CF Industries Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to CF Industries' First Quarter 2023 Earnings Conference Call. [Operator Instructions]

I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations. Sir, please proceed.

[Martin A. Jarosick, Vice President, Treasury and Investor Relations at CF Industries]

Good morning, and thanks for joining the CF Industries' earnings conference call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Burt Frost, Senior Vice President of Sales, Market Development and Supply Chain.

CF Industries reported its results for the first quarter of 2023 yesterday afternoon. On this call, we'll review the results, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.

Now let me introduce Tony Will, our President and CEO.

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted results for the first quarter of 2023, in which we generated adjusted EBITDA of $866 million. Our cash generation remained strong, and on a trailing 12-month basis, our free cash flow was $2.3 billion. These results reflect continued outstanding execution by the CF Industries' team. We ran our plants well, leveraged our logistics and distribution capabilities, and most importantly, worked safely.

At the end of the quarter, our 12-month recordable incident rate was 0.33 incidents per 200,000 labor hours, significantly better than industry averages. While last year's unprecedented pricing environment has moderated, global industry dynamics remained favorable. Global nitrogen demand that was priced out of the market last year's returning, driven by the need to replenish grain stocks. At the same time, forward price curve suggests that energy spreads between North America and high cost producers in Europe and Asia will continue to be significantly wider than historical averages.

As a result, we expect to continue to generate substantial free cash flow. This will enable us to both invest in growth and return capital to shareholders. In line with this, we are pleased to have reached an agreement to purchase Incitec Pivot's ammonia facility in Waggaman, Louisiana. The Waggaman facility offers us a newer, highly efficient ammonia plant that we expect to enhance through improved uptime and asset utilization. This acquisition is the latest step in our drive to provide shareholders with greater participation in our business and access to superior cash flows, as it shown on Slide 6, 7, and 8 in our materials.

The facility will fit seamlessly into our network and increase our capacity to meet demand for decarbonized ammonia as a clean energy source, once we have implemented carbon capture and sequestration at the site. We believe the demand for low carbon ammonia will provide a robust growth platform for the company in the years ahead. We have made [Technical Issues] disciplined investments alongside partnerships and collaborations with global leaders in order to be at the forefront of producing decarbonized ammonia as a clean energy source.

With that, let me turn it over to Bert who'll discuss the global nitrogen market conditions in more detail. Bert?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Thanks, Tony. Over the last year, the global nitrogen market has continued to change rapidly and in dramatic ways. At this time, in 2022, global energy prices reflected the shock and uncertainty brought on by Russia's invasion of Ukraine. There were fears that Russian fertilizer exports would be locked out of the global market, and we entered a period of substantial production curtailments and shutdowns across Europe, while China restricted urea exports.

Today, global energy costs have moderated and global operating rates have risen. New capacity delayed by the pandemic ramped up production. Other than ammonia, Russian fertilizer exports have returned to near pre-war levels, as willing buyers have continued to take the discounted product, especially in the United States and Brazil. And global fertilizer trade flows have largely adjusted. As a result, global nitrogen prices have fallen from 2022 highs. This helped lead to a first quarter of 2023 that was marked by lower than typical global buying activity.

Agricultural purchases in North America took a wait-and-see approach as global nitrogen values fell and weather patterns did not support an early spring. Several large importing regions were essentially absent from the market during the quarter as well. Most notably, this included India, which only had one urea tender during the quarter, in large part due to higher domestic operating rates. Additionally, European purchasers slowed import activity in the first quarter after securing substantial imports in the second half of 2022.

Lower global nitrogen prices have triggered a rebound in demand from less affluent regions of the world, as you can see on Slide 13, offsetting some of the impact of lower purchasing from large importers. CF Industries was well prepared for this environment, having entered the year with a strong order book as demand in North America held off, we leveraged our distribution and logistics capabilities during the quarter. This included capturing superior netbacks available from exports as well as positioning product at our distribution terminals for the spring application season.

As a result, we had a more open order book heading into the second quarter than usual. We have managed this well as the North American spring application season kicked off recently. Pricing in North America has risen as demand emerged and all products started moving at a more normal rate. We expect this to be an active fertilizer season, application season in 2023 with corn acres in the U.S. expected to be up about 5% and wheat acres up around 9% compared to 2022.

Income at the farm gate in the United States and Canada is historically high, underpinned by an extended period of low grain stocks to use ratios supporting high crop prices, as you can see on Slide 9. We continue to believe that this will take two growing seasons at trend yields to replenish global grain stocks. This should support agricultural led demand as growers seek to optimize nitrogen applications and maximize returns.

That said, over the next seven to eight weeks, the entire value chain will be a walking a logistics tightrope due to the purchasing delays. And with that, let me turn the call over to Chris.

[Christopher D. Bohn, Senior Vice President and Chief Financial Officer at CF Industries]

Thanks, Bert. For the first quarter of 2023, the company reported net earnings attributable to common stockholders of $560 million or $2.85 per diluted share. EBITDA was $924 million and adjusted EBITDA was $866 million. These results reflect the impact of realized and unrealized losses related to natural gas derivatives. As you know, we typically engage in hedging activity during the winter months to de-risk our exposure to shocks in the natural gas market, such as those that occurred with winter storm Uri in 2021. As our hedge -- winter hedges rolled off, we purchased natural gas at market prices during the second quarter. As we work through higher cost inventory produced in the first quarter, we expect natural gas costs in our cost of goods sold to decline significantly.

