Earnings Call Transcript - CF Q2 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to CF Industries' First Half and Second Quarter of 2023 Earnings Conference Call. All participants will be in listen-only mode. I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick, with CF Investor Relations. Sir, please proceed.

Martin Jarosick, CF Investor Relations

Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the first half and second quarter of 2023 yesterday afternoon. On this call, we'll review the results, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find the reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our President and CEO.

Tony Will, CEO

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for the first half of 2023, in which we generated adjusted EBITDA of over $1.7 billion. Our trailing 12-month net cash from operations was $3.2 billion and free cash flow was $2.1 billion. These results reflect outstanding execution by the CF Industries team against the backdrop of robust demand. Our plans ran extremely well, and we leveraged our unique system flexibility to maximize results, given the high volume of just-in-time purchasing that took place. We sold more product than we produced and ended the first half with low inventories. As you will hear from Bert in a moment, we believe we are really well positioned for the remainder of 2023 and into 2024. While our safety performance remained good by most measures and comparisons, it is not where we expect it to be. Our 12-month rolling recordable injury rate at the end of June was 0.54 incidents per 200,000 labor hours. Ashraf and his team are focused on this, not to manage the number, but to ensure that all of our people go home in the same condition as when they came to work every day. Looking forward, changes in the energy markets have steepened the global nitrogen cost curve and extended the margin advantage available to our North American manufacturing network. As you can see on Slide 7, we enjoy a $300 to $400 per ton margin advantage versus European and high-cost Asian production. Given the structural advantage as well as our industry-best operating rates and unique network flexibilities, we expect to drive strong cash generation in the years ahead. This will enable us to make disciplined investments in growth opportunities, while also returning substantial capital to shareholders. In that vein, we remain focused on our clean energy growth platform, which has been well served by the collaborations and partnerships we have developed. We expect to make a final investment decision on a new build clean ammonia plant later this year in conjunction with our partners in that project. This approach significantly reduces risk to CF and ensures that the new production volume is consumed in new sources of emerging demand rather than creating an overhang in the market. We also continue to return significant capital to shareholders. Over the last 12 months, we returned $1.3 billion to shareholders through dividends and share repurchases, which was more than 60% of our free cash flow. Looking ahead, as we continue to execute on our current $3 billion share repurchase authorization, we are committed to taking advantage of dips in our share price opportunistically, amplifying the rewards to our long-term shareholders. With that, let me turn it over to Bert, who will discuss global nitrogen market conditions in more detail. Bert?

Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain

Thanks, Tony. CF Industries experienced a very positive spring application season, that we believe points to a strong global demand dynamic in the second half of the year. Our challenge in the spring was managing through peak application season, with customers deferring purchases until the last possible moment. Despite delayed purchases, demand in North America during the spring was substantial, with planted corn and wheat acres up significantly compared to 2022. Even with this high demand, net imports were lower than the prior year. As a result, we believe that inventory in the North American supply chain is extremely low compared to historical norms and will need to be replenished. At the same time, India and Brazil will need to compete for urea tons in the coming months as they prepare for their upcoming planting season. As you can see on Slide 6, we project that Brazil still needs to secure 5 million to 6 million more tons of urea and India, another 4 million to 5 million tons of urea, by the end of the year. Farm economics continue to be robust and supportive of strong demand. Consensus estimates project that global grain stocks will improve slightly in 2023, but drought in the United States and ongoing impacts from the war in Ukraine are keeping grain prices attractive for farmers. The global nitrogen market has responded to these dynamics with rapidly rising urea spot prices through July, with other products following. We saw a strong demand for urea. And in July, we built an order book of domestic and export sales that takes us into the fourth quarter. We also quickly achieved our goals for our initial UAN fill offer in North America and have been able to raise prices for subsequent layers. Against this backdrop of strong demand, the global supply response is somewhat muted. We do expect China to participate in the upcoming India urea tenders, with strong prices for nitrogen in China indicating that domestic demand is competing for the volume available for shipment. Russian tons continue to reach the global market, but willing buyers are limited to a few areas of the world, such as Brazil and the United States. Additionally, European ammonia production volumes remain well below normal due to natural gas prices that make the region uncompetitive globally. As we look at our own operations, our network continues to benefit from low-cost natural gas. Forward curves suggest natural gas values in North America will be $2 to $4 per MMBtu lower than last year in the second half, keeping our production costs firmly in the first quartile globally. With that, let me turn the call over to Chris.

