Intrepid Potash, Inc. (NYSE:IPI) Q4 2023 Earnings Call Transcript

Intrepid Potash, Inc. (NYSE:IPI) Q4 2023 Earnings Call Transcript March 7, 2024

Intrepid Potash, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Fourth Quarter 2023 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.

Evan Mapes: Thank you, Krista. Good morning, everyone. Thanks for joining us to discuss and review Intrepid’s fourth quarter 2023 results. With me today is Intrepid’s Co-Founder, Executive Chairman and CEO; Bob Jornayvaz; and CFO, Matt Preston. Also available to answer questions during the Q&A session is the Vice President of Sales and Marketing, Zachry Adams; and our Vice President of Operations, John Galassini. Please be advised that our remarks today 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 really anticipated are based upon 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 refer to certain non-GAAP financial and operational measures. Reconciliations to the mostly directly comparable GAAP measures are included in yesterday’s press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. I’ll now turn the call over to Bob.

Robert Jornayvaz: Thank you, Evan. Good morning, everyone. We appreciate your interest in Intrepid in attendance for our fourth quarter earnings call. I’ll be structuring my remarks today, beginning with a high-level overview of the quarter, our market outlook and production updates and then dive into more details of the recent XTO deal and takeaways for Intrepid’s equity. In the fourth quarter, our adjusted EBITDA totaled $7.1 million, bringing our 2023 figure to $41.6 million. Significantly higher production costs from our lower production as well as moderating potash prices drove down the decline in profitability this year. While our results continue to be negatively impacted by our current production profile, primarily due to the failure of our HB IP30A well in the fourth quarter of 2022.

Fortunately, the replacement well has been fully permitted and has been constructed as we speak. This individual well failure created a major impact to our unit economics, so correcting our mistake as well as our overall potash production trend remains the number one strategic priority for Intrepid. Before getting into the highlights also included in our fourth quarter results were approximately $43 million of non-cash impairment charges, which were primarily directed at our East langbeinite mine in the Trio segment. During the fourth quarter, we saw continued strong demand for our fertilizer products. And for 2023, our potash and Trio sales volumes were both up 16% compared to the prior year. Market potash pricing has also recently stabilized at levels that are about 35% higher than the previous cycle, and we expect our sales to remain steady ahead of spring application.

Longer term, we will remain constructive on the outlook for agriculture and fertilizer markets even with pricing for key crops recently coming down over the past few months. As we discussed in our earnings call in August, following the last period of moderating U.S. farmer incomes off-peak years, which we saw back in 2012 and the period thereafter. Annual U.S. potash demand still averaged roughly 5% growth rate through 2017. And given the significant profits generated by U.S. farmers over the past three years, they are currently in a very solid financial position. Putting this together, we expect the trend of yield maximization to continue past the upcoming spring application season, which, of course, is positive for fertilizer demand. Moving on to our potash production.

The number one strategic priority at every level within the company has been to correct our declining production trend. To that extent, I’m excited to share that our recent production execution has put us on the path for a meaningful increase in production starting in the second half of the year. We’ve included comprehensive project updates in yesterday’s earnings release, but for a quick summary on the key takeaway, we will forecast that our total potash production will be at least 10% to 15% in 2024 compared to 2023 with an additional 15% to 20% increase expected the following year and higher upside looking long-term. In mid-December, we announced the third amendment for our cooperative development agreement with XTO. For some background, XTO is one of ExxonMobil’s subsidiaries that has a very large acreage position in the Delaware Basin and more specifically within the Designated Potash Area or DPA.

For many years, we’ve been successful in co-developing our respective interest within the DPA, and this amendment helps ensure that this continues, while also formalizing several items. For Intrepid, what this amendment stipulates is then in exchange for us agreeing to support and not oppose XTO’s development and operation of their oil and gas interest within the DPA, Intrepid receives certain payments from XTO. To date, we’ve received the initial $50 million with $50 million more guaranteed by the seventh-year anniversary of the amendment, but possibly received sooner if XTO receives approval for a new or expanded drilling island within this specific area. Intrepid could also receive up to an additional $100 million with the amount of that payment and timing being dependent on certain drilling activities by XTO.