Looking ahead to the rest of 2023, we continue to expect approximately 9 million to 9.5 million tons of gross ammonia production and $500 million to $550 million in capital expenditures. With more than $2.8 billion of cash on the balance sheet, we are prepared to fund the cash portion of the Waggaman facility purchase price. We have begun the regulatory approval process with the U.S. government, but cannot predict when it will be complete.

We remain focused on discipline investments in our clean energy growth platform to meet the demand that our MOUs with JERA and LOTTE indicate is emerging. Our blue and green ammonia projects at Donaldsonville are progressing towards their respective startup dates and the FEED study for our proposed joint venture with Mitsui is advancing as well, and we expect to make a final investment decision later this year. Even with this activity, our capital requirements for the year are modest compared to our cash on the balance sheet and our outlook for robust free cash generation.

As a result, we expect to continue to return substantial capital to shareholders. Over the last 12 months, we have returned more than $1.3 billion to shareholders through share repurchases and another $320 million through dividends.

With that, Tony will provide some closing remarks before we open the call to Q&A.

Questions and Answers

[Operator]

[Operator Instructions] The first question is from Adam Samuelson with Goldman Sachs. Please go ahead.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Yes. Thank you. Good morning everyone.

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Good morning, Adam.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Good morning. So Tony, Bert, I guess, this is actually a bit more of a longer-term question and certainly, as you look at your own activity on the blue and green ammonia side, you've got a number of MOUs and projects that are kind of in various stages of development approaching FID. There's been a slew of announcements, similar to your own in North America over the last -- over the last year. And I'm just trying to get your kind of current perspective on the demand growth, especially the demand growth outside of traditional fertilizer channels that you are looking at as you think about '25, '26, '27, '28? Do you think that that demand is going to have come in commensurate and consistent with some of the potential capacity that's starting to get put into the market? Or is there -- how do we think about the ammonia -- the ammonia market surplus balance and through the later parts of the decade?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. I mean, I think that's an excellent question and there's certainly a lot of uncertainty out there. I would say, the one thing that gives us great optimism and comfort right now, Adam, is the fact that a lot of the agreements that we have put in place and the discussions that we're advancing are with end users that are actually going to be consuming the product for a clean energy source. So whether it's JERA or LOTTE or a number of others, they are ultimately the end users of that product and they're pretty far advanced in terms of their thinking and some of the pilot projects they've run on co-combustion and so forth.

So we feel pretty comfortable that the demand is going to be developing. Our sense is that it's probably going to start developing in larger kind of increments as we get into '27, '28 timeframe, but by the time we get to 2030, I think there will be a sizable volume of ammonia consumed in non-traditional applications as clean energy sources, whether or not the pacing of some of these projects exceeds or lags that I think is to be determined.

I think there's a lot of question in terms of some of these announcements. How real are they? And are they actually going to go forward and are people going to be willing to put the money down? What we saw back in 2012 was something like '26 or '27 announced new projects in North America, of which only four of them got built. Two of them by us, two other ones and all of them were built by traditional industry participants. So a lot of the speculative plants that were talked about never materialized, and I would expect that same dynamic to happen here.

But I think it's an excellent question. One of those things that we are evaluating and thinking about and one of the things that I'm also excited about is, the Waggaman acquisition gives us a lot of flexibility in terms of how we think about continuing to grow our own decarbonized ammonia platform base and different levers in terms of how to, to achieve that while having the same kind of S&D balance in the industry and not overwhelming kind of the marketplace.

So I think we're in a really good position. I think North America is clearly the place, where these projects will get built and should get built, both because of the huge natural resource base, low -- access to low cost natural gas, but also the ability to do carbon capture and sequestration and the incentive structures in the 45Q. So more to come, but I think there's a lot of vaporware announcements out there right now.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

All right. That's very helpful. Thank you. And if I just have a quick follow-up near-term with the Waggaman getting funded out of cash on hand this year, how do we think about kind of buyback pace from cash flow? Is light in the first quarter? I imagine you might have been blacked out for part of it because of the Waggaman kind of transaction, but how do we think about -- how do we think about kind of cash return with Waggaman going out the door?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. You're absolutely right. The first quarter was heavily influenced by the fact that we were in pretty advanced conversations for most of that quarter, and therefore we were blacked out from being able to do buybacks. And then we were able to kind of jump in after the announcement went out the door and participated a little bit. I think we feel very comfortable about the amount of cash generation that we expect through the balance of this year plus a sizable amount of cash on hand even after we consummate the Waggaman purchase. And so we have a large share repurchase authorization in front of us that the board just put in place. But one of the things that we have seen is, despite having what from a historical standpoint is a very strong Q1, including very strong cash generation, share price volatility that seems to trade on all kinds of other factors. And we're committed to taking advantage of those dips opportunistically in a way that really rewards our longer-term shareholders in a very substantial way. And so what you'll probably see is, us diving in deeper and harder on the dips and less so when we're trading relatively flatter, but I think taking over a year or two year period that should really disproportionately reward those that stay with us.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

I appreciate all that color. I'll pass it on. Thank you.