Chris Bohn, CFO

Thanks, Bert. For the first half of 2023, the company reported net earnings attributable to common stockholders of approximately $1.1 billion, or $5.55 per diluted share. EBITDA was $1.8 billion, and adjusted EBITDA was over $1.7 billion. At the end of June, cash on the balance sheet was $3.2 billion. Since that time, we paid CHS a semi-annual distribution of $204 million from our CF Nitrogen partnership. Additionally, $1.25 billion of cash is earmarked for our acquisition of the Waggaman ammonia facility, for which the regulatory process continues. We expect to close the transaction before year-end. As a result, our pro forma available cash at the end of June was approximately $1.75 billion. Looking ahead, we expect the rest of 2023 and into 2024 to be favorable based on the global nitrogen industry dynamics that Bert just described. The second half typically starts with lower production due to maintenance activity as well as seasonally low prices that should rise as we move towards spring. We expect company-wide gross ammonia production to be between 9 million and 9.5 million tons. As you know, we recently proposed to permanently close the ammonia plant at our Billingham complex in the U.K., due primarily to the structural disadvantage that European ammonia production faces from high energy and carbon costs. We have been importing ammonia since the fall of 2022 to produce UAN fertilizer and nitric acid at the site, which we expect to continue to have a positive impact on gross margin compared to producing ammonia at Billingham. Our capital expenditure requirements for the remainder of the year remain modest, with capital expenditures expected to be in the range of $500 million to $550 million. This includes our blue and green projects at the Donaldsonville complex, which continue to progress. We continue to advance the front-end engineering design study for the proposed joint venture low-carbon ammonia facility with Mitsui. We expect to make a final investment decision later this year. Alongside our clean energy initiatives, we remain committed to returning excess capital to shareholders, given our free cash flow generation outlook. In the second quarter, we repurchased two million shares at an average price of approximately $64 per share, compared to an average share price in the quarter of almost $70 and to a share price that has recently been trading above $80 per share. We expect to continue to favor opportunistic purchases layered in at attractive levels. With that, Tony will provide some closing remarks before we open the call to Q&A.

Tony Will, CEO

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF Industries for all that they did during the first half of 2023. Our teamwork continues to deliver outstanding results. We remain very excited about the future for CF Industries. We have a large structural cost advantage that provides substantial margin opportunities, coupled with industry-leading operating expertise and unmatched network flexibility. This should continue to drive significant free cash flow. We will deploy that cash to both grow our business and return capital to shareholders. We have significant decarbonization projects in flight with industry leaders, such as ExxonMobil. The Waggaman ammonia complex will fit seamlessly into our network and enhance our ability to serve customers, and we are positioned at the forefront of low-carbon ammonia into new clean energy applications, supported by collaborations with global leaders such as JERA, Mitsui, and LOTTE. As a result, we believe CF Industries is well positioned to create substantial value for our long-term shareholders. With that, operator, we will now open the call to your questions.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Christopher Parkinson with Mizuho. Please go ahead.

Christopher Parkinson, Analyst

Good morning. Thanks for taking my questions. So I think when most people step back, Tony, I think on normalized EBITDA, we could have a debate on this all day, but it could be low, mid-2s, somewhere in there in terms of billions of EBITDA. But you do have, I'd say, at least three, perhaps four moving variables, which are pertinent for the next two to three years in terms of what you'd add to that. I'd say Waggaman plus, obviously, carbon optionality, you have the additional 45 queues for various projects you're working on. And then on top of that, you have a nice energy transition theme, which perhaps is a little bit later outside that time frame. But it does seem like these three buckets, which could materially add to the perception of normalized EBITDA. And I was just hoping perhaps if you could add color on those three buckets and perhaps add anything else you think is important and how the investment community should be thinking about those? Thank you.

