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

Welcome back, everyone. It's a pleasure for me to host CF Industries in our next session. We have the -- quite a team here with us from CF. Let me introduce them, and then we'll get right into a fireside chat. So we have Tony Will. He's CEO, has been there, I believe, 13 years. We went to competing in high schools, but I'm not going to hold that against him. But -- so when I first got into covering fertilizers about 20 years ago, CF was a co-op, and it's phenomenal how much the culture of that company has changed under Tony's leadership. So we have -- with Tony, we have Chris Bohn. He's CFO. Chris has been there 10 years or so. I know he had led manufacturing for CF for 5 years. He had corporate planning for another 5 years before that. And then we also have Bert Frost. Bert leads their commercial operations, been there maybe a dozen years, and he had a long career with ADM in running fertilizers in various parts of the world. So we got a great team here. CF rolled out a green ammonia project recently, and it's really become quite a topic here lately. It led us to dig in and do a little work with a professor from Wales a few weeks ago, who's had his entire academic career focused on green ammonia, and he makes quite a few pretty compelling arguments about why ammonia for a variety of reasons.

But I think what I'd like to start off here with you, Tony, is a pretty high-level question. And that is, after you made that announcement of converting at least some of the capacity at the Donaldsonville complex, which is world-scale nitrogen manufacturing facility down by New Orleans, since you've made that announcement, can you comment on what the response has been from potential customers? I mean we can readily get into the discussion from a technical perspective about how you produce green ammonia. But I'd like to hear your view about potential demand. And what has happened since you made that announcement?

Yes. Steve, great to see you again, and thanks for having us. So we've had a terrific response from the marketplace following our announcement. We've had inbound inquiries from transportation companies, particularly on the marine side, that are looking at ammonia as being a fuel used in internal combustion engines that will allow fleets to achieve IMO 2050 standards and 2030 standards and moving in that direction. We've had inbound inquiries from -- as you I'm sure are aware, the Japanese utility industry is pushing hard for the use of low-carbon ammonia as a fuel source in power generation. And we've also had inbound inquiries from a number of industrial users that are very focused on their end-to-end supply chain and what their carbon footprint looks like. And that's particularly true in the U.K., where a bunch of our production at the Billingham facility gets piped directly to some industrial users, and they're very excited about that. And then the kind of the fourth leg of that stool is one that we didn't necessarily immediately assume was coming, but it has been a lot of excitement about, which is agricultural use of a low-carbon ammonia product. So a number of ag companies are looking at helping farmers to generate and quantify and monetize carbon sequestration in the soil as being a revenue stream and looking at a low-carbon input as part of the addition of the net carbon position that the growers can generate adds to their profitability. And so we've been working with a number of very large kind of ag companies, where this was a demand that we didn't initially assume was going to be there. But I think it may develop, in some cases, faster than some of the other ones.

And on that point, Tony, is the regulatory template already in place for that carbon credit opportunity for farmers? Or is that something that is being anticipated, perhaps, under the next administration that might promote this? I -- it's been talked about, but I just don't know how real it is today.

Yes. So as you know, there is no federal program in the U.S. Everything is based on a voluntary market. The voluntary market currently is running between about $3 and $5 per ton of CO2. We access the voluntary market ourselves because we've got several projects that were voluntary emissions abatement, projects that were done several years ago. And those projects will go through a certification process in order to generate certified CO2 credits that we can sell to the voluntary marketplace. So today, farmers can access that voluntary marketplace. But our expectation is, with the Biden administration, we will see a more structured cost of carbon and the opportunity to monetize credits and that growers will need to go through a certification process. And once that protocol has been developed, which it has already been developed largely because they're accessing the voluntary market today, but once it becomes kind of approved, then that will become, I think, a pretty substantial revenue source for a number of the growers. And Bert, feel free to jump in because Bert's really been leading the charge on the grower side for us on this one.

The structure, Tony, and it is moving forward, Steve. And it's been active for a number of reasons just because there's a value out there, but there's a lot of great work being done on the farm -- at the farm regarding inputs, outputs, capturing and just best practices. And this will be, I think, lead right into a best practice with tilling practices as well as cover crops. And so there's a quantifiable value of what's able to be pulled down in carbon. But if you take the whole value chain of inputs and maybe even biodiesel or low carbon products in that and ammonia being the #1, there's a substantial amount that could be captured and incorporated and that value falls to the farmer. And that's an income stream similar to what ethanol has provided. I think it's more of a replacement. As ethanol plateaus, this could be a pretty exciting move for the Midwestern states.

