CF Industries Holdings, Inc.

Q1 2023 Earnings Conference Call


spk09: Good day, ladies and gentlemen, and welcome to CFIndustry's first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. We will facilitate a question and answer session toward the end of the presentation. To pose a question at any time, please press star then one on your touchtone phone. I would now like to turn the presentation over to the host for today, Mr. Martin Jarosik with CF Investor Relations. Sir, please proceed.
spk11: Good morning, and thanks for joining the CF Industries Earnings Conference Call. With me today are Tony Will, CEO, Chris Bone, CFO, and Bert Frost, Senior Vice President of Sales, Market Development, and Supply Chain. CF Industries reported its results for the first quarter of 2023 yesterday afternoon. On this call, we'll review the results, discuss our outlook, and then host a question and answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website. Now let me introduce Tony Will, our president and CEO.
spk07: Thanks, Barton, and good morning, everyone. Yesterday afternoon, we posted results for the first quarter of 2023, in which we generated adjusted EBITDA of $866 million. Our cash generation remained strong, and on a trailing 12-month basis, our free cash flow was $2.3 billion. These results reflect continued outstanding execution by the CF Industries team. We ran our plans well, leveraged our logistics and distribution capabilities, and most importantly, worked safely. At the end of the quarter, our 12-month reportable incident rate was 0.33 incidents per 200,000 labor hours. significantly better than industry averages. While last year's unprecedented pricing environment has moderated, global industry dynamics remain favorable. Global nitrogen demand that was priced out of the market last year is returning, driven by the need to replenish grain stocks. At the same time, forward price curves suggest that energy spreads between North America and high-cost producers in Europe and Asia will continue to be significantly wider than historical averages. As a result, we expect to continue to generate substantial free cash flow. This will enable us to both invest in growth and return capital to shareholders. In line with this, we are pleased to have reached an agreement to purchase Insutec Pivot's ammonia facility in Wagman, Louisiana. The Wagamon facility offers us a newer, highly efficient ammonia plant that we expect to enhance through improved uptime and asset utilization. This acquisition is the latest step in our drive to provide shareholders with greater participation in our business and access to superior cash flows, as is shown on slides 6, 7, and 8 in our materials. The facility will fit seamlessly into our network and increase our capacity to meet demand for decarbonized ammonia as a clean energy source. once we have implemented carbon capture and sequestration at the site. We believe the demand for low-carbon ammonia will provide a robust growth platform for the company in the years ahead. We have made a series of disciplined investments alongside partnerships and collaborations with global leaders in order to be at the forefront of producing decarbonized ammonia as a clean energy source. With that, let me turn it over to Bert, who will discuss the global nitrogen market conditions in more detail. Bert?
spk13: Thanks, Tony. Over the last year, the global nitrogen market has continued to change rapidly and in dramatic ways. At this time in 2022, global energy prices reflected the shock and uncertainty brought on by Russia's invasion of Ukraine. There were fears that Russian fertilizer exports would be locked out of the global market, and we entered a period of substantial production curtailments and shutdowns across Europe while China restricted urea exports. Today, Global energy costs have moderated and global operating rates have risen. New capacity, delayed by the pandemic, ramped up production. Other than ammonia, Russian fertilizer exports have returned to near pre-war levels as willing buyers have continued to take the discounted product, especially in the United States and Brazil. And global fertilizer trade flows have largely adjusted. As a result, global nitrogen prices have fallen from 2022 highs. This helped lead to a first quarter of 2023 that was marked by lower than typical global buying activity. Agricultural purchases in North America took a wait and see approach as global nitrogen values fell and weather patterns did not support an early spring. Several large importing regions were essentially absent from the market during the quarter as well. Most notably, this included India, which only had one Urea tender during the quarter, in large part due to higher domestic operating rates. Additionally, European purchasers slowed import activity in the first quarter after securing substantial imports in the second half of 2022. Lower global nitrogen prices have triggered a rebound in demand from less affluent regions of the world, as you can see on slide 13, offsetting some of the impact of lower purchasing from large importers. CF Industries was well prepared for this environment, having entered the year with a strong order book. As demand in North America held off, we leveraged our distribution and logistics capabilities during the quarter. This included capturing superior netbacks available from exports, as well as positioning product at our distribution terminals for the spring application season. As a result, we had a more open order book heading into the second quarter than usual. We have managed this well as the North American spring application season kicked off recently. Pricing in North America has risen as demand emerged, and all products started moving at a more normal rate. We expect this to be an active fertilizer season, application season, in 2023, with corn acres in the U.S. expected to be up about 5% and wheat acres up around 9% compared to 2022. Income at the farm gate in the United States and Canada is historically high, underpinned by an extended period of low grain stocks-to-use ratios, supporting high crop prices, as you can see on slide 9. We continue to believe that this will take two growing seasons at trend yields to replenish global grain stocks. This should support agricultural-led demand as growers seek to optimize nitrogen applications and maximize returns. That said, over the next seven to eight weeks, the entire value chain will be walking a logistics tightrope due to the purchasing delays. And with that, let me turn the call over to Chris.