Tony Will, CEO

Yes, good morning, Chris. Thank you for your question. I agree that those three areas are indeed significant, and I would also like to mention one or two additional points. As Chris noted in his prepared comments, we anticipate closing the Waggaman transaction later this year, which should positively impact our normalized EBITDA numbers, regardless of how people project those figures. Moreover, we plan to initiate the CO2 sequestration project at Donaldsonville in early 2025, allowing us to take advantage of the 45Q tax credit associated with it. The financial benefit from this is considerable since the 45Q credit amounts to $85 per metric ton, and we expect to sequester two million metric tons annually. This project alone will have a substantial impact on our annual performance and will last for 12 years. Besides the Donaldsonville project, we also have ongoing opportunities at some of our other facilities, and we are looking forward to announcing a few of these in the upcoming quarters. We are enthusiastic about the prospects related to decarbonization and the 45Q initiatives. You mentioned clean ammonia for clean energy applications; we believe this segment will start to grow significantly in 2025 and 2026, just as the Donaldsonville project will be operational and ready to address that demand. Additionally, we will assess the new build project, though that may take longer than the immediate timeframe you referenced. Another point to highlight, Chris, is that there are widespread efforts urging industrial companies to move their manufacturing operations back to the U.S. We have already engaged in advanced discussions with several companies about securing steady offtake agreements for some of our products, both in ammonia and upgraded forms. This should yield attractive returns for any new investments we make in these opportunities and enhance our business while allowing us to shift more ammonia into higher-margin sectors. Lastly, I want to return to our $3 billion authorization and the strong free cash flow we are generating. We expect to significantly reduce the number of shares outstanding during this period. Therefore, any previous assumptions about mid-cycle numbers will likely increase based on the initiatives we've discussed, as the reduction in shares will amplify our per-share metrics moving forward.

Christopher Parkinson, Analyst

That's very helpful. As a quick follow-up, there has been a lot of variability in regional operating rates. Europe appears to be stabilizing after an increase earlier this year. India has been rumored to be improving, but it has been somewhat disappointing compared to earlier expectations. North Africa is down, Southeast Asia is down but potentially on the rise. Considering how you're viewing your order books and managing risks to capitalize on the recent rally over the last six to eight weeks, do you disagree with any of those points? Could you help us understand how that thought process is influencing the management of your book for the fall application season and into 2024, especially given the changes over the last 12 to 24 months? Thank you.

Tony Will, CEO

I'm going to give just a real brief high-level comment, and then I'm going to turn it over to Bert to kind of go into a little more detail. And the high-level comment, Chris, is we saw kind of an unusual experience over the last two years. 2022, based on energy differentials and where shutdowns were taking place, and of course, war in Ukraine, created a scarcity of nitrogen products in particular, and then that led to high cost or high prices globally, which reduced demand and consumption. This year, we saw a moderating of pricing, which, I would say, reinvigorated some of the application rates and demand, particularly in parts of the world that are more subsistence-based. But we saw a move toward just-in-time purchasing, which really stresses the network. And I think Bert did a great job of managing kind of that stress, but it adds a lot of complexity in terms of movements. And so there's always a balance between trying to build an appropriate book and making sure we're able to run the plants safely and efficiently and keep them online and be able to ship against that book, but not wanting to miss opportunities when you see some strengthening in the market. And again, I think Bert does a great job on doing that. But it's always a little bit of a tightrope act.

Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain

Yes, thank you, Tony. Let's discuss supply for a moment. You've highlighted some areas where supply is limited, which likely wasn't anticipated a few months ago. Production in India has been increasing in terms of capacity from new and upgraded operational units. We estimate their internal production to be around 29 million tons, with annual import demand expected to be between six million and eight million tons, compared to the 10 million tons we observed a few years back. They are currently behind. The trend we noticed in the United States, where customers were waiting and depleting inventories, has been observed globally, as many destination markets have experienced similar situations and now need to acquire these tons from South America, Asia, North America, and Europe. This has created a scenario where we have seen a decline in the market since February, but by the end of June and into early July, we began to notice a recovery, which has been more significant than the industry expected. This is also influenced by limited supply, as you pointed out, including gas shortages in Nigeria, Egypt, Trinidad, and high gas prices in the European Union. Numerous regions that have historically produced substantial amounts are not doing so currently. When we evaluate our order book, it is essential to enter the forward market with a shippable order book and rely on our rail and truck partners, as well as moving products by vessel, barge, and pipeline to maintain system balance. I am satisfied with our order book for Q3, and as I mentioned in my prepared remarks, some products are extended into Q4, and we have successfully increased product pricing along the way. Therefore, I believe we will perform well, as we always do.

Christopher Parkinson, Analyst

Thank you so much.

Operator, Operator

The next question is from Andrew Wong with RBC. Please go ahead.

Andrew Wong, Analyst

Hey, thank you for taking my questions. Good morning. So CF made the decision to permanently close Billingham for economic purposes, which I think makes a lot of sense. We've seen maybe one or two of these announcements in Europe, but maybe not as much as some might expect, given the economics for nitrogen today in Europe and potentially looking forward. So what do you think is keeping some of these plants operating? And do you expect more permanent shutdowns in Europe going forward?

