Intrepid Potash, Inc

Thank you for standing by. This is a conference operator. Welcome to the Intrepid Potash Inc Q2 2020 results 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. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal operator by pressing star and zero. I would now like to turn the conference over to Matt Preston, Vice President of Finance. Please go ahead.

Thanks. Good morning, everyone. Thanks for joining us to discuss Intrepid's second quarter 2020 results. With me on the call today is Intrepid's co-founder, executive chairman, president and CEO, Bob Gernovas. Also available to answer questions during the Q&A session following our prepared remarks will be our Chief Operating Officer, Brian Stone, and our Vice President of Sales and Marketing, Mark McDonald. 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 them. 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 intrepidpodash.com. I'll now turn the call over to Bob.

Thank you, Matt, and good morning, everyone. The second quarter hopefully was the definition of unique in light of the considerable pressures presented by the pandemic and its economic impacts. We ended the quarter in a solid cash position, which enabled us to voluntarily and fully repay the Series C tranche of our senior notes in July. This had the effect of lowering our effective interest rate while providing us with considerably more flexibility as we execute on our strategic plan and seek opportunities to capitalize on the generational opportunities currently available in the oil and gas space. With available borrowing capacity of $44 million and a $75 million accordion feature under our existing credit facility and $14 million in cash on hand after the July repayment, We believe we are in solid leverage position as we continue to prudently manage our existing assets while considering unique acquisition opportunities during these unprecedented times. Our ability to execute during these uncertain times is testament to the strategic moves we've made to diversify our revenue streams, maximize our saleable assets, improve our leverage position, and infuse our business with cost and labor efficiencies, which enable us to be responsive to ever-changing conditions. Having entered this challenging period in a stronger position, and by continuing to improve our leverage position, we are better able to execute well as we navigate the roller coaster in the oil and gas markets, while providing essential services to the agricultural, animal feed, and oil and gas markets themselves. Considering the COVID-19 pandemic, we delivered a solid first half in our nutrients business, while the earlier spring application shifted volumes to earlier in the year. For potash, we continued to see strong volumes into our agricultural and animal feed segments, particularly early in the quarter, though margins continued to be pressured due to lower pricing compared to the prior year. We finished the spring production season earlier this year due to below average evaporation during 2019, but have seen a great 2020 evaporation season so far with minimal rainfall and above average temperatures at all three potash facilities. In fact, it's 107 degrees in Moab today. In June, a summer fill program announced by our competitors lowered prices $10 to $20 per ton compared to the winter fill price levels. This price applied to tons ordered in the June delivery window and delivered by the end of September. After the order window, pricing increased $15 per ton, and we have seen acceptance of this higher pricing on spot sales in the third quarter, although the majority of tons delivered in the third quarter will be at the fill pricing level. For TRIO, we delivered record domestic volumes in the second quarter as we pursued a more U.S.-focused strategy in light of favorable domestic weather conditions and solid demand for our granular and premium products. Our success in driving domestic sales in the second quarter, in turn, drove a 6% year-over-year increase in second quarter net realized sales prices. In June, a summer fill program, very similar to the PUDISH program, was announced by our sole competitor, lowering prices $5 to $10 per ton compared to the first quarter price levels. Pricing increased $15 per ton after the fill window. As we discussed last quarter, our oilfield solutions business remained well positioned, even in light of the pressures posed by the ongoing pandemic. The strategic moves we have made in our oilfield businesses have resulted in low cash operating requirements and a unique ability to deploy our labor force in Southeast New Mexico in real time to address our highest business needs. This gives us considerable flexibility as we manage through the oil and gas down cycle that is in the process of rebounding. Accordingly, our approach to the oil field market today is pragmatic. We acknowledge that the pullback in our customers' Second quarter products and the schedules and general lack of visibility in the market was painful for our business in the short term. However, we are reminded that the market pressures we are seeing today are inherently time bound. Even in light of considerable uncertainty in the short term, we know that by successfully managing through this part of the cycle, we open ourselves up to taking advantage of of all the down market can offer, including an abundance of unique opportunities to further strengthen and diversify our business. To that end, we continue to evaluate opportunities to organically expand and diversify our existing oil and gas midstream businesses, which include full cycle water management, which is defined as source water delivery, recycling, blending, and disposal. We also continue to evaluate synergistic and sometimes organic opportunities to expand further within the entire midstream and upstream oil and gas space, which includes the gathering of a variety of produced products, byproducts, and waste products. As we enter the second half of the year, we remain thoroughly optimistic. As we speak today, we are delivering water into a two million barrel frack and believe we're well positioned to withstand economic pressures presented by the pandemic and related downturn in the commodity cycle. Through diligent execution on our strategy and prudent management of our existing assets, we believe we can opportunistically improve and expand our business and emerge a stronger company once headwinds have banked. And now I'll turn the call over to Matt for a view of our financial results.

