Intrepid Potash, Inc. (IPI) Q1 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash Inc. First Quarter 2019 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, Ivy. 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. We delivered a solid first quarter as strong domestic pricing for potash and Trio, increased industrial potash sales, and growth in byproduct revenue drove improvement in our gross margin and bottom line compared to the prior year. Growth in byproducts and industrial volumes highlight our push toward greater revenue diversification, which took a huge step forward with our acquisition of 100% of the Dinwiddie Jal Ranch and related assets, which we completed on May 1 of this year. As you likely saw in our press release last week, we negotiated a reduced purchase price at closing, with the $53 million amount due at closing and an agreement to pay up to an additional $12 million pending the resolution of certain issues identified during the due diligence process. The addition of these assets, which will operate as Intrepid South is a huge win for us strategically, as we look to expand our presence in the Delaware Basin, where we believe decades worth of oil and gas drilling activity provides meaningful growth for our Oilfield Solutions segment. As of the closing date, we are adding approximately 5.8 million barrels per year of permitted water rights perfectly located in the Northern Delaware Basin and ready for sale. As we mentioned on previous calls, water located close to oil and gas operations sells for a premium compared to our legacy water rights on the Pecos River and the Caprock wells, as we have seen sales and average sales prices between $1.25 per barrel and $1.50 per barrel. There is also meaningful upside potential to the volume of water rights on the property and we believe, we will be able to permit at least an additional 13 million barrels over the next two years. The property also generates cash from various surface and road use agreements, easements, oilfield pad and road construction materials, and from a royalty interest in our produced water system located on the property. We strongly believe we can double the revenue on this acquisition in the next 18 months to 24 months and continue to grow it from there. The oil and gas activity around this property with hundreds of wells permitted on the property and in the surrounding area, makes us an ideal location to participate in additional produced water gathering and disposal opportunities for decades to come. During the next quarter, our Oilfield Solutions – during the first quarter, our Oilfield Solutions segment saw revenue growth led by a significant increase in the potash mixing jobs during the quarter. One mixing job in the Powder River Basin contributed to a record initial production rate for one of our customers and we are encouraged by the clear benefits of KCl into certain formations, as we continue to gain traction into this market and another oil and gas basins. As we mentioned last quarter, our water partners are investing significant capital to develop and enhance the infrastructure around our operations to deliver water to end users in the oil and gas industry. One exciting project currently underway, is with Select Energy Services, who is currently constructing a pipeline and several large storage ponds, which will run on the east side of our properties, south into the heart of the Delaware Basin. This pipeline, which has the capacity to move more than 100,000 barrels a day is expected to be complete in 2019 and will provide a much needed increase in the capacity for their area. We are already generating sales as we fill storage ponds and are excited about the potential that springs for our Caprock water rights. For perspective, we’re currently moving approximately 90,000 barrels per day versus an average of approximately 35,000 barrels per day to 40,000 barrels per day in 2018 through that system. Total water sales remained consistent with previous quarters with $5.4 million sales in the first quarter. With the integration of Intrepid South, we expect our water revenue in the year towards the high end of the previously announced range of $20 million to $30 million. Moving to our potash segment, as expected, we saw a significant increase in our average net realized sales price compared to the first quarter of 2018, which drove another quarter – of year-over-year gross margin increases. The spring season was somewhat delayed by the wet weather in many parts of the country in the first quarter. Intrepid’s agricultural sales are geographically diversified and with the spring activity moving into the second quarter, Intrepid is well positioned with a solid subscription book at stable pricing levels. Byproduct sales of salt increased with more sales to our customers in the oil and gas, highway de-icing and animal feed markets. Our focus on the industrial market, which generally carries premium pricing, allows us to continue to be selective in the geographies we serve, focusing on sales where we have a logistical advantage compared to our competitors. We see continued potential for our industrial sales in the back half of 2019, but as a result, expect to sell slightly less potash during the first half of this year when compared to last year, as we hold back some inventory to increasingly serve the demand from our industrial customers. For Trio, year-over-year price increases and robust byproduct sales led to another solid quarter. Similar to our potash sales, wet weather pushed some sales into early second quarter, but we expect to see strong domestic sales volume in the second quarter. Overall, we are very enthusiastic about completing the strategic acquisition and building upon the revenue diversification strategy that we’ve emphasized during our last few earnings calls. Our experience in water transfer refined from the significant growth in water sales over the last 18 months and our history of water transfer for use in our production processes, gives us confidence in our ability to unlock the potential of the Intrepid South property and related assets in the coming quarters, years and decades. We’re excited to integrate the Intrepid South property into our existing Oilfield Solutions segment, while leveraging our highly trained workforce in Carlsbad, New Mexico. We now have a physical presence in the entire Southeast New Mexico portion of the Delaware Basin. We plan to continue to thoughtfully pursue potential opportunities across our business segments and we look forward to updating you on that progress on future calls. I’ll now turn the call over to Joseph, who will discuss our financial results and the outlook.

