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Intrepid Potash (NYSE:IPI)
Q2 2020 Earnings Call
Aug 04, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Thank you for standing by. This conference operator. Welcome to the Intrepid Potash Inc. Q2 2020 results conference call.

[Operator instructions] The conference is being recorded. [Operator instructions] I would now like to turn the conference over to Matt Preston, vice president of finance. Please go ahead.

Matt Preston

Thanks. Good morning, everyone. Thanks for joining us to discuss Intrepid's second-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, Mark McDonald. 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 Securities and Exchange Commission, 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.

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Thank you, Matt, and good morning, everyone. The second quarter, hopefully, was the definition of unique in light of the considerable pressures presented by the pandemic and its economic impacts. We ended the quarter in a solid cash position, which enabled us to voluntarily and fully repay the Series C tranche of our senior notes in July. This had the effect of lowering our effective interest rate while providing us with considerably more flexibility as we execute on our strategic plan and seek opportunities to capitalize on the generational opportunities currently available in the oil and gas space.

With available borrowing capacity of $44 million and a $75 million accordion feature under our existing credit facility and $14 million in cash on hand after the July repayment, we believe we're in a solid leverage position as we continue to prudently manage our existing assets, while considering unique acquisition opportunities during these unprecedented times. Our ability to execute during these uncertain times is testament to the strategic moves we have made to diversify our revenue streams, maximize our salable assets, improve our leverage position and infuse our business with cost and labor efficiencies, which enable us to be responsive to ever-changing conditions. Having entered this challenging period in a stronger position and by continuing to improve our leverage position, we're better able to execute well as we navigate the roller coaster in the oil and gas markets while providing essential services to the agricultural, animal feed and oil and gas markets themselves. Considering the COVID-19 pandemic, we delivered a solid first half in our nutrients business, while the earlier spring application shifted volumes to earlier in the year.

For potash, we continue to see strong volumes into our agricultural and animal feed segments, particularly early in the quarter, though margins continue to be pressured due to lower pricing compared to the prior year. We finished the spring production season earlier this year due to below-average evaporation during 2019, but have seen a great 2020 evaporation season so far with minimal rainfall and above-average temperatures at all three potash facilities. In fact, it's 107 degrees in Moab today. In June, a summer-fill program announced by our competitors, lowered prices $10 to $20 per ton compared to the winter-fill price levels.

This price applied to tons ordered in the June delivery window and delivered by the end of September. After the order window, pricing increased $15 per ton, and we have seen acceptance of this higher pricing on spot sales in the third quarter, although the majority of tons delivered in the third quarter will be at the fill pricing lift. For Trio, we delivered record domestic volumes in the second quarter as we pursued a more U.S.-focused strategy in light of favorable domestic weather conditions and solid demand for our granular and premium products. Our success in driving domestic sales in the second quarter, in turn, drove a 6% year-over-year increase in second-quarter net realized sales prices.

In June, a summer-fill program, very similar to the potash program was announced by our sole competitor lowering prices $5 to $10 per ton compared to the first-quarter price levels. Pricing increased $15 per ton after the fill window. As we discussed last quarter, our oilfield solutions business remained well-positioned even in light of the pressures posed by the ongoing pandemic. The strategic moves we have made in our oilfield businesses have resulted in low cash operating requirements and a unique ability to deploy our labor force in Southeast New Mexico in real-time to address our highest business needs.This gives us considerable flexibility as we manage through the oil and gas down cycle that is in the process of rebounding.

Accordingly, our approach to the oilfield market today is pragmatic. We acknowledge that the pullback in our customers' second-quarter fracs in the schedules and general lack of visibility in the market was painful for our business in the short term. However, we are reminded that the market pressures we are seeing today are inherently time-bound. Even in light of considerable uncertainty in the short term, we know that by successfully managing through this part of the cycle, we open ourselves up to taking advantage of all the down market can offer, including an abundance of unique opportunities to further strengthen and diversify our business.

To that end, we continue to evaluate opportunities to organically expand and diversify our existing oil and gas midstream businesses, which include full-cycle water management, which is defined as source water delivery, recycling, blending, and disposal. We also continue to evaluate synergistic and sometimes organic opportunities to expand further within the entire midstream and upstream oil and gas space, which includes gathering a variety of produced products, by-products, and waste products. As we enter the second half of the year, we remain thoroughly optimistic. As we speak today, we are delivering water into a 2 million barrel frac and believe we're well-positioned to withstand the economic pressures presented by the pandemic and related downturn in the commodity cycle.