Thanks, Bob. Second quarter sales were down 26% as an early spring season shifted fertilizer sales to the first quarter, and water and byproduct sales were impacted by pandemic-related pressures. For potash, second quarter sales volumes were down 22%, while pricing pressures from summer and winter fill programs and lower industrial sales resulted in a 14% decline in average net realized sales price. Potash segment gross margins were down 6.2 million in the quarter compared to the prior year. First half agricultural and feed volumes increased compared to the prior year due to good weather and strong demand in our feed markets. For TRIO, the record domestic sales volumes we delivered in the second quarter drove a 6% year over year increase in our second quarter net realized sales prices. Our focus on the higher price domestic market resulted in fewer international sales compared to the prior year. Decreased oil and gas activity due to the pandemic also reduced our byproduct sales, resulting in a 10% year over year decline in total sales for the segment. This as well as increased lower cost or net realizable value adjustments and lower recovery rates in our production process pressure segment margins in the second quarter. Byproduct sales across our nutrient segments continue to be pressured and we're down 26% compared with the year ago second quarter. While increased market availability of salt and lower demand for byproduct water due to the pandemic continued to impact sales in the second half of 2020, Magnesium chloride production and sales return to historic rates towards the end of the second quarter. Assuming average evaporation rates at our window or facility, we expect magnesium chloride sales to remain at historic levels through the balance of the year. During the second quarter, our oil field solutions segment saw a 51% year-over-year decline in sales as the pandemic continues to affect oil and gas markets, resulting in curtailed drilling plans and lower demand for water and other oil field products and services. Looking ahead, we continue to expect the disruption caused by the pandemic will have meaningful impacts on our results and our visibility for the remainder of this year. In particular, for our oil field solution segment, planned reductions in activities from operators are expected to impact our sales of water and other oil field products and services through the balance of 2020. We continue to monitor this ever-changing situation and are managing our business to comply with changing mandates from federal, state, and local authorities while continuing to serve our customers. Turning to liquidity, we generated $23.5 million in cash from operations in the first half. As we discussed last quarter, we received $10 million in April under the CARES Act Paycheck Protection Program, which we used to fund eligible payroll expenses. We elected to use the 24-week time period to use the funds, and we have since used the entire $10 million for eligible payroll expenses. Our 24-week period ends in the first week of October. Capital expenditures during the first half were $10.6 million. We continue to proactively manage our capital plans as we navigate through the challenges presented by the pandemic and its associated impacts and remain on track towards our CapEx guidance of $15 to $20 million for 2020. In July, we made a voluntary early repayment of the remaining $15 million outstanding under our Series C senior notes, along with a reduced make-whole payment and accrued interest for a total payment of $17.1 million. As Bob mentioned, this payment reduces our effective interest rate, simplifies our debt structure, and gives us additional flexibility to pursue our strategy. Immediately after the payment, cash on hand was $14 million, and availability under our credit facility was unchanged at $44 million. Our Series B senior notes did not change and remain due in 2023, while our revolver matures in 2024. As we announced late last week, all the proposals set forth during our special meeting of shareholders were approved paving the way for a reverse stock split, which we expect to occur in August. Our board is planning to convene on August 10th to consider the options available to us. In executing this reverse split, we hope to achieve a per-share stock price sufficient to keep us well within the range of compliance with NYSE continued listing standards while expanding ability to attract new investors. We look forward to sharing more information in the coming weeks. That concludes our prepared remarks for today. Operator, we're ready to take questions.

