Intrepid Potash, Inc. Q4 FY2020 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Intrepid Potash, Inc. Q4 and Year-End 2020 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to hand the conference over to Matt Preston, Vice President of Finance. Please proceed.

Thanks, Teresa, and good morning, everyone. Thanks for joining us to discuss Intrepid’s fourth quarter 2020 results. With me on the call today is Intrepid’s Co-Founder, Executive Chairman, President and CEO, Bob Jornayvaz. Also available to answer questions during the Q&A session following our prepared remarks will be our Chief Operating Officer, Brian Stone and our Vice President of Sales and Marketing, Zachry Adams. 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 risks and uncertainties that could cause actual results to be materially different from those currently anticipated. These statements are based on the information available to us today, and we assume no obligation to update them. These risks and uncertainties are described in our periodic reports filed with the SEC, which are incorporated here by reference. During today’s call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday’s press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. I’ll now turn the call over to Bob.

Thank you, Matt, and good morning, everyone. Solid cash flow and EBITDA highlighted our fourth quarter and put a positive end on a unique year. The encouraging trends we saw emerging in the fourth quarter are continuing in the spring as commodity markets show strength across both our fertilizer and oilfield segments. In the last couple of months, we’ve seen gradual yet sustained improvements in our ability to combat the COVID-19 pandemic, and we are optimistic that the good news will continue as cities begin to relax restrictions, now that significant portions of our most vulnerable populations are protected. We wish the world well. Our nutrient business ended the year with significant momentum and hasn’t slowed down in the first quarter. We called the bottom in the potash market on our November earnings call, and recent pricing and demand have exceeded our expectations. We announced another potash price increase in February of $50 per ton, increasing our posted potash prices $140 per ton above summer fill levels. Trio has also seen strong demand and is currently posted $60 per ton higher than the summer fill values. Customers have been eager to secure our product as prices continue to move up and have locked in some volumes through the second quarter with additional spot buying occurring throughout the spring and farmers who are eager to replenish nutrients at today’s crop prices. Strong commodity pricing in soybeans, corn, wheat, palm oil, sugar, cotton, at bottoms in the cocoa market and the coffee market all contribute to continuing global demand. During the fourth quarter, we continued to position ourselves to capitalize on the return of the oilfield demand in the Delaware Basin, leading ESG initiatives with a clear emphasis on full cycle water management. Full cycle water management means minimizing traditional source water used and produced water disposal, with environmentally friendly treated produced water recycling. With environmental and sustainability goals front and center for so many oil and gas management teams, regulatory bodies, and governments, the need for responsible and innovative use and reuse of water is key to capturing the full potential of the Delaware Basin. Intrepid is uniquely positioned with its variety of assets and water rights in Southeast New Mexico to become a leader in the space, touching every aspect of the market from fresh and brine water delivery to recycled and produced water handling and disposal. We’re in the early stages of construction of a produced water disposal system adjacent to our south ranch and should have our first produced water well drilled in the first half of this year. As we finalize our capital plans, we’re also working on minimum volume commitments with operators that will provide a solid base of demand to support our investments. We expect the produced water well will cost approximately $2 million and will complete incremental capital for the surface facilities at the appropriate time. Total capital for our first well and surface facilities is estimated at $7 million. We expect additional wells can be added as demand and volume commitments require, at a cost of approximately $2 million each. In addition to produced water, we’re investing in recycling infrastructure and expanding our capabilities to deliver the services and products necessary to operate in an increasingly ESG-focused environment. We are currently in talks with multiple companies about partnering in new and exciting areas of oilfield and full cycle water management business that will leverage our unique position, the inherent optionality of our Intrepid fresh water and brine water assets across the Northern Delaware Basin. Northern Delaware is full of long-term, focused, well-capitalized operators, and we’re seeing many of these operators revisit their expectations for 2021 as oil prices have improved significantly in recent months. Frac demand is increasing and sourced water demands per completion are higher than ever. During the first quarter, we sourced water from third parties at positive margins to supplement our own water rights and existing infrastructure to meet the increasing volume requirements of operators. Our strong relationships with those operators and our ability to meet significant refresh rights set us apart from any other sourced water providers in the Delaware Basin. The next few quarters are pivotal for Intrepid as we will execute our strategy to expand our oil and gas midstream business in the Delaware Basin and tap into the significant opportunity full-cycle water management offers. Proper water management and the ability to provide operators with a single source capable of meeting both their operating and ESG goals will be essential in unlocking the potential value of this business over the coming months. And now, I’ll turn the call over to Matt for a review of the financial results and outlook.

