Welcome to the Intrepid Potash Inc. Third Quarter 2019 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead.

Thanks, Steve. 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 is also available for questions. I'll now turn the call over to Bob.

Thank you, Matt, and good morning to everyone. We executed well again this quarter, delivering double-digit sales increases across all of our business segments, inclusive of a 54% increase in water sales compared with the same quarter one year ago. For our Potash and Trio segments, we successfully captured summer fill sales as customers look to replenish soil nutrients after delaying purchases in the first half of the year that saw a record wet weather and flooding throughout much of the United States. Overall, we believe we are well-positioned to capture opportunities as they arise through the diversification of our revenue stream. Our Oilfield solutions business continues to perform well against our expectations with the addition of Intrepid South and our joint marketing agreement with NGL to our operating portfolio, we are able to deliver a 28% increase in water revenue including byproduct water sales compared to the second quarter of this year. Sales from other revenue streams of caliche of produced water disposal royalty rights of way easements and surface use agreements also increased this quarter yielding 58% more revenue than they did in the sequential second quarter. Further, the area in which we operate, the Northern Delaware Basin remains strong, despite the pullback in frac activity elsewhere in the Permian Basin. As we look at the business today, we are confident in our ability to continue to deliver steady volumes in Q4 based on planned completions in the area. We currently expect water sales to be between $25 million and $28 million for 2019. We have accelerated our capital investments and expenses incurred by third-parties in and around our soft facility as we work to optimize our infrastructure and mobility around the property and establish long-term relationships with our operators. Through these investments, thus far, we believe we…

Thank you, Bob. And I'd like to add my congratulations to Matt, and thank you everyone for joining. During the third quarter, we delivered a 24% increase in sales, driven by higher realized prices, higher volumes and increased sales of water and byproducts. Net loss for the quarter was $200,000 as margins contracted driven by below-average of operation across our facilities, which increased our per ton production costs. Increased costs associated with delivering water and the lower of cost or market adjustment related to Trio as we chose to lock in an international shipment for the fourth quarter. Our potash segment generated $4.6 million in gross margin during the quarter, down 35% compared to the prior year. This was a result of several factors, including sales mix changes higher production costs related to a wet evaporation season and reduced magnesium chloride production in sales as a result of August rains at our Wendover facility. Potash sales volumes were up during the quarter, following a successful summer fill program as agricultural customers expressed interest in replenishing soil nutrients after the wet spring offset by lower industrial sales. As Bob mentioned, we expect fourth quarter potash prices will remain similar to the third quarter. Our solar solution mines began production in August and early September as planned. Although we anticipate production will be lower this year as a result of the significantly wetter and cold weather during the 2019 evap season. As a result of the lower production, we will push some sales from the fourth quarter of 2019 into the first half of 2020, as potash demand strengthens in the key spring selling season. For the Trio segment, sales increased 35% primarily due to increased pricing and the strong subscription to the summer fill program after the wet spring. In addition,…

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

Hi, this is Bria Murphy on for Joel Jackson. Thanks for taking my question. So in oilfield solutions, you alluded to in your prepared remarks but margins are clearly pressured in the quarter on higher third-party delivery costs. Can you quantify the exact margin impact in the quarter and how do you expect these transit costs to play out in 2020? Thanks.

Well, as we tried to make clear in our remarks by building out the infrastructure, we won't have the need for third-party transfer costs anywhere near to the degree. Those costs can be anywhere from $0.10 to $0.60 depending upon which operator and how far you are trying to go with that specific sale. And so as we put together the 3 ranches, the 2 branches of NGL's and ours and entered into a multi-year contract with an operator down there. We had to bring on a third-party water transfer service to help us make that first piece of that long-distance water haul. I can't give you an exact number but Matt can get back to you with that exact transfer cost for that. But the good news is that's a multi-year relationship and so it was worth the initial upfront investment to use a third party water transfer, as we've built out our own infrastructure to be able to capture higher margins in the second and third years of that water contract.

Okay, thanks. And then just switching to potash quickly. Some of your competitors have spoken about higher potash channel inventories. And I know you spoke about some of this in your prepared remarks, but what are you currently seeing and how do you expect this to play out through the year-end and into 2020? Thanks.

I'm sorry, I'm not sure I understood your question. You talking about our potash inventory or you're talking about global potash inventory, how we see the global potash market?

Exactly, yes.

Well, I think, now that we have India behind us. As you know, the fall of 2018 was less than optimum. The spring of 2019 was terrible in terms of applications. So if you look at the -- just the simple mathematics of the soil nutrients required and the production capacity that's been taken offline, I think there is approximately 3.3 million tons offline. Supply and demand should be much closer to being back in balance. And given some of the remarks that we've heard from our competitors, they intend to strive for higher pricing, and so as a price-taker we intend to watch and see what happens in the market, but I think there is good tailwinds. And if you were to look at a variety of crops globally, as you know, we've been in a secular bear market for quite a while and there are several crops trying to pop their heads up and come out of that secular bear so we'll see.