[Operator]

The next question is from Steve Byrne of Bank of America Securities. Please go ahead.

[Steve Byrne, Analyst at Bank of America Securities]

Yes, thank you. I'd like to better understand your own outlook for demand for nitrogen in both fertilizer and industrial markets. When do you anticipate that collective demand will warrant pulling that production in Europe back on stream, even if it's $15, $20 per million Btu, do you anticipate that that demand could develop? Or is the reduced demand for nitrogen in some of the chemical end markets basically eliminating that that pole?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Good morning, Steve. This is Bert. And when you look at the outlook for nitrogen for 2023 and beyond, it's positive, as we've said, we -- due to on a -- on a fertilizer basis, the stocks used ratio, where we are -- and where we are structurally in the grain complex. With what we've lost in production in Argentina this year, and in terms of corn and what's not being either consumed or exported from Ukraine, it's a substantial portion of the world supply. Then you look at the Chinese demand maintaining that 20 million, 21 million, 22 million metric tons of corn imports supporting the international market. We're structurally positive that it's going to take at least two years and possibly longer to refill that supply of grains.

And so fertilizer demand should be very strong, and we're seeing that now recover in some of the countries that took a kind of a purchasing holiday in 2022 due to high prices, Thailand, Turkey, some places in South America where demand is recovering quite substantially. And we're looking -- you're looking at additional acres in the United States, additional corn and wheat acres. So additional demand, Brazil's been very strong. We're anticipating eight -- probably close to 8 million tons of imports through 2023. They've only imported 1 million to date, so demand ahead as well as with India.

So fertilizer should be, I would say, returning to its historical growth pattern of 1% to 2%, but probably greater in this year. And that's why I think you're seeing some of the price recoveries. Regarding industrial demand, we're still doing very well in terms of our industrial book and it's diversified with nitric acid, ammonia, ammonium nitrate, and DEF in North America. I think in Europe, you're going to see some of a little bit harder situation just due to the cost structure and the complications there, but I think that's what you'll see as imported ammonia, helping to balance that, that supply. And we're looking at probably 5 million to 6 million, 7 million tons of ammonia production capacity, either offline or curtailed. That's going to help support the whole industrial or the whole ammonia production globally as products move that direction. So we're structurally positive for this year and for demand on both industrial and fertilizer.

[Steve Byrne, Analyst at Bank of America Securities]

And then Bert, maybe more near-term, do you anticipate pricing in the corn belt, particularly in the northern plains that may be tied on supply with the river being closed? Do you expect premium pricing to come through in the remaining of this quarter? How much have you sold forward? And can you comment on any allocation out of your Port Neal plant that we've heard about?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

So when looking at that's the dynamic that we're experiencing today. The product is tight. Through the last several quarters, a lot of the inventory has remained with the producers side or in inventory on the -- with the producers. And retail took a holiday for at least two, 2.5 half quarters of purchasing. Well, when you need that product promptly for walk up demand, which is where we are today, you need it today, tomorrow, the next day, and it is short and it is very tight, then it's exacerbated by these river issues on the Mississippi with the lot closures and the difficulty to move product that may be in the gulf up to the Midwest where it's needed. So yes, we went on allocation in Port Neal, we're producing every day at maximum rates, but a lot of demand came in for maybe a 30-day window contract. A lot of demand came in wanting it in the first week of the month, and we're allocating that out on a ratable basis to treat all of our customers fairly.

So product is tight. We don't believe there's going to be enough urea. We believe that there'll have to be migrating for second and third applications to ammonia and UAN and we're preparing for that with positioning product throughout the system. And pricing has extended from the normal spread of NOLA, let's say $30 to the Midwest, it's between $50 and $100 today, and we'll probably go up towards the higher end as we get to peak applications. We're pleased with our order book. We demonstrated well in Q1 what we did and our pricing reflects that, and we're equally happy with where we are for Q2.

[Operator]

The next question is from Joel Jackson of BMO Capital Markets. Please go ahead.

[Joel Jackson, Analyst at BMO Capital Markets]

Hi, good morning everyone. I ask a couple questions just on your answer before Bert, maybe Tony will chime in too. So we know that retail as your own words, took a buying holiday for two to 2.5 quarters. Can you talk about that some more? They did that and it seems like they won out for a while. Maybe now they're not winning, but is that going to change your strategy going forward? Like what are lessons learned from this year in many years of your career?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Yeah. I'm just a spring chicken, so I just have a few years on my career, but this has been an interesting year and a difficult year. A lot of -- I give a credit to the teams, the production team operating safely and the distribution teams managing our terminals well, our logistics teams are working with at times six to seven toes and at times 20 for moving product up the river, and then the export program with the vessels we've contracted and the work that goes into that, so a lot of dispersion of responsibilities and taking good decisions. But the retail sector, I think as reflected prices were falling, I understand that if they bought $500 UAN and the market is now $300. How do they price that to the farmer? And the farmer's reading some of the same materials in -- whether that's the publications or online.

