Intrepid Potash, Inc. (IPI) Q1 2021 Results - Earnings Call Transcript

Intrepid Potash, Inc. (NYSE:IPI) Q1 2021 Results Conference Call May 4, 2021 12:00 PM ET

Company Participants

Matt Preston - VP, Finance

Brian Stone - COO

Zachry Adams - VP, Sales and Marketing

Conference Call Participants

Bria Murphy - BMO Capital Markets

John Roberts - UBS

Operator

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. First Quarter 2021 Earnings 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.

Matt Preston

Thanks, Ariel. Good morning, everyone. Thanks for joining us to discuss Intrepid's first quarter 2021 results. With me on the call today is Intrepid's Chief Operating Officer, Brian Stone. Also available to answer questions during the Q&A session will be our Vice President of Sales and Marketing, Zachry Adams; our CEO, Bob Jornayvaz, is currently navigating the complex quarantine system in Australia to visit his newly born granddaughter, is unable to join the call today.

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. 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 Brian.

Brian Stone

Thank you, Matt, and good morning, everyone. Intrepid's first quarter was highlighted by robust performance in the fertilizer segments as strong demand increasing prices drove significant increase in bottom line results compared to the prior year. We recorded first quarter adjusted net income of $2.5 million and adjusted EBITDA of $12.9 million, an increase of $4.5 million and $4 million, respectively, compared with the first quarter of 2020 and much better than the pandemic-related losses from the second and third quarters.

Cash flow from operations was a robust $19.1 million in the first quarter, and we expect that this will continue into the second quarter. We ended the first quarter with approximately $36 million in cash and eagerly await the SBA to give us some guidance and when the proposed PPP forgiveness process might restart given our 100% usage directly to payroll-related expenses.

Our fertilizer and nutrient business led by strong global agricultural commodity prices and slightly weaker dollar, continued momentum from the fourth quarter as demand for potash and Trio exceeded our forecast in the first quarter on both realized price and volumes. As a reminder, our posted price for potash is now $140 a ton above summer fill level while our Trio prices currently posted $80 per ton higher than summer fill value.

Customers remain eager to secure volumes, and we are fully booked on potash and Trio through the second quarter. We are currently allocating our Trio premium and Trio granular deliveries and hope to see this tightness result in stronger performance. MOP pricing in Brazil has moved up $55 a ton over the last 60 days and now sits at a $15 per ton premium to U.S. NOLA barge market. This combined with the renegotiation of a standard potash Indian contract, from $247 a ton to $280 a ton, support stability and strength heading into the second half of the year.

Reports from the field are that strong early season application levels and increased nutrient rates have depleted inventories on all nutrients, including potash and Trio, much quicker than expected. The prospect of any product carryover after heavy buying since last fall now looks unlikely across U.S. market. We believe that strong commodity values will lead to good farmer income supporting another strong fall application season if weather and harvest schedules to operate.

Oil commodity pricing continues to be supportive of Dutch well completions and new well development. We have seen rigs, frac crews and approved permits consistently throughout the first quarter of 2021. During the first quarter, we also sourced water from third parties to supplement our own water rights to meet increasing water volume requirements of operators on our South ranch, which increases margin as we continue to optimize our water book. As the oilfield outlook improves, we expect water sales will continue to grow through the back half of the year. We hope to have our multiyear Pecos litigation resolved in the next 120 days as the trial ended in December, and all briefing was finalized in April, which will allow us a much clear and wider runway to diversely serve our customers.

We continue to pivot to ESG-friendly full-cycle water management systems that we described in our last earnings call. In the first quarter, we've invested in additional recycling equipment, infrastructure and resources as we expand on the full cycle water management products and services demanded by customers in the Delaware Basin. We are fully equipped for our first recycled job and have acquired major long lead time components for additional jobs, #2 and 3. We plan to have our first unit in place, hopefully anchored by a service contract with a large producer toward the end of the second quarter.

This initial operation will be able to recycle approximately 75,000 barrels per day with additional recycling units in service in the third quarter. As operators, regulators and politicians increasingly focus on environmental and sustainability goals, full cycle water management includes source water, recycled water and produced water handling will continue to become a central focus of our oilfield services segment.

In addition to our source water and increasing recycled capabilities, we have significant brine water sources near our operations that have the potential to supplement the increasing needs for long lateral multistage fracs. As we first mentioned in our last call, we had hoped to have an Analyst Day soon after our fourth quarter call but delayed a bit as COVID vaccinations ramped up in Colorado. We now expect to host an Analyst Day call in mid-June, and we'll announce a final date and attendance information soon.

And now I'll turn the call back over to Matt for a review of our financial results and outlook.

Matt Preston

Thanks, Brian. As Brian noted earlier, potash demand exceeded our expectations in the first quarter with 117,000 tons of potash sold at an average net realized sales price of $282 per ton, supported by rising commodity pricing and continued strength in our specialty feed and armory markets. Strong demand has continued into the second quarter, and we expect to sell between 85,000 and 90,000 tons of potash in the second quarter, bringing our first half volumes to over 200,000 tons and well above prior year levels.

