Intrepid Potash, Inc. (IPI) Q4 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash Fourth Quarter and Year-End 2018 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead, sir.

Thanks Claudia. 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, Vice President of Sales and Marketing; and Alex Wagner, Vice President of Business Development for Oilfield Solutions are also available for questions. I'll now turn the call over to Bob.

Thank you, Matt, and good morning to everyone, and we appreciate you joining us. As you know, we delivered a solid fourth quarter highlighted by improvements in net income and cash flow, continued strength in our potash segment, and a return to positive gross margin for our Trio segment. Net income improved $9.3 million and $34.4 million in the fourth quarter and full year of 2018 compared with the same periods last year while full year operating cash flow increased $47.5 million year-over-year. Total cash received for water ended the year at $30.2 million. Our improved liquidity position has allowed us to actively pursue opportunities to grow our diverse business lines, and we recently announced details on our pending acquisition of a 51% undivided interest in the Dinwiddie Jal Ranch and related assets. This pending acquisition, which will operate as the Intrepid South Ranch will add water rights, surface rights, saltwater disposal and other oilfield-related assets to our existing portfolio in the perfect location to the south to fully complement and now allow us to further expand our footprint. The significant infrastructure announcements of tens of millions of dollars of pipelines and frac ponds on the east side of our property, to which we will market additional water will allow for the continued expansion of current sales from our existing rights or legacy rights as some have referred to them. The location and diverse set of revenues from the Dinwiddie Ranch are great strategic fit as we grow our water supply and develop a more complete midstream water infrastructure system for our partners in Southeast New Mexico. The Dinwiddie assets have a strong history of generating positive cash flow with revenue of approximately $13 million in 2018. The property includes approximately 70,000 acres of owned and leased land in the Northern Delaware Basin, part of one of the most productive oil and gas basins in the world. 750-acre feet of currently permitted water rights as well as additional incremental water rights to permit, produce, and market. It also includes a significant royalty interest in an operating saltwater disposal well and multiple surface and road use locations with oil and gas operators. There are currently over 600 wells permitted on the ranch alone and at least 1,500 acres permitted around us. We expect our 51% undivided interest in this property will quickly contribute to our bottom line in addition to the existing diversified cash flow streams. As we mentioned earlier, we believe there is meaningful growth potential for the property through additional water permitting and sales, saltwater disposal wells, and the addition of produced water transportation in the future. The location of the property puts us near our midstream and water solution company partners. And given our unique set of assets, we are currently pursuing multiple ways to further utilize our water rights while allowing us to grow our other oilfield offerings. The close proximity to our HB and East mines will also allow us to leverage our existing highly trained workforce, and we believe we have the opportunity to hit the ground running hard. We expect to see the benefit of some of these opportunities as early as the second quarter of 2019, and believe there's room to grow this revenue, this revenue run rate in subsequent quarters. Further, EOG has waived its right of first refusal on the property and we expect that the Dinwiddie acquisition will close later this month. We will finance our portion with cash on hand and our existing credit facility. This property also complements our existing offerings of water, heavy brine, KCL mixing and trucking services which are included in our new oilfield solutions segment. These high margin touch points with the oil and gas companies while not moving the needle significantly on our overall revenue, more than pay for themselves and allow us to better serve our customers and increase our presence in the oil and gas operations around our mines. For the fourth quarter and full-year of 2018, year-over-year sales growth in the oilfield solutions segment was largely attributable to an increase in water sales, while fourth quarter results also benefited from an increase in KCL mixing revenue. During the fourth quarter, we saw continued growth in our water business. We’ve put in place a diverse set of arrangements aimed at generating long-term recurring revenue from our water sales. Our water customer partners are investing significant capital to develop and enhance the infrastructure around our mines to deliver this water to end users in the oil and gas industry. We are excited about the potential of this growing business segment and the large footprint that we have not created in the Northern Delaware Basin that covers the entire part of southeast New Mexico. For the full-year 2019, we expect cash received from our total company water sales including byproducts but excluding the acquisition of the Dinwiddie ranch of between $25 million and $35 million and revenue of between $20 million and $30 million. We expect to update these numbers throughout the year as we have more insight into frac schedules, more partner relationships, infrastructure investments of our water partners that are currently under construction and other opportunities afforded to us by our pending Dinwiddie acquisition and expanded footprint in the Delaware Basin. Looking at the rest of our business, we're pleased with the results from our potash segment where price and sales increases drove year-over-year sales and margin improvements. During the fourth quarter, potash net realized price continued to increase up 9% compared to the fourth quarter of last year. We expect a strong spring season with fourth quarter price increases accepted in the market and continued healthy domestic demand for both potash and byproducts. And above average evaporation season has us well-positioned to capitalize on this demand through the wet weather is delaying fieldwork across the country which will push some sales into the second quarter. For Trio, year-over-year price increases helped buoyed us to a positive gross margin for the segment for the first time since 2016. Similar to our potash sales, wet weather in many parts of the country could push some sales in the early second quarter. But we don't expect any impact to overall volumes for the first half of the year. Internationally, we have seen meaningful price increases in certain markets where we worked to grow our business and maximize freight savings into those areas. Over the last several years, we have diversified our cash flows through our efforts to maximize the value of our assets as evidenced by the growth in byproducts and the creation of our Oilfield Solutions segment. Heading into 2019 we've already taken a big step towards further cash flow diversification with the pending acquisition of the Dinwiddie Ranch. We believe these steps strengthen our overall platform adding more resilience to our overall business model in enhancing overall shareholder value. We believe these strategic moves combined with stability in potash and Trio prices growth in byproducts and an above average 2018 of operations season have us well-positioned to consent to continue to generate strong cash flows and allow us to pursue additional growth opportunities. I’ll now turn the call over to Joseph who'll discuss our financial results and outlook.