And so there's this standoff. What is an appropriate price at the retail level? What should the farmer be paying? And so in effect, they said, well, I'm going to stop buying because the farmers stopped buying. And the -- as does happen when there's an imbalance, prices fall and they fell quite hard in Q1. But eventually, this was our conversation with a lot of our customers, you need to plan because it can take railcars days to be loaded and move and to come back and to have a full cycle, same thing with barges. And so that's where we are right now in a difficult situation on the retail side of -- for the second applications, or enough for the first and second and third applications.

And so pricing has rebounded and we're now the highest price market in the world, and we think that's going to extend through to Q2. And then inventory will be drained, positioning well for Q3. So I think every year is different, and we've had over purchasing, aggressive purchasing probably in 2022 as a reflection of fear and this year a lack of purchasing as a reflection of anticipation of overabundance. And so I think we'll see how this year unfolds, but as I said in my comments, it's going to be very logistically challenged.

[Joel Jackson, Analyst at BMO Capital Markets]

Okay. Then my second question's actually a two-parter. So is there any reason why Q2 earnings should not be higher than Q1, right? A lot lower average gas costs, maybe pricing down, but volume is higher. And my second part of that is, is there any reason why this year should be different other years, where Q3 pricing is typically lower than Q2 pricing? Any reason why that may not be this case -- the case that's here?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

When you're looking at Q2 versus Q1? We're still in the beginning of the game, if it's a nine inning game, I'd say, we're an inning three and product has been moving, a lot of demand has been coming in for prompt shipments. And so I think it's an order to speculate on where and what. But we're active in all fronts. We are exporting, we are moving product and we are taking new orders. So I think Q2 will be positive. When you look at Q3, you're right, traditionally, we do have a reset period, why? You're asking customers to hold inventory in North America for up to nine months. And that's something we work closely with our retail and wholesale customers to make sure we're properly priced against the import alternative, helping our customers move that product ratably because we want to keep our plants operating and be in a good position for fall demand, which is generally ammonium and then spring demand for the three major nitrogen products. So I think it's a little too early to go into Q3.

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. The other thing I would just add, Joel, is that, there's still basically eight weeks or so to go here in Q2. So there's a lot of -- there's a lot to play for yet, and it's probably too early to make a call one way or another in terms of how we do sequentially, quarter-on-quarter. But if you look at our price realizations in -- reported in Q1, Bert did a great job, this team of really getting some good numbers there, despite the fact that you saw pricing kind of moderate throughout that quarter. And if you take a straight average, we did a great job of getting price compared to Q1. Current prevailing prices in the spot market today tend to be a bit below where our average prices were in Q1 as reported.

And so again, more to play for, we do expect some tightness in the marketplace. We do expect the inland premium and product coming out of Port Neal and Med Hat and our other facilities to really trade at a pretty significant premium given some of the logistical challenges that Bert talked about. And it's also clear based on Chris's comments that our gas cost should be a lot lower than it was in Q1. So all of those things are positive, but we're starting at a point where prevailing prices are a bit below, where our average price realization was in Q1, so more to play for, but some all of that together. We still expect a great first half of the year by historical standards and to generate a lot of cash over this period of time. Q3 is, as you pointed out, normally a reset period. But every year is different. So stay tuned, I guess.

[Christopher D. Bohn, Senior Vice President and Chief Financial Officer at CF Industries]

Yeah. I think the only thing I would add to that, Joel, is on the natural gas prices, while we're buying at lower prices today significantly lower. We still do have an inventory, some of those hedges that were -- the actual production that occurred in Q1. So some of that'll roll off here in Q2, and then we'll get into sort of the $2 per MMBtu gas that we're seeing today and purchasing today.

[Joel Jackson, Analyst at BMO Capital Markets]

Thank you.

[Operator]

The next question is from Christopher Parkinson of Mizuho. Please go ahead.

[Christopher Parkinson, Analyst at Mizuho]

Great. Thank you so much. You obviously allude to this a few times in your PowerPoint, in your prepared remarks, but the cost curve seems to be engaging at least a little bit more in a fluid manner than it has in the last 12 to 18 months, especially with European operating rates increasing. I would just love to hear your team's perspectives on how -- what your, let's say second half/normalized view of import export trends are going to be just given the dynamics in Europe right now. I mean, do you still expect more product coming out of MENA [Phonetic] specifically North Africa to Europe, in terms of also ammonia trade flows as you saw last year going into Europe to basically supplement some of the product that's still offline. Just any quick thoughts on that as well as you aim would be incredibly helpful? Thank you so much.

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. Chris, I'll start and then hand the mic over to Bert here in a second. But MENA is running at full rates, and so it's not like we're going to see incrementally more product coming out of MENA. It's local consumption is relatively low in region, and so it's a pretty constant stream of product coming out of MENA. That said, our belief is, it's a pretty tough operating environment in Europe. The reason why is there's a very steep contango on the gas forward curve between Q3 and Q4. And even if you see prices, the spot market moderate a little bit on gas, it's kind of hard to want to campaign an ammonia plant for three months or four months of operation. It takes a terrible toll on the equipment to heat it up and then cool it back down again.