With good demand continuing, we have booked more tons at current posted prices and now expect a second quarter average net realized sales price of between $300 and $310 per ton. We expect continued robust demand through the second half of the year as a combination of strong commodity pricing, rising potash prices in international markets and limited supply likely set a solid floor in the U.S. market for the next couple of quarters.

Our Trio segment saw equally great early season demand. Total sales volume was 69,000 tons was down slightly from the year ago period, but our first quarter 2021 sales were heavily weighted in domestic markets as we see the benefits of our expanding warehouse footprint and reliable supply. Our posted price is up $80 per ton compared to the summer fill levels, and we are fully booked through the second quarter.

Accelerated demand increased our first quarter average net realized sales price for Trio to $233 per ton, and we now expect second quarter average net realized sales price of between $235 and $245 per ton. Total water sales were similar to the fourth quarter of 2020 with $5.5 million of sales, including byproduct water.

As we noted on our last call, record cold weather slowed us down a bit in the first quarter, although we continue to see strong demand and increasing rigs, crews and permits in the Northern Delaware Basin. First quarter margins were pressured as the majority of our sales were on our South ranch, which generally has a lower margin than our other water sources. And we also required a significant amount of third-party water to meet the refresh rate requirements of fracs in Q1.

Our debt position remains at $55 million outstanding, of which $10 million relates to PPP loan. With improving earnings, the availability under our credit facility increased to $35 million at the end of the first quarter. Cash flow from operations improved to $19.1 million and capital investment was $2.4 million.

We still estimate 2021 capital investment of between $25 million to $35 million of which $12 million to $15 million will be sustaining capital with the remainder as potential opportunity capital projects. We continue to have significant discretion over our opportunity capital investments in 2021, and we may adjust our investment plans as the year progresses.

With a strong early start to the spring, our cash position today is $48 million with no change in our outstanding debt from quarter end. That concludes our prepared remarks for today.

Operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Joel Jackson with BMO Capital Markets.

Bria Murphy

This is Bria Murphy on for Joel. Can you just talk about what drove the higher third-party water purchases in the quarter?

Matt Preston

Sure. It's kind of what I said in my prepared remarks, we're seeing significant refresh rates for certain fracs. And in the 200,000 and potentially up in the 300,000 barrel refresh rates per day. And we just don't have the capacity to serve that with all of our JMA waters we define some third-party water. The nice thing about this is it really extends just our season and our ability to serve more operators. So but we still think we're going to be sold out of our JMA water by year-end. And so really what we're doing now is just being able to expand our sales to more operators than we otherwise would have.

Brian, I don't know if there's anything else you want to add to that.

Brian Stone

No, I think you put that very well, Matt. I think it's about exploiting the optionality that's in the water book. We think of the JMA water as baseload. We think the third-party water that we're bringing in to meet spot demand on these high refresh rates in that.

Bria Murphy

Okay. And then just, I guess, following up on water sales in general, they're obviously still lagging somewhat. How long before you think water sales can reach pre-pandemic levels again?

Matt Preston

Yes. It's always a tough question to answer. We've certainly seen a lot of improvement over Q3 and Q4 -- Q2 and Q3. Q1 is always a pretty slow quarter just in general in the oil and gas markets as these guys start to ramp things up for the year. I think towards the back half of the year is where we could potentially see sales getting back to those kind of pre-pandemic levels. But we'll wait and see here. All signs point to things continuing to ramp up and a lot of positive news here over the next couple of quarters.

Bria Murphy

Okay, great. And the last one from me. Just on Trio. I guess when can we expect Trio to return to positive gross margins? Obviously, been pressured for, I think, 5 or 6 consecutive quarters. So when are you expecting an improvement?

Matt Preston

Well, we certainly had quite a bit of improvement in our Q1 numbers. We don't give exact margin guidance for our Trio facilities, but with another quarter of increased pricing and another quarter of solid domestic demand, outlook remains improving for Trio going forward, and I'll leave it at that.

Operator

[Operator Instructions] Our next question comes from John Roberts of UBS.

John Roberts

And maybe another question on Trio. It seems like you've been reducing Trio exports for a long time. How much export do you still have? And does it go to near 0?

Matt Preston

No, it doesn't go to near 0, but we really have cut back on kind of the abroad sales. Most of our international sales are now into Mexico and Canada. They represented about 10% of our overall Trio sales in the first quarter. There'll be a little bit of seasonality to that, but that's probably a pretty standard run rate volume-wise going forward.

John Roberts

Okay. And is the Delaware Basin drilling activity recovering ahead of the other basins? I'm not an oil expert, but I thought oil drillers in general, were keeping a lid on spending since the spike that we had -- spiked down that we had in oil back in 2020.

Brian Stone

Yes. This is Brian. I think, John, that's right. I think the Delaware Basin has seen a quicker response to the WTI price bounce back. And so we're certainly seeing that on the water demand side.

Operator

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Brian Stone for any closing remarks.