And so Bert, who are you talking to with respect to this opportunity for farmers? I mean is the government involved in this? Are there -- is there awareness and support from the USDA for this? Or where is that -- the bulk of these conversations really focused at?

Like any new issue, a lot of that work is organic. And it's recognized as a possibility -- and again, in that value chain of the input suppliers, the retail groups as well as the co-ops and the farmers and why Tony said, there's already activity taking place at a lower value. And so I think there's going to be a number of streams working in parallel to push this forward faster than what we had anticipated.

And Steve, I would just add to that, although we have not had direct communication with the incoming Secretary of Ag, the fact that Secretary Vilsack is from Iowa, this is kind of bread and butter. This is an easy win from my perspective to imagine that this is the direction things are headed. And as Bert said, particularly as you see increased penetration of EVs and enhanced fuel economy, we've already hit the blend wall for ethanol. So the RFS from a subsidy standpoint to farmers is kind of largely hit its limit. And this is a way where you get both the replacement kind of subsidy that ethanol used to provide along with improving kind of the overall climate and environment and support in the Midwest where, I think, there's a real push to shore up support there. So the fact that the incoming secretary has got that kind of ag root background is very helpful in this regard.

And so Tony, you described 4 legs of this demand stool. And if I understood you correctly, the first 3 would essentially involve exporting green ammonia or maybe blue ammonia, and we should talk about that, too, out of Donaldsonville. But this fourth leg that you're describing about in the ag markets, that could utilize your existing distribution infrastructure, would it not? You could move that ammonia up in the NuStar pipeline. You could move it up in barges. You could move it around the country in railcars. Is that what you're envisioning?

Yes. Absolutely, Steve. So as you point out, we've got this very advanced logistics and infrastructure network across the U.S. And I would say not only the fourth leg, the ag piece of the demand puzzle, but also some of the industrial demand. Some of that is, of course, offshore. Some of it is here in the U.S. So our ability to access and provide low carbon solutions for some of the industrial demand sources that are focused on what their end-to-end carbon footprint looks like will also be able to leverage and utilize our existing infrastructure. But your point about exports is a good one. The thing I would just highlight for you is we've got 2 deepwater docks at Donaldsonville, where we can load oceangoing vessels on ammonia. And so we, today, already export a fair bit of ammonia coming out of Donaldsonville. And this will continue to leverage that set of assets as well. So we're a long way down the pipe of having all of the pieces in place to be able to produce and ship this product globally not just on the green ammonia, but as you said, on the blue ammonia side as well. We already do the carbon capture. Some of that carbon or the CO2 is used to the upgrade of ammonia into urea. The rest of it ends up being vented. And so we're looking at a number of projects where we can put in some compression and dehydration facilities, access an existing CO2 pipeline on-site there and get access to geological sequestration. So that will enable us to take what was previously vented CO2 sequestered geologically and get credit for the production of essentially blue or low-carbon ammonia. And that's really exciting for us as well because we think that will be a very fast-growing marketplace given the cost structure of blue ammonia production is very comparable to conventional ammonia. And so it really, I think, has the opportunity to be ubiquitous and really the transition driver because we can get there fast in very large-scale and the cost structure is very reasonable.

Chris, I know we talked about this a couple of months ago about your opportunity in blue, and you made that argument that you could produce the blue ammonia at roughly comparable cost to gray. And as Tony just mentioned, you do have dehydration, you do have compression, and then you also have to sequester this somehow. So maybe, perhaps, walk us through how do you do that at comparable cost to your existing gray ammonia production?