The next question comes from Mark Connelly with Stephens Inc.

Good morning, this is Joan Tom on for Mark. A couple of questions here, first off for Potash, I'm just wondering how the weather impact is going to roll through your earnings over the next couple of quarters?

Hey, Joan, this is Matt. You can see the results in Q3 just on the segregation of revenue table where it relates to just the mag-chloride production and the sales we were able to achieve in the quarter and a lot of it will just depend on evaporation starting in the spring of 2020. We'll certainly be down here for Q3 and Q4, just due to tons available for sale.

And then, for your Trio business, I'm just wondering, is your decisions on the international Trio sales in the fourth quarter, is it a decision to stop trying to expand like Trio overseas over the long term, or is it just like a one-time market adjustment?

Well, as we've described many times before, we've done a great job of expanding our domestic footprint and our netback is domestically or significantly higher. So, I'm not going to say we're giving up on it, but as you know, there's going to be an increase in freight rates, starting January 1st, due to different fuel requirements. So, we were able to get a good fuel rate to restock our Port Klang warehouse and given the present value calculations that we went through to ship it now, versus ship it later at a higher fuel cost, it made more sense to go ahead and re-stock that inventory, so that we would have plenty of product for Southeast Asia and our Chinese customers. I don't say we're abandoning the market internationally, but it's got extremely competitive and we have found better ways to capture higher netbacks, and we'll leave some of those lower netback sales to others.

Okay, got it. And then, obviously everybody is looking at news and we know that you sell quite a bit in California. Just wondering, if the fires that are happening right now in California would have any meaningful impact in your demand or potential demand even for the spring next year? Thank you.

Joan, this is Mark. Just a quick simple answer. No.

Thank you.

[Operator Instructions]. The next question comes from Josh Spector with UBS.

Yes, hi. First congrats, Matt, on the new role. And for the question, you talked about pressure on water pricing in the quarter. I was curious, if you can give kind of a magnitude of how large that was percentage wise, how big that was? And in your opinion, what leads that to turn to improve, or do you assume that pressure continues on into the guidance that you gave in 2020?

There are so many factors at work. Let me take a stab at naming just maybe four or five of the different factors. There is a fair amount of water that has begun to come across from Texas and New Mexico has decided that it's going to attempt to regulate that water. And whether not that water continues to come across from the State of Texas, there have been several Supreme Court rulings on whether or not that water needs to be permitted in the same fashion that our water is permitted. Given the New Mexico's an appropriation state and Texas as a rule of capture state. That's one factor that will have an impact on it. The second factor is, there have been a couple of people that tried their entry into the water business and recycling business and if you look at recycling as a stand-alone without produced water, that's why we're so focused on being on the produced water. We had some new entrants into the water and recycling business. Recycling by itself, unless you're doing it on a fee-basis, is not commercial. We saw people come and go, there are several other factors that have to do with water availability, excess water that was available due to reduced frac schedules. So, there were certain parties that had some excess water that chose to fire sale some of their water because some of the smaller to mid-sized companies that are equity back -- our equity backed E&P companies chose not to execute on their budgets. So there were a variety of factors that influenced pricing. To give you an order of magnitude, in some cases, up to the north, it was a nickel the $0.07, down to the south near the border, it was anywhere from $0.35 to $0.40, so the water is dynamic and iterate depending upon where your infrastructure is located and your water resources are located within the Northern Delaware. So I hope that just gives you a feel for not only the complexity but the moving parts that impact the price.

That's definitely helpful, definitely more complicated picture around that, so I appreciate the color. And just on the CapEx side of things, I mean, it's helpful you gave the number for 2019. You talked about a number of investments. What do you consider kind of the ongoing CapEx number that you'd look out for the next couple of years to help maintain your growth and invest in the business?

Are talking about sustaining or opportunity Capital?

I guess it's both, I mean, if you could give us sustaining number and then there is a number of projects that you know you need to spend or you are spending on to achieve your water guidance for 2020, curious what that number is and just maybe the range between what sustaining and maybe some ongoing modest growth would be on top of that?

Well, to be clear, a majority of that CapEx on the water side is on the produced water side. As we grow our produced water business, which has a much longer tail on it. and those are investments that we're making alongside NGL in our produced water side of the business. So there is very little capital directed towards what we would call the source water into the business or the first part of the water business. That infrastructure is largely in and been paid for. So the great part about spending money on the produced water side is that you have a ready market so it generates revenue literally from day one. On the sustaining side, our goal is to keep it in the $15 million to $18 million range and then be very conservative -- just watch what's happening in the markets. There are a couple of small acquisitions that are highly synergistic and bolt on what we're doing that if we pursue we would pursue with NGL. So we are very cognizant of our potential capital budget and we said that in our prepared remarks and I hope this is enough information to answer your question.