Brian Stone

Ariel, thank you, and thank you, everyone, for taking the time to join the call today. We appreciate your interest in Intrepid, and we look forward to speaking with everybody in the near future. Thank you.

Operator

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

Comments

[Scared Bear]

Royce & Associates LP, Royce Opportunity Fund and Legg Mason Royce, all part of the same family, just disclosed last week that they significantly increased their IPI holdings to close that 14% of the company. Now they are the 2nd largest shareholder. Some smart money coming in. Just saying...

[No Called Strikes Investing]

Hard to see a scenario where they don't reach at least $.20/share in earnings in Q2, especially with the extra $20/ton for both potash and TRIO announced this past week.

[Kerkorian]

lets see where buyers come in for ipi. The momo guys are out and now its just value guys to make a bottom. Company needs an investor day soon as even knowledgeable investors can't make heads or tails out of water segment. If any one has thoughts on margins and economics of water segment would love to hear it.

[No Called Strikes Investing]

@Kerkorian Water sales have certainly dropped in the last year or two, but the historical margins have been solid. In 2018 gross margin was as high as 75%, but that was before they really started ramping up their whole Oilfield Services segment. In 2019 gross margin was about 50% and was about 40% in 2020. The main thing seems to be that the fixed costs are fairly high, now that water sales are a full-fledged division of the company. Based on a limited sample size of two years, looks like about $12 million in fixed costs, so if they get back to around $5mil / qtr, looking at probably $5-$8 mil in margin? Something like that anyway.

[Cue Ball]

So IPI will way another 30 to 45 days to clarify Q1 poor margins . Its not like they care about the stock price . All the fertilizers reported good result - even IPI - but it always manages to disappoint .

[Kerkorian]

the disclosure for the water segment is ridiculous. No gallonage data for sales volumes , no dollar pricing of water gallons sold, no metrics on cost of goods.
The 4th q 2020 comments that much more water will be sold in 2021 than 2021 1st q results come in with no reasoning. Gross margins in water segment falling by 5 or 7 million annualized is around 50 cents a share hit right to bottom line. With potash we can see the operating leverage from tonnage increases and price changes but with water i have no clue.

[Kerkorian]

From 4th Q Conf Call

Robert P. Jornayvaz Intrepid Potash, Inc. – Executive Chairman, President & CEO
We're definitely going to sell a lot more water in 2021 than we did in 2020. I don't know how much you follow Department of Interior policy, New Mexico State Land Office policy. One of the benefits that Intrepid has is we also, on top of our fresh water rights on very significant non-potable water rights as well. So we have a unique ability to mix to -- as we mentioned earlier, service the water market on a full cycle basis, which means taking some freshwater, some brine water, also taking produced water and recycling it and reselling the recycling water, and so our full hope is in the next 30 to 45 days is to have an Investor Day where we really walk through the infrastructure that is under construction. Beyond the fly recycling that we're doing, the disposal projects that we have underway and give a much fuller, robust picture of everything that Intrepid has been working on during the 2020 COVID season.

This is why stock went down from what they said in 4th q they sold less water and much lower margin.

[Cue Ball]

What you get when management rides polo ponies...

[Kerkorian]

i would like to start a discussion on ipi water ( oilfield results) results this q which is reason stock has been smashed past two days.
The entire explanation is quite weak and no follow up in conference call. From earnings release "Cost of goods sold increased 29%, or $0.9 million in the first quarter of 2021, compared to the prior year, primarily a result of increased third-party water purchases to meet the significant daily refresh rates for certain fracs on our South ranch. During the first quarter of 2021, we sold a majority of our water from water rights on our South ranch, while in the first quarter of 2020 we sold a majority of our water from our Pecos and Caprock water rights. Our water sales from the South ranch water rights generally carry a higher cost of goods sold as compared to sales from our Pecos and Caprock water rights.
Gross margin decreased $4.3 million compared to the prior year, due to the factors discussed above."
Their you have it revenue declined from 7.7 mill in 2020 1st q to 4.25 this q which makes sense since drilling has been crushed but cgs went up from 2.897 mill to 3.75 mill.
The potash business has turned but now obviously concern about the water business and what margins look like going ahead. I have more to say but want to see if any other participants interested in discussing.

[Pops007]

@Kerkorian New ways to screw up a qtr. Never ceases to amaze me.

[tbraun]

@Kerkorian I'm invested in this stock and would love to hear more from you.
Thank you for your input!

[Bumbershoot Holdings]

@Kerkorian the answer that was given to the question - i.e. "optionality of the water book" - doesn't do a good job of clearing up the details for new potential investors. Very difficult to parse out what is happening with Pecos water vs. Caprock water vs. area-of-mutual interest water with NGL on the South Ranches vs. 3rd party water being sourced from NM and/or TX and more importantly how that fits back with all the prior commentary/guidance to provide confidence that the business is still on track in terms of being the right strategy to take advantage of the growth in Permian/Delaware over time. Optimistic that the company will be able to communicate it better in the next few months, especially with an investor day.