Thank you, Bob and good morning everyone. During the first quarter, we generated net income of $6.2 million or $0.05 per diluted share, as higher realized prices and increased sales of byproducts drove an improvement of $4.4 million or $0.04 per share over the prior year’s first quarter. Our potash segment generated $9.4 million in gross margin during the quarter as an increase in net realized sales price per ton offset the lower sales volumes compared to the prior year. As expected, agricultural sales were delayed by wet weather in many regions of the country, although this was somewhat offset by an increase in industrial sales when compared to the prior year. Increases in domestic price levels drove a $45 per ton increase in average net realized sales price compared to the prior year and $18 per ton increase compared to the fourth quarter of 2018. During the first quarter, our Trio segment generated a gross margin of $700,000 as higher domestic pricing and strong byproduct sales drove improvements in gross margin compared to the first quarter of last year’s loss of $2.1 million. Similar to our potash sales, domestic field sales were lower than last year due to inclement weather which delayed the spring application season. As we mentioned on our fourth quarter call, the timing of international shipments can cause some variability in our quarterly results and that contributed to our lower average net realized sales price for the first quarter of 2019. We expect a sizable international shipment in the second quarter, which we expect to drive an approximately 10% to 15% decrease in average net realized sales price compared to the first quarter of 2019 for Trio. Trio production was up significantly compared to last year as we increased the conversion of our WIP inventory into premium Trio product, although we remain on the same operating schedule as previous quarters. Oilfield Solutions delivered a good quarter with $4.1 million in water sales and a significant increase in our potash mixing services. These mixing services carry a lower gross margin than our water sales, which contributed to the change in margin as a percentage of revenue compared to the previous year. Our cash guidance on water remains unchanged at $25 million to $35 million, as Bob mentioned, we now expect to be at the high end of our water guidance of $20 million to $30 million in revenue, although we expect this to be weighted more towards the second half of the year. We did see an increase in demand, leading into the second quarter as we began delivering water to fill the new Select infrastructure. Additionally, after our acquisition on May 1, we’re already selling water out of Intrepid South and expect this will ramp up as the year continues. We are renegotiating surface-use agreements with operators, and given the oil and gas activity in the area, we anticipate these relationships lasting well into the future. Our first quarter SG&A expense increased to $5.8 million in the first quarter due to increased admin labor and legal fees. We still expect 2019 SG&A will be between $24 million and $27 million. Turning to our liquidity after the acquisition, on May 3, we had approximately $16 million of cash on hand, $30 million drawn on our credit facility, and an additional $19 million available to borrow under the facility, although we have since paid down $10 million on the facility. After the acquisition, we expect total capital investment for the year of between $25 million and $35 million, although approximately half of that will be opportunity projects with solid returns. Overall, we remain in a favorable liquidity situation, as a good albeit later than normal, spring ag season wraps up. We expect an increase in cash flow from operations in the second quarter compared to the first quarter and we believe we are well positioned to meet our debt obligations, while continuing to grow our business. That concludes our prepared remarks operator, and we are ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Connelly with Stephens Inc. Please go ahead.