We feel we are now more properly aligned with XTO in the co-development in the area. We can’t emphasize enough the importance of this transaction with the cash infusion significantly bolstering our liquidity position and helping de-risk our outlook. The current balance sheet cash is close to fully funding our 2024 capital program providing a solid cash runway until we see the positive impacts to our unit economics associated with the higher potash production expected later this year. Overall, we think Intrepid is extremely well positioned. But when looking at where the equity is trading, we are close to being priced for worst-case scenarios, which is certainly not the case. And I want to clarify several key points. Potash production will be inflecting higher following the summer’s evaporation season, so we are only a few quarters away from seeing those results.

We also want to be clear that as we progress through the commodity cycle, we will be focusing on measures that protect our balance sheet and enhance our margins and cash flow. And accordingly, we will be evaluating our options for Trio. Our primary business of selling a product that supports crops is forecast to see steady growth, and we are seeing price support for potash. We have long-lived reserves and resources that can support many decades of production, which significantly helps reduce our terminal value risk. The non-potash growth projects already underway, namely sand and lithium, offer attractive returns and upside. For these projects, Intrepid won’t be committing significant upfront capital in owning all of the risk. So we are currently negotiating with various parties in pursuit of a JV partnership structure for each of those commodities.

We have a very strong balance sheet, no long-term debt, a cash position of $35 million and $150 million revolver with maturity of August of 2027. Moreover, we will have another $50 million guarantee from our XTO deal, the possibility of an additional $100 million in payments from XTO over time. And this is the most important point, no one has a more important stake or greater stake in wanting to see Intrepid succeed and have this translate to the price of our common stock and myself as the largest shareholder. I firmly believe that for the items we can control, our outlook is the best we’ve had in many years, and I’m excited in the direction we are going. I’ll now turn the call over to Matt. Please go ahead.

Matthew Preston: Thanks, Bob. In the fourth quarter, Intrepid generated adjusted EBITDA of $7.1 million and had an adjusted net loss of $5.2 million. Although our sales volumes and demand for our key products have remained steady, moderating potash pricing and higher unit costs associated with the lower production levels continue to be headwinds for our financial results. As Bob noted, returning our potash production to prior peak historical levels remains the most effective way of improving our margins with the first key inflection expected later this year. The improvement in our unit economics will be gradual, but should start to be evident in the second half of 2024 and keep improving from there with the higher levels of potash production.

For segment highlights, in potash, our Q4 and 2023 sales volumes totaled 45,000 and 258,000 tons, respectively, with the fourth quarter volume down 10% compared to last year, while the full-year sales volumes increased 16%. Sales volumes into agriculture markets comprise about 74% of our overall potash sales while sales into feed markets made up approximately 23% of our tons sold in 2023. Despite lower overall production levels, we’ve been successful in continuing to grow sales into feed markets to ensure we take advantage of the premium pricing. In the fourth quarter, our potash production totaled 79,000 tons, which brings our 2023 calendar year production to 224,000 tons, reduced brine grades at HB and Wendover were the primary drivers of the lower-than-expected production.

But since commissioning the Eddy Shaft project in October, we’ve been filling our ponds at HB with some of the highest grade brine in Intrepid’s history, which will translate to a production benefit we should see beginning with the fall 2024 harvest. As for the first quarter potash outlook, we expect our sales volumes to be in the range of 65,000 to 75,000 tons at an average net realized sales price in the range of [$3.85 to $3.95] per ton. In Trio, our Q4 and 2023 sales volumes totaled 49,000 and 228,000 tons, respectively, which compares to 28,000 and 197,000 tons in the same prior year periods. In the fourth quarter, we produced 57,000 tons of Trio, which was up about 5,000 tons, both sequentially and year-over-year. As for the first quarter Trio outlook, we expect our sales volumes to be in the range of 80,000 to 90,000 tons at an average net realized sales price of $290 to $300 per ton.

In Oilfield Solutions, our fourth quarter sales saw an approximately $2 million sequential increase, which was largely attributable to a roughly $3 million increase in our water sales from a large frac job on our South range. Our fourth quarter gross margin was double the prior year figure and our brine business is becoming a steady contributor with room for more organic growth, although we are still subject to quarterly fluctuations based on the timing of larger frac jobs like we saw in the fourth quarter. Finally, given our improved financial position and recent period of high investments, I’ll end my remarks clarifying our capital allocation priorities as we look ahead. First and foremost, we are focused on successfully finishing the remaining potash revitalization efforts.

