Intrepid Potash (IPI) Q3 2020 Earnings Call Transcript

Intrepid Potash (IPI 16.71%)
Q3 2020 Earnings Call
Nov 03, 2020, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash third-quarter 2020 results conference call. [Operator instructions] And 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, sir.

Matt Preston

Thanks, Claudia, and good morning, everyone. Thanks for joining us to discuss Intrepid's third-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.

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

Thanks, Matt, and good morning to everyone. We managed well through another quarter of uncertainty and volatility and are seeing positive trends in both fertilizer and oilfield markets. We worked with the various states and their agencies to maintain our essential business status so that we could continue to operate. As we emerge from the bottom of a down cycle in fertilizer and start to produce off a great 2020 summer evaporation year, we see numerous positives in front of Intrepid.

Oilfield activity is increasing, water sales are improving and the water market is tightening. And the outlook looks supremely good for 2021. Lawsuits are behind us, weak partners are getting out of the way and we're teaming up with a strong set of financial partners to embrace, transform, and truly grow into 2021. 2020 has been and remains a unique year regardless of the pandemic.

Over the past nine months, we decreased our overall debt by $15 million, which will increase to $25 million when we receive forgiveness of our PPP loan. We settled outstanding litigation in continued preparation for the eventual resolution of our Pecos water dispute. We incurred legal costs significantly above any normal level. These expenses and cash outflows were, clearly, onetime events.

Over the past couple of quarters, our earnings have certainly been pressured by the COVID-19 pandemic, decreased fertilizer pricing, but when we look at our debt compared to our asset base and our cash flow potential, we see a lot of upside potential for Intrepid. As with any downturn, and as you may be aware, there have been numerous in my decades of commodity experience, these are the opportunities to strengthen and diversify your business if you're willing to be quick thinking and adjust with an ever-changing landscape and maintain a creative optimistic culture. Companies who keep their eyes up instead of hunkering down can be rewarded, and that is exactly what we have done as we continue to expand our relationships in the Delaware Basin with strategic partners. We are thoroughly engaged with our strategic partner Select, several oil and gas operators, and a couple of midstream companies to become a powerhouse in the smart use and development of environmentally friendly methods to utilize water, then reuse it, and finally, to innovate creative management systems to beneficially use oil and gas-related water.

Intrepid has a laser-like focus on smart or full-cycle water management. We ask you to follow us closely as we lead the way. Our second-quarter investment in the Von Gonten Laboratories is also yielding great data on the benefit of using potash, or KCl, as it's known in the oilfield, in certain formations, and we hope to improve our industrial potash sales significantly as drilling and fracking activity increases in future periods in various specific areas. Our nutrient businesses ended the third quarter on a positive note as domestic potash inventories have leveled out over the past few months, which should set us up for a good end of the year and heading into the next spring season.

The post-summer fill price increase has stuck. And just last week, we announced an additional $15 to $20 increase, bringing our posted price up to $30 to $35 per ton from the summer fill price levels, and clearly calling a bottom to the potash market. This is welcome news for the market that has struggled to find its footing over the past year and a great start to the fourth quarter as our potash production ramps up after an above-average 2020 summer evaporation season. For Trio, we continue to maintain consistent production levels to prior years as we balance existing inventory and focus sales efforts on growing domestic volume.

Similar to potash, the summer fill price has been accepted, and we announced an additional $10 per ton increase last week, effective immediately. During the third quarter, we continued to position ourselves to capitalize on the return of oilfield activity in the Delaware Basin, moving most of our transfer equipment off of generators and on to the power grid, which will continue to improve our transfer expenses going forward. Our approach to the oilfield markets today remains pragmatic with a focus on establishing long-term relationships with operators as dependable water suppliers in the Delaware Basin that can meet the incredible demand for water delivery in a frac. And they require increasingly larger volumes of water per completion and increasingly larger flow rates.