We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a piece of phone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. The first question comes from Joel Jackson with BMO Capital Markets. Please go ahead.

I'm Brie Murphy. I'm for Joel. Thanks for taking my questions. I know you spoke about the summer field program weighing on potash and trio pricing in Q3. But based on your disclosure, is it fair to assume potash pricing will be down about 10 to 20 per ton quarter over quarter in Q3 and trio pricing down 15 to 20 per ton?

Yeah, I think you've got those numbers right. I think we, in our queue, will certainly walk through this in more detail. You know, it gets a little confusing as we talk list prices versus effective prices, but I'll turn it over to Mark to go into a little more detail on each of those summer fill programs. But effectively, our TRIO price will be down $5 to $10 compared to our first quarter price levels in 2020. And then, Mark, I'll turn it over to you for the potash side.

Sure. And I think the takeaway here, Bree, would be that I think as Bob and Matt mentioned in the prepared remarks is that there's been a reset on the pricing. So certainly some of the Q3 pricing will be evident in the fill values that were discussed. But after that order period expired, pricing has increased. And I think we've seen on some spot in the new business some traction on those price levels. So Certainly as the harvest and market transcends into the third quarter, I think that we're looking towards the fourth quarter for potential uplift.

Okay, great. And then potash production is obviously lower in the second quarter. How should we think about the full year expected production and inventory levels at the company?

Yeah, so we're really right on track to start the fall season on time. We're getting ready to start our HB facility here this week and ramping up over the next 10 days, and we'll start our Argonvois facility on time in September as well as Wendover the middle of August. So you should see kind of normal production rates for two of our three facilities by mid-August and then the other one starting in September, which is really just our normal cycle given the evaporation season.

Okay, and then just quickly on water or oil field services, can you talk about the expected trajectory of sales for the rest of the year and into 2021? Do you think Q2 represents a score for water revenue?

Well, we hope so. If you look at several – this is Bob. Thank you for the question. We've seen activity in July grow month over month. And so the entire Permian has grown 30% in terms of frack activity month over month. We're also seeing just a solid uptick. So everywhere that we look in the Permian and the Delaware, and I want to be very clear that we're just talking about the Permian Basin and the Delaware Basin. We're seeing July grow over June, and we're seeing August demand that we're talking about go up over July. So, I think just about every oil and gas analyst has picked up on the increased fracked activity, and we're seeing it out in the field. So, we see 2021 as being in a much more normalized situation, as we see, once again, July grow over June, August grow over July, and we have every indication that September will grow over August, based on the orders that we're taking today. I hope that answers your question.

Yeah, thank you. I'll pass it on.

The next question comes from Mark Coney from Stevens. Please go ahead.

Hey, good morning. This is John Ryder. I'm from Mark. Our first question is how much room do you have in terms of potash capacity before you'll need to open up new underground panels or make other incremental investments?

Well, on the potash side, as you know, 100% of our potash production is solution mining. The only underground conventional mining we have is on the trio side. So right now we're producing a thoroughly saturated potash brine. So we would have to add additional ponds, if that's what you're asking, to increase our potash capacity. And we have plenty of land available. for additional ponds. Was that your question around potash?

Yeah, I'm sorry. We got that a little mixed up there, but that's helpful color. And then on potash again, so we've heard pretty bullish comments on the potash volume outlook for the second half and some of that fall application and some being international demand. Do you have a view on fall application needs relative to normal domestic demand?

Well, as you know, going into last spring, we had three consecutive very poor application seasons. So the soils are still deficient in terms of minerals. So I think there's every reason to anticipate very bullish demand. The good news in terms of inventories along the river is that we're not seeing a lot of imports that have come in. So the inventories along the river are pretty low. So unless we see pretty quick deliveries into the river system, then it's just going to be primarily the Canadians providing the majority of the potash into the United States. So I think we have a unique opportunity to see very, very strong volume as well as firm pricing. I hope that answers your question.

Yeah, that's really helpful. Thank you very much.

The next question comes from John Roberts from UBS. Please go ahead.

