Intrepid Potash, Inc. (IPI) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Intrepid Potash Fourth Quarter and Year End 2017 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead.

Thanks Kyle. Good morning and welcome everyone. I remind you that parts of our discussion today will include forward-looking statements as defined by the U.S. securities laws. These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable. These statements are based on the information available to us today and we assume no obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the SEC. 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 this morning's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. Presenting on the call today are Bob Jornayvaz, our Co-Founder, Executive Chairman, President and CEO; and Joseph Montoya, Vice President and Chief Accounting Officer. Mark McDonald, our Vice President of Sales and Marketing, is also available for questions. I'll now turn the call over to Bob.

Thank you, Matt and good morning everyone. Our fourth quarter results reflect an improved trajectory for our business as we benefit from the strategic decisions we've made over the last two years. Our Potash segment realized another quarter of strong margins due to a lower-cost production profile, an increased focus on the byproducts and more selective selling in the markets with higher net realized sales prices. Our winter field program announced in early January, which encouraged our customers to commit to spring volumes before a $20 per ton price increase in mid-January, was extremely well supported, and we have solid volumes committed for the first quarter. Our decision to build inventory during the fourth quarter is clearly paying off as we see good market fundamentals entering the spring season with solid demand and higher price levels as the $20 price increase is now in effect. Moving to our Trio segment. International sales continue to be a larger percentage of our overall sales volume. We've been expanding our international footprint for a year-over-year basis and our efforts to reintroduce Trio into key international markets is succeeding with repeat orders from numerous customers. Trio had become increasingly unavailable in many international marketplaces in past years due to decreased production and strong demand in the U.S. We now have the capability to produce at higher levels and make the specialty product readily available. Given that Trio pricing is down almost $185 per ton from just two and a half years ago and taking into account the current pricing of the nutrient components that make up Trio, we have reason to believe there's room for meaningful pricing upside for our Trio product. While our Trio segment deficit increased compared to the fourth quarter of last year due to lower average net realized prices and an increase in lower of cost or market adjustments, a mid-December winter field program is driving healthy order volume during the first quarter. Under the program, our customers could order tons for shipment through the end of February before a $15 price increase took effect in early January. We are now selling at the higher price levels and have solid inventory levels to satisfy these order volumes and take advantage of the $15 price increase. We continue to make progress on our income diversification strategy. Water sales of $3.5 million in the fourth quarter were in line with our expectations of $3 million to $4 million and increased our full year sales to $7 million. Fourth quarter sales were a significant increase over the $2.1 million sales during the third quarter of 2017. Increasing demand, combined with several commitments in place for 2018, give us great confidence in our expectation of $20 million to $30 million in sales during 2018. We continue to work on, negotiate, and execute on opportunities that should increase this run rate in future years. Brine sales are also showing considerable growth with fourth quarter sales up $160,000, up 76% compared to the third quarter of 2017. We sold a record amount of brine in January with sales of over $70,000 in that month alone and are well-positioned to meet the expectation we set in June of $500,000 to $1 million of brine sales during 2018. Our customer base is increasing which broadens our touch points with the oil and gas operators in the area. As we have mentioned over the past several quarters, we are broadening our reach into the oilfield services arena given our -- the advantaged locations of our operations. During the fourth quarter, we formally launched the Intrepid oilfield services initiative, under which we offer a portfolio of products and services to oil and gas operators and service companies. Our tech services team, which includes geologists, engineers and third-party consultants, are beginning to provide research services to educate the market on the benefits of KCl over other completion fluid additives that are quite necessary in today's modern completion fracs. During the fourth quarter, we began to deliver product ourselves, offer well location services and provide custom, high speed, onsite blending services, in addition to simply selling bulk KCl. We've also received requests from several operators and agricultural customers to help lessen the logistical burden created by the industries that are dependent on fast and reliable delivery. In response, we have built a truck fleet with multiple types of trailers to deliver product on a just-in-time basis to oil and gas operations and to our ag and feed customers. All of our newly purchased trucks are up and running and generating additional revenues as we speak. In addition, we have employees who already have CDL certifications and licenses and three complete maintenance shops to service our new equipment. Over the past year, we reviewed our markets with a renewed focus on high margin sales. Sales of certified organic Trio and Safe Feed/Safe Food potash tons have increased. We've been successful in expanding our profitable byproduct offerings. To support our efforts in our byproduct and oil and gas markets, we hired our first oilfield services salesman last March and are actively recruiting another salesperson to focus exclusively on our oil and gas KCl markets. We've also increased our sales team to include a Market Manager to oversee our growing brine and salt markets in Carlsbad. We continue to seek a method to economically recover the known, but relatively modest lithium resource in our Wendover brine. We have identified several potential approaches and have seen quite promising lab scale results in initial testing. 2018 is truly a year in which we are looking forward to completing our transition and growing again at a very solid pace. We continue to be excited about our growing water business, our growing brine and salt businesses, entering the year with robust growth in the pricing in the agricultural commodities and their demand. We are thrilled by the immediate demand for our trucking and logistics services and the very successful rollout of Intrepid oilfield services. Our OMRI offerings continue to grow as well as our Food Safe/Feed Safe offerings and our additional abilities to now add a variety of bag [ph] products. It is a year to continue to improve our balance sheet, to continue to grow organically as well as search for appropriate acquisitions through the growth in free cash flow. I'll now turn the call over to Joseph, who will update you on the financial results and the outlook.

