Intrepid Potash (IPI) Q3 2021 Earnings Call Transcript

Intrepid Potash (IPI -0.66%)
Q3 2021 Earnings Call
Nov 02, 2021, 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, Inc. third quarter 2021 results conference call.

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

Matt Preston -- Vice President, Finance

Thanks, Ariel, and good morning, everyone. Thanks for joining us to discuss Intrepid's third quarter 2021 results. With me on the call today is Intrepid's co-founder, executive chairman, and CEO, Bob Jornayvaz. Also available to answer questions during the Q&A session following our prepared remarks will be our president, 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 Securities and Exchange Commission, which are incorporated here by reference. During today's call, we 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, and Chief Executive Officer

Thank you, Matt. Good morning to everyone. We recorded third quarter net income of $4 million and adjusted EBITDA of $13.1 million, with results benefiting from another strong performance in the sales through our fertilizer segments as increasing prices continue to drive improved bottom line results compared to the prior year. Third quarter is normally our lowest cash flow quarter of the year, and this year was no exception, with $8 million in cash from operations, increasing our year-to-date total to nearly $60 million through the first nine months of 2021.

Our balance sheet remains in great shape and allow us to execute on the significant opportunities ahead of us in the strong commodity environment. We ended the quarter with $26 million in cash on hand and no debt outstanding on our revolving credit facility. Earnings for our nutrient segments continued to improve over the prior year as price levels increased for both Potash and Trio. We announced an $80 per ton potash price increase in August and have continued to move our posted pricing up to match rising spot prices during the past few months.

Unfortunately, Carlsbad, New Mexico region received more than double the amount of average rainfall during the latter half of the evaporation season, which not only added fresh water to our ponds that in turn dissolved harvestable potash back to a brine that we need to evaporate before producing potash, but also led to reduced overall evaporation rates. As a result, our HB facility will produce under a shortened initial harvest season this fall and winter, likely ending production in mid-January. To offset the delayed production, we plan to restart our HB production in March and run for a few months during the spring to increase the potash production during the spring season and capture what is likely to be continued strong pricing in the first half of 2020. Our Trio segment continues to generate sequential quarter improvements in gross margin due to rising prices and steady demand.

We announced a $50 per ton increase to our Trio products in August. And similar to our Potash segment, we continued to move spot pricing higher to match rising potash prices across the country during the last few months. We continue to see strong demand and have responded by adding an extra shift at our East plant using overtime labor. With low inventories of key products and the potential for strong demand in spring season, we expect to bring contract labor on at our East mine to continue our extra production shift through the spring season and to better supply our customers.

This added shift is expected to increase production by 50,000 tons over the next 12 months, and we have the potential to add an additional 50,000 tons depending upon continuing market conditions. Our Oilfield Solutions revenue increased in the third quarter as the oilfield activity and frac volumes increase in step with oil price. As source water refresh rates increase, we are bringing in an increasing amount of third-party water to supplement our JMA water, which has compressed margin percentages in the segment. Our south water rights remain fully committed for the year, and we're beginning to bid for jobs for the first half as operators look to secure reliable supply.

High refresh rates and frac rates are becoming the standard. We're beginning to see operators increasingly value reliability from their water providers, which we believe puts us in great position given our history and capabilities in the Delaware Basin. Before wrapping up my comments, I want to recognize our East mine one more time for being the winner of the National Mining Association's 2020 Sentinels of Safety Award in the large underground nonmetal category. This is a testament to the safety culture and the leadership at our New Mexico operations.

And we, again, congratulate every member of our East mine on such a prestigious award. And now I'll turn the call over to Matt for review of our financial results and the outlook.

Matt Preston -- Vice President, Finance

Thanks, Bob. As Bob noted earlier, rising fertilizer prices and improving oilfield revenues continue to drive positive momentum across our business segments during the third quarter despite the above-average rainfall at our HB mine. The Potash segment generated $4.5 million of gross margin in the third quarter as higher net realized sales prices drove improvements in our bottom line. As Bob noted, exceptionally high rainfall, more than double our average rates in the Carlsbad region, has reduced our production outlook for the current harvest, and we recorded a $3.6 million adjustment in the third quarter related to abnormal production costs.

The reduced production at HB led to higher cost of goods sold in the quarter compared to prior periods and may lead to increased COGS for the next few quarters. With potash price continuing to trend higher over the past few months, we expect fourth quarter pricing will improve over the third quarter and estimate an average net realized sales price of approximately $495 per ton. Third quarter potash production trailed the prior year primarily due to a later start-up at our Wendover facility and lower ore grade at our HB facility. Our trio segment saw great results with third quarter margin of $6.8 million compared to the prior year as higher average net realized pricing and consistent cost of goods sold drove the improved profitability.

Similar to our Potash segment, recent price increases should continue to increase our realized pricing into the fourth quarter and we expect our average net realized sales price per ton to improve to approximately $370 per ton in Q4. Third quarter Oilfield Solutions revenue increased to $6.7 million as oilfield and frac activity continues to improve alongside commodity pricing. A portion of our revenue increase was due to additional third-party water purchases to meet the refresh rates of operators in the area, which contributed to our increased cost of goods sold as a percentage of revenue. Other revenue sources improved compared to both the prior year and the second quarter of 2021 as produced water disposal rates increase along with the oilfield activity in the Delaware Basin.