We are surrounded by well-capitalized and long-term-focused operators, with attractive breakeven drilling economics. Many of these operators have continued to operate, albeit at reduced rates, through the downturn and are indicating plans to ramp up considerably in 2021. We acknowledge the next couple of quarters could be bumpy due to an uncertain trajectory for the COVID-19 pandemic. But the rebound in the Delaware Basin is happening as we speak.

As I said last quarter, these pressures are inherently time-bound and the attention that companies are focusing in the Permian and specifically, Northern Delaware, gives us a lot of optimism about the future. To that end, as I stated in the beginning of my comments, we have used the past nine months to not just focus on improving our existing business, but to find opportunities to participate in the upside of improving oilfield demand as we remain convinced of the value and potential of smart or full-cycle water management in the Delaware Basin. And now I'll turn the call over to Matt for a review of our financial results and outlook.

Matt Preston

Thanks, Bob. We managed well through the uncertainty caused by the COVID-19 pandemic and down cycle in fertilizer during the third quarter, highlighted by solid demand across our nutrient segments and a great end to the 2020 summer evaporation season, which will lead to lower per ton potash production costs in the coming months. Total company water sales were up 42% from the second quarter of 2020 as oilfield activity steadily improved over the past three months. For potash, we saw good engagement during the quarter, and believe we've hit the bottom of the down cycle for fertilizer, heading into a winter and spring season in which we will have above-average volumes to sell due to the good evaporation during the summer.

Strong growth in specialty segments helped to offset some of the declines into industrial markets, and our third-quarter results started to see the benefit of a good evaporation season as our cost of goods sold improved compared to the prior year. Margins compared to the prior year were pressured by price decreases over the past year and reduced byproduct water and brine sales to the oilfield. For Trio, another quarter of steady demand in the domestic markets led to similar results compared to the prior year. Sales volume was down compared to the third quarter of 2019 as we continue to narrow our international focus, while production remained consistent as we manage inventory levels.

Similar to the potash market, we have seen good subscription at post-summer fill values, which we expect will improve pricing in the fourth quarter and into the spring season. Byproduct water sales improved significantly compared to the second quarter of 2020, and we are seeing good demand for water in the fourth quarter. Our oilfield solutions segment continued to be impacted by reduced oil and gas activity compared to the prior year as reduced demand for water has also pressured pricing on our South ranch. On a positive note, activity has steadily increased over the past few months as operators focus their attention on the great resource in the Delaware Basin, and operators are forecasting continued increases in completions over the coming months.

Turning to our debt and liquidity. We recently applied for forgiveness on our $10 million CARES Act Paycheck Protection loan. We used the entire loan amount to fund eligible payroll expenses and expect the loan will be forgiven, although the timing of response remains uncertain. As a reminder, in July, we made a voluntary early repayment of the remaining $15 million outstanding on our Series C senior notes, along with the reduced make-whole payment.

We now have $15 million remaining on our Series B senior notes, which mature in 2023. And as of September 30, we had $30 million borrowed under our revolver, which matures in 2024, with $30 million of availability remaining. Capital expenditures during the first nine months of the year were $14 million. We continue to manage our capital plans through the cycle and expect to be near the low end of our previous $15 million to $20 million range for the full year.

Although the trajectory of the COVID-19 pandemic remains uncertain, the proactive steps we've taken to reduce our debt and diversify our revenue from our long-lived assets have us optimistic about the potential of our business. That concludes our prepared remarks for today. Operator, we're ready to take questions.

Questions & Answers:

Operator

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

Bria Murphy

Hi. This is Bria Murphy on for Joel. Thanks for taking my question. So some of your fertilizer peers are also reporting today, and they spoke about the strength of the U.S.

fall application season. Is this consistent with what you're seeing? And what kind of incremental volume could we expect in potash and Trio in Q4 compared to Q4 '19?

Bob Jornayvaz

I'll take the first part of that and let Matt speak to the incremental volumes. We're just seeing price acceptance across the board. As you know, we had an early harvest. We've seen recent strength in wheat, soybeans, corn, price of sugar has rebounded in South America.