Tony Will, CEO

Good morning, Andrew. I believe we have a unique situation at Billingham, where we can import ammonia and then upgrade it to nitric acid and ammonium nitrate. Over the past couple of years, there's been a significant margin between the deep-water price of ammonia and the selling prices of upgraded products like fertilizers and intermediate chemicals. The decision was quite clear for us. As Chris noted, this approach enhances our margins by avoiding the high and fluctuating gas expenses, along with the elevated carbon costs linked to operating in that area, while still allowing us to benefit from the upgrade margin by importing ammonia. Some plants in Europe lack the capability to import ammonia or are producing urea-based products that require CO2 for upgrades, unlike nitrate-based products. For certain producers, examining the gas costs against the available margin for upgraded products might still make it feasible to operate at certain times throughout the year. This variability in operational rates is likely why some producers who can import ammonia continue to do so. Several plants have recently ceased ammonia production. We've opted to focus exclusively on being an import and upgrade facility, considering the age of our equipment, the amount of capital investment needed to maintain it, and the ongoing carbon costs.

Andrew Wong, Analyst

That's great. And maybe just kind of following up on that. There's a few plants that are in the planning stages for the U.S. Gulf on blue ammonia, and there has been some concern that there might be too much ammonia that gets brought online over that three to five-year time frame. But there are some plans to import ammonia coming from different places into Europe, and one of your peers have mentioned something like that as well. So do you look at that as a way to balance some of these new ammonia projects that we're seeing coming online potentially over the next few years?

Tony Will, CEO

Yes. I mean, I think just like happened in 2012, there's very likely a slew of announcements about projects. And I think back in 2012, there were something like 26 projects that were announced, of which only four got built. And I think you probably saw some of that exuberance last year and into this year as well, where you're seeing a lot of announcements. And then when people really put pen to paper and need to go out and begin construction, there's a little more cautiousness that goes into it. It's easy to announce something. It's a lot harder to build it. And I think one of the interesting things about our potential new build project is that we're partnering with ultimately, folks that are going to be end users of the project from a volume standpoint and putting it into new clean energy applications. And so it's production that's not going to create the kind of overhang situation that you were just talking about. Now that's very important for us. The other piece of that is we're still collecting data on the cost side of the equation, and it's got to make economic sense for us and earn a fair rate of return for us to move forward with it. But I think that between some of the shutdowns you're seeing in high-cost places in the world, and some new demand centers that are springing up, particularly for clean energy applications, I'm pretty optimistic that we'll end up with a balanced to tight ammonia market going forward to the balance of this decade.

Operator, Operator

The next question is from Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson, Analyst

Hi, good morning. It seems you had a very favorable realized gas cost this quarter in Q2. There were concerns that some of the inventory might have pushed the realized cost closer to around $4 due to higher cost gas and your winter hedges. Can you explain what went positively to prevent such a high gas realization?

Chris Bohn, CFO

Yes, Joel, thanks. This is Chris. There's really two items that occurred that allowed us to have lower gas than what we were projecting when we talked about some of that overhang from production in Q1 being sold into Q2. The first being, as Tony and Bert mentioned, we sold more product than we produced. So we went into inventory deeper than what we had anticipated doing during the particular quarter. So we bled through that overhang more quickly. And then additionally, instead of doing first of month purchases, Bert's team that was purchasing natural gas did more of the daily buying, and the daily numbers were quite a bit lower than what the first of month would have been. So I think those higher prices that we saw in, call it, March and April, have bled through. And as you look at the strip right now, it's relatively flat kind of in the $2.50 to $2.75 range. And that's what we'll expect going forward. But you're right, we were expecting slightly higher natural gas costs, but sort of those two points mitigated that a bit.

Operator, Operator

The next question is from Josh Spector with UBS. Please go ahead.

Josh Spector, Analyst

Thank you for taking my question. I'd like to inquire about project returns in general. As you invest more in clean ammonia and other applications, how do you assess the return rates on those projects compared to your past investments? I'm wondering if you're approaching these differently, especially if they involve stable offtake, allowing for a lower return in contrast to historical investments in the FERC market, which tend to have more volatility but also periods of significantly higher earnings. How are you and the Board navigating these decisions?