Thank you, Bob and good morning everyone. Although we recorded a net loss of $1.4 million during the fourth that compares to a net loss of $16.6 million during the fourth quarter of 2016. The decrease was driven primarily by improved results for our potash Segment and an increase in water sales. Fourth quarter results also included a $2.7 million tax benefit related to the monetization of our alternative minimum tax carryforwards. Additionally, we still hold significant deferred tax assets, including NOL carryforwards that could become available to us to offset future tax liability. Our Potash segment recorded a gross margin of $4.3 million in the fourth quarter of 2017 as we continued to see the benefits of lower cost solar-only production. Strong fourth quarter results increased our full year potash gross margin to $15.7 million, a $44.3 million increase when compared to our 2016 results. Potash sales volume during the quarter decreased compared to the prior year due to our transition to solar-only production. Although we had transitioned our East facility to Trio-only in April of 2016 and idled West in July of 2016, we continued to sell down inventory from those operations through the end of that year. Production volume of 121,000 tons during the fourth quarter was a slight increase compared to the prior year, primarily due to increased run-time at our Wendover plant. We experienced average evaporation rates during the 2017 summer and generally expect to operate our potash facilities until midway through the second quarter. Average net realized sales price per ton increased to $247 for the quarter, that's a $15 per ton increase from the third quarter of 2017 and a $62 per ton increase from the fourth quarter of last year as our transition enabled us to sell a higher percentage of tons into the higher netback industrial and feed markets. The price increases Bob mentioned, which were announced in early January, although already in effect for spot sales, are expected to improve our overall netbacks beginning in the second quarter. Our Trio segment generated a gross deficit of $3.2 million in the fourth quarter, bringing the full year gross deficit to $9.9 million compared with $2.9 million and $0.6 million in the fourth quarter and full year of 2016. The increased deficits in 2017 were the result of lower average net realized sales prices and increased lower of cost or market adjustments, primarily related to our international sales. As Bob mentioned earlier, we saw domestic price stabilize during the fourth quarter and then increased $15 per ton beginning in January. Similar to our potash sales, we are now selling spot tons at these higher prices and expect the full benefit of the price increase to be realized next month. Trio production of 51,000 tons during the quarter reflects our reduced production schedule that better matches our sales volumes and manages inventory levels. While we are implementing some improvements to increase overall recovery of our Trio, we expect to continue to produce at reduced rates for the rest of 2018. Moving on now to our capital investments and liquidity. During 2017, we made $16.7 million in capital investments, which included a $2.2 million offshore early buyout of a lease. We estimate our capital spending for 2018 to be about $12 million to $16 million, the majority of which will be sustaining capital. We ended the year with cash on hand of $1 million and $22 million available to borrow under our asset-backed credit facility. During the year, we reduced long-term debt by $75 million and total debt outstanding on our senior notes was $60 million at the end of the year. Our next scheduled prepayment of $10 million is due by December of this year. We expect the interest rate on our senior notes to remain at 4.3% during 2018. As of December 31, 2017, we had $3.9 million outstanding on our asset-backed credit facility and currently have approximately $30 million available on that facility. I'll now turn the call back over to Bob for some closing remarks before we take questions.