As we look at cocoa, we look at a variety of commodities that impact the usage of global potash production. We're seeing here in the United States strength in the fall application market and very solid acceptance of the price increases. I'll let Matt speak to any potential for incremental year-over-year demand that we anticipate seeing.

Matt Preston

Yes. You certainly continue to see very good demand in the potash market and just with our production profile, and we really focus our tons into the spring season into truck markets, West Texas area and California, and the PNW. So the winter isn't normally, or Q4 isn't normally our biggest sales season, and some of the tons we're going to see from improved evaporation during the 2020 season, it will hold off for higher and better margins in the first half of 2021. So don't expect a whole lot of change year over year for our potash volumes in Q4.

Bria Murphy

OK. Thanks. That's helpful. And then can you just talk about the expected trajectory of water sales in 2021? And how should we think about 2021 sales relative to 2019 levels?

Bob Jornayvaz

I think they should be at least at 2019 levels, depending on permits that we've had under dispute getting resolved. COVID -- we've got several permits that were -- that are up for administrative approval that are going through the hearing process. And, unfortunately, COVID has created a bumpy administrative schedule, if that makes sense. So any additional water that we see receiving the approved permits on, we see full utilization going into 2021.

So we would see total sales in excess of 2019.

Bria Murphy

OK. And then just one last quick one. Is your 2020 CAPEX guidance still for $15 million to $20 million?

Matt Preston

Yes. We think we'll be at the low range of that previous guidance of $15 million to $20 million.

Bria Murphy

OK. Thank you.

Operator

Our next question is from John Roberts with UBS. Please go ahead.

John Roberts -- UBS -- Analyst

Great. Thank you. I'm not expecting you to purchase any more water rights near term, but has the downturn allowed a lot more rights to become available for purchase? And what's going on with the asking price for water rights?

Bob Jornayvaz

If you break the year into COVID-related periods, you'll see the second and third quarter, were lacking, so to speak. I'd say we're seeing the fourth quarter strengthen dramatically in terms of water demand and then pricing power going into 2021, we're definitely seeing. New Mexico is a unique state in that it's an appropriation state. And so the Office of State Engineer has begun to have investigations into the water being imported from Texas into New Mexico.

And as an appropriation state, the water coming out has historically not been permitted, accounted for, taxed, regulated, et cetera. And the Office of State Engineer in New Mexico in the third quarter initiated a pretty intensive investigation into the water that's coming across from Texas that's on an unregulated basis. So it's going to be interesting to see what the state engineer does with the data that they are collecting from the various operators and pipeline companies that are bringing water across those operators that are choosing to use Texas water.

John Roberts -- UBS -- Analyst

And any estimates on how much potash unit costs will decline due to the favorable evaporation conditions?

Matt Preston

It's a good question, John. We don't have estimates right now that we're going to share, but we'll certainly see some improvements year over year.

John Roberts -- UBS -- Analyst

Thank you.

Operator

[Operator instructions] Our next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Steve Haynes -- Morgan Stanley -- Analyst

Hi. This is actually Steve Haynes on for Vincent. Just wanted to ask a quick question on potash inventories and kind of where you see those inventories exiting the fall season.

Bob Jornayvaz

Matt, you want to take that?

Matt Preston

Yes. I think we're in a really good place here at the end of the third quarter, start of November, compared to where we were just three or four months ago. You've seen it through increased price, both on potash and Trio that we announced last week, and it looks like things are clearing up nicely along the river and really expect a solid first half of 2021.

Steve Haynes -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question is from Matt Farwell with ROTH Capital. Please go ahead.

Matt Farwell -- ROTH Capital Partners -- Analyst

Hi. Good morning. I was just wondering if you can comment on the margin outlook for the oilfield solutions business given the negative gross margin in the quarter. How that might trend in the fourth quarter and then 2021?