Thank you. Did your oil field solutions business decline in line with the overall fracking activity in the basins, or does market share shift when we get a sharp correction like this?

I would say it's definitely proportionate. If anything, we picked up a few things given our local presence. But you've got to remember that starting around the middle of March through the third week in June, things basically came to a dead stop. And then the third week in June, things picked up a touch. And then we saw a good, you know, July was up. I want to say it was about 8% over June. And then an additional 13% to 14% is what we're seeing in August in terms of the order book. Okay. We're certainly not going to lose any market share. If anything, given our ability to do full water management, I think our opportunity to pick up market share is pretty good. So I feel very comfortable with that. Once again, I hope I'm answering your question.

Sure. Yeah. And I'm going to ask, what's happened to the price of acquiring new water rights for Does the market become illiquid or freeze up in a correction like this so there's really no market price for new water, right?

Yeah, I think it's what you're seeing in the entire oil field is that the spread between the bid and the ask, whether you're looking at actual producing assets for a willing seller and a willing buyer, there's a pretty big bid ask, whereas those that have gone into bankruptcy, there's some very, very unique opportunities. And as you know, we've seen record bankruptcies. So those that can afford to hold on to their assets are holding on to them. So it's a very unique market that we're seeing, given that you've got record bankruptcies across all sectors of the oil and gas industry. You've got some that are getting ready to get into loan-based redetermination that we think we're going to see an another wave of problems. But all of those assets are being managed. And then the well financed ones that are remaining are, as I said, are continuing to frack we're working on a 2 million barrel frack as we speak on this call. So it really is across the board. And we think it's this roller coaster provides a very unique opportunity.

Ben, on the reverse stocks, you've got a range of one for three up to one for 15. Why isn't it automatically like one for 15? That's still not a really high stock price. So why do you have a range that goes down to something so low as one for three?

Well, we followed the way that hundreds of companies have done it over the past several decades in terms of how the SEC attorneys prepare the paperwork. And so I hate to sound so ignorant, but we used two highly rated SEC firms that prepared all the paperwork and the document. That was their recommendation, and we followed it. So I think at the end of the day, we'll meet on the 10th, and we'll pick the appropriate split number in terms of the target range and make it effective as quickly after that as is practical. So all I can say is we had great counsel that said this is the way you do it. Okay. All right. Thank you.

Once again, if you have a question, please press star then one. The next question comes from Jason Ersner from Bumbershoot Holdings. Please go ahead.

Thanks. Just on the MOP potash business, could you walk through the fill programs? And obviously you can't speak for the industry, but can you maybe just explain in your view what is going on there? Because it, I mean, it kind of seems like distributor inventory should be getting work done, but then we're kind of continually offering them a discount to replenish that, and it almost seems like a double negative in terms of them having less risk to not hold inventory and then giving them lower pricing.

Jason, I think you are right on. We certainly – We did not initiate the fill program, and so unfortunately we had to participate in it. I think it was given the demand out there and the need for the mineral deficiency. I don't have a rational explanation for why the fill program occurred this summer. I'll let Mark weigh in, but I didn't think it was necessary, so I'll let Mark weigh in.

And I think maybe the takeaway, Jason, is that when we looked at this program, I think as Bob indicated, we were a little perplexed in terms of the timing of it as well as the mechanics. And so we made a conscious choice to look prudently at our sales and our distribution channel business and really try to focus in on what we felt were businesses that we wanted to – participate with some of our loyal and core customers, but I certainly didn't want to extend beyond that and really focus in on some of our better net back sales opportunities.

Okay. Just second question for me. Can you walk through the decision to pay back the Series C notes? Obviously, this was the longest dated maturity you guys had, and it wasn't particularly at a very high interest rate. Obviously, just given the situation with COVID and everything else where you're managing the liquidity position pretty closely, it doesn't make a ton of sense relative to the idea of just holding cash or even relative to these opportunities that could come up in other parts of your business. So you did mention more flexibility with lenders. Can you maybe detail specifically what that is?