We just look forward to taking your questions and I want to remind you that we really look forward to a very prosperous 2018.

Thank you. We will now begin question-and-answer session. [Operator Instructions] The first question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

This is Robin on for Joel. I have two questions. I'll ask them one at a time. The first is, did water sales begin in January with the customer with the five-year contract? And how should we think about the sales from that customer on a quarterly basis? Are sales expected to be consistent throughout the year or more of a ramp?

I think as we described, it's going to be very consistent payments every quarter over the next five years. We outlined that in our last Q and I think we outlined it in the K. So, yes, -- the answer to your question is yes, that project has started. And yes, we will see the quarterly benefits of those payments for the next several years.

And can you provide any color on Q1 total water sales guidance?

I think if you look at the fourth quarter run rate, I think you can easily take that, in addition to the other customer that we've talked about. So, we look at first quarter being significantly better than fourth quarter in its totality.

Right. Okay. And my last question is, will you able to elaborate on the international shipment size optimization for Trio? How much is that expected to offset the higher international freight costs? And if you could provide any color on where you expect Trio freight costs to be in 2018 on a year-over-year basis. Thanks.

Well, there's a couple of reasons for the -- why we see a potential optimization. Number one, we're seeing larger orders, which enable us to fill a hold in a ship quite easier and schedule it better. Second, we're partnering with a variety of groups to put together what I would call a grocery shift as you see other nutrient producers producing products that they are going to export that we are working with on joint transportation so that we can help them bring down their transportation costs as well. We're working with our customers -- our international customers to coordinate the purchase of those products. So, there's a variety of strategies as well as warehousing strategies that we're putting into place that required the repeat orders and the larger repeat orders to begin to negotiate transportation for larger volumes on a bulk basis, which bring down your costs.

Okay. So, would you expect for Trio freight costs to be lower or a little flat year-over-year in 2018?

Lower.

Okay, all right. Thanks.

Our next question comes from Mark Connelly of Stephens Incorporated. Please go ahead.

Thanks Bob. A couple of things. When you talk about running Trio differently and producing less this year, do you have a target for how much you want to bring inventories down?

Yes, but I'm not going to talk about it. It's -- we've just done a great job of growing our volumes. And when we have certain international customers that are placing their third and fourth orders and those orders are going up significantly. We have one customer in the South American region that has literally gone from zero to tens of thousands of tons. And so we're now beginning to focus on what are the proper run rates for the plant because, as you know, as we run that plant, it has significant excess capacity. So, 2018 is an exciting year for us as we look at our ability to manage our transportation costs on a much higher volume basis and having customers that are now providing warehouse space and placing larger orders that allow us to negotiate freight contracts at larger levels, larger volumes, and with more advanced notice.

So, I mean, you're also pushing to increase sales in the U.S. Do you expect the mix of domestic to international to swing more heavily towards international? You've mostly been talking about the international side.