Thanks, Bob. Our fourth quarter was highlighted by strong improvements in earnings and EBITDA compared to the third quarter as good fertilizer fundamentals and an improving oilfield outlook drove increased gross margin across all our business segments. We recorded fourth quarter adjusted EBITDA of $9.7 million, an increase of over $8 million compared to the third quarter of 2020. As Bob noted, the potash market really took off in the fourth quarter, with three announced price increases, good weather across the country, and rising commodity prices. Customers looked to replenish potash inventories after a strong fall application season that was evidenced by the 78,000 tons of potash sold in the quarter, up significantly from the prior year. Looking towards 2021, we still expect first-half potash volumes to exceed the prior year by about 5% to 10%, despite the large volumes in the fourth quarter. Average net realized sales price will continue to increase into the second quarter as we’ve layered in sales at varying price levels throughout the spring. We have fully realized the fourth quarter price increases in our second quarter volumes and expect some additional spot tons at our current pricing. All said, we expect our net realized pricing to increase from $248 per ton in the fourth quarter of 2020 to $300 to $310 per ton for the second quarter of 2021, with the first quarter net realized sales price about halfway between the two. Going forward, we continue to focus significant effort on expanding our specialty potash sales, specifically into the premium OMRI and feed markets, areas where we saw significant growth in 2020. For the Trio segment, our domestic market saw great early season demand in the fourth quarter as we continue to grow sales in key markets throughout the US. Total fourth quarter sales volumes were down slightly compared to last year due to large international sales in the fourth quarter of 2019. Our posted price is now up $60 per ton compared to the summer fill levels, and we are seeing good subscription at current pricing into the spring. We expect our net realized sales price will increase to approximately $220 to $230 per ton in the first quarter, and $230 to $240 per ton in the second quarter of 2021. The oilfield segment improved significantly over Q3 as water sales increased from our higher margin sources in contracts benefiting the bottom line. Total water sales including byproducts were $5.8 million in Q4, an increase of $2.2 million compared to the third quarter of 2020. Operators are adding more crews than they expected just a few months ago, and commodity pricing is clearly supportive of world-class reserves in the Northern Delaware Basin. Our debt position is unchanged since the third quarter with $55 million outstanding, of which $10 million relates to the PPP loan. Our forgiveness application has been reviewed by the SBA with our 90-day review period ending in April. Availability at our credit facility was $20 million at year-end. Cash flow from operations was $12.7 million in the fourth quarter and $31 million for the full year. 2020 capital investment ended the year at $16.4 million. We estimate 2021 capital investment of $25 million to $35 million, of which $12 million to $15 million will be sustaining capital, with the remainder as potential opportunity capital projects. We have significant discretion over our opportunity capital investments in 2021, and we may adjust our investment plans as our expectations for 2021 change. With a strong early start to the spring season, our cash position today is $28 million with no change in our outstanding debt from year end. That concludes our prepared remarks for today. Operator, we’re ready to take questions.

Bria Murphy on for Joel. Thanks for taking my questions. How much spring potash demand in the U.S. is pulled forward to the fall? Did growers buy earlier than usual? How does that affect the channel for potash inventories currently?

I’ll let Zach give you a little more color on that. But what we’re seeing is a very diverse market because all crops are up. So, if we look across our entire distribution chain across the entire United States, we’re seeing pretty low inventories. One of the great things about having strong commodity prices across the board means that the potato growers are buying as much product as the cotton growers in the delta of Mississippi. When you have that kind of widespread commodity price strength, you see drawdown throughout the country. The other good news is, we’re not seeing the level of imports from the European countries. So, I think that we’re extremely well positioned to see 2021 from a comprehensive standpoint be a very solid year. I’ll let Zach add some color to that.

Yes, thanks, Bob. I believe we observed that the inventories at the end of 2020 were quite low based on the usual fall application season. Despite this, we anticipate a strong spring application driven by the robust commodity values. So far in the first quarter, we've seen evidence of that strength, and we expect it to continue through spring, well into April and May.