Thank you, Bob and good morning everyone. During the fourth quarter we generated net income of $7.6 million or $0.06 per diluted share as improved pricing for potash and Trio continue to improve our bottom line compared to previous periods. That brings our full year net income to $11.8 million and EPS of $0.09 per share. This success is also due in part to growing our Oilfield Solutions business. Accordingly in our press release filed this morning you'll notice a few changes to our consolidated and segment presentation compared to prior quarters. We’re now presenting Oilfield Solutions as a third segment in addition to the potash and Trio segments the new Oilfield Solutions segment includes certain sales of water, high speed KCL mixing, saltwater disposal, trucking, and other activities associated with oil and gas production. While not included in the 2018 results, going forward, the results of the pending acquisition will also be included in this segment. Additionally, we are now recording to sell the byproducts as revenue instead of as a credit to the cost of goods sold. Prior period amounts have been recast to be consistent with current presentation and quarterly figures for the past two years will be available on our website later this week. Our Potash segment generated $10.7 million in gross margin during the quarter as price increases and increased sales volumes propelled our Potash segment to another great quarter. We produce slightly less potash during the fourth quarter than the previous year due to a decrease in runtime across our facilities but we still anticipate producing more tons in the 2018/2019 solar production year due to above average evaporation during 2018. As we enter the spring season, we expect to benefit from recent price increases and increased spring truck sales which generally carry lower freight costs. In the first quarter of 2019, we expect this will drive a $15 to $20 increase in our average net realized sales price when compared to the fourth quarter of 2018. Our Trio segment generated a gross margin of $700,000 in the fourth quarter because of the increase in fuel pricing, increased byproduct sales, and fewer international sales. This was an improvement of $4.1 million compared to the year-ago period and continues the significant improvement in overall profitability for the segment that we saw during the third quarter. Reduced international sales combined with recent domestic price increases led to an increase in our average net realized sales price in the fourth quarter of 2018. Heading into the first quarter of 2019, we expect a slightly lower average net realized sales price per ton than the fourth quarter due to increased international shipments somewhat offset by higher domestic prices. Trio sales volumes were down 21,000 tons in the fourth quarter, compared with last year, primarily due to the timing of a large international shipment close to the end of 2017. Changes associated with the adoption of the new revenue rec standard altered the timing of revenue recognized for this shipment. And instead of recording the sale in 2018, as we had under the old standard, we recast it back to 2017 in conjunction with the adoption of the new standard. Improved ore grades drove a 10% increase in the fourth quarter Trio production compared to prior year. Full-year production decreased to 11% compared to prior year due to the reduced production schedule which began in the second half of 2017. Our oilfield solution segment delivered strong results in the fourth quarter, led by water sales of $3.5 million, compared to $2.9 million in the fourth quarter of 2017. Fourth quarter also saw an increase in demand of our high-speed mixing services, a trend that has continued into 2019. Gross margin as a percentage of sales decreased in 2018, due to an increase in mixing and trucking, which on average, carry lower margins than our water sales. We also incurred increased legal fees related to the permitting process and third-party protests of our water rights. As a reminder, a portion of the water we sell is a byproduct from our potash and Trio operations and the sale of that water is recorded to those respective segments. Total company water sales across the three segments were $19.8 million for 2018. Total cash received related to water sales was $30.2 million inclusive of $11.9 million in cash received for future water deliveries, which is reflected as a contract liability at year-end. Fourth quarter SG&A expense was similar to prior year as increased legal expenses were offset by cost savings as we did not meet the pre-established targets required to pay bonuses under our bonus program in 2018. We expect 2019 SG&A expense will be between $24 million and $27 million due to the increased stock comp legal expenses and bonus compensation. Interest expense increased during the quarter due to make-whole payment and write-off of deferred financing fees associated with our scheduled $10 million prepayment made on the senior notes in the fourth quarter of 2018. We expect to remain in the most favorable financing tier in our senior notes for all of 2019. We ended the year with $33 million in cash and no outstanding balance on the $50 million credit facility. As Bob mentioned earlier, we expect to finance the Dinwiddie acquisition with cash on hand and some short-term borrowing under our credit facility. With a good spring season ahead and continued strength in our water and byproduct business, we expect to remain in a favorable liquidity position for all of 2019. That concludes our prepared remarks, and Operator, we are ready to take questions.

