CF Industries Holdings, Inc. (NYSE:CF) Q4 2018 Earnings Conference Call February 14, 2019 9:00 AM ET
Martin Jarosick - Vice President, Investor Relations.
Anthony Will - CEO.
Bert Frost - Senior Vice President of Sales, Market Development and Supply Chain.
Dennis Kelleher - CFO
Chris Bohn - Senior Vice President of Manufacturing and Distribution.
Conference Call Participants
Joel Jackson - BMO Capital Markets
Mark Connelly - Stephens, Inc
Steve Byrne - Bank of America
Don Carson - Susquehanna Financial
Duffy Fischer - Barclays
Jeff Zekauskas - JPMorgan
P.J. Juvekar - Citi
John Roberts - UBS
Andrew Wong - RBC Capital
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 CF Industries Holdings Earnings Conference Call. My name is Tiffany, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. [Operator Instructions]
I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations. Sir, please proceed.
Good morning and thanks for joining the CF Industries 2018 full year and fourth quarter earnings conference call. I'm Martin Jarosick, Vice President; Investor Relations for CF. With me today are Tony Will, CEO; Dennis Kelleher, CFO; Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain; and Chris Bohn, Senior Vice President of Manufacturing and Distribution.
CF Industries reported its full year and fourth quarter 2018 results yesterday afternoon. On this call, we'll review the CF Industries results in detail, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements.
More detailed information about the factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.
Now, let me introduce Tony Will, our President and CEO.
Thanks, Martin, and good morning, everyone. Last night, we posted our financial results for 2018, in which we generated adjusted EBITDA of $1.4 billion, a 45% over 2017 adjusted EBITDA of $969 million. These results reflect a backdrop of tighter global nitrogen supply demand and generally lower North American natural gas prices. But it was the hard work and outstanding execution by the CF team that allowed us to capitalize on the market conditions.
And even though it was the efforts of the entire CF team that delivered these great results, I want to highlight Chris’ and Bert’s organization in particular. Let me call your attention to slide 7 of our materials. This data taken from an analysis conducted by CRU indicates our superior operating performance.
We've talked about being great operators in the past, but this may be the first time we've quantified the impact for you. We've been able to achieve a 10% greater utilization in our ammonia plant production than our North American competitors. Based on the size of our network, that translates into roughly 800,000 tons of incremental ammonia per year that we produce versus what our competitors would be able to do with a comparably sized asset base.
Or said another way, we basically have a full additional world scale ammonia plant worth of production every year based on our operational capabilities. Given that a world scale ammonia plant in North America would cost over $1 billion, our operational expertise is a significant competitive advantage.
On the supply side and -- on the supply chain and marketing side, we realized higher selling prices across all products year-over-year. We also achieved lower costs of goods sold for the year. This execution across all parts of our business enabled us to generate an increase in adjusted EBITDA of 45% versus 2017.
We operated well and most importantly, we did so safely. We ended the year with a recordable incident rate of zero point six incidents per 200,000 hours worked, and we accomplished that despite a very heavy turnaround in maintenance schedule.
I am really proud of the CF team for a truly fantastic year. Looking ahead, we're excited about 2019. As Bert will explain in a moment, we see a continuation of the favorable market conditions from last year. Based on January and February, actual gas costs along with the forward strip 2019 gas could be lower than 2018 by almost 50 million.
Additionally, year-to-date index pricing at the U.S. Golf for major products as reported in the publications is also running ahead of last year, and we anticipate a substantial increase in nitrogen demand in North America given our expectations for increases in both corn and wheat acres compared to last year.
All of that suggests a strong first half of 2019. Weather will have a big say as to if that materializes in the first quarter or the second quarter. But either way the first half in total should be strong. The second half of the year is always a reset, and therefore somewhat uncertain as we sit here in February. But, we continue to be bullish about the long term trends that extend out to 2022 and beyond.
New global nitrogen capacity is growing more slowly than demand, further tightening supply and demand. And the forward curve from North American natural gas looks really attractive compared to the rest of the world. So our story is more than just about a great opportunity in the first half of 2019. We are very well positioned for the next four to five years.
In 2018, our business generated $1.5 billion in cash. We deployed that cash consistent with our longstanding capital allocation philosophy. We invested in sustaining and improving our existing assets. We grew by acquiring the previously outstanding units of Terra Nitrogen LP.
We paid our regular dividend and we returned our excess cash to shareholders by announcing and then completing a $500 million share repurchase program. As shown on Slide 9 of our materials, the share repurchases by themselves should drive a roughly 5% accretion in 2019 over 2018.
We closed the year with almost $700 million in cash on the balance sheet and given our positive outlook for the next four to five years, our board has authorized a new $1 billion dollar share repurchase program that runs through 2021.
In addition, we again reiterate our commitment to retire the $500 million in debt honored before its maturity in May of 2020.
With that, let me turn it over to Bert, who will cover our market outlook and then Dennis will discuss our financials before I return for some closing thoughts. Bert?
