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Operator
Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Q4 and year-end 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an 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.
Matt Preston
Thanks, Charisse, and good morning, everyone. Thanks for joining us to discuss Intrepid's fourth quarter 2020 results. With me on the call today is Intrepid's co-founder, executive chairman, president, and CEO, Bob Gernobis. 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, Zachary Adams. 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 SEC, 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.
Bob Gernobis
Thank you, Matt, and good morning, everyone. Solid cash flow and EBITDA highlighted our fourth quarter and put a positive end on a unique year. The encouraging trends we saw emerging in the fourth quarter are continuing into spring as commodity markets show strength across both our fertilizer and oil field segments. The last couple of months, We have seen gradual yet sustained improvements in our ability to combat the COVID-19 pandemic, and we are optimistic that the good news will continue as cities begin to relax restrictions now that significant portions of our most vulnerable populations are protected. We wish the world well. Our nutrient business ended the year with significant momentum and hasn't slowed down in the first quarter. We called a bottom in the potash market on our November earnings call, and recent pricing and demand has exceeded our expectations. We announced another potash price increase in February of $50 per ton, increasing our posted potash prices $140 per ton above summer fill levels. TRIO has also seen strong demand and is currently posted $60 per ton higher than the summer fill values. Customers have been eager to secure product as prices continue to move up, and have locked in some volumes through second quarter with additional spot buying occurring throughout the spring and farmers who are eager to replenish nutrients at today's crop prices. Strong commodity pricing in soybeans, corn, wheat, palm oil, sugar, cotton, and bottoms in the cocoa market and the coffee market, all in strength to a continuing global demand. During the fourth quarter, we continued to position ourselves to capitalize on the return of the oil field demand in the Delaware Basin, leading ESG initiatives with a clear emphasis on full cycle water management. Full cycle water management means minimizing traditional source water use and produced water disposal with environmentally friendly treated produced water recycling. With environmental and sustainability goals front and center for so many oil and gas management teams, regulatory bodies, and governments, the need for responsible and innovative use and reuse of water is the key to capturing the full potential of the Delaware Basin. Intrepid is uniquely positioned with its variety of assets and water rights in Southeast New Mexico to become a leader in the space, touching every aspect of the market from fresh and brine water delivery to recycled and produced water handling and disposal. We're in the early stages of construction of a produced water disposal system adjacent to our south ranch and should have our first produced water well drilled in the first half of this year. As we finalize our capital plans, we're also working on minimum volume commitments with operators that will provide a solid base of demand to support our investments. We expect the produced water well will cost approximately two million bucks and we'll complete incremental capital for the surface facility at the appropriate time. Total capital for our first well and surface facilities is estimated at $7 million. We expect additional wells can be added as demand and volume commitments require at a cost of approximately $2 million each. In addition to produced water, we're investing in recycling infrastructure and expanding our capabilities to deliver the services and products necessary to operate in an increasingly ESG-focused environment. We are currently in talks with multiple companies about partnering in new and exciting areas of oilfield and full cycle water management business that will leverage our unique position and inherit optionality of our intrepid freshwater and brinewater assets across the Northern Delaware Basin. The Northern Delaware is full of long-term, focused, well-capitalized operators and we're seeing many of these operators revisit their expectations for 2021 as oil prices have improved significantly in recent months. Fract demand is increasing and source water demands per completion are higher than ever. During the first quarter, we sourced water from third parties at positive margins to supplement our own water rights and existing infrastructure to meet the increasing volume requirements of operators. Our strong relationships with those operators and our ability to meet significant refresh rates sets us apart from many other source water providers in the Delaware basin. The next few quarters are pivotal for Intrepid as we will execute on our strategy to expand our oil and gas midstream business in the Delaware basin and tap into the significant opportunity that full cycle water management offers. Proper water management and the ability to provide operators with a single source capable of meeting both their operating and ESG goals will be essential in unlocking the potential value of this business over the coming months. And now I'll turn the call over to Matt for a review of the financial results and outlook.