[Operator Instructions] Our first question is from Mark Connelly with Stephens. Please go ahead.

Can you give us a sense of the incremental investment cost that you referenced for the ongoing business development? I mean looking at that X, the acquisition cost, is it going to be higher in 2019 versus 2018 and is it a meaningful number?

Well, I don't remotely understand your question. Are you talking about the didn't - what are you - are you talking about the pipelines being built on the East. Mark, clarify what you’re asking.

Sure. I mean in the release you talk about ongoing development activity in 2018 and now you've picked up this new acquisitions. So I'm just trying to figure out, is there a lot of additional spending that's going to come along with this?

No. In fact it's really quite small in terms of the returns achieved. I mean we're talking minimal amounts and significantly less than $4 million or $5 million.

That's fine. It was hard to say - to tell from the release whether the spending has already happened or not. Okay, so that's the first thing. Can you talk generally, Bob about how you think about development of oil and gas activity in the geographies that are relevant to you? This is relatively new business over the last couple of years and how do you think about the longevity of this business? It's clearly coming your way now, right?

Well, it’s in our backyard. And depending upon which article you read, we've got decades and decades of reserves, thousands of wells that are being permitted that totally surround us in just the Northern Delaware Basin in Southeast New Mexico. And so we have really focused on making sure that we can service and it turns out that the northern portion of the Delaware and Southeast New Mexico because of the multiplicity of pay zones has become the most prolific area overall. So we've really concentrated on having our footprint as we're pretty much surrounded being able to service the east side of our property with certain water groups that are now putting in tens of millions of dollars of pipelines, frac ponds, et cetera to greatly expand our water sales to the north and the east. The Dinwiddie fits in as it connects all this together on the south, and then we handle everything on the west, if you will, with access water that comes off some of our Caprock infrastructure as well as our Pecos River rights. So, we now have a very well-thought out strategic footprint so that we can service what has become one of the largest oil fields in the world.