spk14: Thanks, Bert. For the first quarter of 2023, the company reported net earnings attributable to common stockholders of $560 million, or $2.85 per diluted share. EBITDA was $924 million, and adjusted EBITDA was $866 million. These results reflect the impact of realized and unrealized losses related to natural gas derivatives. As you know, we typically engage in hedging activity during the winter months, to de-risk our exposure to shocks in the natural gas market, such as those that occurred with winter storm Yuri in 2021. As our winter hedges rolled off, we purchased natural gas at market prices during the second quarter. As we worked through higher cost inventory produced in the first quarter, we expect natural gas costs and our cost of goods sold to decline significantly. Looking ahead to the rest of 2023, We continue to expect approximately 9 to 9.5 million tons of gross ammonia production and $500 to $550 million in capital expenditures. With more than $2.8 billion of cash on the balance sheet, we are prepared to fund the cash portion of the Wegman facility purchase price. We have begun the regulatory approval process with the U.S. government, but cannot predict when it will be complete. We remain focused on discipline investments in our clean energy growth platform to meet the demand that our MOUs with Jarrah and Lotte indicate is emerging. Our blue and green ammonia projects at Donaldsonville are progressing towards their respective start-up dates, and the feed study for our proposed joint venture with Mitsui is advancing as well, and we expect to make a final investment decision later this year. Even with this activity, Our capital requirements for the year are modest compared to our cash on the balance sheet and our outlook for robust free cash generation. As a result, we expect to continue to return substantial capital to shareholders. Over the last 12 months, we have returned more than $1.3 billion to shareholders through share repurchases and another $320 million through dividends. With that, Tony will provide some closing remarks before we open the call to Q&A.
spk07: Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF for all that they did during the first quarter of 2023. Their commitment to safety and outstanding execution continued to drive our company's performance. This is an exciting time for CF Industries. Global nitrogen market conditions, coupled with our network and operational expertise, support our outlook for superior cash generation. We are excited about the value that integrating the Wagman facility into our network will offer, and we have positioned the company at the forefront of global decarbonized ammonia supply, bringing together our expertise in ammonia production, enhanced by partnerships and collaborations with leading companies such as Jera, Lotte, Mitsui, ExxonMobil, and Nextera. Taken together, we are well positioned to increase our free cash flow generation and and grow shareholder participation in that free cash flow, enabling us to continue to build on our track record of creating substantial long-term value for shareholders. With that, operator, we will now open the call to your questions.
spk09: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. To withdraw from the question queue, please press star, then 2. The first question is from Adam Samuelson with Goldman Sachs. Please go ahead.
spk03: Yes, thank you. Good morning, everyone. Good morning, Adam. Good morning. So, Tony, Bert, I guess this is actually a bit more of a longer-term question. And certainly, as you look at your own activity on the blue and green ammonia side, you've got a number of MOUs and projects that are kind of in various stages of development approaching FID. There's been a slew of announcements similar to your own in North America over the last year, and I'm just trying to get your kind of current perspective on the demand growth, especially the demand growth outside of traditional fertilizer channels that you are looking at as you think about 25, 26, 27, 28. Do you think that that demand is going to come in commensurate and consistent with some of the potential capacity that's starting to get put into the market, or is there how do we think about the ammonia market surplus balance through the later parts of the decade?
spk07: Yeah, I mean, I think that's an excellent question, and there's certainly a lot of uncertainty out there. I would say the one thing that gives us great optimism and comfort right now, Adam, is the fact that a lot of the agreements that we have put in place and the discussions that we're advancing are are with end users that are actually going to be consuming the product for a clean energy source. So whether it's Jera, Lotte, or a number of others, they are ultimately the end users of that product, and they're pretty far advanced in terms of their thinking and some of the pilot projects they have run on co-combustion and so forth. So we feel pretty comfortable that the demand is going to be developing Our sense is that it's probably going to start developing in larger kind of increments as we get into 27, 28 timeframe. But by the time we get to 2030, you know, I think there will be a sizable volume of ammonia consumed in nontraditional applications as clean energy sources. Whether or not the pacing of some of these projects you know, exceeds or lags that I think is to be determined. I think there's a lot of question in terms of some of these announcements. How real are they? And are they actually going to go forward? And are people going to be willing to put the money down? You know, what we saw back in 2012 was something like 26 or 27 announced new projects in North America that of which only four of them got built, two of them by us, two other ones, and all of them were built by, you know, traditional industry participants. So a lot of the speculative plants that were talked about never materialized. And I would expect that same dynamic to happen here. But, you know, I think it's an excellent question. One of those things that we are evaluating and thinking about. And, and one of the things that I'm also excited about is the, you know, the Wagman, um, acquisition gives us a lot of flexibility in terms of how we think about continuing to grow our own decarbonized ammonia platform base, uh, and, and different levers in terms of how to, to achieve that while, um, you know, while, uh, having, um, the same kind of S&D balance in the industry and not overwhelming kind of the marketplace. So I think we're in a really good position. I think North America is clearly the place where these projects will get built and should get built, both because of the huge natural resource base, access to low-cost natural gas, but also the ability to do carbon capture and sequestration and the incentive structures in the 45Q. So, you know, more to come, but I think there's a lot of vaporware announcements out there right now.