Tony Will, CEO

I'm happy to share my thoughts on this, and I encourage Chris to add his input if I stray off topic. We usually aim for a minimum return in the low teens, which has been a consistent benchmark for us. This is generally well above our cost of capital, but we also factor in aspects like potential contingencies for construction projects. The advantage of years like last year is that it made our past projects look exceptional in terms of capital deployed versus the returns we've seen. As we consider bringing in partners who contribute equity and take on guaranteed offtake, while also applying it in non-traditional areas, this significantly reduces the project’s risk. However, I don't believe it fundamentally alters the return profile we anticipate for the capital invested in the project.

Chris Bohn, CFO

I agree with what Tony mentioned. As we evaluate these projects, we consider them based on risk-adjusted returns. The ratable offtake that Tony referred to allows us to improve our working capital through receivables and inventory. This clearly enhances the return profile, aligning it even if it starts slightly lower, in line with the mid-teens return expectations of our other projects.

Operator, Operator

The next question is from Steve Byrne with Bank of America. Please go ahead.

Steve Byrne, Analyst

Yes. Thank you. Do you expect ammonia pricing to remain well below the unit nitrogen pricing for urea, just because of less industrial demand? And if so, do you think that that combined with what could be a relatively early harvest, might lead to a very strong ammonia application season this fall? And if so, are you planning accordingly to have a strong fall through your network of storage tanks?

Tony Will, CEO

Ammonia typically trades at a significant discount on a margin per unit of nitrogen compared to upgraded products, mainly because it requires less capital to produce ammonia than to upgrade it. Direct application of ammonia is primarily limited to North America, leading to a notable margin improvement when upgrading ammonia into other forms. I don't anticipate significant changes in this trend. However, it's important to acknowledge that there has been a decrease in industrial demand for ammonia over the past year. Considering energy costs in various regions and the current state of the global economy, ammonia is likely to remain an attractive product in terms of price per unit of nitrogen. If grain prices remain favorable and weather conditions support it, we expect a strong ammonia season. However, availability for fall application is restricted by the storage capacity of end-market tanks, as it's challenging to empty and refill them multiple times in the fall. Typically, you want to complete one loading in the fall.

Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain

Yes, I believe that based on the pricing structure of ammonia and the revenue opportunity from planting corn for the 2024 harvest, we are going to see an increase in ammonia demand. As Tony mentioned, there is about a month to move that product through the system, which is influenced by weather conditions. If there's early snow or excessive rain, inventory and demand would carry into spring. The fall pricing has been established and is expected to rise from the initial levels, and I anticipate strong demand if the weather is favorable.

Steve Byrne, Analyst

I wanted to follow up on the blue projects in Louisiana. Can you expedite the Brownfield project in Donaldsonville to start earlier than early 2025? Is there a way to create shipments and meet some of the demand before then? I'm unsure what the limiting factor is — is it your engineering, your plastics, or something else? Is there any chance you could advance that schedule and begin fulfilling the interests from the low case and JERA instead of waiting until 2027?

Tony Will, CEO

We will have blue ammonia or low carbon ammonia ready by 2025. As demand increases, we can support companies in advance of any potential new plant start-up. We expect to have the necessary equipment for CO2 compression and dehydration on-site and operational by the end of 2024. However, challenges remain with obtaining the necessary permits for injection wells and constructing pipeline connections. ExxonMobil has effectively managed these aspects, and it's beneficial that Louisiana has received permitting authority from the EPA for these types of wells. These developments are significant, but the process takes time and requires various permits. We are working as quickly as possible because we recognize the economic benefits of completing this process and starting injections. We are currently targeting the first quarter, possibly early in the second quarter, for a 25% commencement.

Operator, Operator

The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson, Analyst

Yes, thank you. Good morning everyone.

Tony Will, CEO

Good morning, Adam.

Adam Samuelson, Analyst

Could you provide more information on clean ammonia, particularly regarding sales? As you approach the final investment decision, could you share where the main challenges lie in establishing contractual terms for this product? Are you planning to secure a take-or-pay agreement with a major off-taker before reaching that decision? How are these agreements being structured, and what are the key parameters still under negotiation? Outlining these discussions would be appreciated.

