CF Industries Holdings, Inc. (CF) Earnings Call Transcript & Summary

Good morning. So I am delighted to have with us this morning, nearly the whole crew from CF Industries: Chief Executive Officer, Tony Will; Chief Financial Officer, Chris Bohn; and Bert frost, the SVP of Sales, Market Development and Supply Chain. I think most of our investors are pretty familiar with CF as the world leader in nitrogen fertilizer, but a lot is changing quickly. So I'd like to just jump right in, Tony, and ask you to talk about your recent development, your plans to become a leader in blue and green ammonia and clean hydrogen fuel.

Yes. Thanks, Mark. One of the big issues has been the huge amount of capital that is flowing toward investments that are considered ESG-friendly and green. And in fact, capital flowing out of investments that have been historically relatively high on the emissions profile. And certainly, that was where our business has been. And coincident with that has been [Audio Gap] and clean energy sources, hydrogen being the principal one. And so we really saw this as an opportunity to marry those 2 concepts together, which is to dramatically improve our greenhouse gas footprint. And at the same time, put a growth path in front of us where we could help not only ourselves, but economies broadly decarbonize. And really, the reason kind of "why now" has been that it's just lately with some of the advent of the newer technologies and electrolysis and so forth, that this is even feasible or economically viable. And so this is really, I think, very consistent with internally how we view our mission and our values of feeding the world and helping to provide clean energy to decarbonize the economy, and it's exciting. It's exciting for us to have a growth path that does good beyond just us.

So can you talk about where CF -- about your starting point here? Because you're already doing a whole lot in terms of low-carbon ammonia, so it's not like you're starting from scratch.

No. Our plants are already configured in most cases, to capture the processed gas CO2. And in most instances, we have a collection compression header system. And so we're able to provide that CO2 to, in some cases, the beverage industry, in other cases, to other applications. But in a number of our facilities, we are very close to or, in fact, right on the corner of CO2 pipelines and EOR projects and so forth. And so for us, the movement to geological sequestration away from, historically, our practice of venting excess CO2 is a natural one and something that is relatively easy for us to accomplish. And then with expected regulatory environment to come in with the new administration, we ought to have a regime that also provides economic incentives to decarbonize. And again, we're very excited about that. So we're not -- to your point, we're not starting from square one. A lot of that investment in our PP&E was already in place. We're just deploying in a way that hopefully maximizes its value.

When you talk, Tony, about already having a good position to do sequestration, can you give us a little more color on that?

Yes. Let me give you just kind of 2 or 3 examples on that. So in Donaldsonville, which is our, by far, largest facility, it accounts for about 45% of our total production. And commensurately, about that amount of our CO2 production. The Denbury pipeline runs literally right off the corner of our property. So we have an ability to access a CO2 pipeline that, today, historically, has been used for EOR, but there is a number of permit applications that have been put in place in Louisiana to actually drill into the underground salt domes for permanent geological sequestration not associated with EOR. Those kind of projects qualify under the Federal Tax Credit Program, called the 45Q program. And so that's one example. Similarly, in Medicine Hat, there have been times where we've provided CO2 through a compression system to both -- for both methanol use and also other applications, including EOR up there. And so again, this is something that we are familiar with and kind of can turn on or ready now to be able to do that. And then with the amount of CO2 that is sequestered and that equivalent amount of ammonia can be deemed or certified as low carbon or kind of "blue ammonia." And we expect there to be a significant rise in the value for that, relative to the nutrient content of it.

Now are there -- as you think about -- you talked about a couple of different geographies. Are there regulatory issues still unsettled that needs to get worked out for the sequestration side?

So it's more of a -- I think, a permitting issue than a regulatory regime that is currently under review right now in the case of Louisiana by the state. But the governor there is Bel Edwards, who is very interested in decarbonizing the economy. We've had a number of very, I would say, productive discussions with them that we're very excited about our announcement. And our expectation is that these permits are coming forward. In fact, one of the things, Mark, I neglected to talk about was in the U.K., where we have 2 sites, there was just a recent sequestration project that was announced, I believe it was either yesterday or the day before, on the Teesside area, which is where our Billingham plant is. And there's currently a project under a feasibility study with the IRC at the northwest side of the country, which is where our Ince plant is. So these things are moving, and they're moving pretty quickly ahead. In some cases, it's just the normal review process that these things have to go through, but there doesn't appear to be anything standing in the way of permits being issued. And in fact, it's completely consistent with where a number of the regulators want to move.

Sure. Now we're going to talk about green in just a moment, but can we talk about the cost, the capital cost beyond the permit issues?

Yes. So generally speaking, in a lot of these situations, the -- one of the requirements is to do a dehydration plant and a compression plant. That's not a huge amount of capital. And different -- I think different ones of our facilities will have different kinds of solutions in terms of how we go about it. In some cases, we may be large enough where the economics pay out for us to build our own and operate it ourselves. In other cases, we may partner with other industrials nearby. And still, in others, we may go ahead and do a lease instead of a buy and make use of somebody else's equipment that's acting in that capacity. So we're going kind of plant by plant by plant, making the decisions as we go, based on the economics and the volume and configuration of each of those facilities.