spk03: All right, that's very helpful. Thank you. And if I just have a quick follow-up near term with the Wagaman getting funded out of cash on hand this year, how do we think about kind of Buyback pace from cash flow is light in the first quarter. I imagine you might have been blacked out for part of it because of the Wagman kind of transaction. But how do we think about cash return with Wagman going out the door?
spk07: Yeah, you're absolutely right. The first quarter was heavily influenced by the fact that we were in pretty advanced conversations for most of that quarter, and therefore we were blacked out from being able to do buybacks. And then we were able to kind of jump in after the announcement went out the door and participate a little bit. You know, I think we feel very comfortable about the amount of cash generation that we expect through the balance of this year, plus a sizable amount of cash on hand even after we consummate the Wagman purchase. And so, you know, we have a large share repurchase authorization in front of us that the board just put in place. But one of the things that we have seen is despite having what from a historical standpoint is a very strong Q1, including very strong cash generation, share price volatility that seems to trade on, you know, all kinds of other factors. And we're committed to taking advantage of those dips opportunistically in a way that really rewards our longer-term shareholders in a very substantial way. And so what you'll probably see is us diving in deeper and harder on the dips and less so you know, when we're trading relatively flatter. But I think taking over, you know, a year or two-year period, that should really disproportionately reward those that stay with us.
spk03: I appreciate all that, Keller. I'll pass it on. Thank you.
spk09: The next question is from Stephen Byrne of Bank of America Security. Please go ahead.
spk10: Yes, thank you. I'd like to better understand your own outlook for demand for nitrogen in both fertilizer and industrial markets, when do you anticipate that collective demand will warrant pulling that production in Europe back on stream, even if it's $15, $20 per million BTU? Do you anticipate that that demand could develop or is the reduce demand for nitrogen in some of the chemical end markets, basically eliminating that pull.
spk13: Good morning, Steve. This is Bert. And when you look at the outlook for nitrogen for 2023 and beyond, it's positive. As we've said, due to, on a fertilizer basis, the stocks to use ratio where we are and where we are structurally in the grain complex. With what we've lost in production in Argentina this year, and in terms of corn and what's not being either consumed or exported from Ukraine, it's a substantial portion of the world supply. Then you look at the Chinese demand, maintaining that 20, 21, 22 million metric tons of corn imports supporting the international market, we're structurally positive that it's going to take at least two years and possibly longer to refill that supply of grains. And so fertilizer demand should be very strong, and we're seeing that now recover in some of the countries that took kind of a purchasing holiday in 2022 due to high prices, Thailand, Turkey, some places in South America where demand is recovering quite substantially. And we're looking at additional acres in the United States, additional corn and wheat acres, so additional demand. Brazil's been very strong. We're anticipating probably close to 8 million tons of imports through 2023. They've only imported one to date, so demand ahead, as well as with India. So fertilizer should be, I would say, returning to its historical growth pattern of 1% to 2%, but probably greater in this year. And that's why I think you're seeing some of the price recoveries. Regarding industrial demand, we're still doing very well in terms of our industrial book. And it's diversified with nitric acid, ammonium nitrate, and DEF in North America. I think in Europe, you're going to see a little bit harder situation just due to the cost structure and the complications there. But I think that's what you'll see is imported ammonia helping to balance that supply. And we're looking at probably five to six, seven million tons of ammonia production capacity, either offline or curtailed. That's going to help support the whole industrial or the whole ammonia production globally as products move that direction. So we're structurally positive for this year and for demand on both industrial and fertilizer.
spk10: And then, Bert, maybe more near term, do you anticipate pricing in the Corn Belt, particularly in the northern plains that may be tied on supply with the river being closed? Do you expect premium pricing to come through in the remaining of this quarter? How much have you sold forward? And can you comment on any allocation out of your Port Neal plant that we've heard about?
spk13: So when looking at, that's the dynamic that we're experiencing today. The product is tight. Through the last several quarters, a lot of the inventory has remained with the producer side or in inventory with the producers. And retail took a holiday for at least two, two and a half quarters of purchasing. Well, when you need that product promptly for walk-up demand, which is where we are today, you need it today, tomorrow, the next day. And it is short and it is very tight. Then it's exacerbated by these river issues on the Mississippi with the lock closures and the difficulty to move product that may be in the Gulf up to the Midwest where it's needed. So, yes, we went on allocation in Port Neal. We're producing every day at maximum rates, but a lot of demand came in for maybe a 30-day window contract. A lot of demand came in wanting it in the first week of the month, and we're allocating that out on a ratable basis to treat all of our customers fairly. So product is tight. We don't believe there's going to be enough urea. We believe that it will have to be migrating for second and third applications to ammonia and UAN, and we're preparing for that with a positioning product throughout the system. And pricing has extended from the normal spread of NOLA, let's say, $30 to the Midwest. It's between $50 and $100 today, and it will probably go up towards the higher end as we get to peak applications. We're pleased with our order book. We demonstrated well in Q1 what we did, and our pricing reflects that. And we're equally happy with where we are for Q2.