And plants don't operate well when you're pulling them up and down like that, at least on the ammonia side. And so we do not expect Europe to return to kind of historical relatively higher operating rates. We think it's going to be spotty and campaigned and I think the upgrades will run, but that means to sync for ammonia as opposed to producing ammonia locally. We do think that Europe is going to go ahead and continue to evaluate and look at bringing in more urea and UAN as an alternative to locally produce nitrates. And I think that that bodes well for our production network in North America.

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Yeah. Just some of the numbers behind Tony's comments, when you're at 20 million tons more or less of production capacity in Europe, west and east, and you have 5 million to 7 million of that off liner curtailed, that's an impact of about 2 million tons of urea. So as those demands for that nitrogen are needed in Europe, and they're pulling those imports in from wherever that is structurally helpful to the global nitrogen complex and supporting prices, and as we go more towards winter, that only is further placing those plants in difficulty with an operating environment plus carbon costs. Today, I would say that cost for ammonia is probably $550 to $600 where you can import for substantially less. So it makes sense, and that then supports the global price of ammonia. So I think that that these trends only continue and get worse as we hit winter.

[Christopher Parkinson, Analyst at Mizuho]

Got it. And just as a quick follow-up, Tony, it sounds ludicrous to mention this now, but we used to discuss normalized earnings many years ago between let's say, $1.3 billion and $1.8 billion of EBITDA. Now I think in most people's analysis, it's probably, let's not say quite, but almost, double that. When I take a step back and I look at obviously your -- obviously your M&A pipeline as well as the deals with JERA, Mitsui. I mean, is there -- do you have any additional thought process on just how you're enhancing and improving CF's normalized EBITDA profile, not only for '23 and '24, but quite frankly for the balance of the decade? You just have any insights on your way think there? Thank you so much.

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. I mean, I think a lot of the new demand that we're looking at for ammonia as a clean energy source is much more likely to be kind of longer term contractually based with ratable off-take and a return profile that's attractive based on either the acquisition price of the asset or the build, construction if it's -- if it's new build. And so our expectation is that we believe that we're the best operators of these kind of assets in the world. We operate in one of the lower cost regions. There's incentive structures out there from a legislative perspective and access to some great partners like we have with ExxonMobil and others to help us achieve blue ammonia.

And so from that perspective, we think that we can earn a really attractive rate of return on incremental capital that we're putting in the ground on these kind of projects. And it's likely to be much more kind of ratable and fixed rate of return than it is subject to some of the volatility in the -- in the fertilizer space. And so we think that adding some of those layers of attractive fixed margin returns will be pretty additive to the overall valuation of the enterprise going forward. We will continue to generate some good cash flow for us. So we can deploy either against share repo or appropriate growth projects when we find opportunities to continue to generate those rates of return. So we'll probably see us doing more of that kind of thing, particularly as this new demand source emerges.

[Operator]

The next question is from Vincent Andrews of Morgan Stanley. Please go ahead.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you. Bert, can I ask you on China? If the export policy does lapse and kind of go back to what it was in 2021? I think you highlighted that maybe we'd go back to that 3 million to 5 million range, but what I'm curious is that would be for urea, last year we started to see China pick up significant exports of ammonia sulfate. So if the urea restrictions lapse, do you think that the -- clearly urea exports would go up, but do you think ammonia sulfate exports stay the same? Or does that get reduced as some of that ammonia gets used to make urea that gets exported instead? How would that work?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Hey, good morning, Vincent. I think that's the untold story of 2022 is the volume of ammonium sulfate that did come out of China. For years, that product was available. But with the new compaction projects that have gone in and making that product more viable to places like Brazil or Turkey or even the United States, in term, well, we use the ammonia sulfate that's domestically produced, but ammonium sulfate is a good fertilizer. It's a half the n of urea but has sulfur. And so it has moved out. I don't see the growth though of where we're at. There's a substantial volume that has been moving out of China. Regarding the urea exports out of China, where they are capacity wises of -- significant amount of capacity has come offline and been taken out over the last, let's say five, six years. And then we would peg that at about 81 million, 82 million tons of capacity.

Operating rates have ranged from the mid-60s to the low-70s. So taking an operating rate of 70%, you're producing about 56 million to 58 million tons of urea. Domestic consumption is in the low-50s, so there's just not a lot of urea available to export as there were maybe 10 years ago. And so we see this -- this is all speculation today on the change in an export policy. There are some plants that are -- that were built for export purposes, and those are the, I think three or four that were announced as possibly gaining those export limit or opportunities or clearance for export sooner rather than the other plant. So I don't see a significant amount of urea coming out of that 3 million to 5 million tons for 2023.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. And then, Tony, if I could just ask you a clarifying question on Waggaman versus some of your MOUs. Am I correct in saying that Waggaman was a sort of a unique purchase that you don't view as a substitute versus some of your potential greenfield opportunities?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

So I think it gives us some flexibility in terms of how we evaluate the attractiveness of new construction in the near-term. And it certainly gives us an opportunity to enhance our platform from the standpoint of adding dehydration and compression and making more blue ammonia in that location without having to do a full greenfield expansion. So it gives us, I would say, a lot of flexibility in terms of how we think of, if and when it makes sense to do a new project. And we've added 900,000 tons of ammonia to the portfolio that ammonia is already being consumed in the marketplace. So it doesn't disrupt the S&D. And we can generate a fair bit of blue ammonia with a fairly modest incremental investment. So I really like the project, because of the optionality it brings us in addition to just the base economics of it.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. Thanks very much guys.