Well, it's where our volumes are growing and I think where have -- if we can continue to work on the transportation side, we're seeing good, solid demand. And when we look at the nutrient components that make up Trio, there is upside room in pricing. If you think of Trio as basically being 42% SOP and 58% magnesium sulfite, if you were to take those two products and combine them, there's about $120 current price differential, so we think there's additional room for Trio pricing to go up just because of the nutrient components. And we're seeing the demand and the enjoyment of the product and the quality of the product internationally. So, I don't -- Mark, I don't know if I'm answering your question or not, but--

It's very helpful. One more question. Can you characterize the operating costs that you saw in the quarter on your potash side in terms of how normal they are seasonally and if we should expect any significant changes in the next quarter?

I would say, as you know, Mark, you've been following for a while -- this is Joseph speaking, by the way. Our production of potash, now that it's all solar-only, is a bit cyclical with more production, therefore, costs in the fourth quarter and the first quarter. So, year-over-year, I think it will spread out. I would just say, though, that we haven't incurred any additional excess or unusual abnormal costs. So, I guess the general answer to your question is, yes, it's pretty flat, but just keeping in mind the cyclicality throughout the year.

Sure. No, that's exactly what I was looking for. And one last question. We're hearing a fair amount about drought concerns in the Southwest. Is that affecting you yet? And is it going to affect the mix of where you sell your product this year, do you think?

I'd say no. When we look at what's happening to -- cotton is having a great run if you look at North Texas and the moisture levels and our ability that we're seeing into the cotton markets, the hay markets. We're not seeing an impact yet and so if you look at California snowpack levels, the reservoirs are at normal levels, but California clearly needs some moisture. Pacific Northwest just got some significant moisture. So, I think it's something to be aware of, but we're not seeing it have an impact on us. I'm not saying that it won't in the future, but we're not seeing it yet. We're seeing good, solid, steady demand. And the one thing that I would really like to add that people have just got to be paying attention to are the strength in the price of corn, soybeans, wheat. If we were to go back and look at what all the analyst predictions were for corn at the $2 handle and beans at an $8 handle and wheat sub $3, we didn't see it. We're seeing a strong wheat market; we're seeing a stronger soybean market, a stronger corn market, a stronger cocoa market. And so we're seeing globally agricultural commodities appear to put in bottoms and are showing a lot of strength.

Sure. Well, farmers like to tell us they're broke, so perfect. Thanks for your help though.

Mark, I want to go back to your Trio question, if I may. There are several variables that are involved, and they're all moving in the same positive direction. I just want to reiterate for you and for the folks listening in the call. The increased volumes is huge as we delve into the international arena and have repeat sales from customers. So, that's the first thing. The freight issues that we're working on, and as we increase the volumes, those freight prices will come down, as Bob mentioned earlier. Our capacity, we've talked before and documented in our previous 10-K and you'll see it again in the K later this morning in terms of the capacity that we have for ability to produce more Trio there as the customers demand it, and then the price increases that we referred to. So, I just kind of want you to leave the call with a positive feeling about Trio. It's been dragging us down for the past several quarters, but there's a lot of positive momentum moving forward.

That's helpful. Thank you.

Our next question comes from John Roberts of UBS. Please go ahead.

Thank you. On the oilfield services, does KCl compete primarily with bromine additives? And what are the cost and performance characteristics relative to the alternatives there?

It really depends on which basin and which clays you're dealing with. So, it's not as generalized as you would like to think it might be. So, if we were to look at certain cretaceous formations, if we look at in the Powder River Basin, the Uintah Basin, parts of the Delaware Basin, deeper parts of the Permian Basin, they're very specific geographies and geologies that have different types of clay that react differently to KCl versus so-called clay substitutes or clay inhibition substitutes. So, in the past, Intrepid has been much more of a passive order taker as it relates to our oil and gas services side. We're now very aggressively pointing out to operators, working with operators in discussing their fracs, designing their fracs in very specific geologies and geographies where they do have clay swelling problems that we can identify long-term differences in decline curves and show the benefits of KCl on a very proactive basis that we just simply have not done before. And so being able to -- one of the downfalls of KCl in the period in, say, 2014, 2015, 2016 was high speed mixing equipment, and we've built our own custom high-speed mixing equipment that we own and can deliver to the oilfield service so that we can deliver it on a 20% brine basis and then dilute it down to a 2%, 4%, 7% brine as needed and inject it with these large frac jobs on a just-in-time basis. So, it's a much, much more complicated answer to your question than just once -- and I just can't stress, that's the benefit of what we're doing now is using our geologists, our engineers and third-party consultants to work directly with oilfield companies to help them design their fracs to -- where they need KCl. There are clearly plays where they don't need KCl, and we shouldn't be out there trying to market to them. So, I hope that answers your question. And we're clearly cost competitive in certain areas, in certain formations, and we clearly have the ability to generate a well that's going to have a higher EUR by using KCl than one that doesn't in certain geologic formations.