spk09: The next question is from Joel Jackson of BMO Capital Markets. Please go ahead.
spk04: Hi, good morning, everyone. I have a couple questions. Just on your answer before, Bert, maybe Tony will chime in too. So we know that retail, as your own words, took a buying holiday for two to two and a half quarters. Can you talk about that some more? They did that, and it seems like they won out for a while. Maybe now they're not winning. But is that going to change your strategy going forward? What are the lessons learned from this year in many years of your career?
spk13: Yeah, I'm just a spring chicken, so I just have a few years on my career. But this has been an interesting year and a difficult year. I give a credit to the teams, the production team operating safely and the distribution teams managing our terminals well. our logistics teams of working with at times six to seven tows and at times 20 for moving product up the river, and then the export program with the vessels we've contracted and the work that goes into that. So a lot of dispersion of responsibilities and taking good decisions. But the retail sector, I think, as reflected, prices were falling. I understand that if they bought $500 UAN and the market is now $300 UAN, How do they price that to the farmer? And the farmer's reading some of the same materials, whether that's the publications or online. And so there's this standoff. What is an appropriate price at the retail level? What should the farmer be paying? And so, in effect, they said, I'm going to stop buying because the farmer stopped buying. And as does happen when there's an imbalance, prices fall, and they fell quite hard in Q1. Um, but eventually this was our conversation with a lot of our customers. You need to plan because it can take rail cars days to be loaded and move and to come back and to have a full cycle. Same thing with barges. And so that's where we are right now in a difficult situation on the retail side of, for the second applications are enough for the first and second and third applications. And so pricing has rebounded and we're now the highest price market in the world. And we think that's going to extend through to Q2. And then inventory will be drained, positioning well for Q3. So I think every year is different. And we've had overpurchasing, aggressive purchasing, probably in 2022 as a reflection of fear. And this year, a lack of purchasing as a reflection of anticipation of overabundance. And so, you know, I think We'll see how this year unfolds, but as I said in my comments, it's going to be very logistically challenged.
spk04: My second question is actually a two-parter. Is there any reason why Q2 earnings should not be higher than Q1? A lot lower average gas costs, maybe pricing down, but volumes higher. My second part of that is, Is there any reason why this year should be different than other years where Q3 pricing is typically lower than Q2 pricing? Any reason why that may not be the case this year?
spk13: When you're looking at Q2 versus Q1, we're still in the beginning of the game. If it's a nine-inning game, I'd say we're in inning three. And product has been moving. A lot of demand has been coming in for prompt shipments. And so I think it's a little hard to speculate on where and what But we're active in all fronts. We are exporting, we are moving product, and we are taking new orders. So I think Q2 will be positive. When you look at Q3, right, traditionally, we do have a reset period. Why? You're asking customers to hold inventory in North America for up to nine months. And that's something we work closely with our retail and wholesale customers to make sure we're properly priced against the import alternatives. helping our customers move that product ratably because we want to keep our plants operating and be in a good position for fall demand, which is generally ammonium, and then spring demand for the three major nitrogen products. So I think it's a little too early to go into Q3.
spk07: Yeah, the other thing I would just add, Joel, is that, you know, there's still basically eight weeks or so to go here in Q2. So there's a lot to play for yet. And it's probably too early to make a call one way or another in terms of how we do sequentially quarter on quarter. But if you look at our price realizations reported in Q1, Bert did a great job with his team of really getting some good numbers there, despite the fact that you saw pricing kind of moderate throughout that quarter. And, you know, if you take a straight average, we did a great job of getting price compared to Q1. Current prevailing prices in the spot market today tend to be a bit below where our average prices were in Q1 as reported. And so, again, more to play for. We do expect some tightness in the marketplace. We do expect the inland premium and product coming out of Port Neal and MedHat. and, you know, our other facilities to really trade at a pretty significant premium given some of the logistical challenges that Bert talked about. And it's also clear based on Chris's comments that our gas costs should be a lot lower than it was in Q1. So all of those things are positive. But, you know, we're starting at a point where prevailing prices are a bit below where, you know, where our average price realization was in Q1. So more to play for. But, you know, sum all of that together, we still expect a great first half of the year by historical standards and to generate a lot of cash over this period of time. Q3 is, as you pointed out, normally a reset period. But, you know, every year is different. So stay tuned, I guess.
spk14: Yeah, I think the only thing I would add to that, Joel, is on the natural gas prices. While we're buying at lower prices today, significantly lower prices, We still do have in inventory some of those hedges that were the actual production that occurred in Q1. So some of that will roll off here in Q2, and then we'll get into sort of the $2 per m mbtu gas that we're seeing today and purchasing today.
spk01: Thank you.
spk09: The next question is from Christopher Parkinson of Mizuho. Please go ahead.