So let's talk about your announcement of your first green ammonia facility. Obviously, that's a big step. But as you discussed it the other day, it sounds like an evolutionary step in terms of D'ville.

Yes. It's sort of a -- to borrow a line of a big step for mankind and a small step for man, right? So for us, it's circa $100 million. It is about 20,000 tons per year on this first tranche, which in the context of 10 million tons of ammonia is a pretty small step. It's also the size of project that's easily manageable and doesn't put our neck too far out on the ringer from the standpoint of risk profile. But I think what it signals is a seismic shift in terms of the direction of the company, our commitment going this direction. A bunch of that $100 million, call it, 25% to 30% it is laying the foundation of infrastructure work that we can then leverage and get scale benefits for subsequent trains that we would be looking to put in. And it really is the -- kind of the first step of many. And so while it's somewhat modest in its own right, I think it really puts the dawn of a whole new era on the map for us.

Can you talk about what comes next? You said one of many. Are we talking about mostly new equipment expansion over existing capacity? Are we talking about conversion as well of existing?

Yes. I mean -- I think right now, one of the benefits that we have is with 17 ammonia plants, we have an ability to replicate and duplicate. Within one plant, we can expand this first train and then we can go ahead and replicate that across the network. We can generate kind of 300,000 to 500,000 tons of green ammonia much more cost effectively than anybody else can because everyone else is basically starting from either square 0 or dealing with a different network architecture. And so that's why this is really, in a lot of ways, what we expect it to be an NPV-positive investment. It is a learning trial phase for us to figure out how to do this much more efficiently as we hopscotch this across the rest of the network. I wouldn't count out the possibility of doing something different or new in the future. But I think that, that's a pretty far distant future at the moment because we have so many great opportunities at much lower capital cost within our existing network before we need to do something different. Our expectation, though, is the demand for green ammonia and the demand for green hydrogen is going to far outstrip the existing capacity to produce ammonia globally. And so it's got to bid in new production. And I think given our expertise and capability in running ammonia plants, we're a natural participant in that. We just think that, that's a little bit farther down the road because it comes at a higher capital ticket than what we're able to do on our own.

Right. Now you touched upon a little bit that others are out there doing it and that you've got some advantages. But can you sort of help us understand how you see the competitive playing field and where you're advantaged and who you think you're going to be really competing against as you build this out?

Yes. I mean in terms our advantages, we have the largest ammonia production network in the world. We've got, I think, the largest static ammonia storage system in the world. And we've got a very advanced clockwork sort of logistical infrastructure to move ammonia, whether it's barges up and down the river, pipeline access, railcar, access to deepwater ammonia. We've got 5 docks that can load deepwater vessels and transport either to the coast, one of the coasts or the other or internationally. So we really kind of enter the game from a very advantaged position. And as I said, 17 ammonia plants with the largest production footprint gives us the opportunity to leverage that into a much lower cost, larger-scale green platform than anyone else. When I think about competitors, I actually view it more as a necessary component to really help hit the tipping point for this industry to take off because you can't have demand that dramatically outstrips supply. Otherwise, prices go crazy and they start looking for other solutions. I think, again, our view is the demand for green ammonia, the demand for green hydrogen is going to grow so exponentially that we really do need, whether it's the Air Products plant in Saudi or some of our current competitors, to make similar moves like we're doing because I think the supply of product will also help facilitate demand growth and again, hit that tipping point faster.

Now you're starting at D'ville, which is no surprise given the strength of your position there. Will there be significant alterations to the way D'ville has to operate as you build this system out?

No. I mean the -- from a technical standpoint, this is pretty simple. It's a -- we probably have to put in a water polishing and maybe even a reverse osmosis system so that you take what's already very clean water and turn it into exceptionally clean water to run through the electrolysis system. But then you're basically taking the hydrogen from that system and pumping it into the back end of an existing ammonia loop. And that's a relatively straightforward process. We are working with a couple of the best technology companies in the world out there with ThyssenKrupp and Haldor Topsoe. And -- but we feel that there aren't any significant technical challenges in terms of how to make this work. And again, our view is for green ammonia and blue ammonia to really take off and to be efficient, it's more of a certification program as opposed to individual molecules that need to be tracked. There is horrific inefficiencies on a global basis if you're talking about needing to isolate individual molecules. And so from our standpoint, once you can certify the tons, it -- they're chemically identical, whether it's a conventionally produced ton of blue ton or a green ton, it's more about being able to audit and demonstrate certified low carbon or green ammonia.

Tony, can you talk about the -- you touched on the fuel value briefly. Can you talk about how you see the fuel value of ammonia going into hydrogen fuel versus the fertilizer value?