[Operator]

The next question is from Edlain Rodriguez of Credit Suisse. Please go ahead.

[Edlain Rodriguez, Analyst at Credit Suisse Group]

Thank you. Good morning, everyone. This might be for Bert, I mean, Bert, like [Indecipherable] ammonia prices is down to, what, $380 or so? I mean, that's a level that's well below European production cost, like what's causing that? And is the EU no longer the marginal cost producer? I mean, it's just been very hard to understand what's going on there. Maybe if you can help us?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Yes. When you're looking at the EU costs, it's a pretty easy calculation. Gas price is public, for looking at TTF or NBP and op costs adding what that would be for cash or for full. And then carbon costs, as I said earlier, get you to between $550 and $600. And you're right in the current spot market you're in the low $400s. And so what I think is happening, and we're seeing this reflected in announcements as well as public and private companies of -- they are operating either curtailed or shutdown and supply demand does work. And I think as you take some of that supply off in Europe and some of that is being backfilled with supply from around the world, then pricing tends to moderate and move up. We did -- I think, as a reflection of some of the issues we talked about globally in Q1 with some economic downturn as well as purchasing holidays in different places. And delays and consumption probably went a little long on ammonia, which drove that price down to the level where it is today. And so we're positive on what's coming in terms of, what we think, especially in winter with Europe and back filling with product -- ammonia produced in different locations and shipping that. And we have done that ourselves taking down our Billingham plant and buying product or shipping product in from Donaldsonville.

[Edlain Rodriguez, Analyst at Credit Suisse Group]

Okay. And that's great. And another one on corn prices, they have come down not by a lot, but they have come down. I mean, if you look at the December futures price, it's at $5.25 or so per busher. Like how do you think this will impact farmers' psychology? Will they be willing to pay high fertilizer prices when they see corn prices kind of moving down a little bit?

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

So yeah, when you look at the prompt price and the forward price, you referenced December. So that's the harvest price for the 2023 North American crop. And when you look around the world, again, these stocks used ratios are tight. We've had a drought in Argentina, where we've probably lost 8 million to 10 million tons of production. We've had the difficulties in Ukraine, where an initial probably 12 million tons were lost. And that's a reflection not of lost exports, but lost domestic consumption in Ukraine, whether that's corn processing are for feed. And then you've seen a consume, we also had a negative trend yield in the United States in our harvest last year. Some of that has been made up by Brazil, which had a record corn crop and the United States is trending forward, but the price of $5.25 on a historical basis is pretty positive. We've tended to operate in the $4 to $5 range over the last several years.

And so yes, we're coming off the highs of $6 to $6.50, but still $5.25 is incredibly profitable. We're estimating this is the third most profitable year. But that's three years in a row because last year was exceptional and the year before that was also incredible. This is just going to be very, very good, if I were to rank it. So it is still very profitable to whether you're a dry land farmer or an irrigated farmer, to absolutely maximize your seed population as well as your nutrient applications for yields, and we're seeing very good soil moisture in North America to support that. So I think were $5.25 represents a fairly -- a very fair price, which then supports livestock, it supports ethanol for the demand of those products.

[Edlain Rodriguez, Analyst at Credit Suisse Group]

Okay, thank you.

[Operator]

The next question is from Richard Garchitorena of Wells Fargo. Please go ahead.

[Richard Garchitorena, Analyst at Wells Fargo & Company]

Great, thanks. First question, just on Waggaman, can you just give some an update in terms of timing for closing any regulatory progress that you've made? And is where's -- where we expected to close?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. So we've filed with the FTC and they're reviewing it right now. We don't necessarily have a timeframe on that. We're supplying them the information that they need. We think we're hopeful that it'll be sometime this year that we'll be able to close on that project.

[Richard Garchitorena, Analyst at Wells Fargo & Company]

Okay, great. And then just in terms of once you get that deal done, when you think about the flexibility that you mentioned one option I guess is, to convert it to CCS potentially get IRA credits. Can you talk about that in terms of how that might work in terms of timing? And have you had a chance to sort of work that into your options with your partners, whether it's JERA or Mitsui or LOTTE? Thanks.

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. So timing on putting in the dehydration compression and getting access to the pipeline and being able to have that injected is probably two years out. That's about the timeframe it took us to announce the project at Donaldsonville and can -- have the equipment ordered, delivered, and installed. So it's probably about that kind of timeframe. And again, we're -- we are in ongoing discussions with the partners that we have already signed and announced MOUs with and -- and there's a series of other conversations that are happening in the marketplace as well that are not quite as advanced at the moment. But this just is another source of supply. So it both provides some diversity of supply locations in case there's an outage or a storm or an issue that that would affect one location. It also just increases the aggregate volume of material that we'll have that's, that's low carbon. So it's certainly of interest to all of those folks that you mentioned. And we are in ongoing discussions about appropriate ways to try to structure agreements that provide them attractive and certainly secure access, but also provide our shareholders an attractive rate return on our investments.