And if I could just squeeze one more question in. You talked about the shifting mix of export where you're going to try to focus that business on the markets with better returns and better freight. How is that process going? You've talked about that for the last couple of quarters.

It's going really well. I mean, we've just been highly selective. We've said no to certain sales. We've got some good sales that are booked in the second quarter going into South America that we feel very, very good about. We've seen the price increases stick, and with larger volumes we've been able to bring down freight costs. So, on that - in that arena, I think we've done a good job of really focusing on our netbacks and maximizing margin.

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

Will you report a minority interest line now after you close this next deal and are the margins on the new acquisition here Dinwiddie, be similar to your current water segment or you - do you expect it to be the same?

Yes is the answer to both of your questions. We’ll be consolidating the revenue of the Dinwiddie assets, but as we only own 51%, we will be showing a minority interest. And I'll let Bob or Alex take the second part of the question but I believe the answer relative to returns on that property transactions will be similar to our current.

Yes, I would say because we have virtually no basis in our water rights up near the mine. Our margins on those are significant, but the price because of the location of the Dinwiddie property, the price of water is going for in some cases two to three times what we're getting to the north, so it's more than offset. So when you look at water strategically, the key is, just like in real estate, location, location, location. And as we're now surrounded by oil and gas production of the highest quality in the world, we want to have a footprint in all of those areas and recognize the ability to turn it into one more major system if you will, or massive system that can supply not only the water logistics companies but dealing directly with the oil companies themselves. So, it takes us to a whole another level.

And then is Sherbrooke just a passive financial minority partner? And do you have any rights to buy them out over time?

We do have a right of first refusal. And Sherbrooke is a company that brought us the deal. And so as we were – everyone's out looking in this part of the world and they have approached us, and so they're paying for 49% for 49% interest, and we're paying 51 for a 51%, we’ll operate the property. And the beauty is because of our labor force, the machinery that we have just 20 minutes down the road, all the equipment that we have in place, our ability to take advantage of anything from the millions of dollars of caliche sales, the ability to build the roads, to build pads, to service the water infrastructure, to lay the water infrastructure, I mean it's just starting in terms of the number of permits that are just on the ranch itself.

Our next question is from Vincent Andrews with Morgan Stanley. Please go ahead.

This is Jeremy on for Vincent. First question on Trio, I was wondering, were there any one-time items that drove the positive gross margin in the quarter? And if not, do you think that can remain positive in 2019? Thanks.

So the first - the answer to your first question is no. Very kind of standard, stable quarter if you will. As to the second part of your question, it really all depends on how successful we are relative to our volume – our price over volume strategy. If that continues as Bob said, if we've been successful, then that will continue. As I mentioned in my in my prepared remarks, we will have some international sales in Q1 that will bring that down a little bit. But kind of in the long run period over period, year-over-year, it should start to stabilize.

And then just from the…

There’ll be some fluctuations from quarter-to-quarter is my point.

In terms of oilfield services, just trying to understand if you could quantify what percentage of that is the water business versus some of the other lines you mentioned like trucking, like oil and gas.

The vast majority is water and due to new accounting rules. That's why you're saying it reported the way it is. And so we apologize if it appears complicated. But as you know the accounting profession continues to move the bar and change the rules. So, we have to act accordingly. So we'll do our best to simplify it and try to make it as understandable while breaking it into the segments that we're forced to do so by the new accounting rule.

What you'll see and would be helpful for you as you're working on modeling Jeremy is the additional disclosures that we put in our 10-K this year relative to the new revenue recognition standard and note till you'll see a lot more information than we've put in before that will help break out exactly what we're generating from water which we haven't ever done before. So, I think that will be helpful for you and other folks as well.

Our next question comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Potash costs were a lot higher in Q4 but those costs were kind of similar in the first half of the year. So, looking at 2019, what is sort of the right run rate for potash costs or will it look more like a Q4 number or Q3 number. Maybe you can help us. Thanks.