Yeah, if you'll remember, that was a $15 million tranche that had a senior – that was a senior note that had a collateral claim on every asset, including newly acquired assets. And if we blinked, they wanted a waiver fee. And so if you look at our ability to use cash on hand and have the access to the BMO facility – we got a tremendous amount of flexibility in terms of what now needs to be collateralized. What is sort of senior nature. If you look at the difference in who makes up the series B versus the series C, um, there's just a tremendous amount more, uh, rationale, reasonableness, flexibility in, in who those specific, uh, note holders were. And so I just can't stress that, um, It was the right thing to do as we continue to look at different ways to expand our opportunities to access low-cost credit. And having someone that had a first position on everything, as well as everything to be acquired, was difficult to manage around.

Okay. And in terms of, I guess, opportunities and acquisitions, you spoke a lot in the release about the long-term potential for the Delaware Basin. Could you possibly talk about that strategy in more detail, specifically from a capital structure perspective with leverage and priorities for cash flow?

Well, the good news is the majority of them are organic. And so as you've seen in our water presentation, we've explained many times, we've got a great infrastructure that covers the entire southeastern portion of New Mexico. So our ability to now deliver source water, participate in the recycling and reblending that is going to occur more and more as we go through quarter by quarter, as well as on the disposal side, which we'll talk about in upcoming quarters. It just gives us a very unique opportunity to build that out. We're just in a special position geographically and with our headcount, take advantage of all of those. There's also byproducts and waste products that need to be disposed of. were in many cases changed from a waste product or byproduct to an actual product. I kind of leave it at that. There just are a tremendous amount of opportunities as people fall off the radar and leave things behind. And so I'm not going to go into any more specifics other than if you really take a look at southeast New Mexico, look at at the existing rig count, look at the existing fracts that are occurring, the economics of the basin, the people that had to leave the basin because of debt structures in other parts of the United States. There have been a lot of opportunities left behind.

Okay. Would you be at a competitive disadvantage if you don't pursue these things? You know, for Dinwiddie, keeping the financial aspect, I guess, aside for a second, it seemed like that did you know, truly expand the capability of what the business you're building there could be with the four-corner strategy and that you would have been, you know, competitively disadvantaged in terms of selling water over time if you didn't, you know, secure that position. This sounds more opportunistic, you know, and I don't get the sense that it's something that's out of necessity but rather opportunity. So I guess the question is, you know, at what point do you make, you know, I guess I understand that you could make more money over time if you pursue them, but at what point do you kind of let someone else have that margin versus focusing on compounding the existing capital base to get them more of a fair value?

Well, I guess if you're in full cycle water management so that you manage the source water, the recycling and blending that is occurring as we speak, So if you are able to take a barrel of water and capture margin off that same barrel of water multiple times in its handling, I'm not understanding your question why you wouldn't gather every piece of margin off that same barrel of water rather than let somebody else pick it up.

I guess to do that relative to, I mean, Your stock is trading at 0.3 times tangible book. So relative to doing nothing, if I pegged normalized cash earnings or something of $30 million a year, and I'm not asking for guidance on that number. That's my number. Well, it's not my number. That's about half my number because I'm not trying to be overly optimistic. But you would be debt-free in one to two years, and you would earn back your entire market cap in four to five years. The uncertainty, I think, of what you're doing is clearly weighing on how people are valuing the company. So that's why I'm trying to understand, you know, getting to a fair value versus pursuing these margin opportunities.

I guess I really don't understand your question if you really understand where full cycle water management is going in the Delaware Basin. And so you really can't be left out when you can control the entire system. So I think you and I are speaking past each other in terms of the amount of capital that's required to enter into all phases. So once again, I just think we're speaking past each other. I don't think you really understand the opportunity or the way water is managed in the Delaware Basin.

How large a capital requirement to get into that full system do you think it would take?

You know, it's not a lot. I'm not going to really go into details on the backside. I appreciate the question and I understand it. And so they're not major capital investments. They're bite-sized organic capital investments that add margin to the bottom line. And so the key is to grow a diversified revenue stream that generates as much margin as we possibly can.

Okay. Awesome. I will hop back in here.

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

I just want to thank everyone for their participation, and thank you for your interest in Intrepid, and have a great day, and stay healthy.

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