Okay. Thank you.

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

Hi, this is Neel calling in for Vincent. It seems like you expect a positive price environment in the first half of 2018 for both Potash and Trio. How do you see that evolving through the second half of 2018 as demand potash should be down year-over-year and there should also be incremental capacity from the new K+S hubs?

Well, let's just stick with the first half. I mean, we're seeing good, solid, strong demand. And all of the conferences that we're attending across the nation, we're saying, because of the recent recovery or bottoming, whatever we want to call it, in agricultural commodities, we see the opportunity for a solid base and upward pricing in the agricultural commodities. So, we just really -- we haven't seen K+S in our markets at all. And so when and how they are going to appear is a mystery. That's a question you should ask them.

Okay. And on your water sales, can you talk about maybe the pricing and volume mechanisms that are embedded in your contracts?

No.

Just like any color in terms of, I guess, what could take you to maybe the $20 million to $30 million in sales?

I guess I don't understand. We've given you the revenue guidance. And to share our pricing and how we're structuring our contracts, I just don't think it's really appropriate.

Okay, all right. Thank you.

Our next question comes from Jon Evans of SG Capital. Please go ahead.

Can you talk a little bit about SG&A? And it was up sequentially pretty smartly. And is that a good run rate for SG&A on a quarterly basis? Or was there some comp embedded in there because you guys achieved some goals or something?

I would say no -- this is Joseph speaking, Jon. Thanks for the question. I would say no that the fourth quarter does not represent a new run rate. If you look at year-over-year, our SG&A is flat. I could argue that it's down, if you want to get technically, to $19.5 million versus $20 million, but let's just call it flat, and that's probably more indicative of what you should see going forward. In the fourth quarter, we experienced some increase in allowance for doubtful accounts as we're venturing into the international markets. Although we talked about all the good things, there are some bad things as well. We're seeing some slow paying customers. We haven't yet completely written off, but we believe the proper accounting thing to do is to create an allowance. So, you've seen that. There are also -- not necessarily specific to SG&A, but while we're on the topic, in the industrial world that we're delving into ever more deeply, we're also seeing different payment terms where our potash and line core customers are pretty quick payers. The industrial markets, while they're good payers, are a little bit slower. So, what you're seeing in the fourth quarter is really a one-off. Relative to the fourth quarter in that specific allowance issue, we're continuing to bet our new customers more closely, looking for cash deposits up front on some of the unknown international customers, so just managing a little bit differently. But long story short, I would say no that the run rate should still be that $20 million year-over-year.

Okay. So, the $1.3 million year-over-year up was just an anomaly and we should -- I mean, you finished it kind of $19.5 million, which was down from $20 million a year before. So, you're saying that for a year basis, it should be in that $19.5 million to $20 million run rate. Is that fair or no?

Yes, that's fair.

Okay. So, now onto the water side. I know you've given us the revenue, et cetera, but what I'm -- I guess I'm trying to understand here is, since we don't have the Q out yet, you had income last quarter of $1.5 million. So, the water was $1.969 million and -- so this quarter, if you did $3.5 million in water, I guess why was the income that you showed only $2.158 million? Is there something else in that other losses, other something? Or is there something different in the water sales from the standpoint of the profitability sequentially? Do you understand the questions?