Matt Preston
Thanks, Bob. Our fourth quarter was highlighted by strong improvements in earnings and EBITDA compared to the third quarter as good fertilizer fundamentals and an improving oil field outlook drove increased gross margin across all our business segments. We recorded fourth quarter adjusted EBITDA of $9.7 million, an increase of over $8 million compared to the third quarter of 2020. As Bob noted, the potash market really took off in the fourth quarter with three announced price increases, good weather across the country, and rising commodity prices. Customers looked to replenish potash inventories after a strong fall application season, that was evidenced by the 78,000 tons of potash sold in the quarter, up significantly from the prior year. Looking towards 2021, we still expect first half potash volumes to exceed prior year by about 5 to 10 percent, despite the large volumes in the fourth quarter. Average net realized sales price will continue to increase into the second quarter as we've layered in ag sales at varying price levels throughout the spring. We have fully realized the fourth quarter price increases in our second quarter volumes and expect some additional spot tons at our current pricing. All said, we expect our net realized pricing to increase from $248 per ton in the fourth quarter of 2020 to $300 to $310 per ton for the second quarter of 2021 with the first quarter net realized sales price about halfway between the two. Going forward, we continue to focus significant effort on expanding our specialty potash sales specifically into the premium OMRI and feed markets, areas where we saw significant growth in 2020. For the TRIO segment, our domestic market saw great early season demand in the fourth quarter as we continue to grow sales in key markets throughout the US. Total fourth quarter sales volumes were down slightly compared to last year due to large international sales in the fourth quarter of 2019. Our posted price is now up $60 per ton compared to the summer fill levels, and we are seeing good subscription at current pricing into the spring. We expect our net realized sales price will increase to approximately $220 to $230 per ton in the first quarter, and $230 to $240 per ton in the second quarter of 2021. The oil field segment improved significantly over Q3 as water sales increased from our higher margin sources and contracts, benefiting the bottom line. Total water sales, including byproducts, were $5.8 million in Q4, an increase of $2.2 million compared to the third quarter of 2020. Operators are adding more crews than they expected just a few months ago, and commodity pricing is clearly supportive of the world-class reserves in the Northern Delaware Basin. Our debt position is unchanged since the third quarter, with $55 million outstanding, of which $10 million relates to the PPP loan. Our forgiveness application is being reviewed by the SBA, with our 90-day review period ending in April. Availability under our credit facility was $20 million at year end. Cash flow from operations was $12.7 million in the fourth quarter and $31 million for the full year. 2020 capital investment ended the year at $16.4 million. We estimate 2021 capital investment of $25 to $35 million, of which $12 to $15 million will be sustaining capital with the remainder as potential opportunity capital projects. We have significant discretion over our opportunity capital investments in 2021, and we may adjust our investment plans as our expectations for 2021 change. With a strong early start to the spring season, our cash position today is $28 million with no change in our outstanding debt from year end. That concludes our prepared remarks for today. Operator, we're ready to take questions.
Operator
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 speakerphone, 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.
Joel Jackson
Maria Murphy on for Joel. Thanks for taking my questions. How much spring potash demand in the U.S. is pulled forward to the fall? Did growers buy earlier than usual? And how does that leave the channel for potash inventories currently? Thanks.
Bob Gernobis
No, I'll let Zach answer. give you a little more color on that, but what we're seeing is a very diverse market because all crops are up. So if we look across our entire distribution chain across the entire United States, we're seeing pretty low inventories. So one of the great things about having strong commodity prices across the board means that the potato growers are buying as much product as the cotton growers in the Delta of Mississippi. And so when you have that kind of across-the-board commodity price strength, you see drawdown throughout the country. The other good news is we're not seeing the level of imports from the European countries. So I think that we're extremely well-positioned to see 2021 from an entirety standpoint, be a very solid year. I'll let Zach lend some color to that.
spk05
Yeah, thanks, Bob. Yeah, I think we saw the inventories to close 2020 on the field be very low out there just based on the historical fall application season. But even with that said, you know, we're really expecting a continued really strong spring application just due to the, as Bob mentioned, the strength in the commodity values out there. And through the first quarter so far, we've seen the realization of that. We think that'll continue with a strong spring well into April and May.
Bob Gernobis
Does that answer your question?
Joel Jackson
Yeah, thank you. That's helpful. And then just turning to water, how should we think about the trajectory of water sales in 2021 versus, I guess, 2019 levels? We're definitely going to sell a lot more water in 2021 than we did in 2020.
Bob Gernobis
I don't know how much you follow Department of Interior policy, New Mexico State Land Office policy. One of the benefits that Intrepid has is we also, on top of our fresh water rights, own very significant non-potable water rights as well. So we have a unique ability to mix, as we mentioned earlier, service the water market on a full cycle basis, which means taking some fresh water, some brine water, also taking produced water and recycling it and reselling the recycling water. And so our full hope is in the next 30 to 45 days is to have an investor day where we really walk through the infrastructure that is under construction, the on-the-fly recycling that we're doing, the disposal projects that we have underway, and give a much fuller, robust picture of everything that Intrepid has been working on during the 2020 COVID season.
Joel Jackson
Okay, great. And then just the last one from me. Can you talk about your margin outlook for TRIO in 2021, just given a few quarters of negative margin now?