Thanks Tony. The CF team performed well throughout 2018 with total sales of 19.3 million product tons. This included a record volume of urea and near record volume for UAN. Ammonia sales while benefiting from higher prices were notably lower in 2018 compared to 2017. This was due both to a higher number of plant turnarounds in 2017 and a fall ammonia season negatively affected by poor weather.
Global prices reached 2018 highs in October. Since then, they have been under pressure; first due to moderating energy prices in Asia and Europe, and then due to seasonally low demand in the northern hemisphere. We believe that as demand begins to materialize, industry fundamentals will support global nitrogen prices in 2019.
As a result, we see substantial opportunities to build on our 2018 performance. Net global urea production capacity additions are projected to be modest for the year at approximately 3.5 million metric tons. Additionally, we believe global nitrogen demand will be solid in 2019.
Most notably, we expect strong nitrogen demand in North America during the first half of the year. The new crop soybean to corn futures ratio favors a substantial increase in corn plantings in the United States, which are projected to rise by 4 million acres to 93 million acres in 2019. We also expect a 1 million acre increase in wheat plantings.
These acreage shifts should drive incremental nitrogen demand in North America. Additionally, the poor fall ammonia season supports further incremental demand, areas that did not apply ammonia in the fall will likely need to make up the resulting nitrogen deficit in the first half of the year with applications of ammonia or upgraded products in the spring.
With the demand outlook in North America, we anticipate barge, rail and truck logistics assets will be in high demand and price at a premium through the second quarter. As we look ahead, we expect sales volumes to increase compared to 2018. In any given year, CSL is around 19.5 million product tons, which can be higher or lower based on turnarounds and maintenance inventory levels during the year and product mix.
We also expect it to continue to benefit from our access to low cost North American natural gas. We weathered spikes in the fourth quarter well, and the forward curve looks favorable. We continue to benefit substantially from basis differentials particularly in Oklahoma and Alberta and are actively managing our natural gas requirements purchasing forward the lock in basis differentials to remove near term price spike risk.
Each of these factors make us optimistic about 2019. We're well positioned for this environment. We have demonstrated our ability to effectively leverage the flexibility of the CS [ph] system to navigate market conditions and we're confident our ability to maximize our overall margin through the year and into the future.
With that, I'll turn the call over to Dennis.
Thanks Bert. The company reported net earnings of $49 million or $0.21 per diluted share and EBITDA of $349 million for the fourth quarter of 2018. After taking into account the items detailed in our press release, our adjusted EBITDA was $341 million. As the global nitrogen recovery has taken hold, our cash generation has increased in turn. This has allowed us to play excess cash in line with our longstanding capital allocation philosophy.
As you can see on Slide 6, net cash provided by operating activities is approximately $1.5 billion dollars in 2018. We use $422 million for capital expenditures on sustaining and improvement projects. We also invested in growth by purchasing all of the publicly traded common units of Terra Nitrogen in April.
It also enabled us to return $780 million to shareholders in 2018, which included $280 million in dividend payments and $500 million in share repurchases. The repurchase program reduced our share count by approximately 11 million shares.
As you can see on Slide 9, taken together, these have increased shareholder participation in the underlying assets of the business by approximately 5% or 2 tons of nitrogen for 1000 shares compared to the end of 2017.
As we look ahead, we believe, we will be able to build on this track record. We ended 2018 with Apple liquidity. Our cash and cash equivalents were about $682 million and our $750 million dollar revolving credit facility was undrawn. We expect capital expenditures in 2019 to be $400 million to $450 million dollars. And as Tony explained, we also expect substantial cash generation in the years ahead.
As a result, the board approved a new $1 billion share repurchase authorization to the end of 2021. We also remain committed to repaying $500 million in debt on or before its maturity date in May of 2020.
With that, Tony will provide some closing remarks.
Thanks Dennis. Before we open the call to questions, I want to again thank all of CF’s employees for their outstanding work in 2018. Their commitment and dedication drives everything we achieve as a company. We're proud of what we accomplished in 2018 and we're looking forward to the opportunities we see ahead in 2019 and beyond. We're well-positioned to leverage our considerable strengths and take advantage of the favorable industry fundamentals we see for the foreseeable future. We expect us to drive our substantial cash generation capability and we can enable us to continue to create long term shareholder value.
With that operator, we will now open the call to questions.
[Operator Instructions] And our first question comes from Michael Piken with Cleveland Research. Please proceed.
Yes, hi good morning. I just wanted to find out a little bit about your thoughts on the Magellan pipeline, potentially being shut down and what that means longer term for both your business as well as the future for ammonia?
Yes, thanks. Regarding the Magellan, we are disappointed, but not surprised by their decision to shut down the pipeline. They've had operational issues for the past several years which has challenged them to support or shift the tons of wheat we've wanted to move up in the upper Midwest.