Again, I'm not trying to be okay by any sense of the word, Joel, but we will be helpful for you and the teams that are modeling will be all the detail that we put on the website later this week, because what's happening is you’re looking probably if you're just taking your Q3 10-Q or earnings reported or the byproducts were reported as a reduction of cost of goods sold. And so, therefore, our cost of goods sold look lower. And now, we're reporting it as revenue, so therefore, it's making our cost of goods sold look higher. If you look at the gross margin, there's no change because net-net, they both get to the same bottom line of gross margin, but it hits all like Bob here, but because of the revenue recognition changes that we've reported, it's becoming a little bit confusing. So…

Joel, so you're very, very aware of the accounting rule changes given your position. And so, that's why we changed it – had to change it in the fourth quarter. And so, instead of having byproduct sales, it's reported differently. So, net-net, it's still the same numbers.

And, Bob, when you look at your strategy now for water, are you happy with what you have? And there are some hole you still want to fill in the next couple of years. I mean, what do you have or what more do you want?

A lot, it's working really, really well. And so we're marketing a fraction of what we have. And when you look at what the infrastructure that's being around us to service not only our water rights that are far to the north, we couldn't be in a better position to service southeast New Mexico in its entirety. So, we're very excited about what's going on in southeast New Mexico. The various companies that are spending tens of millions of dollars on water delivery infrastructure that we are participating in by providing water into that infrastructure. So, we're very pleased with how it's playing out, and we look forward to the significant growth that we're going to see in 2019 and 2020 as this plays out.

And finally, I think you were looking at maybe hoping to partially fund the pilot plant. I think it went over to investigate whether you have a commercial lithium brine potential could be in lithium. Could you give an update on that, please?

We've actually - we're talking to several groups. As you well know, the complex producing lithium from complex brines is difficult, to say the least. And so, rather than us - there are a lot of companies, both Canadian Juniors that you're very familiar with, as well as folks down in South America that are trying to produce lithium from complex brines. So, there's interest in participating because the knowledge from the technology is what's most valuable.

Our next question is from Christopher Perrella with Bloomberg Intelligence. Please go ahead.

On the outstanding debt, is there any payments scheduled for 2019, sizable ones? And is there anything in that when you rework the debt that preclude you from repurchasing shares or issuing a dividend going forward?

So, no is the answer to your question relative to requirements for debt payments in 2019. The first tranche of our debt, as you know, comes due in 2020. That'll be the $20 million tranche and then nothing do again until 2023 and 2025. Because of the very favorable rates that we're enjoying at present, we don't have any immediate plans to do any restructuring of the debt. But given the successful results that we're reporting, we have opportunities but we don't have any plans.

And then with a year of water sales under your belt and a good handle on what's coming down, how should we think about the seasonality of cash generation, the cadence over 2019 here. Is there a big slug when you – into 2Q, 3Q now or is it more smooth because of water sales?

My guess is you're going to just see it get smoother and smoother and smoother as additional infrastructure gets built out as we are working more directly with both the water transmission companies and the actual oil companies setting up their frac schedules. I would say in Southeast New Mexico, there was a brief hiatus while the legislature met. People came up with their 2019 budgets. But I think like in any situation as you see the pipelines that have had - there was a condensate pipeline that was converted to an oil pipeline. So the takeaway capacity in certain parts of the Delaware are getting better and better. So as you see, the infrastructure built out, the takeaway capacity being added onto, we feel like we're in a perfect position to grow this at a very rapid pace as we move into the next several quarters.

And then one quick one. Is it the only the big contract that has disconnect between the revenue and the cash generation, or with this acquisition, are you – similar deals where there's a lag between the revenue recognition and the earnings recognition and when you get the cash on the books?

I’ll tell you, whenever we can organize say take-or-pay contract which there are folks that like them, take-or-pay contracts create that delta between cash receipt and revenue recognition. So right now, it's only that one primary contract. But there are other folks that we're talking about take-or-pays with. So if we enter into more take-or-pays, it will create that slight offset if you will. It all comes out in the wash at the end of the day, but that's just what a take-or-pay does because they're paying you for the right to have availability of the water.