Does that answer your question?

Yes. Thank you. That’s helpful. And then, just turning to water, how should we think about the trajectory of water sales in 2021 versus, I guess, 2019 levels?

We’re definitely going to sell a lot more water in 2021 than we did in 2020. I don’t know how much you follow Department of Interior policy, New Mexico State Land Office policy. One of the benefits that Intrepid has is we also have very significant, non-potable water rights as well. So, we have a unique ability to service the water market on a full-cycle basis, which means taking some fresh water, some brine water, also taking produced water, recycling it, and reselling the recycled water. Our full hope is in the next 30 to 45 days is to have an investor day where we really walk through the infrastructure that is under construction, beyond fly recycling that we’re doing, the disposal projects that we have underway, and give a much fuller picture of everything that Intrepid has been working on during the 2020 COVID season.

Okay, great. And then, just the last one from me. Can you talk about your margin outlook for Trio in 2021, just given a few quarters of negative margin now?

Sure. As I mentioned on the price, we didn’t see the domestic price really in our results in Q4 for a variety of reasons, our mix of international versus domestic and expect that to really rebound in Q1 and Q2 as we realize that full $60 up. As far as the cost of goods sold side, I think we’ve been pretty steady state here for a while now. The nice part of your business with pretty low royalty rates compared to competitors on the potash side is that about 95% of those increased prices fall to the bottom line. So, we expect improvements going forward into 2021.

Yes. I would also add on the last potash price increase, we did not take a Trio price increase. I think the market is well positioned for additional upside potential in the Trio market as well. I think we’ll just continue to see continued improvements. Don’t forget, we’ve also got capacity opportunities at our plant as well. We’re just seeing the overall market for Trio improve pretty dramatically.

Thank you.

The next question comes from Mark Connelly with Stephens. Please go ahead.

Thanks. I wonder if you could provide more insight into the pace of development. Are there any delays in what you can achieve quickly as this ramp-up occurs? There’s a lot of uncertainty regarding how fast things are picking up, but it seems to be accelerating rapidly. Are you finding yourselves trying to catch up now, or are you a bit ahead? And is this also true for the partners you are collaborating with?

I would say we’re keeping up with everything. The one thing that we are seeing as people ramp up is don’t forget the levels that we’re ramping up from. We’re still not back to 2019 levels. As we see the ramp up, I just can’t describe the level of communication with the major partners that we’re supplying to. There’s virtually daily, if not twice, daily communication around frac crew availability, working through the current Department of Interior suspension, what they will allow, what they won’t allow. There’s just a tremendous amount of collaboration between the oil companies and the service providers. I think we’re going to be able to keep up with it just fine if we continue to collaborate in the fashion we are.

Okay. But you’re still in a good position because the current demand is behind 2019. So, you’re not racing just to catch up with where you are today? Okay.

No. I see frac crews coming on just continually, gradually and continually. As we talk to the variety of operators that we’re dealing with, we’re not seeing frac crews just 'appear.' There’s a tremendous amount of planning that’s going on this time. Because the downturn in 2020 was so vicious, there’s a lot more active participation with the operators, their bankers, their hedging programs, the timing of their hedging programs. There’s just an inordinate amount of collaboration to make sure that the well-funded operators that did hedge get their timing just right. I’m probably answering a lot more of your question, but I see very sustained, organized, thoughtful development occurring in the Northern Delaware.

That’s super helpful. Just a question. Has weather affected your expectations for fertilizer production this year? I’m just wondering if what we just went through was enough to throw you off track anywhere.

The only place we got thrown off track was the freezing weather in Texas and New Mexico. We had some power outages. I’d say everywhere else that we market fertilizer products, we were just fine. I would say that it provided more of a challenge for four or five brief days in Southeast New Mexico and Texas as it relates to our water business. That’s behind us. I think everybody, when they saw the weather coming, did a good job of shutting things down. We’re seeing some of the major operators just turning things back on now, making sure everything is in total repair. What happened in the state of Texas in terms of the electrical grid, and Southeast New Mexico was pretty much unprecedented. The good news is the repair has happened, and everyone’s checking things out; everything is working. We’re just slowly bringing everything back on.