We ship about 4% to 5% of our ammonia on the Magellan and kind of projecting what we thought would happen. We've been working with our system, with our team to create options and different avenues to move our tons up into that market. One is barge loading out of vertebrates which we're able to do now, as well as increasing our storage capabilities in certain terminals and working with our truck providers.
So we believe that we will be in an okay position moving forward to continue to move those tonnes into the market and we expect that the pipeline to shut down by the end of the year.
Realistically Michael, it was just the [Indiscernible] tonne, so with the predominant tons that that we transported down to the gallon as Bert said, we've got a good barge options coming out of there. So I think Bert's team has done a really nice job of preparing for this eventuality.
Thank you. And our next question comes from Ben Isaacson with Scotia bank. Please proceed.
Good morning. Thank you. When you think five plus years out, can you give us an update on how you see the growth of the U.S. LNG market impacting U.S. nitrogen economics and specifically CS position on the cost curve and do you have kind of strategies to manage that? Thanks.
Yes. Ben, I think both Dennis and I will take a look at this. But, the good news is from our perspective that construction costs in North America are extremely high. And so anybody that’s building an LNG liquefaction capacity in North America is putting a fair bit of dollars into the ground and are expecting a return on it given that those are all for profit entities over here.
And the result of that is given an expected rate of return. We see gas costs in the rest of the world continuing to be in a position where North America is substantially advantaged relative to our competitors abroad. And I think from a resource base in North America if you look at what's happened just in the last couple of years we've gone from high 60s low 70s Bcf production into the 80s or mid 80s now. And the supply response is very quick in North America and gas price is below three bucks.
So, we don't think there is an issue of the resource drying up quickly and North American gas spiking and we don't see the new LNG capacity dramatically lowering the marginal cost of production elsewhere in the world. So for the next four to five years, we think it's business as usual for U.S. producers.
Yes. Ben I think the key thing for you to look at on the resource side is what is sort of the resources to production ratio, and I've seen that anywhere from 80 to 100. And when you've got a ratio that high, typically when you've got money, you can tap into the resource with short cycle time, low cost, land rig projects, the production response can be as Tony has talked about or outlined it.
And so, the small increments that we see in LNG capacity that have come or that will come are pretty small compared to what the resource base is capable of producing in a fairly short timeframe.
Thank you. And our next question comes from Christopher Parkinson with Credit Suisse. Please proceed.
Thank you. Given we're approaching the challenge of capacity expansions over the last build cycle was half decade or so. How do you believe urea trade flows are going to evolve given the decreasing importance of Chinese exports? And if you could also touch on how you believe the UAN trade flows will evolve in the context of European anti-dumping duties, both of those would be appreciated? Thank you.
So you're right. Regarding expansions, we're as I said, in my notes that about 3.5 million tons are coming on this year, a declining amount of tonnage, new tonnage coming on and with the expected growth we expect that the urea market will be good and positive going forward. However, the capacity of expansions that have come are from lower cost production areas, Nigeria, Northern Africa, Middle East. I'm not sure about the Indian additions that there are announced just because there'll be having to pay high cost LNG. And we do believe that China over time is moderating down to this level of about 2 million tonnes of exports.
So trade flows. I think you've seen the additions come on and operate well in the United States. We're going to move down into a lower level of imports and stay in that range of let's say 4 million tonnes, and we expect growth in Brazil as the Petrobras plants are shut down. So moving from 5 million tonnes to over 6 million tonnes, still expect India to be a net six to seven million tonne range for the next couple of years.
And so it's a classic supply and demand and high cost and marginal producer back to those economics and the cost curve will work and that these higher cost, higher LNG markets will have to moderate down and absorb the lower cost tonnes and that's a direct reflection of these EU discussions.
We're actively participating in and cooperating with this analysis. We expect an announcement to come out in the next month or month and a half and they can lead to duties, no duties or continuation of the same duties, which we paid today at 6.5% while millions of tonnes come this way and pay no duty in the United States.
So our position on that one is pretty clear, the low margins of the European producers is completely unrelated to the U.S. imports that we have shipped or exports we have shipped over to there, but it's caused by a combination of what we would experience a lower price UAN and urea global prices and then higher European production costs driven by high gas costs, whether that be LNG or Russian imports.
And so, we expect, and I would if you were thinking economically and reviewing the economic analysis that we and others have provided that that analysis should come out that we did something that was shipping tons at prices similar to what the United States were and was not anything close to dumping.
Yes, I mean, I think on that point as Bert said, we're cooperating actively with the Commission investigation. We are not dumping, it is a global price point for UAN and our delivered price into France and Belgium is above what our net back price would be using a Jones Act Vessel that hit the East Coast of the United States.
So those are very rational, kind of moves for us to make. And at the end of the day, it is not the Western European producers that are filing this complaint. It is -- it's not Euro Cam [ph] it's not OCI, it's not Yara, it is the Eastern European producers; Lithuania, Romania, Poland, [Indiscernible] that are bringing this. This lawsuit and as Bert said, they're running very inefficient, very high cost, and logistically challenged plants, because if you look at where the center of mass of U.N. consumption is in Europe, it's France and Belgium and where those plants are located in the East, they have as high of transportation costs to land that product as we do, or even higher.