Matt Preston
Sure. As I mentioned on the price, we hadn't seen the domestic price really in our results in Q4 for a variety of reasons, our mix of international versus domestic, and expect that to really rebound in Q1 and Q2 as we realize that full $60 is up. As far as on the cost of goods sold side, I think we've been pretty steady state here for a while now, and so certainly the nice part about our business with pretty low royalty rates compared to competitors on the potash side about 95% of those increased prices fall to the bottom line. So we expect improvements going forward into 2021.
Bob Gernobis
Yeah, I would also add on the last potash price increase, we did not take a TRIO price increase. And so I think the market is well positioned for additional upside potential in the TRIO market as well. So I think we'll just continue to see very continued improvements. Don't forget, we've also got... capacity opportunities at our plant as well. So we're just seeing the overall market for TRIO improve pretty dramatically.
Operator
Thank you. The next question comes from Mark Connolly with Stevens. Please go ahead.
Bob Gernobis
Thanks. Yeah, I wondered, Bob, if you could just give us a little more of a sense of the pace of development. Are there bottlenecks in what you can get done quickly as this ramp comes? Obviously, there's so much uncertainty in terms of how quickly things are ramping back up, but now it seems to be coming very fast. I'm just wondering, are you finding yourself racing to catch up now, or are you a little bit ahead? Not just yourselves, but obviously the partners that you're working with. I I would say we're keeping up with everything. The one thing that we are seeing as people ramp up is don't forget the levels that we're ramping up from. And so we're still not back to 2019 levels. And as we see the ramp up, I just can't describe the level of communication with the major partners that we're supplying to. So there's virtually daily, if not twice daily, communication around frack crews, availability, working through the current Department of Interior's suspension, what they will allow, what they won't allow. So there's just a tremendous amount of collaboration between the oil companies and the service providers. So I think we're going to be able to keep up with it just fine. if we continue to collaborate in the fashion we are. Okay, so you're still sort of in a good position because the current demand is behind 2019.
Bob
So you're not racing just to catch up with where you are today. Okay.
Bob Gernobis
No, I see frack crews coming on just, you know, continually and gradually and continually. As we talk to the variety of operators that we're dealing with, we're not seeing frack crews just, quote, unquote, appear. There's a tremendous amount of planning that's going on this time. I think that because the downturn in 2020 was so vicious, there's a lot more active participation with the operators, their bankers, their hedging programs, the timing of their hedging programs. And so there's just – an inordinate amount of collaboration to make sure that the well-funded operators that did hedge get their timing just right. So I'm probably answering a lot more of your question, but I see very sustained, organized, thoughtful development occurring in the northern Delaware. That's super helpful. Just a question, has weather affected your expectations for fertilizer production this year? I'm just wondering if what we just went through was enough to throw you off track anywhere. The only place we got thrown off track was the freezing weather in Texas and New Mexico. You know, we had some power outages. I'd say everywhere else that we market fertilizer products, we were just fine. I would say that it provided more of a challenge for, you know, four or five brief days in southeast New Mexico and Texas as it relates to our water business. So that's behind us. I think everybody, when they saw the weather coming, did a good job of shutting things down. And, you know, we're seeing some of the major operators just turning things back on now, making sure everything's in total repair. You know, what happened in the state of Texas in terms of the electrical grid in southeast New Mexico was pretty much unprecedented. So the good news is the repair has happened, and everyone's checked things out, things are working, and so we're just slowly bringing everything back on. Okay, and just one quick question on TRIO. You had bigger international sales last year. Can you just talk sort of about – your thoughts about where the TRIO market is going, domestic versus international. You made a lot of changes last year on where and how and size of shipments. I'm just curious where you come out in terms of where you think the best opportunities are for that product over the next year or two. Well, we've got two very specific customers that we really enjoy doing business with in a certain part of the world. I'm Given we only have one competitor, I'm not going to tell you who our favorite customers are. I would imagine that we'll continue to service those customers because they really are a joy to work with. There's other markets that we're just choosing not to be a part of until they come back and knock on our door. As you know, the last several years were extremely competitive, and so we chose to exit certain markets. and let other people take that business, some of those people are coming back and knocking on our door. And so we're just going to reenter the global market much more thoughtfully than we did several years ago. That's helpful. And obviously it's not just TRIO that's struggling to get paid for nutrient value. We've seen a lot of uneven performance across the specialties.
spk07
I appreciate it. Thank you. Sure.
Operator
The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.