Okay. And then, just one quick question on Trio. You had bigger international sales last year. Can you just sort of talk about your thoughts about where the Trio market is going versus domestic versus international? You made a lot of changes last year on where and how and size of shipments. I’m just curious where you come out in terms of where you think the best opportunities are for that product over the next year or two?

We’ve got two very specific customers that we really enjoy doing business with in a certain part of the world. Given we only have one competitor, I’m not going to tell you who our favorite customers are. I would imagine we’ll continue to service those customers because they really are a joy to work with. There are other markets that we’re just choosing not to be a part of until they come back and knock on our door. As you know, the last several years, we’re extremely competitive. We chose to exit certain markets and let other people take that business. Some of those people are coming back and knocking on our door. We’re just going to reenter the global market much more thoughtfully than we did several years ago.

That’s helpful. And obviously, it’s not just Trio that’s struggling to get paid for nutrient value. We’ve seen a lot of uneven performance across the specialties. I appreciate it. Thank you.

Sure.

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

Hi. This is Steve Haynes on for Vincent. Just wanted to ask a quick one on the above-average evaporation you talked about in the press release. I guess, can you provide expectations for cost per ton in 2021, and then, also, I think there was a comment about being able to operate a bit longer in the spring? So, any comments around your production volumes as well?

We experienced favorable evaporation years. As you know, being in the solar evaporation business means we are influenced by weather conditions, which can be cyclical and lead to fluctuations. There are years when our costs may be slightly elevated and other years when greater evaporation results in improved margins due to a slight reduction in our cost structure. Matt, would you like to elaborate on that with more specifics?

Yes, no real change from our previous comments. We touched a little bit on some of the freezing weather earlier in the year, and really no impact on our potash production. It was very cold weather and we didn’t operate for a few days, but it wasn’t a major precipitation event that would impact our pond inventory. So, still above-average evaporation, we do think we’ll operate a bit longer than normal just to get through the ponds. And all else equal, that will certainly help our cost per ton heading into 2021.

The next question comes from John Roberts with UBS. Please go ahead.

How much does the transition to brine water increase the resources available to you?

Is your question, how many more water rights do we have of brine, or I guess, I don’t understand the question…

How significant is the availability of brine compared to freshwater, especially as it develops over time?

That’s a great question. We currently own about half the water rights we have in terms of freshwater as brine, but obtaining an appropriation is much easier. Because it’s high TDS brine, which is non-potable, it’s simpler to get an appropriation and have supplemental wells approved since there’s no competition from farmers or municipalities. So, the transition is just an easier process from an appropriation standpoint.

Okay. And then, adding full cycle water management, what’s kind of the revenue opportunity maybe per customer barrel, or I don’t know how to measure it, but how much does it increase your addressable market by having full cycle capabilities versus what you were doing previously? Do you need to partner or acquire additional capabilities to be able to fully offer that?

No. That’s the beauty. Part of the capital that was spent in 2020 and some of the team members we’ve brought on allowed us to use 2020 as an opportunity to acquire talent from significant oil companies with extensive recycling experience. We’ve already purchased much of the necessary equipment and are currently under construction. We expect to be operational in a matter of months. From a margin perspective, the margins are comparable to or even better than freshwater because a barrel of produced water can be recycled several times, enabling the resale of the same barrel multiple times. There are only small fixed chemical and labor costs involved. The units we have are actually mobile. Developing a produced water outlet on the backside provides us with that capacity. Therefore, it’s about having sourced water from various geographical locations, sourcing water throughout the basin in different forms, modular recycling capabilities, and the disposal capacity that we’re currently building, along with an intriguing project that we’ll discuss in future months.

The next question comes from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

Just following up on the last answer there. I guess, you mentioned that the next couple of quarters are going to be pivotal for that business. Is there anything you would point to that investors could be looking for that would either signify the success or not getting traction in that business, or is that kind of what the Investor Day that you have planned would be about?