[Operator Instructions]. The next question comes from Jason Ursaner with Bumbershoot Holdings.

Good morning. The third-party logistics that weighed on the third quarter is the fixed the [indiscernible] infrastructure investments. Is that already in kind of the math you brought in the slide deck on the water months ago or is that additional work to what we have seen?

I would say very little. As you know, we acquired the ranch in May. We had some immediate -- we were able to take on one immediate 3-year contract. And that company was farther north upon the McCoy Ranch or the NGL North Ranch. And so in order to get water up to them in the first year, we had to use a third-party transfer service to get water up to them. We are building our own infrastructure right behind it, most of which has been built, that will allow us to service that customer over the next couple of years. So we felt like it was definitely worth the reduction in margin to capture a three year contracts. So the next two years should be highly profitable as it relates to that specific operator.

Okay. And was that one contract the bulk of the third-party transfer or there was also kind of a bunch of smaller ones that [indiscernible].

As we talked about in prior calls, going from what we call the back into the go to keep it going from the NGL South Ranch to the Dinwiddie Ranch, which is called the Intrepid South Ranch, that was previously serviced with years old lay flat pipe that we needed to get that transfer up and running if we built our own pipe. So as we brought it into third-party transfer company to use new sufficient pipe to make the transfer -- the multi-mile transfer from one pit to another pit, in service, the contracts on the west side of the facility, we did that and at the same time, we are building our own infrastructure right behind it.

Okay. And the $32 million to $45 million number, that's just for water sales or that's the entire Oilfield Services segment.

That's just water. That's our conservative first look at what we think we can do in 2020.

And just given the frac schedules and completions, I realize that the Northern Delaware there are less challenge and maybe some other areas, but just given that they are at least at a high level from what people read in the news or challenge, what's causing that big increase, I guess is just the Intrepid South coming together or is there other specific customers that are causing that increase?

Well, there are several things that we think will increase that. First and foremost is the addition of Intrepid South and how we're going to manage Intrepid South. The second part, are the pipelines that we've laid from our Caprock water down to our Pecos water to supplement those sales on the completion of the select JERA pipelines and the JERA frac ponds, one, two and three, they are all complete. So as we put out our water presentation, it's the completion of that overall infrastructure within the Northern Delaware, that we fit in, that is now finally complete along with the produced water infrastructure that's largely complete. So that companies like XTO can hit the go button on some of their drilling plans. We've tried to focus on the larger mid-sized companies and the major oil companies that have given us frac schedules, who suggests that they would drill through a lower priced energy cycle. Now, if every mom-and-pop chooses to drill and frac through whatever cycle we may have, then we can do better. And so, but we wanted to give a very realistic achievable range based on the completion of the overall infrastructure -- overall infrastructure, so you've got to look at not only as a major operator goes out and increases their frac crew count, they've got to also have the saltwater disposal infrastructure in place to take care of that produced water. So as we look at the various consolidations that have occurred, the infrastructure that's been built out the handle produced water, the infrastructure to handle fresh water, the takeaway capacity for oil and natural gas. The New Mexico is trying to implement no flaring rules. So there is more natural gas piping going in. So when we look at takeaway capacity and the reduction in the basis differential. There is just a whole variety of things that would lead us to believe that large-size or the larger midsize independents and the majors will execute on the budgets and the forecast that they've given us.

Okay, great. And just last one from me. Any -- I guess, the rig counts in the Mexico seems like they're kind of staying very steady relative to some of the other basins. But I guess, just overall, maybe some of your take on the Northern Delaware specifically compared to maybe general news about energy and fracking and what's going on with lateral lengths there. I guess just there has been [indiscernible].

The Northern Delaware continues to be the bright spot in the United States oil and gas exploration without a doubt, some of the biggest wells completed and producing in the United States or in the Northern Delaware. So if we look at reduced rig count throughout the rest of the United States Lea and Eddy County continue to stay strong. Now, the frac crew counts have gone down a touch. And so we have to pay attention to the frac crew availability as you know the number of docs has increased in our backyard. So as we watch the rig count at Lea and Eddy County, we watch the ever increasing docs. We pay attention to it, but as you pointed out, Jason very well, those are moving targets. So to give you an exact example as to what's going to happen in 2020 there is a fair amount of variability, but the great news is in the Northern Delaware is the primary operators are XTO/Axon, EOG, Chevron, Occidental, Devon so some of the larger midsized oil companies as well as the majors. So those are the guys that we would like to have drilling in our backyard.

This concludes 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 interest in Intrepid. And if you have any questions, comments or concerns, always feel free to call Matt Preston. And we look forward to talking to you in the future. Thank you again.

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