So the fact the matter is, if the European Commission goes forward with some sort of duties, what they're basically telling us the French farmers you have to subsidize the high cost eastern European producers. And if you're sitting in Belgium, that's probably not a terribly attractive message to be sending out to the French farmers particularly given the yellow vest situation and so forth.
So we'll see how it develops. But Bert, you want to talk about plans that we've made to deal with the situation if it goes that way, if the farmers are subsidizing high cost producers.
Yes, either way, it's regarding your question on trade flows. We're constantly looking at our options and optionality to the system whether that be moving it to this market or that market we're ambivalent to where the tons go. We like to move them to the highest net back.
But, that being said, we've constantly review, we brought on 1.8 million tonnes of capacity in 16 and 17 of UAN, and we've had additional capacity growth because the Port Neal plant, the urea plant is running so far above capacity we have extra liquor, and we’re making extra UAN up there also.
So when you look at the buckets that are available to us, it's the production mix that we choose to work with each. We can move really on a ship, let’s each day to week, and probably right now we're running a little higher urea mix because that is more attractive. We're looking at extra terminating opportunities in the United States and on the coasts, and we're working with our domestic customers for additional tonnage to remain in this market.
And then you've heard us talk about the development of South America, Argentina, Brazil, Chile, Colombia and Mexico all of those markets have grown substantially in the last five years and we're at the forefront of that effort for very attractive margins.
So we look at least CF’s UAN book we think, we'll be able to continue at the same level or above that we're participating in the market today, and see good opportunities going forward.
Thank you. Our next question comes from Joel Jackson with BMO Capital Markets. Please proceed.
Hi good morning guys. The last few months, we saw a lot of volatility around Indian tenders, which urea tenders, which you don't participate in. But maybe from your perspective, you can comment on what kind of volatility the market has created among -- participants in terms of different trade flows going in between China and India, senior [ph] China and Iran, but also there's a lot of discussion of maybe some of the bid volumes into that tenders were double counting different ways.
So maybe talk about how the different play on the Indian tender has affected your market that you participate in? Thanks
Yes. When you look at the India tenders, they do, depending on the size and the timing, can have a big impact. They're the only country in the world that purchases this volume, this amount of tonnes, six, minutes let's say five and a half to seven million tonnes depending on the year. And in the past, that came principally from Iran and China.
As we've talked about over the last couple of years, these trade flows are changing. And we see a decreasing amount of tonnage coming out of China, over the next couple of years and that has happened. And then, with the sanction on Iran, that has been difficult if not impossible to participate in the recent Iranian tenders.
So that tonnage has moved to the Middle East principally supplied out of Qatar, Saudi Arabia, and some of those countries as well as Nigeria and some northern Africa. And so I think, as traders and producers have participated, some producers are going direct, and some traders, you're right, some people took some shorts and then covered later. And so that does have a disrupting impact on the overall market when you get it in and buy a million plus tonnes in a week, and then that ships over a six to eight week period.
So, we look at that for us and how we manage our position and how we manage what we expect to come into North America. And I think for us, that's a good outcome that Indian buyers are buying, and the Middle East Eastern producers are shipping it's like a $7 freight to go to India rather than spending $20 to $30 to come to North America.
But this goes back to my earlier comment that, this is just how economics works. Low cost providers are providing into a market that's attractive for them, and so trade flows will continue to evolve. We have some spot tonnage that comes into this market as well as Brazil. And when that is too much, that overwhelms the market. That's what happened to Brazil and that's what happened to us in the last couple of months. We think that will moderate, and we see a positive market going forward.
Thank you. And our next question comes from Mark Connelly with Stephens, Inc. Please proceed.
Thanks. Just a quick follow up on the pipeline issue. With cold weather affecting the barge season, there's already talk of high barge demand through second quarter. Is that going to drive your freight costs higher?
For CF, we’ve contracted our barge logistics and as well we have our own railcars were 5000 and we have our own trucking group that’s managing an increasing amount of our truck logistics. You're correct. I think with the cold weather, the ice, and ice lot probably will be a little bit later, but the volume of water that's probably going to be going down the rivers will make barge traffic going up slow.
So, the impact of the Magellan for us is ammonia, and we do barge ammonia for Verdigris as well as Donaldsonville, and we are already putting that. What we believe will happen into motion and I think we’ll be fine. But I do think that barge freights probably will go up and we can see what’s other competitors and customers are doing, locking up lows points like Saint Louis and CF for Midwest or securing large logistics versus the spot vessels that are coming in for its inability to get that, that’s what I think will be impacted, but these vessels are coming without barge service connecting to the sale might suffer an inability to get service for a short period of time.