I do. And part of the difficulty is the way that we've chosen to disclose our water income in our financial statements. And I'm happy to tell you and all the other callers that moving into 2018, it's becoming a bigger part of our business, and therefore, we'll be disclosing it differently. But when you see the 10-K come out in a little while, you'll see the answer to the question in footnote six. The water sales is broken out specifically, but there are other items in there that we talked about. We had a sale of an asset that just gets recorded in other operating income expense. We've got an increase in our reserve for inventory obsolescence and a various few other things that are netting all out to make the water sales a bit more opaque on the face of the financial statements. And we're being as transparent as we can be by disclosing the details in footnote six, which you'll see in a bit. And going into 2018, when the 10-Q comes out, we'll see it presented a little bit differently. Does that help?

So, just to make sure I understand, there is no change in the profitability sequentially in the water business, right?

No, absolutely no.

Because you've talked about incrementals being 85% to 90% kind of margins on the revenue, right?

Yes, I would say that's fair. We're incurring some costs but still very, very profitable from a margin perspective. And the profitability that you're seeing on the face of the financial statements has absolutely nothing to do with water sales. It's these other accounting items that I'm referring to.

And so to understand your answer to a question about guidance for Q1 water, which I guess I don't understand why you have to be so opaque about it, but reading your filing, all I have to do is take that contract that you have and it's divided by five years for the quarters and then add that on to the $3.5 million and that's going to give me at least what water sales should be in Q1, is that correct?

It's a fair way to look at it, yes.

Okay. And then that customer made some really positive comments that they -- with the tax thing, they're going to be even more aggressive in the Permian. Have you had more discussions with that customer? Do you think that customer is going to get bigger here over time because they're sure going to frac a lot more wells than they've talked about at least after that announcement? So, I'm curious if you can give us any kind of update there.

All I'm saying is that there are more -- there are certainly more than one customer that we're selling water to. And so we're selling to a variety of people on a variety of terms at a variety of prices. And so because they all have different needs and they all have different demands and you literally can get a phone call on a Friday morning where someone needs water on a Saturday afternoon. And so that can get priced differently than someone that's on a longer term contract or someone that's given you a frac schedule that they've committed to. So, that's why we don't want to go into the details of how we're servicing a party that calls up at the very last minute versus someone that's signed a long-term contract. And so if you look at all of the operators that are surrounding us, they're all some of the biggest names in the oil business and so we're servicing all of those companies -- or the majority of those companies as well as several much smaller companies. So, it's not just, well, that one company, if you will.

I guess I would add to that, Jon. Just to be clear, the one thing that we're quite certain of is the cash that we'll generate from operations relative to water. The revenue will be a little bit more staggered. And it's not that we're being opaque, we just don't have complete control over the demand. One of the things that we pride ourselves on is, as Bob referred to on this call and other calls, is our ability to deliver basically on moment's notice and so that's the thing that we have over some of our other competitors in the market. But at the same time, we still don't have control over the operating schedules of the customers either. So, not -- certainly not an intent to be opaque, just providing information that we're most comfortable with sharing.

And then that takes me to the next question. If you've been on a lot of the frackers calls, Halliburton talked about sand issues, other guys have talked about weather, et cetera. They've talked about frac schedules started out weak in January. They got better in February and March. They expect them to be exiting at a really strong rate. Have you seen those weather kind of issues or the sand issues which has caused less water usage for you in Q1 sequentially?

No, we feel very good about how Q1 should turn out. And so -- but I would say that we're looking at the balance of 2018 really taking off. And that's the exciting part is that as we get frac schedules from a variety of companies; we're seeing them grow from what we had expected in 2017. So, I think that 2018 is shaping up to be a very robust year for the Delaware Basin in terms of fracking that's going to occur as those oil companies are reporting. When you refer to frackers, I don't know if you're talking about the Halliburtons of the world or if you're talking about the XTOs and the EOGs and the Occidentals, who exactly you're talking about, but--

I'm talking about the guys that are providing the pressure pumping because when they provide the pressure pumping, they need the water.