The next question comes from DeForest Hinman with Walthausen & Co. Please go ahead.

Just some more color on the Dinwiddie ranch. You mentioned the $18 million of revenue in the prepared remarks. Can you give help us understand…

I think that’s $13 million.

$13 million, excuse me. Can you help us understand what that is? Is it primarily water? Is it some sort of rental revenue you received for some of these frac ponds? I just want a better understanding of what is that right now.

Well, it was - in 2018, it was a combination of some water, some caliche, some damages. We bought this from a family that’s owned it for decades and decades and decades and run it as a cattle ranch. And so, as the activity increased around them, there was tremendous opportunity for that we saw to expand it significantly. And so, that's what we're excited about is instead of having a rancher managing it, that's a cattle rancher, you now have intrepid that has 400 plus employees 20 miles up the road. We own all the equipment, we own everything to significantly improve all the various opportunities for revenue whether it's saltwater disposal, fresh water delivery, caliche sales, road use, pad building, just a very robust set of diverse income opportunities. And I hope that sort of answers your question.

So when we hear about the $13 million, that's kind of the base that's going to get clearly built off going forward.

That's how I see it.

And then just when we're thinking about that $13 million, is that a gross number? And then as it grows, there's the royalty part of the business that's related to that, that would be a subtraction from that or is the $13 million the…

As the royalty only applies in the event we drilled saltwater disposal and it's proportionate reduced to the interest. So, another - it's not a straight royalty of any fresh water, caliche, it's very specifically related to saltwater disposal which generate a very - a small amount of that revenue. But we’ve got plans to expand that opportunity pretty significantly. So, I just want to make it clear that, that royalty that they're reserving is only future saltwater disposal I just want to make it clear that that royalty that they're reserving is only on future saltwater disposal pieces.

I did want to explore that a little bit, if you can help us understand that. What is the opportunity to put saltwater wells on that ranch? I guess from a comparative - it sounds like there is some well, saltwater well or wells, plural, on that property already. How many saltwater wells could there be? And what does it cost to drill a saltwater well in that area?

It really depends on which zone you're looking at. I mean if you're looking at a Devonian well, which we're not really as - I mean, you're asking a very broad geologic question, whether you're talking about going into the Devonian. We've got some other thoughts that we're not going to go into right now, but a much better way to handle the saltwater disposal piece. That's the good news is that there's a very significant opportunity that exists that in future quarters as that matures and the potential joint ventures that we're discussing with adjacent ranch owners and oil and gas companies, we just think it's a very significant opportunity. It will give you more color on as that opportunity develops.

Yes. The forest, and I guess, along those lines you should basically consider no royalty in any modeling that you're going to do, since we currently don't have any saltwater disposals in any of the numbers. And as Bob says, as we start building those out and giving you more information at that point, it would be appropriate to introduce the royalty.

I'm just trying to get a better handle on the strategy. And then, as it relates to EOG not exercising their right of first refusal is obviously a positive to get the deal closed. But when I read that it made me think there's some sort of contract relationship with them from a supply perspective. It was clearly stated I guess from the last answer from previous questioner but do we have a supply contract with EOG when we close this deal or not?

In terms of supplying water and access to them, the answer is yes. But it has virtually no impact on - it would have had no impact on 2018 revenues and would have minimal impact. And if you go to EOG’s website you’re reading their press releases or their IR presentations EOG is very specifically trying to get out of their ancillary businesses and focus primarily on oil and gas drilling and then buying their services rather than building them out themselves. So it was - it's a great fit. It's a great new relationship with the EOG that we're excited about. And so it just it simply didn't fit into their announced - publicly announced plans which are easily and readily available throughout their IR presentations in their website.

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

Just first on the potash. I wanted to follow-up on Joel's question. You're now seeing all the byproducts’ revenue but some of that is in the news segment but you still have that $5 million that looks like it came through with the potash segment. So, if I look at you gave kind of a full breakdown of water, mag chloride, salt, brines and other. Is there any high level way to think about which of those is kind of high-level way to think about which of those is kind of going into each segment?

