Chord Energy Q4 2023 Earnings Call Transcript

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February 21, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the CVR Partners 4th Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Roberts, Financial Planning and Analysis and Investor Relations.

Speaker 1

Thank you, Christine. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer Dane Newman, our Chief Financial Officer and other members of management. Prior to discussing our 2023 Q4 and full year results, let me remind you that this conference call may contain forward looking statements as that term is defined under federal securities laws.

Speaker 1

For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward looking statements. We undertake no obligation to publicly update any forward looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law. This call also includes various non GAAP financial measures.

Speaker 1

The disclosures related to such non GAAP measures, including reconciliation of the most directly comparable GAAP financial measures, are included in our 2023 Q4 earnings release that we filed with the SEC and Form 10 ks for the period and will be discussed during the call. Let me remind you that we are a variable distribution MLP. We will review our previously established reserves, current cash usage, evaluate future anticipated cash needs and may reserve amounts for other future needs as determined by our General Partners Board. As a result, our distributions, if any, will vary from quarter to quarter due to several factors, including but not limited to operating performance, fluctuations in the prices received of finished products, capital expenditures and cash reserves that are necessary or appropriate by the Board of Directors of our general partner. With that said, I'll turn the call over to Mark Pytosh, our Chief Financial Officer.

Speaker 1

Mark?

Speaker 2

Thank you, Richard. Good morning, everyone, and thank you for joining today's call. The summary financial highlights for the Q4 of 2023 included net sales of $142,000,000 net income of $10,000,000 EBITDA of $38,000,000 and the Board of Directors declared a 4th quarter distribution of $1.68 per common unit, which will be paid on March 11, 2024 to Unite Holdings of Record at the close of the market on March 4. For the full year 2020 3, we reported EBITDA of $281,000,000 and distributions of $17.80 per common unit. Our facilities operated extremely well for the year with ammonia utilization rates of 99% 100% at Coffeyville and East Dubuque respectively.

Speaker 2

In 2023, we set a new annual record for UAN production volumes at Coffeyville along with new records for monthly production volumes in both ammonia and UA entities to be. We are also proud to report continued improvement in our environmental and safety metrics in 2023 with only one environmental event for the entire year and 0 Tier 1 process safety incidents. For the Q4 of 2023, our consolidated ammonia plant utilization was 94%. This resulted in combined ammonia production of 205,000 gross tons, of which 75,000 net tons were available for sale. Combined UAN production was 306,000 tons.

Speaker 2

During the quarter, we sold approximately 320,000 tons of UAN at an average price of $2.41 per ton and approximately 98,000 tons of ammonia at an average price of $4.61 per ton. Relative to the Q4 of 2022, UAN and ammonia sales volumes were higher, primarily due to strong demand for nitrogen fertilizers in the fall, driven by favorable weather conditions and lower fertilizer pricing relative to the past 2 years. 4th quarter prices for UAN ammonia declined approximately 47% 52% respectively relative to the prior year period. Following the reset of nitrogen fertilizer prices in December 2020 3, we saw an increase in pricing in the fall, particularly for ammonia, driven by strong demand for application after the harvest. While grain market conditions have softened recently, at current fertilizer price levels, we believe farmer economics remain attractive and we expect to see continued strong demand for the upcoming spring planting season, which I will discuss further in my closing remarks.

Speaker 2

I will now turn the call over to Dane to discuss our financial results.