Through diligent execution on our strategy and prudent management of our existing assets, we believe we can opportunistically improve and expand our business and emerge as stronger company once headwinds abate. And now I'll turn the call over to Matt for a review of our financial results.

Matt Preston

Thanks, Bob. Second-quarter sales were down 26% due to some early spring season shifted fertilizer sales for the first quarter and water and byproduct sales were impacted by pandemic-related pressures. For potash, second-quarter sales volumes were down 22%, while pricing pressures from summer and winter-fill programs and lower industrial sales resulted in a 14% decline in average net realized sales price. Potash segment gross margins were down $6.2 million in the quarter compared to the prior year.

First-half agricultural and feed volumes increased compared to the prior year due to good weather and strong demand in our feed markets. For Trio, the record domestic sales volumes we delivered in the second quarter drove a 6% year-over-year increase in our second-quarter net realized sales prices. Our focus on the higher-priced domestic market resulted in fewer international sales compared to the prior year. Decreased oil and gas activity due to pandemic also reduced our byproduct sales, resulting in a 10% year-over-year decline in total sales for the segment.

This as well as increased lower cost or net realizable value adjustments and lower recovery rates in our production process, pressured segment margins in the second quarter. Byproduct sales across our nutrient segments continue to be pressured and were down 26% compared with the year-ago second quarter. While increased market availability of salts and lower demand for byproduct water due to the pandemic, continued to impact sales in the second half of 2020, magnesium chloride production and sales returned to historic rates toward the end of the second quarter. Assuming average evaporation rates at our Wendover facility, we expect magnesium chloride sales to remain at historic levels through the balance of the year.

During the second quarter, our oilfield solutions segment saw a 51% year-over-year decline in sales as the pandemic continues to affect oil and gas markets, resulting in curtailed drilling plans and lower demand for water and other oilfield products and services. Looking ahead, we continue to expect the disruption caused by the pandemic will have meaningful impacts on our results and our visibility for the remainder of this year. In particular, for our oilfield solutions segment, planned reductions in activities from operators are expected to impact our sales of water and other oilfield products and services through the balance of 2020. We continue to monitor this ever-changing situation and are managing our business to comply with changing mandates from federal, state, and local authorities while continuing to serve our customers.

Turning to liquidity. We generated $23.5 million in cash from operations in the first half. As we discussed last quarter, we received $10 million in April under the CARES Act Paycheck Protection Program, which we used to fund eligible payroll expenses. We elected to use the 24-week time period to use the funds, and we have since used the entire $10 million for eligible payroll expenses.

Our 24-week period ends in the first week of October. Capital expenditures during the first half were $10.6 million. We continue to proactively manage our capital plans as we navigate through the challenges presented by the pandemic and its associated impacts and remain on track toward our CAPEX guidance of $15 million to $20 million for 2020. In July, we made a voluntary early repayment of the remaining $15 million outstanding under our Series C senior notes along with a reduced make-whole payment and accrued interest for a total payment of $17.1 million.

As Bob mentioned, this payment reduces our effective interest rate, simplifies our debt structure, and gives us additional flexibility to pursue our strategy. Immediately after the payment, cash on hand was $14 million and availability under our credit facility was unchanged at $44 million. Our Series B senior notes did not change and remain due in 2023, while our revolver matures in 2024. As we announced late last week, all the proposals set forth during our special meeting of shareholders were approved, paving the way for a reverse stock split, which we expect to occur in August.

Our Board is planning to convene on August 10th to consider the options available to us. In executing this reverse split, we hope to achieve a per-share stock price sufficient to keep us well within the range of compliance with NYSE Continued Listing Standards while expanding the ability to attract new investors. We look forward to sharing more information in the coming weeks. That concludes our prepared remarks for today.

Operator, we're ready to take questions.

Questions & Answers:


Operator

[Operator instructions] The first question comes from Joel Jackson with BMO Capital Markets. Please go ahead

Bria Murphy -- BMO Capital Markets -- Analyst

Bria Murphy on for Joel. I know you spoke about your -- the summer-fill program weighing on potash and Trio pricing in Q3. But based on your disclosure, is it fair to assume potash pricing will be down about $10 to $20 per ton quarter over quarter in Q3 and Trio pricing down 15% to 20 per ton.