Thank you, Bob. Two things. First, can you tell us a little bit more about Trio in terms of the mix and the outlook giving – given late planting in particularly California? I’m curious if you see California leading to a shift in your geographic mix and whether that mix might impact your margins, and also whether you expect Trio inventories to be more or less normal by the end of Q2. And my – my second question is a simple one. Obviously, the breadth of your water and services business is taking off a lot faster than many of us anticipated and your customers are making big investments. Are they are discrete investments that you’re going to have to make if this pace of growth keeps up?

Yes, they are small and what I would not categorize as material, but each of them are really, highly accretive in terms of adding revenue almost immediately. So we’re not spending any capital on something that doesn’t have an immediate high-quality return. So the answer is, yes to that, but the returns associated with them are quite good. Trio, I’ll let Mark, give you a little bit of flavor, but I don’t see any significant geographic differences or any material differences, and we continue to add warehousing space, we continue to pick up new customers and diversify our customer base. So, I think that diversification is going to help us keep our pricing strong. And I’ll let Mark add a little bit to that.

Thanks, Bob. Yes, Mark McDonald here. I think part of our strategy on Trio, as Bob mentioned, is the diversification. So we see opportunities on a lot of different crops here at United States, as well as different sell types. We try and marry the agronomic needs that we see in the marketplace with the Trio advantages, with the sulfate potash and magnesium components. And specifically California, there is certainly a significant opportunity that we see on the trees, nuts, fruits, vines, crops that are growing there. I think last time I checked, it was the fifth largest ag economy in the world. So we certainly have, as Bob mentioned, some input there with that, as well as some good warehouse locations.

Mark, has late planting had a big impact on you so far and is it going to affect your year?

Specifically to Trio or the potash market?

I’m thinking about California and Trio mostly.

I’d say, no. You know that market hasn’t been maybe as delayed as we’ve seen throughout the Midwest, I think certainly the I-states of Iowa, Illinois, Indiana. I think everyone’s read the headlines there. California, we haven’t seen anything and that market is very diverse and it’s their culture, and we’ve got good touch points throughout the whole state there.

Fantastic. Thank you.

Yes, I’d just like to add Mark, that the PNW has gone strong, Texas has gone strong in spite of its wet weather. So, the geographies that we serve that are the non-I states, we’re seeing really good movement.

Great.

Our next question is from Josh Spector with UBS. Please go ahead.

Hey guys, just a couple of questions around the acquisition and the impact to the earnings. I guess, if I look at the 8-K that you guys filed well, about a week or so ago, sort of you had around $13 million in sales for the last year, I believe. Is that the right number when you think about doubling over the next 18 months?

Well, as I said, 18 months to 24 months and that is the appropriate number that we think we can double.

Okay, great. And just in terms of some other modeling items around that. And I think historically, you’ve talked about your own water sales around 85% gross margins-ish. Is that a reasonable estimate for this new property and how much D&A do you think this will add to you guys?

Same kind of margins. Joseph...

Yes. With respect to CapEx, as Bob mentioned, there is nothing major or significant. We aren’t planning any huge major infrastructure projects. and so the D&A impact will be relatively minimal.

Okay. All right. thanks guys.

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

Hi. This is Robin on for Joel. Thanks for taking my questions. So, does the increase in your water sales guidance come solely from the addition of Dinwiddie asset or are there other...

No.

No?

No. as we talked about in the prepared remarks, we’re partnering with Select Energy Services to sell quite a bit of water off the – the Caprock. So, it’s a combination of a few different things.

So, if you look at our entire water infrastructure system that we’re part of now, we cover the entire portion of Southeast New Mexico, the north side is covered by our Caprock well locations. The pipeline coming down the east side of our property that Select is building takes care of the activity to the east. Our Pecos water rights, which are on the west side of our property handle the west side. And now, the Intrepid South property will complete the rectangle if you will, on the south side. So, we see the ability now to – because we have a physical presence in the entire basin, northern portion of the basin, we see the ability as well as the capacity to continue to ramp it up. As you heard in my prepared remarks, I gave just one brief bit of color around the increased movement that we’re seeing on the east side. It’s virtually double, where we were in 2018 already.

Okay, thank you. And just one last question. I know you talked about this before, but can you just elaborate further again, for us please, what are the main buckets that you guys can access to achieve this doubling of Dinwiddie revenue over the next 18 months, 24 months, and has – now that you’ve had another couple of months to plan out growth for that asset going forward? Thanks.