I would say minimal amount. I guess probably the best way to look at it, Jason, would be to take the total water number and then compare that to the segment number, and then it's probably split relatively evenly between Trio and potash. What you're really going to see in the different kind of with follow-on to Joel's question is really less to do with water and more to do with the other byproducts that primarily relate to potash specifically, the mag chloride that we've had for years and years, and we'll continue to have in the salt and brines.

And, Jason, I just want to make it clear, you'll see a IR deck coming out trying to clean up some of that so that it makes it very easy to understand and we'll be on the road in a pretty significant fashion so that you can just physically see from maps. And when you see the infrastructure that's been built and our current infrastructure and how it fits into it, the whole situation in southeast New Mexico makes so much more sense. So, we apologize for any temporary confusion, but we're going to do our best to get a new IR deck out there that really makes it simpler to understand, and then we'll be on the road quite a bit showing people the jigsaw puzzle that we feel was put together.

But just, I guess, on the potash side, the $5 million or so of byproduct. If I'm looking at it from a cost perspective, if I kind of took that the old way as a as a credit, I mean, it looks from a cost perspective like you'd still be well below $100 a ton. But now that you’re reporting it as revenue is it kind of fair the success you're having and growing the byproducts is actually kind of hurting your reported cash cost now even though it's helping gross margin?

That's exactly - although I would say it's more transparent I would say now than it has been in the past because that number was buried before in cost of sales and now we’re disclosing it exactly. And so…

But your answer is totally – your question is totally online that the byproduct revenues are increasing and they're doing better and they're becoming a larger percentage. And that's why they're being reported the way they are because of the success.

Yes. I agree and we - as you recall, we discussed that and mentioned that we would be doing that in the third quarter call. And so this is just further execution of that strategy and now accounting aligned with our strategy execution.

And then just on the sale side looking forward into next year, you talked about the weather issues kind of delaying I guess some sales into Q2 given the wetter weather. Is there any issue on the production side with the weather in terms of rains that you guys had that would impact the evaporation rate that you saw?

No. In fact, we kind of had the ideal situation. So we had the right amount of evaporation in Carlsbad and Moab that we wanted. We had precipitation in Utah in Wendover in the winter time which is what you want. So I would say 2018 ranks as one of the better evaporation seasons that we've ever had.

So the production being down year-to-year, that was more just I think Joseph, you mentioned the timing issue of when the plants reopen not a weather issue?

Not weather-related. More timing of timing of harvesting production.

And then on the water, on the water, I guess just first on the Dinwiddie acquisition. I guess going back, Bob, you talked a lot about how the existing water you've had, I think most of what you were doing is based around a third of your water rights and that you had a very, very broad footprint to begin with. So, I guess, just – you talked a lot about the east – the acquisition should handle I guess parts of the east to the plant. Maybe you could talk a little bit more about where the footprint now builds out in terms of what the acquisition gives you there.

If you look at our - yes, our Caprock water wells, which are on the north side of our property, service the oil and gas activity on the north side and half on the east side but didn't take us farther southeast. So, there've been at least two major public announcements of infrastructure projects that border the east side of our property and take water south, which we will be participating in – the first major million barrel frac pond is actually filling up with water as we speak today and the second million barrel pond is under construction, and the third one has had the civil work done, and everything should be up and operational on the east side of our mine, I would say within the next 90 days, which then allows us to market more water off the Caprock side where we own approximately 16,000-acre feet on the north and east side. And then if you go over to the west side, we service some of that with pipeline that comes off Caprock system that goes a little bit to the west, and then we have our Pecos River rights which help us service even farther west into the southwest. And then the Dinwiddie which is due south really complements the entire Northern Delaware or the entire part of Southeast New Mexico that has oil and gas production. So we now - if you can think of in terms of a giant square or rectangle, we now have the ability to deliver water literally where there's now been thousands of wells permitted. Not to mention the number of docks.