Speaker 3

Thank you, Mark. Turning to our results. For the full year of 2023, we reported net sales of $681,000,000 and operating income of 201,000,000 Net income for the year was $172,000,000 or $16.31 per common unit and EBITDA was $281,000,000 For the Q4 of 2023, we reported net sales of $142,000,000 and operating income of 17,000,000 dollars Net income for the Q4 was $10,000,000 or $0.94 per common unit and EBITDA was $38,000,000 Relative to the Q4 of 2022, EBITDA declined primarily due to lower UAN and ammonia sales prices, somewhat offset by higher sales volumes and lower natural gas prices. Direct operating expenses for the Q4 of 2023 were 63,000,000 dollars Excluding inventory and turnaround impacts, direct operating expenses declined by approximately $5,000,000 from the Q4 of 2022, primarily related to lower electricity and natural gas costs, offset somewhat by increased repair and maintenance expenses. Capital spending for the 4th quarter was 11,000,000 was primarily maintenance capital and full year 2023 capital spending was $29,000,000 We estimate 2024 maintenance capital spending to be $32,000,000 to $35,000,000 and growth capital spending to be $12,000,000 to $13,000,000 We expect a significant portion of the 2024 growth capital spending will be funded from cash the Board elected to start reserving for these projects in 2023.

Speaker 3

We ended the quarter with total liquidity of $84,000,000 which consisted of $45,000,000 in cash and availability under the ABL facility of $39,000,000 Within our cash balance of $45,000,000 we had approximately $3,000,000 related to customer prepayments for the future delivery of product. Assessing our cash available for distribution, we generated EBITDA of $38,000,000 and had net cash needs of approximately $20,000,000 for interest costs, maintenance CapEx and other reserves. As a result, there was $18,000,000 of cash available for distribution and the Board of Directors of our general partner declared a distribution of $1.68 per common unit. Looking ahead to the Q1 of 2024, we estimate our ammonia utilization rate to be between 86% 91%, which will be impacted by some planned downtime at Coffeyville in the quarter. We expect direct operating expenses to be $52,000,000 to $57,000,000 excluding inventory impacts and total capital spending to be between $9,000,000 $13,000,000 With that, I will turn the call back over to Mark.

Speaker 2

Thanks Dane. In summary, we're pleased with our 4th quarter results. We had another good quarter production from our facilities and experienced solid demand for ammonia for fall application, one of the strongest periods we've seen in recent years. We believe market conditions are steady and we expect to see strong demand for nitrogen fertilizer for the spring 2024 planting season. Overall grain market conditions have softened since our last call as grain production estimates from the 2023 planting season have risen.

Speaker 2

Current USDA estimates indicate 91,000,000 acres of corn will be planted in the spring of 2024, a 4 percent decrease compared to 95,000,000 acres in 2023. Planted soybean acres are estimated to be 88,000,000 in 20 24, up 5% from 2023 levels of $84,000,000 Yield estimates for corn are increasing from 177 to 181 bushels per acre and soybean yield estimates are increasing from 51 to 52 bushels per acre. The USDA is now projecting grain inventory carryout levels to be approximately 17% for corn and 10% for soybeans, resulting in inventories near the 10 year averages. Grain prices are a little lower than last quarter with May corn at 4.30 per bushel and soybeans at nearly 11.90 per bushel. These grain prices coupled with current fertilizer prices support attractive farmer economics, which should bode well for nitrogen fertilizer demand for spring 2024.

Speaker 2

We believe that the length of this demand cycle will in large part be driven by grain prices staying at elevated levels and we see fundamentals for grains remaining steady. As I mentioned on the last several earnings calls, customer purchasing patterns have evolved to become more ratable due to higher inventory carrying costs from higher interest rates. We experienced this new buying pattern after the fall ammonia application and we've seen more regular ratable buying of nitrogen fertilizer, which is matching well with our production schedule. Geopolitical risk continue to represent a wildcard for the nitrogen fertilizer industry with meaningful fertilizer production capacity residing in countries across the Middle East, North Africa and Russia. We are closely monitoring developments in the Middle East that could impact energy and fertilizer markets and we expect 2024 will be another period of higher than historical volatility in the business.

Speaker 2

Natural gas prices in Europe have fallen since our last earnings call to $7 to $9 per MMBtu due to lower industrial demand and a warmer than expected winter. While the cost to produce nitrogen fertilizer in Europe is currently lower than in 2023, it is still at the high end of the global cost curve. In the U. S, natural gas prices have remained low in the range of $1.50 to $3 per MMBtu since December of 2023, placing the U. S.