spk06: Great. Thank you so much. You obviously alluded to this a few times in your PowerPoint, your prepared remarks, but the cost curve seems to be engaging at least a little bit more in a fluid manner than it has in the last 12 to 18 months, especially with European operating rates increasing. I would just love to hear your team's perspectives on what your, let's say, second half slash normalized view of import-export trends are going to be just given the dynamics of in Europe right now? I mean, do you still expect more product coming out of MENA, specifically North Africa to Europe, you know, in terms of also ammonia trade flows, as you saw last year, going into Europe to, you know, basically supplement some of the product that's still offline? Just any quick thoughts on that, as well as you, Ian, would be incredibly helpful. Thank you so much.
spk07: Yeah, Chris, I'll start and then hand the mic over to Bert here in a second. But MENA is running at full rates, and so it's not like we're going to see incrementally more product coming out of MENA. Local consumption is relatively low in region, and so it's a pretty constant stream of product coming out of MENA. That said, our belief is it's a pretty tough operating environment in Europe. The reason why is there's a very steep contango on the gas forward curve between Q3 and Q4. And even if you see prices, the spot market moderate a little bit on gas, it's kind of hard to want to campaign an ammonia plant for three months or four months of operation. It takes a terrible toll on the equipment to heat it up and then cool it back down again. And plants don't operate well when you're pulling them up and down like that, at least on the ammonia side. And so, you know, we do not expect Europe to return to kind of historical relatively higher operating rates. We think it's going to be spotty and campaigned, and I think the upgrades will run, but that means it's a sink for ammonia as opposed to, you know, producing ammonia locally. We do think that Europe is going to go ahead and continue to evaluate and look at bringing in more urea and UAN as an alternative to locally produced nitrates. And, you know, I think that that bodes well for our production network in North America.
spk13: Yeah, just some of the numbers behind Tony's comments. When you're at 20 million tons more or less of production capacity in Europe, West and East, and you have five to seven of that off-liner curtailed, that's an impact of about two million tons of urea. So as those demands for that nitrogen are needed in Europe and they're pulling those imports in from wherever, that is structurally helpful to the global nitrogen complex and supporting prices. And as we go more towards winter, that only is further placing those plants in difficulty. with an operating environment plus carbon costs. Today, I would say that cost for ammonia is probably $550 to $600, where you can import for substantially less. So it makes sense, and that then supports the global price of ammonia. So I think that these trends only continue and get worse as we hit winter.
spk06: And just as a quick follow up, Tony, it sounds ludicrous to mention this now, but we used to discuss normalized earnings many years ago between, let's say, 1.3 and 1.8 of EBITDA. Now, I think in most people's analysis, it's probably, let's not say quite, but almost double that. When I take a step back and I look at, obviously, your M&A pipeline as well as the deals with Jared Mitsui, do you have any additional thought for us on just how you're enhancing and improving CF's normalized EBITDA profile, not only for 23 and 24, but quite frankly, for the balance of the decade. Do you have any insights on your way of thinking there? Thank you so much.
spk07: Yeah, I mean, I think a lot of the new demand that we're looking at for ammonia as a clean energy source is much more likely to be kind of longer-term contractually based with ratable offtake and a return profile that's attractive based on either the acquisition price of the asset or the build construction if it's new build. And so our expectation is that you know, we believe that we're the best operators of these kind of assets in the world. We operate in one of the lower cost regions. There's incentive structures out there from a legislative perspective and access to some great partners like we have with, you know, ExxonMobil and others to help us achieve blue ammonia. And so from that perspective, you know, we think that we can earn a really attractive rate of return on incremental capital that we're putting in the ground on these kind of projects. And it's likely to be much more kind of ratable and fixed rate of return than it is subject to some of the volatility in the fertilizer space. And so we think that adding some of those layers of attractive fixed margin returns will be pretty additive to the overall valuation of the enterprise going forward, will continue to generate some good cash flow for us that we can deploy either against share repo or, you know, appropriate growth projects when we find opportunities to continue to generate those rates of return. So, you know, we'll probably see us doing more of that kind of thing, particularly as this new demand source emerges.
spk09: The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.
spk12: Thank you. Bert, can I ask you on China? You know, if the export policy does lapse and kind of go back to what it was in 2021, I think you highlighted that maybe we'd go back to that 3 to 5 million range. But what I'm curious is, that would be for urea. You know, last year we started to see China pick up significant exports of ammonia sulfate. If the urea restrictions lapse, do you think that the, you know, clearly urea exports would go up, but do you think ammonia sulfate exports stay the same, or does that get reduced as some of that ammonia gets used to make urea that gets exported instead? How would that work?