Well, it’s a couple of buckets. It’s increased sales of fresh water as the re-permitting of certain wells occurs. That’s just sort of standard course. It’s increased sales of all the other products in a much more traditional – professional basis using new tech – I mean as silly as it sounds, taking caliche pits and having them – having scales located at those pits and adding professionalism to the way these assets are managed. It’s saltwater disposal. There’s just a variety of buckets and if I were to go into all the weeds, there’s a lot of different revenue opportunities on this property. So – but those are the major buckets.

I think the major takeaway there, Robin is, as Bob mentioned, we’re going to run this what was previously just a ranche in the Dinwiddie family for decades, we’re going to run it as a business. And so there’s lots of opportunity to take these assets that we’re acquiring and turning them – turning them into a business.

Okay. thank you.

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

Hi, this is Jeremy on for Vincent. Thanks for taking my questions. I just wanted to start on 2Q volumes and apologies if I missed this in the prepared remarks. But how are you thinking about how much of the lost potash volumes you can make up in 2Q? I know you mentioned for Trio, you have a push into 2Q, but specifically for potash.

As we said in the prepared remarks, we feel it will easily make it up. So, they’re not lost tons, they have just moved from quarter to quarter.

Okay, then on gross profit per ton for potash, we’ve seen over $100 past few quarters. Is that kind of like the new run rate just given where pricing is, where costs have come down? Should we be kind of thinking about that as the new run rate going forward?

Yes, that’s probably fair, although very subjective in relational to pricing. So, just make sure you’re keeping that in your model. We have every indicator that pricing is going to remain strong, but in the event that something happens in the second half is being indicated by some of our other peers and competitors that will have an impact.

Okay. And then a last quick one. In terms of freight expenses, are you still expecting sort of higher freight expenses in the second quarter, kind of similar levels to the last couple of quarters?

Yes. I would say that’s right. As our mix changes, we have few fluctuations, but in terms of quarter-over-quarter, we don’t expect any major variations. Mark, I don’t know if you can touch on it from an availability perspective?

I think this is – the one thing I would add is that our freight mix will change a little bit into the second quarter as we – first quarter, we sent a little bit more product via rail, particularly, to fill similar warehouse and advance this season. As we move into the second quarter, some of that shift will be more into the truck side of things. Ones we have seen with some of the inclement weather is these amplitudes of extremely busy times with maybe a day or two in-between there where the – some trucks become available. So, we’re well positioned right now, as we move into the second quarter to take advantage of some of those opportunities on the truck side of things.

I will add though, Jeremy. As mentioned in the prepared remarks, we are planning international shipment in Q2. And as you are well aware that bears some additional freight expense. So that will be the thing that changes from year-to-year or quarter-to-quarter.

Got it. Okay, great. Thank you.

[Operator Instructions] Our next question comes from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

Good morning. congratulations on a strong start to the year. For the MLP business for the Moab side specifically, can you talk a little bit about the dynamic of producing salt versus potash, and what the changeover looks like in terms of compaction in layout and that’s – kind of how many days did you take down and how is that going to impact production of potash as we look out to the rest of the year?

Well, we have the opportunity to how we run it. We have the opportunity to either run potash or run salt, and given that we have as you know, that’s evaporation system out there, we’ve got the opportunity to run extra salt there, if that makes sense. I’ll let you Hugh sitting here...

Yes. This is Hugh Harvey, and Bob, that’s pretty right. We typically harvest up until anywhere from mid-April to mid-May out of Moab and we can add extra weeks of harvesting on to produce additional salt. So that potash and salt mix varies year-over-year depending on that salt market program.

What’s been good is that we’ve hired a designated salt salesman. and so we’ve seen our markets expand as we sell salt into a variety of a much greater diversity of markets that we’re selling into today, everything from road salt to water softener salt, animal feed salt. We’re just really ramping up our salt sales opportunities by having a direct salesman that does nothing, but salt alone and we produce salt at all three of our facilities – at four of our facilities.

And to just to add a little color on that, our salt sales increased year-over-year almost by 90% with $3.3 million in Q1 of 2019 versus $1.8 million in Q1 of 2018.