Speaker 2

At the low end of the global cost curve. Europe continues to import a portion of its ammonia needs, and we expect that to continue in the coming months. We do not believe that the structural natural gas market issues in Europe have been resolved and likely remain in effect over the next 2 to 3 years. At our Coffeyville facility, we've been conducting engineering studies on the potential to utilize natural gas as an alternative feedstock to pet coke. We believe that by making certain modifications to the plant, we could utilize either feedstock to produce nitrogen fertilizer.

Speaker 2

If this project is approved by the board and successfully implemented, it could give us the ability to choose the optimal feedstock mix and be the only nitrogen fertilizer plant in the U. S. With that flexibility. We also continue to evaluate brownfield development projects at both the production facilities that could be attractive targeted capacity increases to our existing footprint. The Board elected to continue reserving capital that we expect to spend over the next 2 to 3 years and will be focused on improving reliability and redundancy at the 2 plants that can provide better production rates and lower downtime in the future.

Speaker 2

A union strike began at our East Dubuque facility in October and is ongoing. Since the strike began, we have operated the plant in a safe and reliable manner with utilization of 94% in ammonia production for the 4th quarter with the only significant downtime in the quarter occurring in early October before the strike began. We had record monthly production in December and shipped near record volumes of ammonia in November for the fall application. While it's hard to predict the future, we believe we can continue to operate the plant safely and reliably at high utilization rates. We sincerely appreciate the hard work of our people at East Dubuque and supporting facilities to keep the plant running and meeting the needs of our customers.

Speaker 2

The Q4 continued to demonstrate the benefits of focusing on reliability and performance. In the quarter, we executed on all of the critical elements of our business plan, which includes safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors and communities, prudently managing costs, being judicious with capital, maximizing our marketing and logistics capabilities and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution achieving 94% ammonia utilization for the quarter and 100% for the year. Solid operating performance and delivery on our marketing and logistics plans resulted in distribution of $1.68 per common unit for the Q4 and $17.80 per unit declared for 2023. With that, we're ready to take any questions.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from the line of Brian D'Arubio with Baird. Please proceed with your question.

Speaker 4

Good morning, gentlemen. I guess my question is going to be around the comments you made around Coffeeville and potentially turning into a dual fuel, dual input plant. I guess, what's the timing of that decision? Any thoughts on cost? And how would that impact the agreement that you have with your sister company in terms of buying the pet coke that they produce on-site?

Speaker 2

So a few questions in there. I think that our goal is to make a decision this year to present to the Board. And we think that the capital cost there, we don't have the final engineering, so I don't have the final number, but it's not a significant investment for us. It would be a good investment for us, but it doesn't require a big reconfiguration of the plant, particularly the gasification complex. So it's something that we could easily fund.

Speaker 2

It could be out of the reserves that we've been using for building capacity at the plant. The way that we've sourced pet coke, we source from a group of refineries in the Mid Continent. The Coffeyville refinery is a big component of that. And the cost of feedstock from the Coffeyville refiner is cheaper than the others because we don't have transportation to bring it from these other locations. And so our intention would likely be to keep the Coffeyville contract intact as it exists today, but consider removing 1 or more of the 3rd party providers, which are the more costly end of our feedstock.

Speaker 2

But and so we would what we're contemplating is a dual feed system, which would be natural gas and pet coke. But depending on what we do with the design, we may be able to go back to 100 percent pet coke or 100% natural gas, depending on what the market is offering, but that would give us optionality that we do not have today. And so we're very excited about it. And we do intend to make a decision this year on that.

Speaker 4

Got it. And then I know very early stages, but if let's say for argument's sake, you just get the green light from the Board. Is that a project that you see in place by, I guess, work in 2025 done by 2026? Or would that take a little bit more time?