Bob Jornayvaz

I think you're going to see a continued improvement in the fourth quarter. You just got to think of 2021 as looking much more like 2019 or January and February of 2020 with a continued improvement on the margin piece. So I definitely don't see it going backward. I think you just have to -- unfortunately, we have to accept what the last part of the first quarter and the last six months have been like.

As it relates to the volatility and bumpiness in demand, many times, we will stage a frac for somebody and then there'll be a change of mind. So I think we're just seeing both practices on the acquisition of water and our sale of water in terms of actually making that sale -- a final sale on both sides of the equation. So we're trying to -- we're both working with each other on the operational side and the operator side to take the bumpiness out of it, acknowledging that it's just been a unique six months.

Matt Farwell -- ROTH Capital Partners -- Analyst

Great. Thanks for taking my question.

Operator

Our next question is from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

Jason Ursaner -- Bumbershoot Holdings -- Analyst

Good afternoon. Bob, you sound very optimistic about 2021. Obviously, investors don't want to try to annualize the past three months' results. It was a rough quarter, and you talked about being, hopefully, at the bottom of a cyclical downturn.

You're also not really providing any guidance for next year though. So I guess how do you reconcile those things? And how should investors be framing 2021 from a financial perspective, either in terms of earnings, cash flow, or just direction of the company? Where do you see it headed in terms of any more specifics on that?

Bob Jornayvaz

Well, Jason, thank you for the question, again. I'm trying to direct people back to what 2019 looked like, and I just made the comment that margins should be better than they were in 2019. Volumes for sale should be at a greater level given the permits that are up for administrative approval, assuming that the administrative process continues despite COVID. So it's very hard to give guidance around whether or not the Office of State Engineer will be open or not, given the COVID restrictions in New Mexico, to actually process, approve permits.

So that's why it's hard to give guidance. When the office that actually approves the permit doesn't give you guidance on whether or not they're going to be open or closed to sign a permit, I hope you can appreciate that that then funnels back into the financial guidance that you're asking for. So I'm trying to give you the appropriate color as to what we face in the field. I'll let Matt handle the rest of this answer.

Matt Preston

Yes. I think we've been pretty open about where we think the price is trending year over year. And with potash volumes increasing, I think, we've done the best we can right now given the COVID environment, certainly on the water side to try and lead folks to where we think the first half of 2021 is going to look. But we haven't been issuing guidance for a while now, and so shouldn't come as a surprise that we're not putting out specific numbers, but hopefully, we've given enough color, given what we know today, to help folks model this going forward.

Jason Ursaner -- Bumbershoot Holdings -- Analyst

Sure. That's fair. And when do you expect to have a resolution on the PPP? Because I didn't hear what the -- the comment you had mentioned on -- you applied for it. But what do you think the actual time line is on that?

Matt Preston

We really don't know.

Bob Jornayvaz

In our discussions with the SBA, they will not give any guidance. With our discussions with BMO, they will not give any guidance. So, Jason, I would love to give you guidance, but when the government tells you they have no clue what to expect, and BMO has the same response, it's very difficult for me to answer your question.

Jason Ursaner -- Bumbershoot Holdings -- Analyst

Sure. And in terms of the CAPEX outlook for next year. How are you guys thinking of maintenance CAPEX versus the current year?

Matt Preston

It's on the sustaining capital side, very similar to 2020, in that $12 million to $15 million range.

Jason Ursaner -- Bumbershoot Holdings -- Analyst

OK. Great. Thank you.

Operator

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

Bob Jornayvaz

We just want to thank everyone for taking the time to dial in today. We really appreciate your interest in Intrepid and look forward to speaking with everybody in the near future. Thank you.

Operator

[Operator signoff]

Duration: 26 minutes

Call participants:

Matt Preston

Bob Jornayvaz

Bria Murphy

John Roberts -- UBS -- Analyst

Steve Haynes -- Morgan Stanley -- Analyst

Matt Farwell -- ROTH Capital Partners -- Analyst

Jason Ursaner -- Bumbershoot Holdings -- Analyst

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