And the infrastructure projects, I know, Select Energy, they specifically talked about building a $25 million pipeline that's supported by a take-or-pay contract. And they said that it's finding the customer with an active development program kind of in that area is not the challenge, it's finding the fresh water right, you know, availability. I mean, when you talk about participating in these, is it fair to say that I guess you're part of that discussion and would be part of that?

That's very fair to say.

And in terms of growth in the water, the guidance is kind of flat year-to-year on an organic basis. When you think about growth, I mean obviously, you've tried to remain conservative. Is it organic growth or is it all going to be mostly acquisition growth?

It should all be organic. If you include - if you assume we're going to close the Dinwiddie, that's going to have its own growth projection. But the organic growth should really begin to take off as a variety of these projects get hooked up and online and producing. So when you go from using lay flat to – lay flat on the surface to service certain areas to a massive 24-inch buried pipeline with 3 million barrel frac ponds. It's just - it's a whole different style of infrastructure that allows you to move much greater quantities of water.

And just last question for me. A lot's has been made about recycling of water versus freshwater. I guess just at a high level, what's – a lot of what you're doing at this point has been in the freshwater. It seems like you're moving in a direction of doing a lot more things. But just, I guess, what's your take on some of these operators using freshwater versus recycled water?

We're seeing people attempt - make the attempt, but we're still seeing significant orders. And we literally are – we've got a group going to Midland literally every week talking the – just the vast number of oil companies that we're not dealing with in Southeast New Mexico. And so, there's a lot being talked about trying to use produced water and used recycled water. But we're - the technologies is just not there yet on a commercial basis. Alex, you've been looking at this for literally a decade and given your experience at Halliburton and other companies if you want to give some color to that.

Certainly. So the issue with produced water is primarily a logistics concern. And so while there's quite a few different companies out there that have developed proprietary technologies in and around how to reuse the water, the biggest challenge remains aggregating it in sufficient volumes in order to be able to use it. And so with the current freshwater supply and delivery infrastructure in place, it's difficult for produced water to compete.

Our next question is from Jon Evans with SG Capital. Please go ahead.

Can you talk just a little bit about - just a clarification again on the potash realization sequentially from the 270, what do you think it will be up again, roughly, in a range?

We said $15 to $20 in the prepared remarks. So, more…

And then just on the volume side, you grew about 3% in - the other gentleman talked about the production being down. If demand is strong enough in the market, which it seems like for potash, can you guys grow 2% to 3% again in volumes this year?

That's a tough question to answer. A lot depends on the evaporation rates. We've had a good year, and it fluctuates year-to-year. We have some ability to increase production, but I would be reluctant to give too much upside on that.

And then just the last question…

But we right-sized - if I could just add a little bit of color, we right-sized our facilities in the 2016 timeframe. We were - we shortened the kind of range of available production and gave us the opportunity to decrease the circumference to which we were selling in and increased our pricing, and so that was the strategy that we set out and we're executing on.

And then the last question, just could you update us - since the filing hasn’t come out, just what is left on the deferred that you have to the large customer as you come into the next year and then where you received the - I’m sorry.

That was in the prepared - that was in the prepared remarks. It’s $11 million.

And so can you just help me understand that. I know when do you get to realize that? Is there a time period with your accountants?

There would be. So, in a take or pay contract there and I don’t’ want to get into too much accounting detail because I’ll bore everyone else on the call. But there is a point in time at which we would start recognizing the revenue even if we didn’t deliver the water. The request for water, the forecast from our customer and the need in that area is just so robust. We don’t think we’re going to get there. We think we’re going to deliver the water before accounting rules would kick in and let us take it. But still be a little while before that kicks in.

And then the last question relative to that, will you still get the $15 million payment for 2019 then? Will you get it all upfront again or is it going to be over quarters or how is the cash flow in that take or pay contract?

Well, it’s always been from its announcement. It’s been quarterly.

Okay.

Well, thank you for the question.

I would say we are expecting to receive the range of cash that we’ve disclosed.

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

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

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