spk13: Good morning, Vincent. I think that the untold story of 2022 is the volume of ammonium sulfate that did come out of China. For years that product was available, but with the new compaction projects that have gone in, and making that product more viable to places like Brazil or Turkey or even the United States. Well, we use ammonium sulfate that's domestically produced. But ammonium sulfate is a good fertilizer. It's half the N of urea but has sulfur. And so it has moved out. I don't see the growth, though, of where we're at. There's a substantial volume that has been moving out of China. Regarding the urea exports out of China, Where they are capacity-wise, a significant amount of capacity has come offline and been taken out over the last, let's say, five, six years. And we would peg that at about 81, 82 million tons of capacity. Operating rates have ranged from the mid-60s to the low 70s. So taking an operating rate of 70 percent, you're producing about 56 to 58 million tons of urea. Domestic consumption is in the low 50s. So there's just not a lot of urea available to export as there were maybe 10 years ago. And so we see this is all speculation today on the change in an export policy. There are some plants that were built for export purposes, and those are the, I think, three or four that were announced as possibly gaining those export opportunities or clearance for export. sooner rather than the other plants. So I don't see a significant amount of urea coming out of that three to five million tons for 2023.
spk12: And then, Tony, if I could just ask you a clarifying question on Wagamon versus some of your MOUs. Am I correct in saying that Wagamon was sort of a unique purchase that you don't view as a substitute versus some of your potential greenfield opportunities?
spk07: So I think it gives us some flexibility in terms of how we evaluate the attractiveness of new construction in the near term. And it certainly gives us an opportunity to enhance our platform from the standpoint of adding dehydration and compression and making more blue ammonia in that location without having to do a full greenfield expansion. So it gives us, I would say, a lot of flexibility in terms of how we think of if and when it makes sense to do a new project. And, you know, we've added 900,000 tons of ammonia to the portfolio. That ammonia is already being consumed in the marketplace, so it doesn't disrupt the S&D. And, you know, we can generate a fair bit of blue ammonia with a fairly modest incremental investment. So, you know, I really like the project because of the optionality it brings us in addition to just the base economics of it.
spk12: Okay. Thanks very much, guys.
spk09: The next question is from Edwin Rodriguez at Credit Suisse. Please go ahead.
spk00: Thank you. Good morning, everyone. This might be for Bert. I mean, Bert, September ammonia prices is down to, what, $380 or so? I mean, that's a level that's well below European production costs. Like, what's causing that? And is the EU no longer the marginal cost producer? I mean, it's just been very hard to understand what's going on there. Maybe if you can help us.
spk13: Yes, when you're looking at the EU costs, it's a pretty easy calculation. Gas prices public, looking at TTF or NBP, and op costs, adding what that would be for cash or for full, and then carbon costs, as I said earlier, gets you to between $550 and $600. And you're right, in the current spot market, you're in the low 400s. And so what I think is happening, and we're seeing this reflected in announcements as well as public and private companies, they're operating either curtailed or shut down. And supply-demand does work. And I think as you take some of that supply off in Europe and some of that is being backfilled with supply from around the world, then pricing tends to moderate and move up. We did, I think, as a reflection of some of the issues we talked about globally in Q1 with some economic downturn, as well as purchasing holidays in different places and delays in consumption probably went a little long on ammonia, which drove that price down to the level where it is today. And so we're positive on what's coming in terms of, we think, especially in winter with Europe and backfilling with ammonia produced in different locations and shipping that. And we have done that ourselves, taking down our Billingham plant and buying product or shipping product in from Donaldsonville.
spk00: That's great. And another one on corn prices. They have come down, not by a lot, but they have come down. I mean, if you look at the December futures price, it's at five and a quarter or so per bushel. How do you think this will impact farmers' psychology? Will they be willing to pay higher fertilizer prices when they see corn prices kind of moving down a little bit?
spk13: So, yeah, when you look at the prompt price and the forward price, you referenced December, so that's the harvest price for the 2023 North American crop. And when you look around the world, again, these stocks-to-use ratios are tight. We've had a drought in Argentina where we've probably lost 8 to 10 million tons of production. We've had the difficulties in Ukraine where an additional probably 12 million tons were lost. And that's a reflection not of lost exports, but lost domestic consumption in Ukraine, whether that's corn processing or for feed. And then you've seen a constant, we also had a negative trend yield in the United States in our harvest last year. Some of that has been made up by Brazil, which had a record corn crop, and the United States is trending forward. But the price of 525 on a historical basis is pretty positive. You know, we've tended to operate in the $4 to $5 range over the last several years. And so, yes, we're coming off the highs of 6 to 650, but still 525 is incredibly profitable. We're estimating this is the third most profitable year, but that's three years in a row because last year was exceptional and the year before that was Also incredible, this is just going to be very, very good if I were to rank it. So it is still very profitable to whether you're a dry land farmer or an irrigated farmer to absolutely maximize your seed population as well as your nutrient applications for yields. And we're seeing very good soil moisture in North America to support that. So I think 525 represents a very fair price which then supports livestock. It supports ethanol for the demand of those products.
spk00: Okay, thank you.
spk09: The next question is from Richard of Wells Fargo. Please go ahead.
spk05: Great, thanks. First question, just on Wagamon. Can you just give us an update in terms of timing for closing? Any regulatory progress that you've made? And where's... where we expect it to close.