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Yes. I think you've got those numbers right. I think in our Q, we'll certainly walk through this in more detail. It gets a little confusing as we talk list prices versus effective prices.

But I'll turn it over to Mark to go into a little more detail on each of those summer-fill programs. But effectively, our Trio price will be down $5 to $10 compared to our first-quarter price levels in 2020. And then I'll -- Mark, I'll turn it over to you for the potash side.

Mark McDonald -- Vice President of Sales and Marketing

Sure. And I think the takeaway here, Bria, would be that, I think as Bob and Matt mentioned in the prepared remarks, is that there's been a reset on the pricing. So certainly, some of the Q3 pricing will be evident in the fill values that were discussed. But after that order period expired, pricing has increased.

And I think we've seen on some spot and the new business, some traction on those price levels. So certainly, as the harvest and market trend sends into the third quarter, I think that we're looking toward the fourth quarter for potential uplift.

Bria Murphy -- BMO Capital Markets -- Analyst

OK. Great. And then potash production is obviously lower in the second quarter. How should we think about the full year expected production and inventory levels at the company?

Matt Preston

Yes. So we're really right on track to start the fall season on time, where we're getting ready to start at our HB facility here this week and ramping up over the next 10 days, and we'll start our Moab facility on time in September as well as Wendover the middle of August. So you should see kind of normal production rates for two of our three facilities by mid-August and then the other one starting in September, which is really just our normal cycle given the evaporation season.

Bria Murphy -- BMO Capital Markets -- Analyst

OK. Great. And then just quickly on water or oilfield services. Can you talk about the expected trajectory of sales for the rest of the year and into '21? Do you think Q2 represents the floor for water revenue?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Well, we hope so. If you look at several -- this is Bob, thank you for the question. We've seen activity in July grow month over month. And so the entire Permian has grown 30% in terms of frac activity month over month.

We're also seeing just a solid uptick. So everywhere that we look in the Permian and the Delaware, and I want to be very clear that we're just talking about the Permian Basin and the Delaware Basin. We're seeing July grow over June, and we're seeing August demand, that we're talking about, go up over July. So I think just about every oil and gas analyst has picked up on the increased frac activity.

And we're seeing it out in the field. So we see 2021 as being in a much more normalized situation. As we see, once again, July grow over June, August grow over July, and we have every indication that September will grow over August based on the orders that we're taking today. I hope that answers your question.

Bria Murphy -- BMO Capital Markets -- Analyst

Yes. Thank you. I'll pass it along.

Operator

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

John Rider -- Stephens Inc. -- Analyst

Hey. Good morning. This is John Rider on for Mark. Our first question is how much room do you have in terms of potash capacity before you'll need to open up new underground panels or make other incremental investments?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Well, on the potash side, as you know, 100% of our potash production is solution mining. The only underground conventional mining we have is on the Trio side. So right now, we're producing a thoroughly saturated potash brine. So we would have to add additional ponds, if that's what you're asking, to increase our potash capacity, and we have plenty of land available for additional ponds.

Was that your question around potash?

John Rider -- Stephens Inc. -- Analyst

Yes. I'm sorry, we got a little mixed up there. But that's helpful color. And then on potash again, so we've heard pretty bullish comments on the potash volume outlook for the second half and some of that fall application and some being international demand.

Do you have a view on fall application needs relative to normal domestic demand?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Well, as you know, going into last spring, we had three consecutive, very poor application seasons. So the soils are still deficient in terms of minerals. So I think there's every reason to anticipate very bullish demand. The good news in terms of inventories along the river is that we're not seeing a lot of imports that have come in.

So the inventories along the river are pretty low. So unless we see pretty quick deliveries into the river system, then it's just going to be primarily the Canadians, providing the majority of the potash into the United States. So I think we have a unique opportunity to see very, very strong volume as well as firm pricing. Hope that answers your question.

John Rider -- Stephens Inc. -- Analyst

Yeah. That's really helpful. Thank you very much.

Operator

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

John Roberts -- UBS -- Analyst

Thank you. Did your oilfield solutions business decline in line with the overall fracking activity in the basins or does market share shift when we get a sharp correction like this?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

I would say it's definitely proportionate. If anything, we picked up a few things, given our local presence. But you got to remember that starting around the middle of March through the third week in June, things basically came to a dead stop. And then the third week in June, things picked up a touch, and then we saw good -- July was up.

