area. If you sell through the allocated water year than buying additional water coming down the pipeline, which also I guess happens to be years.
Correct the right way to think okay. That's the right way to think about it so that we get paid we get paid once by select and then select resells the water, but we will have already made a significant margin on that water that goes through the select pipeline.
Okay.
And then just quickly on the balance sheet.
Congrats on the refinance does that change your rate at all.
Yeah that the rates improved about 50 basis points.
But really the key is moving from a an asset backed facility to a cash flow revolver and alleviating some of the.
The covenant restraints that we had before so and the accordion features a big yeah, absolutely and really point being we have capacity to pursue other opportunities.
And I guess, just more broadly pursuing those opportunities what are some additional detail that you can give a high level plan for capital allocation.
[noise].
Well as we continue to have the discussion you know we're looking at some.
At some great bolt, what we're seeing in Intrepid South is Alex Wagner's phone is literally wring every day without additional opportunities that are that are highly synergistic.
And so.
We like the bolt on activity the bolt on opportunities that we can buy at very reasonable multiples and increase the cash flow and increase the the multiple capacity of those assets and so.
Increased diversified cash flow provides for a much firmer foundation.
Two to begin to answer some of the the questions that we get around capital allocation and returning capital to shareholders. So the first.
Step and that was to create a very strong not only balance sheet, but divert diversified revenue stream. So that one blip in trio or a blip in potash or a blip in water isn't going to have a major impact on us.
Yes, the only other thing I would add to that is looking for opportunities that are immediately accretive to EBITDA as we did with the Dinwiddie ranch.
Okay, great. Thank you for taking my question.
The next question comes from Deforest Hinman of Walthausen <unk> co. Please go ahead.
Hi, I will start off by apologizing got on the call little bit late so lets me have already been asked and answered but.
You know a lot of interesting developments like you said over the last three months on the water side you mentioned slot.
Energy business with NGL, we've already to schools, a previous take or pay we start to think about 2020.
Is there any metric you can.
Frame for expectations in terms of.
Contracted water sales are or take or pay so we can just.
Frame up this opportunity, but saying is quite large, but just to help us understand it better.
Well if you were to just look at volumes, it's very easy to show, how our volumes could could actually double and so all the infrastructure is in place to easily double those volumes.
As we said in our prepared remarks, we look forward in our third quarter call forgiving.
Substantially higher guidance for 2020.
I don't know if that answers your question, but we like.
We'd like to disarm act a little bit more of the opportunities that we've done and give you better better cost controls around the capital that's going to be required and the kinds of returns that were looking at and the cash flow that we are going to generate from the substantially increased water sales.
And when we think about the the capital allocation and we've we've used this JV structure.
But I'm also mindful in the past that.
You know we were.
Being very careful with our capital spend or do you still envision oh towards your mouth, but somewhat capital light model were.
The cash allocations for the investments might be lower but.
The economics change as a result, or a you know maybe more capital intensive with.
Ah the better ability to borrow money.
Well, what you're saying and as as we clearly guided to other than the actual acquisition of the.
Texas property and the Dinwiddie those are the major capital expenditures on an ongoing capital basis, you saw a very slight bump up in our capital yet we've tried to give you a feel for the magnitude of the increase.
And in some product potential product sales. So I don't know if I'm answering your question, but we're not talking about going up multiples and capital spend we we tried to stay pretty clearly that we have a lot of bolt on opportunities that we're saying that are smaller bite sized capital pieces that have great returns for us though to the ask your question is yes, we're absolutely I'm watching our capital spend very closely and investing in things that are providing solid returns whether it's this five to seven or seven to 10 that Bob referenced earlier or potentially bigger acquisitions that we come across it. So we continue to be mindful of our capex and if it goes beyond the range, it's going to be because we identify some great opportunity that we think is going to return shareholder value and everything we're doing is accretive I mean, we're we're buying cash flowing assets that are accretive.
Okay. That's helpful and then in one of the press releases you talked about rig count in the.
Northern Permian I think it's over 100 rig obviously, we're having conversations with different customers, but also probably looking at all sorts of different.
Headlines and things like that.
Is your expectation for.
Rig count to go up be flat go down.
On a forward basis.
Well, obviously, that's I'm, probably most dependent upon oil prices, but.
As we mentioned in our prepared remarks, the substantial reduction in the basis differential which was really a 10 dollar decrease or $13 decrease over the last six to eight months goes right to operators bottom lines takeaway capacity, new gas pipeline capacity, which will house with flaring, new water infrastructure produced water infrastructure I mean, all of these things lead to most importantly, the completion of the of the hundreds and hundreds of docs that exist out here and so I think our downside. If you will is that the docs just continued to grow.
So I don't know if I'm answering your question, but to tell you where oil prices are going to go over the next quarter I'm not that good.
But I do think that that will have an impact on activity.
Okay. Thank you if I have additional questions a follow up on line to thank you for taking my questions, even though I got on late.
No. Thank you.
The next question comes from Jon Evans of SG capital. Please go ahead.
[noise], Oh, I'm, sorry, I didn't hear this maybe redundant but could you just walk through again, what's going to happen in potash. So so nutrient took it down for the summer.
What do you expect kind of your mix will be and then they've taken the price up and so can you give us some sense of your thoughts about.
Fourth quarter also pricing because it seems like demand is pretty strong at least that's what nutrient said on their call.
Well demand is very strong we're seeing a really strong order book so we.
We fully believe that Theres no. There's no demand the reason why price can't return to where it was and so its already snapped back Mark correct me, but 20 to $25 and you can discuss our third and fourth quarter order books, and how they're shaping up and the pricing, but we're we're seeing very firm extremely firmed demand, which should lead to calm foreign pricing.
Mark you want to add to that.
Sure John I think just stepping back a little you know I think on a global.
Stage show, we see very good stability throughout most of the potash regions and I think that in combination with what Bob mentioned.
No I think again, we we saw poor application fall of 18 weather related issues in spring of 19.
And are in reasonably good crop coming on here with the both corn and beans, so given that and there wouldn't nutrient removal. We've got good we've had good demand or pricing as Bob mentioned in his has moved back up off of the fill program and as we move through.
Into the fall season with with a good forecast for strong corn planting next year, we certainly believe that Oh, the fall of bodes well for for application I think as Bob mentioned, our order book supports that right now.
Got it if I may add this Joseph the thing also to remember as Bob mentioned earlier is this really is not impacting our pricing on our industrial in our feed tons and as you know up more than 25% of our potash tons go into the industrial and feed so we'll have less of an impact than it might on some of the other producers that are more focused.
Got it and just a follow up with kind of $4 over $4 corn do you expect more acreage to go corn next year.
Or or I I do you expect potash demand to be pretty strong for next spring.
Well, we see because of the way that they.
The low application right in the fall of 18, and the very low rates and in the spring of 19.
There's clear nutrient demand on whatever the acreage figure is whether its 88 or 92, whatever that number is it's going to require a lot of potash. That's good news. So we've seen two application seasons.
That have experienced lower application rates I'm 'cause it because these are flooding or or wet weather and so we have every reason to believe that the fall in the spring should be very robust.
From a demand perspective.
Thank you so much.
This concludes the question and answer session.
I would now like to turn the conference back over to Bob for novice for any closing remarks.
I just want to thank everyone for taking the time and the interest in Intrepid, we look forward to.
Speaking with you on our on our next quarterly call and we're just proud of the results we delivered and continued.
To deliver quarter over quarter. So thank you for your interest and your time and have a great day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating have a pleasant day.