spk14: Yeah, so we've filed with the FTC and they're reviewing it. Right now, we don't necessarily have a timeframe on that. We're supplying them the information that they need. We think, you know, we're hopeful that it'll be sometime this year that we'll be able to close on that project.
spk05: Okay, great. And then just in terms of, you know, once you get that deal done, when you think about the flexibility that you mentioned, One option, I guess, is to convert it to CCS, potentially get IRA credits. Can you talk about that in terms of how that might work in terms of timing? And have you had a chance to sort of work that into your options with your partners, whether it's JIRA or SUBI or LATTE? Thanks.
spk07: Timing on putting in the dehydration compression and getting access to the pipeline and being able to have that injected is probably two years out. That's about the timeframe it took us to announce the project at Donaldsonville and have the equipment ordered, delivered, and installed. It's probably about that kind of timeframe. And again, we are in ongoing discussions with the partners that we have already signed and announced MOUs with, and there's a series of other conversations that are happening in the marketplace as well that are not quite as advanced at the moment. But this just is another source of supply. So it both provides some diversity of supply locations, in case there's an outage or a storm or an issue that would affect one location. It also just increases the aggregate volume of material that we'll have that's low carbon. So it's certainly of interest to all of those folks that you mentioned. And we are in ongoing discussions about appropriate ways to try to structure agreements that provide them attractive and certainly secure access, but also provide our shareholders an attractive rate of return on our investments.
spk05: Great. Just last question. In terms of funding these projects, is the idea basically to look for project financing or are you going to fund it with your JVs from free cash? How are you thinking about that?
spk07: Yeah, so we ended the quarter with over $2.8 billion of cash on the balance sheet. We're continuing to generate a substantial amount of free cash flow kind of every quarter as we move forward. It's going to be funded from cash on hand. And by the way, it's a relatively modest draw on cash on hand, particularly at the rate at which we're building it. So it provides us flexibility to continue to do our share repurchases as well as our growth and improvement projects all at the same time.
spk14: Yeah, just to follow up on that, I mean, these projects are staged over multi-years, so it's not as if similar to the Wagement where there's a big lump sum at one time. So even the Mitsui project, the Lotte project, these are four or five-year cash outflows with a partner involved. So we expect exactly to what Tony said, that there's going to be still significant cash for other capital allocation return policy.
spk09: The next question is from Ben of Barclays. Please go ahead.
spk01: Yeah, thank you very much and good morning. Congrats on the results. Just wanted to follow up on some of the logistic challenges you've talked about and maybe help us understand how that impacted you this quarter or maybe benefited you this quarter and how you think about logistics and supply chain issues just with like those different water levels, et cetera, go forward and how you can prepare yourself to maybe take advantage of it as it relates to your trade and export business. Thank you.
spk07: Yeah, so, you know, it's a really interesting situation. As we got into the back end of last year, you saw historic or near historic low water levels on the Mississippi. Fast forward to this spring, and all of a sudden now we're facing such high water levels that, you know, barge traffic is, again, impacted by it. Combine that with what I would say is a relatively significant national shortage in drivers, you know, over-the-road drivers and so forth. You've seen logistics costs and delays in timing go up kind of across the board. And that helps us significantly. in terms of the in-market premium that we're able to realize in our facilities like Port Neo and Medicine Hat, because we're already in the marketplace. And, you know, generally speaking, the value of product in market is loaded on the coast, plus logistics costs, and maybe you get a time premium for it as well if you're in the middle of, you know, immediate application. And so all of these things really are you know, are helpful for us as we look into the meat of the application season here in the second quarter. I'd say in the first quarter, you know, the increase just costs across the board in logistics probably impacted us a little bit to the negative side, but I think that'll turn around and play to the positive side as we go forward. And it's less important from an export perspective because vessel freights haven't moved quite as dramatically as the inland stuff.
spk13: When you're looking at the logistics options we have, we're on the Class 6 railroads and we're on the Arkansas, the Mississippi, the Illinois, the Ohio. So we are able to barge as far north as Minneapolis. And when we look at each year, we work with our retail wholesale trader customers who work with the farmer And we're in constant communication. And this is a great year for an earlier question of, you know, what did we do when our customers weren't purchasing? Well, we focused on how are we going to deliver the spring needs in a way that makes sense. And so we set out a strategy and a game plan early, late Q4, early Q1 to make that happen. And that's leveraging all these assets that are at our disposal. And we have done that. So we feel very positive about what we have positioned in the interior through our terminals and ammonia tanks, our UAN terminals and urea storage places for dry. But in those conversations, when customers were not willing to buy, we did pivot aggressively to the export market. And we're able to do that. We're able to move several of our plants to the export market and optimize our loading structure. We have five docks in Donaldsonville. So we are a unique company that has many options available to us, and each year we're going to evaluate those and do what's best for our customers and our company. Thank you.
spk01: Perfect. And then my second question is just to understand a little bit the magnitude of the inventory. You said the higher-cost inventory, you still have to run the train to 2Q. Can you give us a little bit of a sense of the timing of that impacting, like, the majority of the second quarter, just maybe half of it, only a few weeks? How should we think about what was in place as to the net gas hedges and how this runs through on the cost of inventory that needs to run through into the usually good second quarter?