The other thing I would add, Mark to what Bert has said is, generally speaking much of the tightness in the barge market is focused around dry product and we have – we own our own ammonia toes [ph] and have long-term leases on the other ones. So we’ve got pretty ready access to the vessels and have power on long-term lease as well. And because of the bases differential favorability in Oklahoma we can actually move Verdigris ammonia down into New Orleans for about the same price or even some days cheaper than what we can produce it in Donaldsonville, and because Donaldsonville already on the Newstar. What we tend when we do an ammonia export is lot of times end up making that the Verdigris tons that go out.
So, on the glass half full side of the equation high barge costs and freight costs in general just increase the in-market premium that we get. And so given the in-market network and capacity that we have -- that’s actually a really good thing for us as opposed to a bad thing, high oil, high freight costs, high scarcity of a vessel another options all play to our advantage instead of becoming a detriment to us.
Thank you. And our next question comes from Steve Byrne with Bank of America. Please proceed.
Yes. Good morning. What would say contribute to your UAN net realized price in the quarter that seems more and more below our spot expectations for the quarter? Was it in particular key end markets who were selling into that weight on that or maybe it was forward sales? And then in terms of your outlook for UAN with respect to pricing that has been a little bit weak here in the last two months, what gives you the conviction that the channels not already full -- your outlook for more corn and the fall application season was light, that seems very supportive, but how do that channels not already full or your competitors haven’t already sold forward?
Steve, let me answer the first piece of that and I’ll turn it over to Bert to handle the forward look. So, I’m going to take you back to our November transcript. I’m not sure how much clear we could have been about saying, look our forward order book, we liked to the price when took it, we didn’t see the huge run-up coming in the fall and expect most of the fourth quarter to contain a heavy dose of fill from the summer. So I understand that a lot of people sort of having “miss out there on UAN price” but its not clear to me what we could've done differently to have provided visibility in that what people should’ve been expecting.
And my only sense is, and I say this with the most respect for your work like you got to listen what we say instead of what the publications are posting for spot price, because we gave you the script for what was to happen in terms of the fourth quarter results. But that said, I’ll turn it over to Bert and let him talk about our view into the first half of 2019.
Yes. So, looking at, I don’t believe that’s general fall. We’ve spent considerable time on the last several years identifying tanks and size of tanks and the ability of the distribution system to absorb the tonnage that’s produced they imported. Today the UAN market we believe for North America will be above 14 million tons. And I think demand for specifically UAN will be robust given that the fall ammonia season was so light. And when you look at the fall ammonia season comparison, 2018 was a very poor year comparable to 2016 [ph], the difference being that in 2016 we didn’t get a lot in Canada and the Northern tier, but did in the Southern tier. It was the opposite this time.
And we did get a lot of movement and product supplied in Canada to Northern tier and did not in the Southern tier which is a bigger consumption area. That means that kind of the industry taking about 40% went down, so 60% did not and that could be considerably 700,000 to a million tons of ammonia. That will be impossible for that to all go out as ammonia. It will have to go to upgraded product. And so, we believe our customers are preparing for that and realizing that they need to get those logistics in place, those logistics can reserve and that is with us and others.
And so competitors may have sold forward, that’s fine. The market in terms of the being weak on an end base, is actually very strong with urea trading where it is in NOLA at the current UAN price which trading above its historic premium. And we think positioned very well and we’re probably, I’d say, four to six weeks away from spring starting and that’s just plays right into our strengths with our storage network, end market production and we think that UAN pricing will fare fairly well in Q1 and Q2.
Thank you. And our next question comes from Don Carson with Susquehanna Financial. Please proceed.
Yes. I had question on – your thoughts on the moderation of Asian and EU energy prices on the global cost curve. Normally in your presentation you’ve got a cost curve and what the implications are for what you think U.S. pricing would be. For example, in Q3 you are implying that – then cost curve would give you a 260 to 310 NOLA urea price range in 2019, you went through some of the your cost advantages over TTF [Indiscernible] site. So can you update us on where we are now compared to what you’re talking about the third quarter given lower energy prices? Thanks.
Yes. Don, this is Dennis. When we talk last time we’ve been – as you said the range was as you laid it out little bit $300. What we’re saying today is basically the floor that we talked about because the shelf fits is roughly the same sort of that– say, 250, but the ceiling has come down to say sort of 285 to 290 to account for what’s happened to oil prices than to related effects that they’ve on gas prices. So we still face a pretty steep cost curve even with what’s happened in energy prices. And if you look at those two numbers I just gave you, you can see it way at the left-hand side of the cost curve, that there is still as Tony and Bert have been discussing, a tremendous margin opportunity still left in the business.
And we’ll have to see what happens to oil prices. What we’ll see now is that OPEC compliance has been reasonably good. OPEC plus and price from upper I think at $64 Brent today, I’m not sure exactly what the forward curve is going out, but it looks like its perking up just a little bit.