We remain in a solid liquidity position and expect cash flow from operations will increase in the coming quarters as higher priced fertilizer sales take effect and as we head toward what has the potential to be a great spring fertilizer season. We spent $12.4 million on capital investments through the first 9 months of 2021 and now estimate full year capital investment of between $18 million and $23 million. That concludes our prepared remarks for today. Operator, we're ready to take questions.

Questions & Answers:

Operator

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

Joel Jackson -- BMO Capital Markets -- Analyst

Good morning Bob and team, how are you all?

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

Good. Joel, how are you doing?

Joel Jackson -- BMO Capital Markets -- Analyst

Thanks. I'm going to ask a few questions, one by one. Just understanding some of the commentary around potash production and HB. So HB has, I guess, capacity of 175,000 tons, talking about producing but you have produced about 70,000 tons.

Can you give us an idea what is the push on potash? What should 2022 production -- what should be the amount of volume available in 2022 be versus you had available in 2021? How much of the impact will we see in Q4, Q1 and Q2 as best as you can give us a bit of intelligence on that.

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

It's a great question. So the averages, if you will, don't change. But when you get a late season rain, I think this is the second really big late-season rain where we've had more than double the rain at the very end of the season. Potash that's been precipitated out into the pond and was ready to harvest got redissolved.

So the potash is still in the pond. We just need evaporation, which occurs at a slower rate, obviously, through the winter and going into the spring. So that's why we'll do what's called a double harvest so that we'll go in and capture that potash that got redissolved back into a brine form will now precipitate either through cold weather through a cold crack or it will dissolve out through normal evaporation in the second quarter. I don't know if that answers your question.

Joel Jackson -- BMO Capital Markets -- Analyst

I think so. Yes.

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

But we always should revert to the mean average. It's just when you get that potash out. When you have a significant rain event, it causes a delay in when you actually get it.

Joel Jackson -- BMO Capital Markets -- Analyst

So you're going to be late?

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

Yes that's one of the -- go ahead.

Joel Jackson -- BMO Capital Markets -- Analyst

So you're going to be late some tons here for Q4 and Q1? Or you think you'll be able to make it up and have a lot to sell in the last three quarters of next year. Does that make sense?

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

That's clearly the goal. That's clearly the goal because the potash is in the ponds.

Joel Jackson -- BMO Capital Markets -- Analyst

Yes. OK. OK. That's helpful.

And we noticed like the potash price performance that you're guiding to in the fourth quarter relatively looks a lot stronger than performance, excuse me, for Trio on Q4, is that just an order book question or can you talk about that a bit?

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

Not sure I understand the question. You mean that Trio didn't go in percentage wise versus Potash?

Joel Jackson -- BMO Capital Markets -- Analyst

Like the quarterly increase you're guiding to in Potash for the fourth quarter for price, it looks a lot higher than the quarterly increase you're guiding for Trio in the fourth quarter.

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

I think if you look at the K value that's in the Trio and the magnesium and sulfur, there's always a percentage increase. So the market continues to be strong, and we just continue to walk that market up as we see increasing demand. So let's give it all perspective. I mean, where we were two years ago versus where we are a year ago versus where we are today, we're just going to continue to build out that market appropriately.

Joel Jackson -- BMO Capital Markets -- Analyst

We know the magnesium pricing.

Matt Preston -- Vice President, Finance

Yes, Joel, this is Matt, and I'll just jump in there. The fill program, potash was obviously very early this year. We just didn't -- we didn't commit our Q3 tons on Trio nearly as early. And so we caught a lot of that increased pricing in Q3, much more than we did in our potash tons.

So that's why you're not seeing as big of a bump from Q3 to Q4, we already captured a lot of that in Q3. As Bob mentioned, when you look at the K value, it all kind of equals out there. But we did a great job of managing our Trio and capturing that ahead of our potash tons.

Joel Jackson -- BMO Capital Markets -- Analyst

That's helpful. And on the MG value, we've seen obviously magnesium prices be on fire in recent months. And do you capture any of that increased value in magnesium or is just Trio is a different beast?

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

I think we do. We've got a chart that we used to put in our IR deck that showed how Trio captured all the components. And so we're clearly at a pricing scenario where we're clearly capturing the proportionate piece of the K, the mag and I would say some of the sulfur. So that's the chart we used to publish on a regular basis, and it's probably one we should put back on our website.

Joel Jackson -- BMO Capital Markets -- Analyst

One more question for me. Can you just share in the third quarter what percent of your oil fee -- excuse, Oilfield Solutions sales came from sales service with third-party product? And then maybe what that looks like in the fourth quarter as well.

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

Yes. The one thing I would suggest on the third quarter, I mean, on third-party water is we have very little margin on that water. So I wouldn't be looking for it. We make a nice margin on it, but there's not a significant margin on the third-party water.