[Richard Garchitorena, Analyst at Wells Fargo & Company]

Great. Just last question, in terms of funding these projects, is the idea basically to look for project financing? Or are you going to fund it at, with your JVs from free cash? How are you thinking about that?

[Christopher D. Bohn, Senior Vice President and Chief Financial Officer at CF Industries]

Yeah. So we -- we ended the quarter with over $2.8 billion of cash on the balance sheet. We're continuing to generate a substantial amount of free cash flow kind of every quarter as we move forward. It's going to be funded from cash on hand and by the way, it's a relatively modest draw on cash on hand, particularly at the rate at which we're building it. So it provides us flexibility to continue to do our share purchases as well as our growth and improvement projects all at the same time.

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Yeah. Just to follow-up on that, I mean, these projects are stage over multi-year, so it's not as if similar to the Waggaman, where there's a big lump sum at one-time. So even the Mitsui project, the LOTTE project, these are four, five year cash out flows with a partner involved. So we expect exactly to what Tony said, that there's going to be still significant cash for other capital allocation return policy.

[Operator]

The next question is from Ben Theurer of Barclays. Please go ahead.

[Ben Theurer, Analyst at Barclays]

Yeah. Thank you very much and good morning, congress on the results. Just wanted to follow-up on some of the logistic challenges you've talked about and maybe help us understand how that impacted you this quarter or maybe benefited your this quarter and how you think about logistics and supply chain issues just with like those different water levels, etc., go forward and how you can prepare yourself to maybe take advantage of it, as it relates to your trade and export business? Thank you.

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. So it's a really interesting situation. As we got into the back end of last year, you saw historic or near historic low water levels on the Mississippi. Fast forward to the spring, and all of a sudden now we're facing such high water levels that barged traffic is again in impacted by it. Combine that with, what I would say is, a relatively significant national shortage in drivers over the road drivers and so forth. You've seen logistics costs and delays in timing go up kind of across the board. And that helps us significantly in terms of the in-market premium that we're able to realize in our facilities like Port Neal and Medicine Hat, because we're already in the marketplace and generally speaking the value of product in market is loaded on the coast plus logistics cost, and maybe you get a time premium for it as well if you're in the middle of immediate application.

And so all of these things really are helpful for us, as we look into the meat of the application season here in the second quarter. I'd say in the first quarter, the increase just costs across the board and logistics probably impacted us a little bit to the negative side, but I think that'll turn around and play to the positive side as we go forward. And it's less important from an export perspective, because vessel freights haven't moved quite as dramatically as the inland stuff.

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

When you're looking at the logistics options we have, we're on the class six railroads and we're on the Arkansas, the Mississippi, the Illinois, the Ohio. So we are able to barge as far north as Minneapolis. And when we look at the each year, we work with our retail, wholesale trader customers, who work with the farmer, and we're in constant communication. And this is a great year per an earlier question of, what did we do when our customers weren't purchasing well? We focused on how are we going to deliver the spring needs in a way that makes sense. And so we set out a strategy and a game plan early, late Q4, early Q1 to make that happen. And that's leveraging all these assets that are at our disposal, and we have done that.

So we feel very positive about where -- what we have positioned in the interior through our terminals that ammonia tanks, our UAN terminals and urea storage places for dry. But in those conversations when customers were not willing to buy, we did pivot aggressively to the export market and we're able to do that. We're able to move several of our plants to the export market and optimize our loading structure. We have five docks in Donaldsonville. So we're a unique company that has many options available to us, and each year we're going to evaluate those and do what's best for our customers and our company.

[Ben Theurer, Analyst at Barclays]

Okay, perfect. And then my second question is just to understand a little bit the magnitude of the inventory, you said the higher cost inventory, you still have to run between the 2Q. Can you give us a little bit of a sense of a timing of that impacting like the majority of the second quarter, just maybe half of it, only a few weeks? How should we think about what was in place as to the Nat Gas hatches and how this run through on the cost of inventory that needs to run through into the usually good second quarter?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. A good question. I think generally what we have is, we have production and inventory that sits a little bit more than a month. So I think at minimum, what you'll see is probably a month's worth of higher gas costs, probably maybe six weeks' worth that roll through here in second quarter before we get into sort of the cash purchases at the low $2 that we're seeing. So I think that'd be a good proxy to use.

[Operator]

The next question is from Josh Spector of UBS. Please go ahead.