Bob
Hi, this is Steve Haines on for Vincent. Just wanted to ask a quick one on the above average evaporation you talked about in the press release. I guess as it, you know, kind of in regard to your expectations for cost per ton in 2021 Also, I think there was a comment about being able to operate a bit longer in the spring. So, any comments around your production volumes as well?
Bob Gernobis
I'll just say we had great evaporation years. As you know, we've had, you know, part of being in the solar evaporation business is that you're dependent upon the weather, and it is cyclical, and it creates variability. And so, you know, there are years where we have slightly higher costs and years where increased evaporation, we're able to take advantage and achieve a higher margin because our cost structure goes down a touch. So I'll let Matt, if Matt, if you want to add to that with some specificity.
Matt Preston
Yeah, no real change from Mario previous comments. We touched a little bit on some of the freezing weather earlier in the year and really no impact on our potash production. It was very cold weather and we didn't operate for a few days, but it wasn't a major precipitation event. that would impact our pond inventory. So still above average evaporation. We do think we'll operate a bit longer than normal just to get through the ponds. And all else equal, that will certainly help our cost per ton heading into 2021. Okay.
Mario
Thank you.
Operator
The next question comes from John Roberts with UBS. Please go ahead.
Matt Preston
Great. Thank you.
spk07
How much does the transition to brine water increase the resources available to you?
Bob Gernobis
Is your question how many more water rights do we have of brine? I guess I don't understand your question. Is brine 2x your freshwater availability or over time as you develop it or? I don't know. I don't have a sense of the order of magnitude of how big brine is relative to fresh. That's a great question. We currently own about half the water rights that we do in terms of fresh water as brine, but getting an appropriation is much easier. And so because it's non-potable, high TDS brine, it's much easier to get an appropriation and get supplemental wells approved because you don't have the protest composition of farmers that are competing or municipalities. So the transition is, it's just an easier transition if that makes sense from an appropriation standpoint.
Matt Preston
Okay.
Bob Gernobis
And then adding full cycle water management, what's kind of the revenue opportunity maybe per customer barrel, uh, or I don't know how to measure it, but how much does it increase your addressable market by having full cycle capabilities versus what you were doing previously? And do you need to partner or acquire additional capabilities to be able to fully offer that? No, that's, that's the beauty. Um, we, you know, part of the capital that was spent in 2020 and, and some of the team members that we've brought on, um, we use 2020 as an opportunity to really, uh, I hate to use the word upgrade, but acquire talent that came from significant oil companies with vast recycling experience. We've already purchased a lot of the equipment necessary. We're under construction right now. We're looking at a matter of months to be up and running. From a margin standpoint, the margins are equal to, if not better, than fresh water because you can take a barrel of produced water and recycle it several times, which means you resell the same barrel of water multiple times. You have a small fixed chemical cost and a small labor cost. And then they actually are mobile units. And so having a produced water outlet side that we're developing on the backside allows us that capacity. So it's having the source water, the variety of geographically, the source water literally all throughout the basin in different forms, having the ability to have modular recycling, and then having the disposal capacity that we're building out as we speak, as well as an interesting project that we'll be talking about in future months as well.
Mario
Thank you.
Operator
The next question comes from Jason Ersner with Bumbershoot Holdings. Please go ahead.
Jason Ersner
Thanks. Good afternoon. Just following up on the last answer there, I guess you mentioned that the next couple of quarters are going to be pivotal for that business. Is there anything you would point to that investors could be looking for that would either signify the success or not getting traction in that business, or is that kind of what the investor day that you have planned would be about?
Bob Gernobis
That's exactly what it's planned for, Jason. You know, we spent 2020 trying to get a lot of projects designed, get the right teams around them, work them through the regulatory agencies. I'll be honest, the Department of Interior suspension was just a touch of a blip. The state of New Mexico regulatory agencies, because we're helping them fulfill their legislative agenda, I think we'll get everything accomplished that we want to. So we really look forward to being able to share with the market the things that we're doing and creating a lot more transparency. I think had COVID not gone into the first quarter where we are, we'd be having that investor day in this quarter. but COVID is what it is. And so we're finding certain regulatory agencies, court systems, legislative bodies are all still operating virtually, and it still slows things down. So that's just a reality of life that we're dealing with. It is improving week to week in terms of being able to get things done either legislatively or regulatory-wise. So I hope I'm answering your question, that we know the market is really wanting a lot more transparency, and we have every intention of getting it as quickly as we can and sharing the nature of the projects that are ongoing.
Jason Ersner
That is answering it, I guess. But is it the type of business where you'd be able to, you know, announce like customer wins or contracts or it's really just going to be waiting for it to start showing up in the numbers?