And I would just add Don, on that one. You’re absolutely right. When we published that curve, I think Brent was at 70 -- mid-70s and now it's low 60s. The one thing that moderated against that a little bit is internal to China, not what they're importing but internal China at least according to the Woodmac [ph], their coal prices have remained relatively flat if not increased a little bit. And so as Dennis said, you may have a couple of those bars on what was otherwise a fairly flat shelf that have changed positions a little bit here and there, but -- and you got compression in terms of the width of that high to low, but its not like the low end to that has collapsed up by any stretch of the imagination.
The other thing that we’re pretty excited about honestly is after we published the curve in October you got into November and December in U.S. gas price, it’s spiked for quite a while. It looked like the forward into the first quarter was up with a four handle on much of that and when you look today it’s come down dramatically. We’re in the mid 2s now. And so there is -- I think it goes to what we spoke about earlier terms of the supply response in the U.S. and just how much capacity there is to gas around here. And if anything our cost structure is favorable to when we produce this chart back in October and we’ll have to see what happens to the rest of the year. But we’re very pleased to be largely open gas right now and -- because I think there is some upside for us out there.
Yes. Don, the other thing that I’ll point out, but its always important I think to remind people who look at the cost curve what they are facing what they are a good indication. So what average prices would be for sort of the year if the energy prices that we lay out in the detail we’re prevalent? And it really is a price floor not a price ceiling. And so you can get into the periods during the year and you can get in two years in which the demand is a lot stronger than the immediate supply and you can get prices on average that rise above the cost curve as we have seen in prior years.
And one thing that I think that they’re going makes us confident in this perspective, that as you look forward going from the 2019 through 2021, 2022 the rate of growth and capacity is outstripped by the rate of growth and demand, And so despite demand balancings moving in the right direction for us.
Thank you. And our next question comes from Duffy Fischer with Barclays. Please proceed.
Yes. Good morning. Two questions of the impact of the floor application fall season in North America. First is, if we get the big expected spring like you think does that change the mix of nitrogen products between urea, UAN and ammonia or will the mix be normal. And then two, what is that do to your inventories both dollar amount that you carried through the year? And then how much kind of product you have replaced to meet a big demand season?
So impact to the floor fall you cannot – as you enter floor we plan for a normal season and we got decades of to shows what normal is. And some of that presold and some of that is sold fast. As we roll through the fall it was evident early, I’m talking about by the 10th November we would not have a fall ammonia season. And so we quickly pivoted in and redirect the tons to different markets and position the plants differently. Our intension is always to run our plants full and to then prepare for the spring and position those products for demand starting kind of now in the Texas and Oklahoma market and as the market moves north those markets come into play.
So first, Spring, we are playing for a big spring with 93 million acres were constructively positive what can happen in the corn sector, one because of the low stock use ratio on corn. We believe that the $4 position today corn has some upside, beans probably has downsize, but carry out almost 100% increase in the carry out in soybeans, very difficult to store and to move and special if you don’t some revolution as Chinese limitation on imports there, plus you’re going into the Brazilian shipment [ph] season now.
So we’re planning out a lower level of soybeans exports from the 24 billion ton type range going forward. And that I think put pressure on soybeans. So the attractiveness of corn I think it goes to 95 million acres. And then moving this additional demand from the fall to the spring will make it difficult to get all those tons out on a timely basis. The ammonia season moves in a period of days and weeks and that’s where I mentioned earlier trucks and other logistics become paramount.
And so, I do believe the mix is going change, let’s say about 700,000 to a million – 700,000 to a million tons of ammonia did not go down in the fall. If you bucket that three different positions just dividing it by a third, 300,000 tons of ammonia will move to the spring, we’re ready for that. And then get it multiplied by the N factor because UAN is 32%, Urea is 46% and ammonia is 82%. You’re going to see a substantial amount of urea and UAN, being needed in the upper Midwest and inventory wise we plan to go in full and prepared and then the challenge will be resupply. So we’re having our railcar position to move those tons as well as our barging assets and we’re up to the challenge.
Thank you. And our next question comes from Jeff Zekauskas with JPMorgan. Please proceed.
Thanks very much. In your fourth quarter results can you talk about how much your volume was limited by short season? And how much it was limited by your own turnarounds? And can you also say something about the level of imports of nitrogen fertilizer you’re expecting to the United States in the first half of 2019?
Jeff, let me handle kind of the first pieces of that or at least the piece of the first piece of that and then I’ll throw it over to Bert.
The turnaround activity while it’s high for us really -- had we had extra ammonia in the fourth quarter that would’ve either had to go out as exports which the ammonia exports are fine. They make some money. But they're certainly not as valuable as the end market ag sales are. And so the volume shortfall on ammonia was really a seasonal issue as opposed to a turnaround issue. And we had a pretty good movement of the upgraded products. And at the end of the day that was a couple hundred dollars tons we’re talking about.
So it’s relatively small number in the context of 19.5 million tons. But I would largely point that to the volume of ag ammonia that didn't go out versus what a normal season is as opposed anything else. And then Bert, I’ll let you kind of comment on the rest.