spk14: Yeah, a good question. I think generally what we have is we have production and inventory that sits above you know, a little bit more than a month. So I think at minimum what you'll see is probably a month's worth of higher gas costs, probably, you know, maybe six weeks' worth that roll through here in second quarter before we get into sort of the cash purchases at the low $2 that we're seeing. So I think that would be a good proxy to use.
spk09: The next question is from Josh Spector of UBS. Please go ahead.
spk08: Yeah, hi. Thanks for taking my question. Just a couple of quick follow-ups on Wagamon. First, can you disclose what the remaining life is on the contracts for the other two buyers outside of Dyno? And just regarding carbon capture and who gets the credits, is there anything in the agreement with Dyno Nobel that has you share some of the portion of what you're selling them in terms of ammonia credits for carbon capture on those tons, or is that still open-ended?
spk07: Yeah, so we're really happy with the way that the contracts are structured and that we've got offtake for all of that production. It gives us some flexibility in terms of how we think about the future and increasing production there and what we do with the incremental funds as we increase production and as we move forward. But it's nice to already have a home for all of those tons that, you know, at kind of market-based pricing. So we're really pleased with those. In terms of the blue ammonia and the CCS there, we have a number of companies that are very interested and have registered interest with us on securing access to decarbonized or blue ammonia. Dyno is among them. And, you know, we will work with Dyno and also work with others, whether it's production out of Donaldsonville or Wagaman, in order to try to satisfy the needs that we see really developing in the marketplace, but also realizing value for that product.
spk14: Yeah, and I think as you look at the production and actually the dehydration and compression piece of that, you know, we purchased the plant with that being an upside to CF, that we would own that asset and also the benefits that would come from that as well.
spk08: Thanks. No, that's helpful. And just to clarify, I mean, just without disclosing, I guess, the remaining life on the contract, do we need to be thinking about is there any risk of renegotiation in the next one to two years, creating different economic bursts of what you expect today?
spk14: I think we feel comfortable with where those industrial contracts are, and we can't really disclose more than that, but we don't see any issues.
spk07: Yeah, we don't see the kind of risk that you're talking about associated with the go-forward in that facility.
spk08: Okay, thank you.
spk09: The next question is from Andrew Wong of RBC. Please go ahead.
spk02: Hey, thanks for taking my questions. So just going by the clean ammonia with a lot of these clean ammonia and clean hydrogen projects coming up in the U.S. along the Gulf, are you seeing any potential for bottlenecks, cost inflation around labor and construction services? And, you know, maybe taking the S&D question from the other side, like could there be any tightness in the clean ammonia market if we see any delays on buildouts and could demand come in quicker than expected? Yeah.
spk07: Yeah, Andrew, so I think it's fair to say that you're seeing inflationary impacts in every aspect of the announced projects that are there. And I think that affects both the time that it takes to bring them online as well as the cost that it takes to bring them online for those that ultimately get built. the raw materials, the metals, the fabrication, the transportation, the labor to construct. You're seeing inflation in every single aspect across the board. And remember that none of these projects that have been announced really are underway at this point from a construction standpoint. So minimum of 2027, maybe 2028 before any of these things that are announced would potentially start up. And there is a high likelihood of cost inflation over that period of time. It's one of those reasons that make us so happy about the Wagaman acquisition because our belief is by the time some of these projects that are being discussed, you know, if they're announced, that, you know, the cost per ton of capacity is going to look really attractive from an acquisition economics on Wagaman. And more to come in terms of whether, you know, what results our feed study for the potential project with Mitsui yields. But I would certainly expect when all is said and done for the Wagamon acquisition to look really attractive like Harrison.
spk02: Okay. And then just a question on the BP deal for low methane gas earlier this year. Can you just talk about how important that is for your customers in securing some of these clean ammonia deals? And is this something that you're looking to do more of going forward?
spk07: Yeah, I mean, I think one of the things that it helps us address is some of our Scope 3 emissions. In this case, it's upstream Scope 3. The downstream Scope 3 are very hard to manage. But from an upstream perspective, if we're sourcing gas that is more responsibly produced and transported, it reduces the methane slip on the upstream. It reduces our upstream Scope 3 emissions, and that's substantial because methane is a very potent greenhouse gas. It certainly goes into our overall you know, carbon footprint. And so customers that are interested in the overall footprint will care about that to some extent. Most of the conversations we've been having around decarbonizing ammonia are very project specific to Donaldsonville and or, you know, Wagamon once we get the carbon capture and sequestration equipment installed and operating. And so, you know, I think In the near term, that's a little less important. In the longer term, it's certainly more important, but it helps us manage our overall footprint and certainly something we're evaluating continuing to expand from a program standpoint.
spk11: Okay, great. Thanks.
spk09: Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back to Martin Dorosik for closing remarks.
spk11: Thanks everyone for joining us and we look forward to seeing you at all the upcoming conferences.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Q1CF 2023