That’s exactly what it’s planned for, Jason. We spent 2020 trying to get a lot of projects designed, get the right teams around them, work them through the regulatory agencies. I’ll be honest, the Department of Interior suspension was just a touch of a blip. The state of New Mexico regulatory agencies, because we’re helping them fulfill their legislative agenda, I think we’ll get everything accomplished that we want to. We really look forward to being able to share with the market the things that we’re doing and creating a lot more transparency. I think had COVID not gone into the first quarter, where we are, we’d be having that Investor Day in this quarter. But COVID is what it is, and we’re finding certain regulatory agencies, court systems, legislative bodies are all still operating virtually, and it slows things down. So, that’s just a reality of life that we’re dealing with. It is improving week to week in terms of being able to get things done either legislatively or regulatory-wise. I hope I’m answering your question that we know the market is really wanting a lot more transparency. We have every intention of getting it as quickly as we can, ensuring the nature of the projects that are ongoing.

That is the answer. I guess, but is it the type of business where you’d be able to announce like customer wins or contracts, or is it really just going to be waiting for it to start showing up in the numbers?

It’d be a little of both. Some of the recycling, you don’t necessarily need a big contract, and some of the other projects that we’re working on, those are all being discussed and negotiated as we speak.

Okay. And then, it’s been a couple of quarters, but any update on the lithium reserves or the tests that had been going on there?

That is a great question. We’ve been reapproached now by a couple of companies. The original company that did the testing for us, Lilac, has come back with promising results. As you know, the lithium market has been a bumpy ride. We’ve got the appropriate personnel retargeted back on that project. It’s interesting to have a lithium opportunity. I don’t think we want to be a full-service lithium processing entity. We’d rather look to monetize the lithium reserves that we have, either through a royalty structure or allowing someone to take that lithium on site, combine it with lithium from other sources and continue to process it further.

The next question comes from Matt Farwell with Roth Capital. Please go ahead.

I was wondering if on the water business, one, if you could make a point of clarification, just because I’m not sure if I quite caught it. I have in my notes that there’s a certain amount of water resources that the Company owns. I have 13,800 acre-feet or 107 million barrels. There’s also a slide on this in the August 2019 presentation. I understand you may not have this data at your fingertips, but I’m wondering if the brine reserves are included or in addition to the reserves you’ve disclosed to the market.

They’re not included. Quite frankly, if you follow New Mexico policy, the state land office policy, if you follow what’s going on in the legislature as we speak today, there are several bills. We’ve been very adaptive to not only the ESG requirements of several companies, but we’ve been adaptive to what’s going on with the state land office, the administration change federally, as well as what’s going on in the New Mexico state legislature.

Okay. I’m definitely looking forward to the Investor Day and am curious about what you might share. So, I’ll ask, how does the recycling opportunity now compare to the more tangible market opportunities in fresh water rights and water disposal? Is it equal, greater, or perhaps still in the early stages?

I think it’s greater. Quite frankly, every single oil company is trying to move towards a recycling component, but you need sourced water, either fresh water or brackish water, to start the flywheel. Despite operators’ claims of very high percentages of recycled water, I’d say right now, it’s in the 25% to 30%. We’re seeing the technology that can easily take it to 50% in 2021 and grow it from there. We see it as first and foremost, where the regulators and the politicians want to take it so that we’re not fighting battles over river water or water, et cetera. It enables everyone to get on the same ESG page and move it forward.

Okay, great. The last question is about the likelihood of the Company generating free cash flow this year due to the higher prices, which reflects an improvement in our financial strength in the equity markets. Can you share what potential uses there might be for the free cash flow or financial strength? Would it be for repaying debt or pursuing other initiatives?

I would say, first, right now, our leverage ratio is in good shape. We don’t have any real risk there. We’d like to reduce debt a little bit more. I’m the first one to admit because I’m the largest shareholder, I would love nothing more than to announce a buyback program when we’re financially able to and return money to shareholders. As we all know, had we done that like many other oil companies in 2019, we’d have never made it through 2020. It’s a good thing we didn’t, despite the urging of many people. I think we just got lucky on that one. As we do, our goal is to return funds to shareholders as quickly as we possibly can. We understand that. We hear that. I just can’t stress how much we appreciate the need to do that. If I can say it any more clearly, I will.

This concludes the question-and-answer session. I would like to turn the conference back over to Bob Jornayvaz for any closing remarks.

I just want to thank everyone for their time and their interest in Intrepid. We hope that everyone stays healthy and look forward to catching up with you. So, thank you, and thank you for your interest. Have a great day.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.