I want to say it was about 8% over June and then an additional 13% to 14% is what we're seeing in August in terms of the order book. So we're certainly not going to lose any market share, if anything, given our ability to do full water management, I think our opportunity to pick up market share is pretty good. So I feel very comfortable with that. Once again, I hope I'm answering your question.

John Roberts -- UBS -- Analyst

Sure. Yes. And could I ask what's happened to the price of acquiring new water rights or does the market become illiquid or freeze up in a correction like this? So there's really no market price for new water rights?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Yes. I think it's what you're seeing in the entire oilfield is that the spread between the bid and the ask, whether you're looking at actual producing assets for a willing seller and a willing buyer, there's a pretty big bid-ask; whereas those have gone into bankruptcy, there's some very, very unique opportunities. And as you know, we've seen record bankruptcies. So those that can afford to hold on to their assets are holding on to them.

So it's a very unique market that we're seeing, given that you've got record bankruptcies across all sectors of the oil and gas industry, you've got some that are getting ready to get into loan-based redetermination that we think we're going to see another wave of problems, but all of those assets are being managed. And then the well-financed ones that are remaining are, as I said, are continuing to frac. We're working on a 2 million barrel frac as we speak on this call. So it really is across the board.

And we think this roller-coster provides a very unique opportunity.

John Roberts -- UBS -- Analyst

Then on the reverse stock split, you've got a range of one for three up to one for 15. Why isn't it automatically like one for 15, that's still not a really high stock price. So why aren't -- why is it -- why do you have a range that goes down to something so low as one for three?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Well, we followed the way that hundreds of companies have done it over the past several decades in terms of how the SEC attorneys prepare the paperwork. And so I hate to sound so ignorant. But we used 2 highly rated SEC firms that prepared all the paperwork and the document. That was their recommendation and we followed it.

So I think at the end of the day, we'll meet on the 10, and we'll pick the appropriate split number in terms of the target range and make it effective as quickly after that as is practical. So all I can say is we had great counsel that said this is the way you do it.

John Roberts -- UBS -- Analyst

Right. Thank you.

Operator

[Operator instructions] The next question comes from Jason Ursaner from Bumbershoot Holdings. Please go ahead.

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

Thanks. Just on the MOP potash business, could you walk through the fill programs? And obviously, you can't speak for the industry. But can you maybe just explain in your view what is going on there? Because I mean, it kind of seems like distributor inventory should be getting worked down, but then we're kind of continually offering them a discount to replenish that. And it almost seems like a double negative in terms of them having less risk to not hold inventory and then giving them lower pricing.

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Jason, I think you are right on. We certainly did not initiate the fill program. And so, unfortunately, we had to participate in it. I think it was -- given the demand out there and the need for the mineral deficiency, I don't have a rational explanation for why the fill program occurred this summer.

I'll let Mark weigh in, but I didn't think it was necessary. So I'll let Mark weigh in.

Mark McDonald -- Vice President of Sales and Marketing

And I think maybe the takeaway, Jason, is that when we looked at this program, I think, as Bob indicated, we were a little perplexed in terms of the timing of it as well as the mechanics. And so we made a conscious choice to look prudently at our sales and our distribution channel business and really try to focus in on what we felt were businesses that we wanted to participate with some of our loyal and core customers, but certainly didn't want to extend beyond that and really focus in on some of our better netback sales opportunities.

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

OK. And just second question for me. Can you walk through the decision to pay back the Series C notes? Obviously, this was the longest dated maturity you guys had and it wasn't particularly at a very high interest rate. So obviously, just given the situation with COVID and everything else where you're managing the liquidity position pretty closely, it doesn't make a ton of sense relative to the idea of just holding cash or even relative to these opportunities that could come up in other parts of your business.

So you did mention more flexibility with lenders. Could you maybe detail specifically what that is?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Yes. If you'll remember, that was a $15 million tranche that had a senior -- that was a senior note that had a collateral claim on every asset, including newly acquired assets. And if we blinked, they wanted a waiver fee. And so if you look at our ability to use cash on hand and have the access to the BMO facility, we got a tremendous amount of flexibility in terms of what now needs to be collateralized, what is sort of senior nature.