Yes. I think as you look at it, Steve, the one thing Tony mentioned here is there's a large amount of capital that's already in place at our facilities in capturing and stripping that CO2. The next part of capital, which isn't all that challenging, is the dehydration and compression side. And with that, what you get for every ton that you're sequestering of CO2 is a 45Q federal tax credit. And that's largely going to offset, if not even more so, the amount that we need to put in for the amount of capital for that dehydration and compression we need. So as you look at that, we're already capturing the CO2, and then essentially that tax credit will fund the capital requirement in order for us to get it into a CO2 line. Additionally, the other thing is, as Tony said, when we made this announcement, a lot of different partners have called and looked at different business models as to who would do the actual sequestration, the Class 6 permitting versus where we would be from a capital side or more -- or higher OpEx side. So a lot of those opportunities, we're still evaluating. But for us, we think, we'll be right around conventional cost of ammonia for the blue ammonia. And the other thing I would mention is Tony talked about CF having the infrastructure in order to move ammonia. I think the other important point is the world globally has the infrastructure. When you look at 120 ammonia ports globally in order to transport that ocean-going vessels, so it's not just our capabilities but it's really -- for this to be attractive worldwide, the global infrastructure is largely in place as well.

Maybe a question about this project that you're going to start on the green ammonia side, building what, I think, is 20 megawatts of electrolyzer capacity and bolting that on at Donaldsonville. You already have your separation unit, world-scale and ammonia reactor. So you can do this green ammonia by just simply stacking some electrolyzers. Is that the way you're looking at it? And this initial step in this direction, the $100 million of CapEx that you've announced, if you had to estimate, if you were to expand subsequently and add another 20 megawatts of capacity or 50 megawatts, what would be the incremental cost to doing that given you would already have a start and a foot in the door?

Yes. So Steve, as you said, the initial green ammonia project, we've got estimates of roughly $100 million, that'd be about $30 million to $35 million spread out over each of the next 3 years. And we should be operational by 2023 with that. And our expectation is roughly $25 million to $30 million of that is leverageable kind of infrastructure that is a platform for further expansion. And so we could drop in additional electrolyzer capacity and at a reduced cost, call it, $65 million to $70 million rather than the $100 million initially and continue to incrementally generate 20,000 tons annually of new green ammonia capacity on top of the first increment. As you said, we are utilizing and leveraging our existing ammonia plants and air sep units, which are part of our ammonia plants. The idea here being that we will put the electrolyzers in, generate a stream of green hydrogen coming off of those, then that will be piped kind of directly into the back end of an ammonia plant, and so kind of skipping the front end. Now in order for that plant to continue to operate, you need the front end and the air sep unit to run -- to give you the nitrogen stream that combines with the hydrogen that will be generating to produce the green ammonia. And so there is a practical limit of how much you can generate in the way of green ammonia on a conventional ammonia plant. We think that's probably somewhere in the neighborhood of 10% to 15% of production. Those numbers are being reviewed right now with some technology partners that we've brought on board to help us with that analysis. But given our network globally is 10 million tons of production, that says that we could get in the neighborhood of 1 million tons, plus or minus, before we run out of capacity and we'd have to do something new. And that's for green ammonia. Our ability to produce blue ammonia or low-carbon ammonia through carbon capture and sequestration is about 3.5 million tons before changing product mix. We have an ability to do much more than that, but that assumes that we continue to upgrade all of the ammonia into urea, UAN and other forms that we do today. But if we decided, ultimately, to change our product mix, then we could produce even more than that in the way of blue ammonia.

I'm getting a question here online. It's really directed to you, Bert. And that is, how much of the Donaldsonville complex would be diverted to either green or blue ammonia before it would start to impact the availability of product that you sell in the ag markets? I mean it's going to reduce your net ammonia production. At what point do you think that, that could start to affect your mix and/or affect the tightness in the downstream markets?

Well, I love the question, and I love the opportunity because what that creates is optionality for the company. And today, we export between, let's just say, average 0.5 million tons recently to global markets, to Morocco, to Asia, to South America. Opportunities for us are how we leverage our system. And so when you look at the -- what the impact would be, all boats rise in this analogy because you're getting -- you're leveraging your ag base, which we've historically been very active in, our industrial base, which are industrial contracts, many of them are annual or quarter contracts and then the export component. And so I would love to have this thing roll in as soon as possible and to take that system. And I think that just improves the company. It improves everything we're doing. Because as a company, we run our plants at 100% of capacity. Chris, when he was running production, and Tony when he ran production and today, Ashraf, we're the world leader in safety as well as operational excellence. And if we can bring these new products on and then run our plants even more efficiently with more options, that's just good all around.