Yes. So today, Bert can give you up-to-date numbers, but I think Tampa ammonia is in the kind of low 200s, about 2.25-ish plus or minus per ton, whereas on the hydrogen content of a ton of ammonia, if you look at sort of the retail pump price of hydrogen in California, that would be about $2,000. So it's a -- call it, a 10x multiple of where the nutrient content is. Now of course, that's only for low carbon or green. But again, our view of the cost of production of blue ammonia, low-carbon ammonia is it's going to be very much in the ballpark of where conventional ammonia is because the 45Q credits will offset some incremental op cost, and there's not significant capital that goes along with it. So we think the prospects around blue ammonia economics are really exciting. It's obviously a lot more expensive because it's an energy-intensive process to make green ammonia, but we still believe that those economics work.

Okay. You also mentioned Joe Biden briefly. And I wonder if we could step back a little bit and think about the sort of global policy and environmental direction. And which pieces of that are the most important in sort of shaping how quickly this market develops?

Yes. I mean -- I think what we're already seeing in Continental Europe and in the U.K. and in fact, in Canada, is a regulatory regime that is both a bit of carrot and stick and helps facilitate decarbonization. And in my mind, a regime or a scheme like that in the U.S. where you've got -- think about it as being a cap and trade with certain allowances for energy-intensive, trade-exposed industries like ours, where if you make voluntary reductions, you can monetize the difference between your allowance and where you end up from an operating standpoint, is exactly the right kind of incentive system from both a carrot-and-stick perspective to get companies to make these sorts of investments that will pay off. And ideally, that's kind of what we're talking to the administration about, which is those kinds of things that are good for the country, create jobs, but also provide an appropriate incentive to deploy capital in this way.

So if you looked out 5 and 7 years, how do you think about the balance of CF's business between agriculture and energy?

I still think, in that sort of time frame, agriculture is going to be the lion's share. Now understanding that today, we're probably circa 30% to 35% industrial use of our product. And I think that, that will go ahead and continue to increase. But I think some of the lower-value industrial business will get shifted over to be more pure energy as opposed to a feedstock for other kinds of processes. So I would still expect us to have 50% of our business plus the agriculture in the 5 to 7 year. But I think the percentage of that share that moves into energy will be increasing. And again, I think it's one of those things that once you hit the tip point, it could move pretty quickly, pretty far.

And that 30% sounds like it could be increasingly higher value even before you get to that tipping point?

Absolutely. Yes. It's definitely a trade up in terms of margin structure on that business.

Right. So let's switch and talk a bit for a moment about the financial implications of this. We have Chris Bohn, the CFO with us. Chris, what Tony has described is -- he says the early stages aren't going to cost too, too much, but it's going to require ultimately some substantial capital investments and a significant shift in the way CF allocates capital in general. So could you help us understand that a little bit better?

Yes. I think the capital allocation philosophy remains in check to what we've talked about over the years that in absence of growth projects, we would return capital to shareholders. And that's what we've done over the last few years, where we didn't have a lot of significant growth platform, like Tony laid out right here. I think our first priority is obviously to pay down the $250 million of debt that still remains from the 2021 notes. We believe by doing that, it's just a matter of time before we become investment grade. Our net leverage metrics are well within investment grade. And I think the capital discipline we've showed over these last couple of years also establishes that to happen sooner rather than later. From that, as Tony mentioned, a lot of these earlier on projects are going to be able to be tucked into our normal CapEx of $400 million to $450 million. As you look at the blue investments that go into sequestration, a lot of that is going to be incented by the 45Q tax credit that Tony talked about, and that's where we'll see some above cost of capital returns on getting blue ammonia out there. From a green perspective, the $100 million, it's going to be very similar to what we saw in our nitric acid -- industrial nitric acid project at Donaldsonville and our diesel exhaust fluid project that we did a number of years back that -- those are circa $50 million projects. So in that $400 million to $450 million, we sort of have that tucked in. I think looking out longer, as Tony said, as we see technological advances that bring down the cost, the green production, we have a very scalable infrastructure. I think the one thing when you talk about how are we viewed versus others trying to enter into this, as Tony mentioned, the molecule is the same, whether it's green, blue or conventional. But our storage is in place, our logistics system's in place. We have an ammonia pipeline. We have our ammonia barges. So all that capital and even the CO2 removal and captures in place is billions of dollars that we don't have to lay out. So as we look forward, it's really about having high-value, very capital-disciplined projects as we move into probably expanding what we're doing at Donaldsonville into other plants. As Tony mentioned, though, a big component of what's going to be happening that's going to help our capital allocation is the incentives that are going out from governments. This morning, the British Prime Minister announced the $16 billion green plant incentive plan over in the U.K. Tony mentioned how both our plants there will probably benefit from that. And those are the type of things we were looking at as well. And then additionally, Tony touched on a little bit, it's really looking at where we play in the value chain on this, what type of partnerships we want to have. Do we want to go capital -- CapEx heavy or OpEx heavy and lighter capital. So we're going to be playing all that out as we look at our overall capital allocation. But we feel really good about the cash generation that's in the near term. And as Tony mentioned, with the expansion of margins, even more so in the longer term.

Clearly, D'ville has some major advantages in terms of transportation, scale of infrastructure, et cetera. But is there a reason why any of your other plants would be significantly more expensive to expand relative to D'ville?