[Josh Spector, Analyst at UBS Group]

Yeah. Hi, thanks for taking my question. Just a couple quick follow-ups on Waggaman, first, can you disclose what the remaining life is on the contracts for the other two buyers outside of Dyno Nobel? And just regarding carbon capture and who gets the credits? Is there anything in the agreement with Dyno Nobel that has you share some of the portion of what you're selling them in terms of ammonia credits for carbon capture on those tons? Or is that still open ended?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. So we're really happy with the way that the contracts are structured and that we've got off-take for that all of that production, it gives us some flexibility in terms of how we think about the future and increasing production there and what we do with the incremental tons as we increase production and as we move forward. But it's nice to already have a home for all of those tons at kind of market based pricing. So we're really pleased with those. In terms of the blue ammonia and the CCS there, what we have a number of companies that are very interested and have registered interest with us on securing access to decarbonized or blue ammonia. Dyno is among them. And we will work with Dyno and also work with others, whether it's production out of Donaldsonville or Waggaman in order to try to satisfy the needs that we see really developing in the marketplace, but also realize in value for that product.

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Yeah. And I think as you look at the production and actually the dehydration and compression piece of that, we purchased the plant with that being an upside to CF that we would own that asset and also the benefits that would come from that as well.

[Josh Spector, Analyst at UBS Group]

Thanks. That's helpful. And just to clarify, I mean, just without disclosing I guess the remaining life on the contracts, do we need to be thinking about, is there any risk of renegotiation in the next one to two years creating different economics versus of what you expect today?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

I think we feel comfortable with where those industrial contracts are and we can't really disclose more than that, but we don't see any issue.

[Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain at CF Industries]

Yeah. We don't see the kind of risk that you're talking about associated with the go-forward in that facility.

[Josh Spector, Analyst at UBS Group]

Okay. Thank you.

[Operator]

The next question is from Andrew Wong of RBC. Please go ahead.

[Andrew Wong, Analyst at RBC Capital Markets]

Hey, thanks for taking my questions. So just going by the clean ammonia with a lot of these clean ammonia and clean hydrogen projects coming up in the U.S., on the Gulf, are you seeing any potential for bottlenecks, cost and inflation around labor and construction services and maybe taking the S&D question from the other side, like could there be any tightness in the clean ammonia market if we see any delays on build outs and could demand come in quicker than expected?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. Andrew, so I think it's fair to say that you're seeing inflationary impacts in every aspect of the announced projects that are there. And that I think that affects both the time that it takes to bring them online as well as the cost that it takes to bring them online for those that ultimately get built. The raw materials, the metals, the fabrication, the transportation, the labor to construct, you're seeing inflation in every single aspect across the board. And remember that none of these projects that have been announced really are underway at this point from a construction standpoint. So minimum of 2027, maybe 2028 before any of these things that are announced would potentially start up and there is a high likelihood of cost inflation over that period of time. It's one of those reasons that make us so happy about the Waggaman acquisition because our belief is, by the time, some of these projects that are being discussed, if they're announced that the cost per ton of capacity is going to look really attractive from an acquisition economics on Waggaman. More come in terms of whether what results our FEED study for the potential project with Mitsui yields. But I would certainly expect when all is said and done for the Waggaman acquisition to look really attractive by comparison.

[Andrew Wong, Analyst at RBC Capital Markets]

Okay. And then just a question on the BP deal for low methane gas earlier this year, can you just talk about how important that is for your customers and securing some of these clean ammonia deals? And is this something that you're looking to do more of going forward?

[W. Anthony Will, President and Chief Executive Officer at CF Industries]

Yeah. I mean, I think one of the things that it helps us address is some of our Scope 3 emissions. In this case it's upstream Scope 3, the downstream Scope 3 are very hard to manage, but from an upstream perspective, if we're sourcing gas that is more responsibly produced and transported, it reduces the methane slip on the upstream, it reduces our upstream Scope 3 emissions. And that's substantial because methane is a very potent greenhouse gas. It certainly goes into our overall carbon footprint. And so customers that are interested in the overall footprint will care about that to some extent. Most of the conversations we've been having around decarbonized ammonia are very project specific to Donaldsonville and or Waggaman once we get the carbon capture and sequestration equipment installed and operating. And so I think in the near-term that's a little less important. In the longer-term, it's certainly more important, but it helps us manage our overall footprint and certainly something we're evaluating continuing to expand from a program standpoint.

[Andrew Wong, Analyst at RBC Capital Markets]

Okay. Great. Thanks.

[Operator]

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back to Martin Jarosick for closing remarks.

[Martin A. Jarosick, Vice President, Treasury and Investor Relations at CF Industries]

Thanks everyone for joining us and we look forward to seeing it -- seeing you at all the upcoming conferences.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Martin A. Jarosick, Vice President, Treasury and Investor Relations
• W. Anthony Will, President and Chief Executive Officer
• Bert A. Frost, Senior Vice President, Sales, Market Development and Supply Chain
• Christopher D. Bohn, Senior Vice President and Chief Financial Officer

Analysts

• Adam Samuelson, The Goldman Sachs Group, Inc.
• Steve Byrne, Bank of America Securities
• Joel Jackson, BMO Capital Markets
• Christopher Parkinson, Mizuho
• Vincent Andrews, Morgan Stanley
• Edlain Rodriguez, Credit Suisse Group AG
• Richard Garchitorena, Wells Fargo & Company
• Ben Theurer, Barclays PLC
• Josh Spector, UBS Group AG
• Andrew Wong, RBC Capital Markets