And I've got another one for you, Bert, and that is, how much more can a farmer pay for ammonia, either it's blue or it's green, and offset that higher cost with what could be carbon credits? And is that realistic given what might be the premium that you have to sell that green ammonia?

This is what we're working on. And when you look at the optionality to a farmer, whether that be and canola of what the yield uplift would be, what the -- I think the return to the farmer will be and then who's capable of serving this market with blue ammonia. Not every company can do what we're capable of doing. Not every company has our -- not only our logistical and distribution assets, but has access to the geological formations that will allow us to sequester this carbon. So we are in a really unique position globally as well as domestically to lead this, create it, run it and help our farmer friends monetize their position. And we think they will align with us. And we do believe there will be a value, not substantially greater than what gray is. But as Chris explained with the credit system, if we're equal to or better, then I think that's a better structure. And then a component of blue parallel to what we just discussed with the export and the capability and energy, I think that will be substantial demand for blue ammonia very shortly.

So what would be coming out of this reactor down in Donaldsonville? Is it going to be some green, some blue and some gray? Obviously, those molecules don't have colors. What kind of record-keeping nightmare is that? Do you expect to be able to defensively document how much you've created of each of those and sell into the various end markets?

Yes. I mean, clearly, there is a need for very good record-keeping and documentation. And ultimately, what we will do is have a third-party come in and certify and register those tons and those credits along with us, and we do that today. So we have a couple of projects that I mentioned earlier, I think, where we are selling CO2 credits into the voluntary marketplace, one for a project in our Yazoo City, Mississippi plant, one in our Verdigris, Oklahoma plant. And so today, we have that record-keeping in place. We bring in a third-party to attest and certify those tons. And we've got all the processes ready to go to manage that. So while it's a needed aspect of this, it's not overly burdensome and we should be able to do that pretty easily. One of the great things about our system is, with the distributed control systems that we have in place, the DCS systems, there is terrific record-keeping of all of the inputs and the production parameters. And so it's pretty easy to go back and look very specifically at quantities and volumes that went into and came out of various plants. And so the math is relatively straightforward on all of this.

And being done today.

Yes.

So Tony, you mentioned that by your estimates, you could convert 10% or 15% of an existing ammonia plant to green ammonia. So if you reach that limit at Donaldsonville, any thoughts about where your next ammonia reactor you might target to convert some of that capacity over to green?

Well, one of the things about our U.K. operation is that, in a lot of ways, Europe and the U.K. is more advanced relative to the U.S. in terms of carbon-trading schemes and cost of carbon. We also have one of the connections to the national grid at our Billingham ammonia facility up in the Northeast in the Teesside area. And so access to the national grid on electricity supply, demand in the area and demand on the continent just across the channel, also relatively high. That would be a very logical place for us to look at an additional kind of investment for green ammonia. On the other hand, the Prime Minister just announced recently a multibillion-dollar project to do carbon capture and sequestration at Teesside. And so there's also the opportunity for us to access infrastructure that's being built out to produce blue ammonia through carbon capture and sequestration. So the good news here is we've got, I think, options to decarbonize our network to produce these kinds of products that are going to be demanded. And it really can be a very commercially based decision on which way we want to go, be it blue or green based on what the demand looks like, what the market is paying for these different products and just how attractive they are.

I'm getting a couple of questions online here about the first 2 legs of that demand stool, Tony, and that is, the fuel for ships and the potential for using ammonia in a power plant. And you mentioned the Japanese utilities. The question being, to be used in a ship ammonia, is there a limit to how much that ammonia can be blended in with the existing fuel? Or are other additives required in order for that -- for the ammonia to be used as a ship engine fuel?

Chris, do you want to -- yes.

Yes. I mean, I think, Steve, a lot of that's still under investigation by several large vessel operators, as you've seen across the globe. Few of the larger shippers are investigating this. One, as Tony mentioned earlier, to really meet the 2030 and 2050 IMO standards, both from a low sulfur and low carbon. So we've been working along with some of those particular technology providers to get a better understanding. But right now, I mean it's still being reviewed. But what is known is that ammonia can be used within the internal combustion engine. And then, two, as you look at it globally, as I mentioned earlier, from almost a bunkering system globally, you have the infrastructure in place with ammonia as well. So I think as time goes on here, there's going to be much more specific answers to that, maybe even some of the other participants that are on the day today of BofA.