If you look at the difference in who makes up the Series B versus the Series C, there's just a tremendous amount more rationale, reasonableness, flexibility in who those specific noteholders were. And so I just can't stress that it was the right thing to do as we continue to look at different ways to expand our opportunities to access low-cost credit and having someone that had a first position on everything, as well as everything to be acquired was difficult to manage around.

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

OK. And in terms of, I guess, opportunities and acquisitions, you spoke a lot in the release about the long-term potential for the Delaware Basin. Could you possibly talk about that strategy in more detail specifically from a capital structure perspective with leverage and priorities for cash flow?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Well, the good news is the majority of them are organic. And so as you've seen in our water presentation, we've explained many times, we've got a great infrastructure that covers the entire southeastern portion of New Mexico. So our ability to now deliver source water, participate in the recycling and reblending that is going to occur more and more as we go through quarter-by-quarter as well as on the disposal side, which we'll talk about in upcoming quarters, it just gives us a very unique opportunity to build that out. We're just in a special position geographically and with our headcount, take advantage of all of those.

There's also byproducts and waste products that need to be disposed of or in many cases, changed in from a waste product or byproduct to an actual product. I kind of leave it at that. There's just a tremendous amount of opportunities as people fall off the radar and leave things behind. And so I'm not going to go into any more specifics other than if you really take a look at Southeast New Mexico, look at the existing rig count, look at the existing fracs that are occurring, the economics of the basin, the people that had to leave the basin because of debt structures in other parts of the United States, there have been a lot of opportunities left behind.

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

OK. Would you be at a competitive disadvantage if you don't pursue these things? For genuity, keeping the financial aspects, I guess, aside for a second, it seems like that did truly expand the capability of what the business you're building there could be with the four-corner strategy and that you would have been competitively disadvantaged in terms of selling water over time if you didn't secure that position. This sounds more opportunistic. And I don't get the sense that it's something that's out of necessity, but rather opportunity.

So I guess the question is, at what point you may -- I guess, I understand that you could make more money over time if you pursue them. But at one point do you kind of let someone else have that margin versus focusing on compounding the existing capital base to get to more of a fair value.

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Well, I guess on -- if you're in full-cycle water management so that you manage the source water, the recycling and blending that is in going -- that is occurring as we speak. So if you are able to take a barrel of water and capture margin off that same barrel of water multiple times and it's handling, I'm not understanding your question, why you wouldn't gather every piece of margin off that same barrel of water rather than let somebody else pick it up.

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

I guess what I'm -- because, I guess, to do that relative to -- I mean, your stock is trading at 0.3 times tangible book. So relative to doing nothing if I pegged normalized cash earnings or something of $30 million year, and I'm not asking for guidance on that number. That's my number. Well, it's not my number.

That's about half my number because I'm not trying to be overly optimistic, but you would be debt-free in one to two years and you would earn back your entire market cap in four to five years. So the uncertainty, I think, of what you're doing is clearly weighing on how people are valuing the company. So that's why I'm trying to understand getting to a fair value versus pursuing these margin opportunities.

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

I guess I really don't understand your question. If you really understand where full-cycle water management is going in the Delaware Basin. And so you really can't be left out when you can control the entire system. So I think you and are speaking past each other, in terms of the amount of capital that's required to enter into all phases.

So once again, I just think we're speaking past each other. I don't think you really understand the opportunity or the way water is managed in Delaware Basin.

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

How large capital requirements to get into that full system do you think it would take?

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

It's not a lot. I'm not going to really go into details on the backside. I appreciate the question, and I understand it. And so they're not major capital investments, their bite-size organic capital investments that add margin to the bottom line.

And so the key is to grow a diversified revenue stream that generates as much margin as we possibly can.

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

OK. Awesome. I will hop back in queue.

Operator

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

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

I just want to thank everyone for their participation, and thank you for your interest in Intrepid, and have a great day and stay healthy.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Matt Preston

Bob Jornayvaz -- Co-Founder, Executive Chairman, President and Chief Executive Officer

Bria Murphy -- BMO Capital Markets -- Analyst

Mark McDonald -- Vice President of Sales and Marketing

John Rider -- Stephens Inc. -- Analyst

John Roberts -- UBS -- Analyst

Jason Ursaner -- Bumbershoot Holdings L.P. -- Analyst

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