Intrepid Potash, Inc. (IPI) Q1 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Matt Preston, Vice President of Finance. Please go ahead.

Thanks, Ariel. Good morning, everyone. Thanks for joining us to discuss Intrepid's first quarter 2021 results. With me on the call today is Intrepid's Chief Operating Officer, Brian Stone. Also available to answer questions during the Q&A session will be our Vice President of Sales and Marketing, Zachry Adams; our CEO, Bob Jornayvaz, is currently navigating the complex quarantine system in Australia to visit his newly born granddaughter, is unable to join the call today. Please be advised that our remarks today, including answers to your questions, include forward-looking statements as defined by U.S. securities laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. These statements are based on the information available to us today, and we assume no obligation to update. These risks and uncertainties are described in our periodic reports filed with the Securities and Exchange Commission, which are incorporated here by reference. During today's call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. I'll now turn the call over to Brian.

Thank you, Matt, and good morning, everyone. Intrepid's first quarter was highlighted by robust performance in the fertilizer segments as strong demand increasing prices drove significant increase in bottom line results compared to the prior year. We recorded first quarter adjusted net income of $2.5 million and adjusted EBITDA of $12.9 million, an increase of $4.5 million and $4 million, respectively, compared with the first quarter of 2020 and much better than the pandemic-related losses from the second and third quarters. Cash flow from operations was a robust $19.1 million in the first quarter, and we expect that this will continue into the second quarter. We ended the first quarter with approximately $36 million in cash and eagerly await the SBA to give us some guidance and when the proposed PPP forgiveness process might restart given our 100% usage directly to payroll-related expenses. Our fertilizer and nutrient business led by strong global agricultural commodity prices and slightly weaker dollar, continued momentum from the fourth quarter as demand for potash and Trio exceeded our forecast in the first quarter on both realized price and volumes. As a reminder, our posted price for potash is now $140 a ton above summer fill level while our Trio prices currently posted $80 per ton higher than summer fill value. Customers remain eager to secure volumes, and we are fully booked on potash and Trio through the second quarter. We are currently allocating our Trio premium and Trio granular deliveries and hope to see this tightness result in stronger performance. MOP pricing in Brazil has moved up $55 a ton over the last 60 days and now sits at a $15 per ton premium to U.S. NOLA barge market. This combined with the renegotiation of a standard potash Indian contract, from $247 a ton to $280 a ton, support stability and strength heading into the second half of the year. Reports from the field are that strong early season application levels and increased nutrient rates have depleted inventories on all nutrients, including potash and Trio, much quicker than expected. The prospect of any product carryover after heavy buying since last fall now looks unlikely across U.S. market. We believe that strong commodity values will lead to good farmer income supporting another strong fall application season if weather and harvest schedules to operate. Oil commodity pricing continues to be supportive of Dutch well completions and new well development. We have seen rigs, frac crews and approved permits consistently throughout the first quarter of 2021. During the first quarter, we also sourced water from third parties to supplement our own water rights to meet increasing water volume requirements of operators on our South ranch, which increases margin as we continue to optimize our water book. As the oilfield outlook improves, we expect water sales will continue to grow through the back half of the year. We hope to have our multiyear Pecos litigation resolved in the next 120 days as the trial ended in December, and all briefing was finalized in April, which will allow us a much clear and wider runway to diversely serve our customers. We continue to pivot to ESG-friendly full-cycle water management systems that we described in our last earnings call. In the first quarter, we've invested in additional recycling equipment, infrastructure and resources as we expand on the full cycle water management products and services demanded by customers in the Delaware Basin. We are fully equipped for our first recycled job and have acquired major long lead time components for additional jobs, #2 and 3. We plan to have our first unit in place, hopefully anchored by a service contract with a large producer toward the end of the second quarter. This initial operation will be able to recycle approximately 75,000 barrels per day with additional recycling units in service in the third quarter. As operators, regulators and politicians increasingly focus on environmental and sustainability goals, full cycle water management includes source water, recycled water and produced water handling will continue to become a central focus of our oilfield services segment. In addition to our source water and increasing recycled capabilities, we have significant brine water sources near our operations that have the potential to supplement the increasing needs for long lateral multistage fracs. As we first mentioned in our last call, we had hoped to have an Analyst Day soon after our fourth quarter call but delayed a bit as COVID vaccinations ramped up in Colorado. We now expect to host an Analyst Day call in mid-June, and we'll announce a final date and attendance information soon. And now I'll turn the call back over to Matt for a review of our financial results and outlook.

Thanks, Brian. As Brian noted earlier, potash demand exceeded our expectations in the first quarter with 117,000 tons of potash sold at an average net realized sales price of $282 per ton, supported by rising commodity pricing and continued strength in our specialty feed and armory markets. Strong demand has continued into the second quarter, and we expect to sell between 85,000 and 90,000 tons of potash in the second quarter, bringing our first half volumes to over 200,000 tons and well above prior year levels. With good demand continuing, we have booked more tons at current posted prices and now expect a second quarter average net realized sales price of between $300 and $310 per ton. We expect continued robust demand through the second half of the year as a combination of strong commodity pricing, rising potash prices in international markets and limited supply likely set a solid floor in the U.S. market for the next couple of quarters. Our Trio segment saw equally great early season demand. Total sales volume was 69,000 tons was down slightly from the year ago period, but our first quarter 2021 sales were heavily weighted in domestic markets as we see the benefits of our expanding warehouse footprint and reliable supply. Our posted price is up $80 per ton compared to the summer fill levels, and we are fully booked through the second quarter. Accelerated demand increased our first quarter average net realized sales price for Trio to $233 per ton, and we now expect second quarter average net realized sales price of between $235 and $245 per ton. Total water sales were similar to the fourth quarter of 2020 with $5.5 million of sales, including byproduct water. As we noted on our last call, record cold weather slowed us down a bit in the first quarter, although we continue to see strong demand and increasing rigs, crews and permits in the Northern Delaware Basin. First quarter margins were pressured as the majority of our sales were on our South ranch, which generally has a lower margin than our other water sources. And we also required a significant amount of third-party water to meet the refresh rate requirements of fracs in Q1. Our debt position remains at $55 million outstanding, of which $10 million relates to PPP loan. With improving earnings, the availability under our credit facility increased to $35 million at the end of the first quarter. Cash flow from operations improved to $19.1 million and capital investment was $2.4 million. We still estimate 2021 capital investment of between $25 million to $35 million of which $12 million to $15 million will be sustaining capital with the remainder as potential opportunity capital projects. We continue to have significant discretion over our opportunity capital investments in 2021, and we may adjust our investment plans as the year progresses. With a strong early start to the spring, our cash position today is $48 million with no change in our outstanding debt from quarter end. That concludes our prepared remarks for today. Operator, we're ready to take questions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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