Speaker 2

I would think that we could do that project in the 20 25

Speaker 5

timeframe. I

Speaker 2

think our goal there would be to make a decision on petco sourcing for the 26 year on there because typically we signed 1 year contracts for sourcing the pet coke. So we'd be looking at making a decision based on how to source the pet coke for the 20 26 calendar year.

Speaker 4

Got it. So best case scenario, this is a 26 event in terms of impacting the P and L?

Speaker 2

Yes. I think currently unless we speed it up, I think that would be the logical and the pet coke cycles on an annual basis. And so as an aside, pet coke costs have come down and our pet coke costs will be down this year from last year. So the peak of the market seems to have subsided in pet coke and it is it's coming down. But we like the optionality of being able to pick pet coke or natural gas or really a combination of those 2.

Speaker 4

I agree on that approach. Remember giving you guys grief a couple of years ago when you thought about going oil not gas at Coffeyville, but I think this makes all the sense of the world. That's all I've got. Thank you

Speaker 1

so much. Appreciate the color.

Speaker 2

Okay. Thank you, Brian.

Operator

Our next question comes from the line of Rob Maguire with Granite Research. Please proceed with your question.

Speaker 5

Good morning, Mark, Dan and Richard. Good morning. Just a few questions here. Can you talk about inventories in the channel? Do you have any color on that from your perspective?

Speaker 2

Yes. And that's I think it's kind of what I was saying in my remarks about ratable buying. Inventory levels are lower than historical. And that's what I call ratable because typically what the pattern that we saw we've seen in recent years is that after fall ammonia application, customers would be buying in size for spring, what we call spring prepay and also winter fill. Well, they're not buying as much in a lump sum in December, but we've seen buying in January February.

Speaker 2

Historically. We haven't really seen much buying in January February for the ammonia run-in the spring. And so the inventory levels are definitely lower in the system and we never they never replenished after the end of last season. They were buying for, I'd call it immediate needs. So in ammonia, they've all for fall application and UAM, they've been buying more ratably over time and not filling up inventories as quickly as they had historically.

Speaker 2

And we from talking to the customer base, a lot of it is that customers don't want to carry as their cost of capital is 8 percent. They don't want to carry product for 8 months or 6 months buying it in the fall and applying it in the every month, whereas historically we sold in episodes and when the customers are ready. So it's actually matches very well with our production schedule.

Speaker 5

Thank you. And then Coffeyville ammonia utilization, can you just give us some color on that step down?

Speaker 2

Yes. We've had some issues with our ammonia converter, which is what Dane said in his remarks, the guidance for the utilization for the Q1 of plant. We're doing work on a catalyst change there. And so that work is going to get done bridge mostly in February, a little bit March. And that's why the ammonia rates dip back down.

Speaker 2

And so we wanted to get in there and change out that catalyst. So that's going on right now and we expect it to get back to full production rates as soon as we come out of that project.

Speaker 5

Thank you. And then lastly, do you have any thoughts on OCI's announced sale of Iowa Fertilizer Company valuation and so forth?

Speaker 2

I would say it hits on a couple of points for us that we definitely believe in. We think that the value of existing production assets is worth more than maybe the market thinks because of the cost to construct. If you look at all the new blue ammonia projects that are contemplated in the Gulf and even the brownfield expansions that have been getting done here recently, the cost escalation in the last 3 years for new capacity is enormous. And therefore, the plants that already up and running have more value in my mind have more value than they did 3 years ago. And there are I think there's really good synergy there, but I think that when you look at the purchase price relative to our assets, it certainly makes us feel like there's real value in the two plants that we have, particularly plants that are located in the Midwest.

Speaker 5

Mark, thank you for all that color. Appreciate it. Have a good day.

Speaker 2

All right. You too, Rob.

Operator

Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

Speaker 2

Well, thanks everybody for joining today and we'll look forward to reviewing our Q1 results in a couple of months. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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Earnings Conference Call
Chord Energy Q4 2023
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