So I don't know if I'm answering your question. Obviously, your COGS go up, but you recover when you sell that water. It enables you to take on some of the bigger fracs and provide reliability. I mean if we look at the refresh rates, the frac rates, four years ago, those were 25,000 to 50,000 barrels a day, and now they're in excess of 250,000 to 350,000 barrels a day.

So you've got to be able to amalgamate a significant pieces of source water through our infrastructure itself and then service those fracs.

Joel Jackson -- BMO Capital Markets -- Analyst

I guess I'm just trying to figure out into 2022 and trying to model the business, the segment, what percent of the sales you think would be third-party at lower margin, what you think will be normal sales at the higher margin.

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

Well, 2021, we're going to be sold out of our JMA water book and 2022 is looking given oil pricing like it's going to have a similar structure. I mean we're negotiating with numerous operators. I don't see a situation where the 2022 order book doesn't get sold out.

Operator

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Will Tang -- Morgan Stanley -- Analyst

Hi guys. This is Will Tang on for Vincent. I was wondering if you could clarify your comments on the 50,000 tons of incremental production from the additional shift at your East mine. Does that mean your East mine is now running at annual productive capacity of 450,000 tons? And then at what rate can we expect that additional production to begin flowing through your sales volumes?

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

Well, we started adding almost 1,000 tons a week back in September. And so that 50,000 tons should easily flow through in the next 12 months. It's really a function we've started trying to hire another crew. So in terms of overall operational capacity that mine's design capacity is about 450,000 tons.

So if we add -- right now, I want to say we're producing between 200,000 and 250,000.

Matt Preston -- Vice President, Finance

That's right.

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

And so an additional 50,000 tons takes you up to 350,000 tons. So it really is I'd say right now, your constraint is the labor market in Carlsbad given the oilfield activity is pretty going tight. So we're using a combination of overtime and contract workers to achieve that. I don't know if that answers your question or not.

Will Tang -- Morgan Stanley -- Analyst

Yes. No, that's helpful. And then you also noted that you had the optionality to add another 50,000 tons as well, pending like continuing market improvement. I mean how much does the market have been proven here in order for you guys to act on adding that? I'm guessing it's another shift there.

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

Well, it's really twofold. So as long as the market stays strong and you generate a good solid positive margin, which we're doing today, you're willing to add additional staff at unfortunately a higher cost. So we're all feeling the effects of labor inflation. So as long as that margin stays strong, you're willing to add those labors on to produce those tons.

So you've got to pay attention to your margin availability so that you don't overstaff or doing it at the wrong time. I hope that answers your question.

Will Tang -- Morgan Stanley -- Analyst

Yes. That's helpful. Thank you.

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

So I want to make it clear. The ore is there, the mining equipment is there, the processing capacity is there. Everything is there. We just have to bring on staff.

Operator

[Operator instructions] Our next question comes from John Roberts of UBS. Please go ahead.

John Roberts -- UBS -- Analyst

Thank you. Does the rain impact the HB byproduct water availability for the oilfield sales?

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

No, not the least.

John Roberts -- UBS -- Analyst

OK. What's the outlook for new water leasing activity?

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

Well, we recently gained preliminary authorization of a significant water well we drilled down at our Intrepid South Ranch that proved up, want to say it was 1,900 acre feet. So we're going through the final approval process there. We won the administrative hearing against the protesters. We continue to drill wells up in our Caprock well field to supplement our existing water rights.

We're very fortunate in that Judge Wexler was overturned in the appellate court on a certain ruling, and he's asked Intrepid and the protestants to go back and rebrief. So that's a bit of good news. As it relates to the Pecos water cases that the judge is revisiting his ruling in light of an appellate decision by Judge Bustamante Carlsbad grave case. It's pretty rare that you see a judge go back out and before he issues an order request that all the parties rebrief the issue.

So we're looking forward to the potential for a reversal there before we have to go through the appeals process. But I think we've got plenty of water. And as we bring on recycling, it's just a lot more there to add that's very environmentally friendly.

John Roberts -- UBS -- Analyst

And then are you experiencing any logistic issues in the fertilizer or oilfield side?

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

Nothing major. I'd tell our truck markets are certainly not as impacted. Zach, are we seeing any rail issues other than higher rates?

Zach Adams -- Vice President, Sales & Marketing

I think rail movement has been good so far. So no issues there. There's a truck availability during the fall season is always limited just due to harvest and stuff, but nothing major on our side at this point.

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

Yes. So, our biggest issue is we've had the opportunity to sell some Trio internationally, but international freight rates have gotten so high that it doesn't make those sales realistic. But the market is out there, and they're pinging us on a weekly basis.

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, and Chief Executive Officer

Just want to thank everyone for their interest in Intrepid. And we really appreciate your time this morning. Everybody, have a great day. Thank you.

Operator

[Operator signoff]

Duration: 28 minutes

Call participants:

Matt Preston -- Vice President, Finance

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

Joel Jackson -- BMO Capital Markets -- Analyst

Will Tang -- Morgan Stanley -- Analyst

John Roberts -- UBS -- Analyst

Zach Adams -- Vice President, Sales & Marketing

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