I think one of the things that's particularly exciting about the marine application is, my understanding is there's, as Chris mentioned, a couple of different paths forward here. But one of them is to basically eliminate bunker fuel entirely and have the entire internal combustion system run off ammonia. So wow, it could be an ammonia vessel for transport, it can also then utilize that cargo as part of its fuel or you can have a separate tank on the surface of the ship for -- as fuel and then carry whatever it is the ship is otherwise commissioned to do. But given the volume of shipping that takes place, even if a small portion of that industry converts over, the usage of ammonia, you'll see more than the doubling of the -- what's currently demanded globally for ammonia today. So for us, this is really exciting because the demand for ammonia could grow exponentially here as we go forward a few years.

And are you having any dialogue with these Japanese utilities with respect to blending the ammonia in -- with their feedstock? Any comments that you can make on that about feasibility or blending limits?

Yes. So I'll start off and then I'll hand it here to Chris in a minute. In the aftermath of the terrible tragedy at Fukushima, the Japanese decommissioned their nuclear power plants. And so that meant reversion back to coal-powered generation, which runs squarely in the face of any kind of climate goals that they had. And so one of the things that they have been developing toward is to inject ammonia along with coal as coal as a co-fuel source into power generation. And the expectation is that there'll be over 2 million tons of ammonia consumed annually within the utility industry in Japan. Now we have been in contact with a number of the companies that are providing sourcing on a consortium basis. So this would be the Mitsubishis, Maribenis, the Mitsuis of the world. And we have an active dialogue with that entire group.

Yes. I mean, there's not a lot to add over what Tony said. But when you look at the aggressive goals that Japanese government have put out for carbon reduction and then also the lack of fuel sources they have, they are putting in place quite a few tests at some of the larger facilities with FIDs coming in the early part of next year. That would be, as Tony mentioned, a co-combustion ammonia coal plants, and that's something that we're actively trying to participate in and encourage for a number of reasons.

I wanted to ask you about maybe a potential fifth leg of that demand stool, Tony, and that is the use of green ammonia in a refueling station, i.e., disassociating back to hydrogen. We'll have Air Products in this event later today, and that's clearly the target end market that they've highlighted, and you've highlighted 4 others for green ammonia. Just wanted to hear your view as to whether that's something that you're also amenable to if there was a demand for green ammonia to be transported but ultimately consumed as hydrogen?

Yes. Absolutely, Steve. And I think that's one of the things that, again, going back to the point that you made earlier, would allow us to further leverage our logistics infrastructure domestically to help accommodate, whether that's in the Midwest on our terminals and barging up the river in pipeline or whether it's further afield to one of the coast, in which case we'd use our rail assets to be able to get out there. But clearly, that's a really exciting potential opportunity as well, not only for kind of over-the-road vehicles, but also construction applications or forklifts and buses and that type of thing. So that's clearly one that we believe should and could and will develop. The time frame on that one is a little bit, I think, less clear to us than the others. And on that one, we would be a supplier to others, doing kind of more downstream delivery. But certainly, anything that is requiring and demanding kind of clean fuels, hydrogen and ammonia is good for us, and we actively participate.

And we're running out of time, but I have one I need to ask you, and that is about the renewable power that you currently get. Can you just comment on what kind of pricing you can get on that? And where do you expect to be for the Donaldsonville complex?

Yes. So currently, about 25% of our global power consumption comes from renewable sources. And that is just part of the normal power mix that we bring in. And so we believe that, that will organically continue to increase over time as a higher percentage of the grid. But in certain locations, where there is ample renewables, we can increase the amount of power that we're using today based on just buying the renewable power. In some locations, it's a little more expensive than in others. But today, in Donaldsonville, we're spending something like $0.04, $0.0450 per kilowatt hour. So it's very attractive relative to electricity rates.

All right, fellas, we are out of time. I'm grateful to all of you for participating in this today. It was an excellent discussion. Our best to you, and thank you.

Steve, thanks very much. Happy Holidays and Happy New Year to you.

Thank you.