Okay. I guess just going back to some of the commentary last year on the production – on the evaporation grades. If you took the time in Q1 to run some of these extra salt base, I mean it sounds like that’s additive to the potash production that we should see kind of in Q2 or maybe into Q3 from the harvest on that. Is that the right way to think about it?

No, not really. The amount of potash we produce is basically fixed and then the salt is a byproduct stream that we can ramp up or turn it back into our production recycle. So, it’s really a matter of adjusting the salt, but the potash is pretty fixed.

In terms of when that fixed potash production flows through, we would see it later than it would have been normally kind of in Q1 for some of that?

Yes. That’s true. It would carry into Q2.

We have flexibility to carry some into Q2. That’s right.

Okay. And then Joseph, just – what was the commentary you made earlier on pricing in terms of Q2 or it sounded like you made something on the back half of the year?

The only thing I made relative to pricing was the note that we were going to have a shipment, an international shipment of Trio. That’s the only thing I really talked about pricing, and I said earlier, we expect pricing to remain stable as far as we know right now.

I thought you said something about MLP pricing, or I guess, just what is sort of now that you’re more than halfway through Q2 sort of where is pricing – I mean, actually, Q1 was very strong for you. So that’s why I am asking.

No. We believe it to be stable for the rest of the year, Jason.

Okay. and then just looking at the Oilfield Services piece, I think there’s still some confusion. When you take that division, if you separate, I guess, the true services from the fresh water and some of these geographies like, Bob, you had mentioned the Powder River Basin versus just the Permian Basin, where I think there’s obviously a lot of excitement going on in the market. When you just look at fresh water sales in the Permian Basin and you kind of look back to the last couple of years versus look forward a couple of years, I guess how did those two compare to troughs, where should it remain consistent from the growth you’ve already seen or has it kind of been building up around you with some growth, but almost still additional growth or even a hockey stick maybe from here? How do you kind of just look at that freshwater piece in the Permian?

I would say a pseudo hockey stick. I think it’s just getting started. And so when we meet with the XTOs or Exxon to the world, Concho, EOG, Devon and we begin to look at their drill – their multi-year drilling schedules and completion schedules, it truly feels like these plays are just starting, they’re not even in a mature stage. And the wells that are producing are just coming on in increasingly higher levels. So, the technology continues to improve and we see it as just the beginning.

Okay. And just last question from me. You described the physical presence in Southern New Mexico and I think you said water infrastructure system that’s now kind of covering the entirety of the Delaware shelf. And I think last quarter, you sort of alluded to sort of seeing that physical presence in terms of maps and maybe some new corporate presentations or stuff. Is that still something we should be expecting over the next – in the fourth quarter?

Absolutely. Yes.

Okay, great. Congrats.

Thank you very much.

Our next question is from Jon Evans with CG Capital – SG Capital, pardon me. Please go ahead.

Can you just give us an update on your outlook for the contract you have with your largest water customer? I know it’s ramped slower than you anticipated, but you’ve been able to continue to receive the cash. Do you think you’ll be more in line this year with the cash received from a revenue recognition or is it just too tough to discern?

We meet with them quarterly and so we get ever-changing quarterly forecasts. So, I think at some point, when they get all the frac crews into the Carlsbad area and the Hobbs area that they want, and they can hit the go button, I think we’ll see a much – we’ll see everything catch-up and get more in line. And so there’s still a certain number of frac crews that aren’t physically located in the Carlsbad area. And so we all used to focus on the rig count, but now, you really look at frac spreads and frac crews, and who’s got what in what location. So, it’s constantly a moving target, but that’s why we spend so much time in Midland with all of our customers. If you just think about where we were 18 months ago, we had virtually zero presence in terms of calling on – the most states of oil companies that we’re calling on and dealing with, and now we’re down in Midland every week meeting with the different groups. So, I think – as they get their – the plants move around a little bit, I think as we develop, number one, more customers, it will even up and especially with the one contract, it will catch up.

Okay. Thank you so much.

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

We just want to thank everyone for taking the time to join us. Thank you for your interest in Intrepid and have a great day. Thank you very much.

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