This is far and away the most important initiative Intrepid can undertake. And for 2024, we expect our capital expenditures to be between $40 million and $50 million, which is down about 30% compared to 2023 at the midpoint. Our next priority is maintaining a solid financial position with a strong balance sheet through the cycle. Third, we will continue to develop the sand and lithium projects already underway, but for these projects, we will be very thoughtful moving forward to ensure we limit Intrepid’s capital commitments, reduce potential operational risks and make sure our operations teams remain focused on the successful completion of our key potash projects. Operator, we are now ready for the Q&A portion of the call.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Joel Jackson from BMO Capital Markets. Please go ahead.

Joel Jackson: Hi. Good morning, everyone. Thanks [for the color]. A couple of questions. I’ll ask them one by one. Maybe on costs, you gave some good volume increases expected for potash this year and next year and talk about costs starting to improve in the second half of the year. Can you give us a bit of color on the magnitude of cost reductions, you might see unit cost second half of the year for potash into 2025 if you hit your production numbers? And then maybe you can give a bit of color on how you see Trio cost trajectory to your cost this year and next?

Robert Jornayvaz: Matt, do you want to take that?

Matthew Preston: Yes, happy to. Given where our production is today, Joel, we’re in that 10% to 15% increase in production. We expect to see the same decrease in our unit economics on potash, 10% to 15%. That will really start to come into effect kind of late Q3 and really into Q4 results as those tons go into inventory, we start to sell down that inventory from the fall harvest beginning in the fourth quarter of 2024. For Trio, right now, our outlook is pretty consistent production cost per ton, not a lot changing there on our production profile. And while we certainly look to limit cash investments, capital investments and kind of cut back wherever we can, I’d say the outlook is pretty steady there with 2023.

Joel Jackson: Okay. And then it looked like on your freight costs were a lot lower in the fourth quarter. Is that something we should expect going through for the next bunch of quarters? How much you have locked in?

Matthew Preston: No, our freight fluctuates depending on just location of sales, mix between truck and rail. Freight really, for us, is mostly a pass-through cost. So when we give our net realized sales, why we focus on that average net realized sales price factor when we give that forward guidance. And so we’ll see normal fluctuations based on where we’re selling, but no reason to think we won’t just go back to sort of long-term trends and averages.

Joel Jackson: And finally, the first $50 million payment, I think in the press release that came in December, but I think you actually got it in Q1, if I look at some of your other color. And then the second $50 million, what is kind of – I know you said it’s within seven years, but what is kind of the best case scenario you envision for getting the second $50 million? What does that look like?

Robert Jornayvaz: Well, Exxon is – XTO is currently applying for drill islands, which is a small geographic area within the known potash area that the BLM has to approve. And so I don’t know if you’re following XTO. I can’t speak as to Exxon and their merger with Pioneer, but they’ve made it very clear that the Permian Basin, overall, both the Delaware and the Midland Basin, are critical areas for them in terms of areas of focus. So it’s much more a question for Exxon as to the timing of their development plan. But given our reading of their public statements and there’s significant merger with Pioneer and their commitment to the Delaware Basin. The sooner that they go to work and receive permits, the sooner we get paid. So I think given Exxon’s commitment to the Delaware Basin, there’s an opportunity for that payment to happen significantly sooner, but that’s not under our control.

Joel Jackson: Thank you very much.

Operator: Your next question comes from the line of Joshua Spector from UBS. Please go ahead.

Lucas Beaumont: Good morning. This is Lucas Beaumont on for Josh. I just want to clarify the volume guidance first of all. I’m not sure if I write this down back to [indiscernible]. Sounded like you guys said 65 to 75 for potash and 80 to 90 for Trio. Was that the other way around?

Matthew Preston: No, that’s correct.

Lucas Beaumont: Sorry, potash is 65 to 75?

Matthew Preston: That’s right.

Lucas Beaumont: Okay. So I guess then just could you kind of talk to us as to why that’s kind of you’re expecting that to be down kind of year-on-year in the first quarter, just the dynamics from 4Q to 1Q there?

Matthew Preston: Yes. It’s just a function of tons and inventory and our 2023 production, obviously, being down. We took advantage of high pricing, selling as much as we could in 2023.

Robert Jornayvaz: Yes. To be clear, the well failure that happened in the fourth quarter of 2022 resulted in lost production somewhere between 60,000 and 100,000 tons at the HB facility. So that one well failure had a very significant impact on our overall production failure, and that’s why I called it out in the early part of my remarks.

Lucas Beaumont: Great. And I mean you have a lot – sorry, go ahead.

Robert Jornayvaz: I was just going to say – go ahead.

Lucas Beaumont: Sorry, you go ahead, mate. Sorry if you had something to add, please.