Yes. So, looking at the imports where we are to-date, I would say, we’re ahead expecting 4 million to 4.1 million tons of urea and one probably needed 1.5 million tons of UAN and we’re currently trending towards above that level. So I think you’ve seen the weakness in NOLA. And Jeff, remember New Orleans is one of the few markets in the world that has liquidity at all times. In Brazil you have to bring that vessel in and nominated and it sold. You don’t have to do that in NOLA and then there you walk off tenders.
And so we’ve seen some traders. This is what has happened over the years, the traders bring product in, market gets lower and they take or some of these taking these losses and we believe that’s decline over time as we’re going from 8 million tons in first to four, but takes time for people who learn lesson I think. And so we expect that inputs coming in Q2 would be probably lower just because of total demand in position. And we think the market will balance that like.
But I want to just comment a little bit on – so you do have [Indiscernible] imports kind of swapping around in NOLA but in market premium what’s happen to that given the constraints on being able to actually move that product out of the region?
Yes. I think a direct reflection of the importance of logistics contracts positioning and timing is where we are on both the market premium for urea and UAN and the ammonia for the matter. Ammonia is trading below $300 in Tampa and at $500 in the end market terminals. Urea is trading in 240 in NOLA and trading at $290 to $300 in the interior, UAN trading at 185/190 in NOLA, trading it say, 210 to 240 in the interior depending on the production location. So you exactly right. This is something we’ve talked about and we plan on continuing, because there is a value to being able to pick up and not has such a substantial position taking a vessels of 30,000 tons at prices several million dollars where you been taking it by the truck loads and I think that’s called just appropriate positioning risk for our customers who want to provide that opportunity for them.
Thank you. And our next question comes from P.J. Juvekar with Citi. Please proceed.
Yes. Hi. Good morning.
So, with the lower fall application that goes into spring, farmers can decide to apply little bit of ammonia, but maybe more likely urea and UAN. And how do you think that will play out in terms of volumes of each, because your margins are different on each product. So how do you maximize your profit while helping your growers and related just quickly how much urea did you export during the off season here and what was the net back on the export? Thank you.
Okay. So, looking at that question and we don’t sell directly to farmer, we work with our retail and channel partners to do the optimal decision-making for the farmer. And that is directly connected to the 4Rs for planting the right product at the right rate, at the right place, at the right time. And so we make these products and we can move our products in different places whether that would be export domestic, up to the river, on the rail, with the trucks, through a pipeline, with the idea of having or the idea of having that product in place for our customers to pull.
And so, when you’re looking though at corn farmer who is planting for yield and their trend yields this year is of 176 bushels an acre. If you’re in the [Indiscernible] space, Iowa, Illinois, Indiana and probably Nebraska pivots irrigation areas, your target is probably 220 to 280 bushels an acre and that’s what it was pulled off last year. So, as you’re planting you’re pulling nutrients off the soil and those nutrients will be needed and especially needed for seed, optimal seed growth. What we’re seeing is a combination of that application but ammonia play the pivotal role in the initial growth stage of the corn crop and then either urea or UAN or a combination there of both application.
And so, yes, margins are different for upgraded product as we go, but we’re driven. I think to serve the needs of the farm center and retail center and that’s what we’ll continue to do. On urea exports, what we [Indiscernible] where our products go and that driven for that market also. So when there is an attractive opportunity we will export and we did that last week. We took a vessel to Chile [ph] where we’re going to be loading in next week and that was positive net back compared towards the domestic market was giving us. Last year we export a little over 400,000 tons of urea, 450,000 and UAN cost to 1.5 million tons focused on Europe and South America, but we shipped to Australia and Ukraine also.
And so those are great opportunities for us. We were happy to build our customer base as a global participant in this market and as those opportunities come to as we will execute against them.
And in particular on Urea I would say much of the year last year or the U.S. was a little bit of the port of last resort for a number of international producers. And so what you saw was NOLA trading at a bit of a discount international parity. And so on, virtually every one of those exports that we conducted last year that net back was substantially above what NOLA was offering. And so I think from the standpoint urea in particular export is a great option for us.
Thank you. And our next question comes from John Roberts with UBS. Please proceed.
Thank you. Was the buyback activity in the fourth quarter about the max rate that you can do in an open market program or could you bought back a lot more stock? And just I think it is about the pace of buyback that we might expect?
So, John, we had an authorization that was capped at 500 million and in mid October we were – the share price was trading in the mid-50s, and then as you wound toward the end of the year we had dropped to the low 40s. So I think what you saw was a increased activity that was reflective of where the share price was in the fact that taken shares out in the low 40s is also providing about a 3% after-tax yield for us given the dividend on the share.
So, we think that's a great opportunity to take that down. And going forward I think what you'll see is a pace that is going to be reflective of market conditions and cash generation as well as where the share price is and with lower share price expect us to buy more in. So that’s kind of the how we think about the world.
And then on slide 16 in the back on the expected closures in China, about half of the expected closures are assumed rather than actually announced. Could you talk about the assumptions behind that estimate?