Right. So, we're talking -- so we're dealing with both the guys that are selling horsepower, the frackers, as well as the operators themselves. So, that's a very different position from us from where we were just 18 months ago in terms of having monthly, if not quarterly, meetings with a lot of these big oil companies to schedule this stuff out.

Okay. And then just relative to your comment on pricing, so you said that pricing was strong and then it moved up. And you said that you should realize part of that $15. Should you realize that in the month of March then? So, when you make your sales, you'll realize that in March or will you realize it in the second quarter?

Well, we're realizing some of it, as we speak, on spot sales, and so--

And how much are your spot sales roughly percentage-wise?

I don't know, Mark, can you -- is it really a -- I don't have a good answer for you right now.

Okay.

I apologize, I should--

Okay. That's all right. And then just a question from the production standpoint. You ramped production in the fourth quarter. I assume that hurt your COGS. Does that benefit COGS as you go into Q1? And I assume you ramped production because demand was going to be strong and you're going to sell more in Q1. Is that a way to think about it simplistically or am I stupid?

Certainly, you're not stupid, an articulate question, for sure. I would say we didn't necessarily ramp production as much as we did manage our inventory when Bob referred to in terms of making decisions on our inventory levels that we thought, we believe, would benefit us going into the new year with the price increases. So, its two different discussions, I guess. One is the management of inventory versus the production. The--

It's choosing not to make a 2017 sale. I think -- I don't know how much you followed us, but if you look at our potash production from a solar standpoint, that's a whole discussion and education around understanding what our production profile looks like. So, when we say we managed inventory, we chose not to make some -- a couple of large sales at the end of 2017 and it looked -- it appears that it served us well going into 2018.

And so why would you do that? Is that because you produced it in solar and you got a better cost? Or is it because you thought prices are going up or is it because of both?

Well, first of all, we were looking at the agricultural -- we were seeing pricing of corn, wheat and soybeans and other agricultural commodities strengthen and the overall market strengthen. We're seeing a tightening in the granular market in the United States. So, when you look at how tight the market was going into the fourth quarter in November and December, the market was really tight. And so you saw agricultural pricing going up. You saw consolidation occurring in the industry and had no idea how that might turn out. And so you had a variety of factors that said, let's hold off on making these sales now and see what happens in 2018, when you know you've got a lot of positive headwinds working to your benefit that could result in a better outcome.

Okay. Thank you for your answers. I appreciate it.

Yes, the one final thing I wanted to speak on in terms of production 2016 compared to 2017, we're talking two different production footprints. So, when you look at the year-over-year production, it looks like we produced less than we did. But keep in mind the changes that we went through in 2016 relative to our East facility, converting the Trio-only and the idling of our West facility. The better way to look at production in this world, though changed completely in 2018, is how we have the full year 2017 compared to 2018. But this is the last quarter; I need to make this comment, it's more important to look at potash production for Q4 versus Q4 2016 to 2017 as opposed to full year 2016 to 2017.

Thank you.

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

Good morning. Just following-up on that last comment on MOP production. The 120,000 tons in the quarter seems like a fairly significant amount, especially after you had sort of walked back expectation the last quarter to be more average due to weather. So, just looking at production in the quarter and I guess the full year of almost 360,000 tons of solar-only, do you see that as kind of being in that fairly average sustainable range going forward?

Yes, absolutely. I would say, just keep in mind again the cyclicality of our business, Jason. As you are aware, I mean, we'll produce a lot more in Q4 and Q1 and dial that back down during the evap season in Q2 and Q3. So, yes, I think it's probably a good indicator. Again, it's going to vary from year-to-year as our evap changes from year to year and our harvest time changes from year-to-year. As I mentioned earlier in my comments, we had a little bit better production because Wendover ran a little bit longer than anticipated. But generally speaking, that's probably about average. There's nothing that we're doing specifically to increase that 10% increase.