Bob Gernobis
It could be a little above. You know, some of the recycling, you don't necessarily need a big contract. And some of the other projects that we're working on, those are all being discussed and negotiated as we speak.
Jason Ersner
Okay. And then it's been a couple of quarters, but any update on the lithium reserves or, you know, the tests that have been going on there?
Bob Gernobis
You know, that is a great question. We've been re-approached now by a couple of companies. The original company that did the testing for us, Lilac, has come back with promising results. As you know, the lithium market has been a bumpy ride. And so... We've got the appropriate personnel retargeted back on that project. It's interesting to have a lithium opportunity. I've got to be honest. I'm not as prepared to discuss lithium today. I thank you for asking about it, but I've got to be honest. Off the top of my head and my prepared remarks, I just don't have the numbers with me to share, so I apologize.
Jason Ersner
No problem. Does the proximity, though, with the gigafactory, would that matter in the long-term viability of the reserves potentially being, you know, in terms of the cost to get it out versus some other method?
Bob Gernobis
Well, as you know, you know, lithium, it's all a function of to what degree do you want to process it to. And so given where we're located, there are – companies that would be interested in using our facility to process lithium from theoretically obtainable other sources that are somewhat nearby. So lithium is all about to what degree do you process it to. So we're still focused on that. We understand it. I don't think we want to be a full service lithium processing entity. We'd rather look to monetize the lithium reserves that we have, either through a royalty structure or allowing someone to take that lithium on site, combine it with lithium from other sources, and continue to process it further.
spk07
Okay, great. I appreciate the answers. Thanks.
Operator
The next question comes from Matt Farwell with Ross Capital. Please go ahead.
Bob Gernobis
Hi, thanks for taking my question. I was wondering if on the water business, one, if you could make a point of clarification, just because I'm not sure if I quite caught it. I have in my notes that there's a certain amount of water resources that the company owns. I have 13,800 acre feet or 107 million barrels. There's also a slide on this in the August 2019 presentation. I understand you may not have this data at your fingertips, but I'm wondering if the brine reserves are included or in addition to the reserves you've disclosed to the market. They're not included. Okay, great. And quite frankly, you know, if you follow New Mexico, policy, the state land office policy. If you follow what's going on in the legislature as we speak today, there are several bills. So we've been very adaptive to not only the ESG requirements of several companies, but we've been adaptive to what's going on with the state land office, the administration change federally, as well as what's going on in the New Mexico state legislature. okay and i'm definitely looking forward to the investor day um i guess i i'm still trying to um get a peek into what you might say so i'll ask is the recycling opportunity how does you know if you see it now how does that compare to the market opportunity that's a little bit more tangible in uh fresh water rights and water disposable disposal is it equal or greater or um or
Bob
perhaps earlier stage?
Bob Gernobis
I think it's greater. Quite frankly, every single oil company is trying to move towards a recycling component. But you need source water, either fresh water or brackish water, to start the flywheel. And so despite operators' claims of very high percentages of recycled water, I'd say right now it's It's in the 25% to 30%, but we're seeing the technology that can easily take it to 50% in 2021 and grow it from there. So we see it as, first and foremost, where the regulators and the politicians want to take it so that we're not fighting battles over river water, Ogallala water, etc., It enables everyone to get on the same ESG page and move it forward. Okay, great. And the last question is, obviously, with the higher prices, there's a high probability that a company generates free cash flow this year. There's the obvious improvement in financial strength in terms in the equity markets. Can you give us an idea of what potential uses of free cash are? and or financial strength might be?
Bob
Would it be repayment of debt or other initiatives?
Bob Gernobis
I would say first it's to, you know, right now our leverage ratio is in good shape. We don't have any real risk there. We'd like to reduce debt a little bit more. I'm the first one to admit, because I'm the largest shareholder, that I would love nothing more than to announce a buyback program when we're financially able to and return money to shareholders. As we all know, had we done that, like many other oil companies in 2019, we'd have never made it through 2020. So it's a good thing we didn't, despite the urging of many people. So I think we just got lucky on that one. But as we do, our goal is to return funds to shareholders as quickly as we possibly can. We understand that. We hear that. I just can't stress how much we appreciate the need to do that. If I can say it any more clearly, I will.
Mario
Great. Thanks for taking my question, Bob. I want to thank everyone for their interest.
Bob Gernobis
Go ahead.
Operator
This concludes the question and answer session. I would like to turn the conference back over to Bob Jornaviz for any closing remarks.
Bob Gernobis
Just want to thank everyone for their time and their interest in Intrepid. We hope that everyone stays healthy and look forward to catching up with you. So thank you and thank you for your interest. Have a great day.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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