Yes. The assumptions that way into that is looking at where the coal prices are as well as electricity price and the internal pricing versus being able to get kind of import parity. What are the number of plants that are below breakeven from the standpoint of cash flow perspective? And so, we have a sense of that the aggregate loss from a cash perspective on the number of those plans and that's what goes into that that assessment. We can’t tell you which ones do you turn off the lights first, but we see that as likely coming. And we think there's going to be about 5 million tons of closures as we make our way through this year. Lot of those plants may not be producing today. They could be on curtailment or shut down, but because they haven’t been announced these closures they haven’t yet list yet, but it certainly wouldn't surprise me if it doesn't change the net balance from a Chinese production demand standpoint. It's just there going to be moved in permanent closure as opposed to temporarily curtail.
Thank you. And our next question comes from Vincent Andrews with Morgan Stanley. Please proceed.
Hi. This is [Indiscernible]. Thanks for taking my question. Question on just from a modeling perspective for 2019, any puts and takes to think about whether there would be the tax rate or really just – anything that slide from modeling perspective would be helpful? Thank you.
Yes. I mean, from a tax perspective what we’re looking at is probably a federal tax rate of around 25%, with sort of mid 20s, so there will be 21% statutory rate plus some state and foreign taxes. Remember that there are largest foreign jurisdiction in Canada has a higher tax rate that we have here today. That however is for provision purposes from a cash perspective you'll see in the in the 10-K, we have a substantial amount of net operating loss carry forwards which are laid out there. But in addition to that we have the ability to take bonus depreciation is to deduct 60% of the cost of capital in year and we’ve got a capital budget next year for four to 450.
So I'm sure how good that our earnings from a tax perspective, you all have different perspectives, but we’ve got way to shelter those, so I wouldn't expect in 2019 we’ll be paying a significant amount of federal cash taxes despite that what we have in the provision.
Thank you. And our next question comes from Jonas Oxgaard with Bernstein. Please proceed.
Hi. Good morning, guys. Thank you. You mentioned in your press release you’ve been monitoring the Iranian sanctions and the Chinese re-exporting. I was wondering is there a role to you taken more active stands than just monitoring? You do have pretty active market intelligence as far as I know. How we see this playing out? Can its Chinese traders keep exporting with no interference from the U.S. government?
Well, I think there’s certainly is the option for some of that to continue and then more recently there's been I think some discussions about doing direct business with India and trying to do some currency payments and movements that don’t touch the international wire system. So, that would allow some of that activity to happen. Our view all along has been that the gas is virtually free, the plants are built. They’re going to run those plants and those tons are going to find a way into the international market through some vehicle and it does created a bit of an overhang and some disruption, but our view is that that was just part of the global supply picture and we were counting on them not happening.
I would say that the U.S. government is well aware that those tons are coming out and some of the stuffs are just outside the areas that we can provide or that the government can provide appropriate pressure against. But I do think longer term the as long as the sanctions stay in place whether it's access to technical expertise, access to new parts particularly some of the more exotic materials that need to be fabbed in Europe or other places that are more directly affected. You may see either a reduction in operating rate or slowness for like the Lordegan plant coming up kind of thing. So I think, what's running is going to continue to run, but depending upon how long this goes on, that could drop off a little bit.
Thank you. And our next question comes from Andrew Wong with RBC Capital Markets. Please proceed.
Hey good morning. So this is regarding the $500 million of debt that's due next year. Do you plan to repay that? Or do you plan to roll it over? And maybe just more of a general question on capital allocation, aside from debt repayments and share repurchases, is there anything else that you look at investing into maybe expansions or M&A things?
Well I mean, if you go back to our capital allocation philosophy. We would like to invest in growth for our business where we can do that and have it be accretive on our cash flow per share basis and above our cost of capital. There are however not a million of those things for us to do, and we're pretty picky about the projects and the M&A prospects that we look at.
So, absent anything of significance in that area, we want to return the cash to shareholders, but we want to do that within a frame -- in a framework that it reflects our commitment to long term investment grade metrics.
And so what we've committed to the market is, we're going to repay on or before its maturity date, which is in May of 2020, the last of the $500 million of the 2010 or 20 I think it’s 2010 bonds. Those are the carrier coupon rate of about 7 and 8.
So, when we finally get that done, we'll be sitting at an interest cost per year cash and just cost of below $200 million per year, so a significant reduction in fixed charges. I think, it's also important as Tony pointed out, that we also do share repurchases as a means of returning cash to shareholders in [Indiscernible] like a 3% ish after tax yield on that, and it does eliminate a lot of fixed charges as well. So we believe that both taking the debt out and also reducing the fixed charge associated with dividends are credit positive.
Thank you. Ladies and gentlemen, that is all the time we have for questions for today. I'd like to turn the call back to Martin Jarosick for closing remarks.
Thanks everyone for joining us. And we look forward to following these conversations at various conferences we’ll be over the next few months.