Okay. And just staying with that, the increased run-time from Wendover, my understanding is that mine, when it's operating kind of optimally, is one of the lower costs of production that you have. So, maybe just following-up on a question from earlier. Would this have beneficially impacted the cost of goods going into inventory that was built up? And how do you see this impacting margins on tons sold in the first half of 2018?

Yes, not significantly. Without getting into too much detail, I think you're right in your comment in terms of the cost footprint at Wendover. But one of the things that we like to say and believe is that our solar-only production is pretty cost beneficial across the Board, not only in Wendover, but in Moab and Carlsbad as well. And so just doing the math, surely, we produce more; we're going to have a lower cost per ton. But again, I'd just caution you to not think that's indicative of any kind of trend or anything like that.

Okay. And on Trio, is there any way to separate the netbacks from domestic sales versus international? I appreciate what you're trying to do is building up the footprint, but when you look at the gross deficit, I guess, is the domestic tonnage achieving profitability? Is it closer to achieving profitability? How do you kind of separate the two?

I guess I'd just be a little bit reluctant, Jason, to get into too much detail. As you know, there are very few competitors in this space and we really don't want to divulge too much information relative to Trio in general and specific to our domestic versus international breakout. Sorry, that's probably the best I can do with that.

Yes, I would just really stress that we believe that Trio is on a very solid upward trajectory and we're very excited about its potential for 2018 and beyond.

Okay, that's fair. And then just lastly, on water, obviously, you reaffirmed the range given how 2018 is shaping out in the Delaware Basin. In terms of sustainability, though, I think one of the aspects, Bob, that you had originally talked about which gave you confidence in being able to build that business was that it was growing from a running start with the drilled but uncompleted wells. And I think at that time that had been around 2,000 DUCs when you first started talking seriously about it. And now I think it's up closer to almost 3,000. So, just when you look beyond 2018, what type of visibility do you have for that range being sustainable out into the future?

Well, we just continue to work with operators on creating that very direct relationship. You got to remember, a lot of those acquisitions were made just 18 months ago. And so those were multibillion-dollar acquisitions that now put in their teams, they're now negotiating for their services, and they're now negotiating for what they want on a long-term procurement basis. And so the transference of information, when you look at their multibillion-dollar capital plans, require the water. And so we're talking to the bigger oil companies just in a different way than we were before because now they own the assets, they've drilled as you know some incredibly prolific wells in the state of New Mexico right around us. And so it's just a different discussion that continues to mature and mature when you look at the incredible volume of wells that need to get fracked in this geography. When you measure it out -- we measured it out, we cover a 3,600 square mile footprint with our ability to deliver water and so that's a vast territory.

Okay. And in terms of the -- hoping to see an increased run rate in future years. Not looking for you to commit anything or share specific contracts in terms of price or volume, but I think you had previously mentioned the range, the $20 million to $30 million range only covered about a third of your total water rights in the state. So, overall, I mean, there is an implied price per barrel range that doesn't seem like it peaked out. And obviously, there is also the implication you'd still have about two-thirds of your water rights left to work with in terms of monetization. So, I guess, how do you see potential for that range to grow in terms of either price or volume or maybe both just given the amount of work waiting to be completed?

Jason, I would just reiterate the comments Bob shared earlier. There are several projects and opportunities that we continue to work on that can increase that run rate. What we're sharing with you now is the range that we feel comfortable working within. As you point out, we haven't utilized all of our water rights. And so certainly, we continue to work on additional opportunities but just aren't any more comfortable than that going any further out on that limb.

Okay, appreciate it. Thanks a lot.

But Jason, this is Bob. I will say you're looking at it in the right way. I mean we have room to grow.

Okay, great. Appreciate all the comments. Thanks guys.

Thanks Jason.

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

I just want to thank everyone for their time today and their interest in Intrepid Potash. Thank you for your interest and your confidence in us. And we continue to look forward as 2018 looks to be a very promising year. So, thank you very much and thanks for your time.

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