Tony Will, CEO

Yes. Let me discuss the new project, and then I’ll hand it over to Bert to share insights on the interest we’re seeing from European users and others regarding decarbonized products. For the new build projects, the operating model we’re adopting will have equity participation proportional to your offtake from the project. Essentially, this will be a take-or-pay structure. Based on what we’re hearing from potential partners about expected growth in demand and the volume they are targeting, it appears that demand will significantly exceed their equity participation. We aim to establish a back-to-back take-or-pay agreement for the remaining volume. Our strategy focuses on minimizing risk for this project, ensuring it is not a speculative investment, but one where the return profile is fairly reliable.

Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain

Yes, Adam. Good morning. It's interesting to see how this area is developing and how we are taking a comprehensive approach to managing the business and reducing risks. We are in discussions with various end users and applications. As companies and industries assess their emissions and strive to enhance their profiles, low carbon products serve as valuable feedstock or fertilizer. We have ongoing conversations and requests for these products and are prepared to supply them not only to the United States but also to our European customers. We are optimistic about the future and focused on building this capability through our people, processes, equipment, plants, and customer relationships to ensure we are ready to move forward.

Adam Samuelson, Analyst

All right. That's helpful. And if I could squeeze a second one on just on share repurchase. And obviously, you did resume that this quarter with the Waggaman transaction announced. Should we be thinking about that more ratably? Opportunistically? How should we be considering share repo over the balance of the year given kind of the other uses of capital and potential uses of capital you've got on the table?

Chris Bohn, CFO

Adam, this is Chris. As Tony, Bert, and I mentioned in our prepared remarks, we expect to continue generating a significant amount of free cash flow. With the $3 billion authorization available, we are starting to act on that now. As we've discussed in previous quarters, we will lean more towards opportunistic repurchases rather than making them on a regular basis. This doesn’t mean it will always be that way, but if you look at the last quarter or even year-to-date, we have purchased over $200 million or 3 million shares in the mid-60s, which we see as a very efficient use of capital moving forward. For long-term shareholders, being more opportunistic will likely deliver greater value in terms of our share repurchases. Historically, we have had share repurchase programs, and over the past 12 months, we purchased more than 11 million shares for around $1 billion, as Tony mentioned earlier. We are committed to this strategy, but we will approach it more opportunistically than in the past.

Operator, Operator

The next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Vincent Andrews, Analyst

Thank you. Bert, would you mind expanding on your comments earlier, just about the order book? And I guess I'm just curious, it sounds like summer fill was very well subscribed in the industry this year. So how much of the 3Q book do you think we should think about around those summer fill values versus sort of where the market has headed? And then how much liquidity is there in the fourth quarter in terms of being able to fill up the fourth quarter book where values are today?

Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain

Yes. When considering our field programs and business operations, we always look ahead to the coming months to ensure we are logistically prepared and aligned with customer needs. It's notable that for the UAN fill program, the price we initiated was actually above the spot price at the end of the quarter. However, we successfully filled our order book for Q3. Similarly, as I mentioned regarding urea, we were securing some export values that are currently lower than today's market rates. This reflects our Q3 position, and we plan to execute this while also preparing for Q4 and Q1 of next year in terms of product availability. It's important to remember that this is a dynamic commodity business, and we must consider factors like gas prices, logistics, and the final market prices. These components are constantly assessed as we navigate the ever-changing nature of our operations. Our performance will be evaluated based on how well we manage these variables, and we will provide further updates when we report our Q3 results.

Operator, Operator

The next question is from Ben Theurer with Barclays. Please go ahead.

Benjamin Theurer, Analyst

Thank you very much. Good morning. Congrats on the results. Two quick ones. So one, on the regulatory approval process for Waggaman. Is there anything you can share an update? Is this coming along as you expected? Is there any potential delays or maybe an acceleration of the process? That would be my first question.

Tony Will, CEO

It's a pretty kind of routine regulatory process, dealing with the FTC these days. And I wouldn't say there's anything that's out of the ordinary compared to how these things run. As Chris mentioned, we do expect to be closed by the end of the year.

Benjamin Theurer, Analyst

Okay. Perfect. And then my second question is really to understand maybe the economic background of the decision to close down the ammonia production over in the U.K. Could you maybe somehow quantitatively elaborate what you expect the benefits are going to be? Because obviously, you're going to be able to allocate more U.S. produced ammonia, but then there's a shipping component to it versus the cost of producing it over days. Have you done any sort of sensitivity analysis or just economic value-added analysis, so we understand better what benefits for the whole CF group ultimately is going to be from this decision?

Tony Will, CEO

Yes. We always have the option of moving ammonia from Donaldsonville over to Billingham. But oftentimes, we can just source ammonia, whether it's from Algeria or other places, and have it delivered on a lower cost basis. And we've got better opportunities to sell ammonia coming out of Donaldsonville at higher rates than moving it into Billingham. So the analysis really is both historically and as we look forward, given the volatile and high-cost nature of gas in Europe and also given the high cost of carbon in Europe, and the age of the equipment and the ongoing cost for maintenance and turnaround of that asset. What do we look at being able to buy ammonia into the facility versus the fully loaded cost of running the ammonia plant, and it's just cheaper for us to be able to buy the ammonia in. And so it's just a pure margin pickup by taking costs out of the system.

Operator, Operator

The next question is from Edlain Rodriguez with Credit Suisse.

Edlain Rodriguez, Analyst

Thank you. Good morning, everyone. I mean, Tony, like you've had a very uneven and a relatively challenging first half with prices going down just in time demand. As you look into the rest of the year and into next year, like what concerns you the most in terms of volume, energy costs, et cetera? And what excites you?

Tony Will, CEO

I'm going to reframe your question for a moment. Aside from the fact that we're comparing year-on-year against an unprecedented performance in 2022, achieving $1.7 billion in adjusted EBITDA in the first half of this year is impressive by historical standards. Bert has managed to handle a challenging market with delayed purchasing patterns and fluctuating prices exceptionally well. Looking ahead, we believe that inventory and supply are relatively tight. As we mentioned, India, Brazil, and North America, where inventory levels are low, will be important for nitrogen demand moving forward. The forward gas market looks promising for North America, so we feel positive about the second half of this year and into next year. We anticipate that grain prices will continue to support farmer profitability as we enter 2024, leading to high acreage and robust global demand. We are genuinely optimistic about this outlook. Currently, I don't have any significant concerns. Our priority is to restore safety to the levels we've maintained over the past couple of years, keep our plants operational, and execute our plans effectively.

Operator, Operator

The next question is from Aron Ceccarelli with Berenberg. Please go ahead.

Aron Ceccarelli, Analyst

Hi, good morning. I have two. The first one is on blue and green ammonia. How do you see the potential for blue and green ammonia as an alternative fuel for marine, which is completed now with methanol? And one of your competitors in Europe yesterday was very bullish about it? The second question is on the Slide 6 of your presentation. May you help me understand a little bit better what's the embedded assumption for the lower and the upper end of the targets, please? Thank you.

Tony Will, CEO

We are somewhat optimistic about the potential for ammonia to serve as a clean energy source in marine applications. However, we believe it will take some time due to existing environmental health and safety concerns on board, necessary retrofitting, and the development of new propulsion systems fueled by ammonia. There are encouraging developments, including some engines currently in testing. We expect this transition to occur, but we don't anticipate a significant demand in the next five years. However, over the next ten years and beyond, we believe there will be a substantial demand for clean ammonia. I would like to hear Bert or Chris's thoughts on this as well.

Chris Bohn, CFO

Yes, I would just say there's going to be, as Tony mentioned, our thoughts are that this is really into 2030, where you will start to see some of the demand for ammonia from marine applications build. A significant part of the reason for that is not only due to the development Tony talked about with the engines, but also because of the attrition of the existing fleet. With 60,000 vessels, replacing them with ammonia-fueled ones will take time given the 1% to 3% annual attrition rate. Therefore, we're being a bit more conservative than others regarding the marine demand build. We do expect it to materialize, but it's likely to happen closer to 2030 and beyond.

Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain

In response to your second question regarding our assumptions on Page 6 of our analysis, these are based on our active integration and understanding of the markets, as well as discussions with the consuming regions such as India and Brazil. Many of these markets have been waiting to make purchases and currently lack inventory, but they have the pricing structures for feed grains that support substantial urea consumption. For instance, India's decision to limit rice exports is a significant move in the international market aimed at controlling prices; however, they will need nutrients to produce rice during a favorable monsoon season. Similarly, Brazil is in a strong position as a major producer. The cotton planting season occurs in Q4, and the second crop corn for early 2024 will necessitate significant imports. Moreover, considering the gas limitations and supply issues we've previously discussed, this creates a very positive market outlook for the end of the year and into 2024.

Operator, Operator

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back over to Martin Jarosick for any closing remarks.

Martin Jarosick, CF Investor Relations

Thanks, everyone, for joining us today, and we look forward to seeing you at the upcoming conferences.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.