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

Welcome back, everyone. My name is Steve Byrne, covering U.S. Chemicals, and we've had 8 peer plays in a row in the hydrogen field. And now we're switching to CF Industries, the largest nitrogen producer in the world, but having a very meaningful opportunity here to move into green ammonia. And so it's a pleasure for me to host the CF team. So with me today, we have Tony Will, CEO; we have Bert Frost, SVP of Sales, Marketing and Supply Chain; and we have Chris Bohn, CFO. So we got the whole team here. I believe Tony started in maybe 2007 at CF with Bert maybe a year later and Chris a year after that. But this crew has been together for a long time, and running the CF organization through that time period.

So the purpose today is to drill into green ammonia, but I got to tell you guys, I got to start off with $465 ammonia, urea and NOLA. I got to ask you, Bert, 6 months ago when NOLA urea had a 2 in the front, did you expect the NOLA urea price to double in 6 months?

I wish I could say yes, but it's been a very good ride and a very good ride for our investors as we obviously increase from the lows of Q2 and Q3 last year. But you're right, a year ago this time, NOLA urea was $200. Today, we're at $450 to $460. And we're -- we've never trended from an April, May into a June, July, with prices going up. and they have the lowest, I think, $370 in May and now we are where we are today. So a lot of strength in the market and it's multifaceted driven by, obviously, supply limitations and high demand, and a lot of good information coming out of the grains and oilseeds markets. So we're pretty positive, pretty bullish going forward.

And then maybe one more S&D question for you, I had one of my associates plot Chinese domestic prices for N, P and K this morning, and all 3 of them, these price charts have just gone parabolic. And so it -- certainly, the Chinese farmer is paying significantly higher prices for all 3 nutrients. We've been getting signals from various contacts that there could be some action taken by the Chinese government to block exports. Just was curious to hear your view on that, whether or not this momentum in urea prices is likely to continue? And as you said, here we are almost the end of June, and we are still seeing prices going up, it's very strange, at least in the years that I've been covering the fertilizers and now you got potential for China to take some action. What's your view on that one?

You're actually hitting the sweet spot of a very good question because what's come from the investor community in the past is always the bogeyman is what China, what China is going to do this, what China is going to do that. And we've seen over the last 10 years, different activity from China from the record exports in 2014 of 13 million tons to today an expectation of around 4 million tons, we've gone through where China is going to have a decrease in consumption of fertilizer and that's going to negatively impact urea market, especially to today where consumption is on the upswing, not only industrial, but agricultural for a need for yields. And so whether it's a whisper campaign or an actual export tax, that is the rumor in the market that exports will be limited. And I can tell you from real-world photographs that we have and Intel, the product is not moving to the ports. So in the past, where you and I might have talked 5 years ago, there would have been hundreds of thousands of tons stored ready for export in bags or embodied warehouses, those don't exist. And so India, the tender that will be open tomorrow, we may need well over 1 million tons, probably 1.5 million tons. They are over 1 million to 2 million tons behind their export -- or excuse me, import pace. And so China needs to play a major role. And we just don't think that's possible. And then you talk about where the pricing is today, and it's at a very high level, and they are driving as the marginal producer driving that export curve. And I don't think they're going to be a major player this year. We peg them at 4 million tons of exports, which is about based on capacity shutdowns and where their operating rates are about where they should be. So I don't think China is going to be the player that they have been in the past in the export market.

Okay. So maybe we can circle back to fundamentals later, but I do want to jump into the topic at hand here and it's the green ammonia opportunity. So perhaps I'll ask you right up here on the big project down in Donaldsonville. It's a huge nitrogen complex, and you have this $100 million CapEx investment to convert some of that ammonia from gray to green, and we can get into the blue option as well. But how about give us just a quick update on where that project stands right now? Is there any site work going on? Or is this still in engineering?

Yes. You bet, Steve. So we've signed the agreement on the technology licensing and the EPC with ThyssenKrupp. And we do have some site work going on in terms of the civil engineering, some of the beginning pieces of it. Obviously, in order to get real deep into it, you need to have finished engineering drawings so that you know exactly what the load-bearing requirements are. But we're beginning to do some site prep and figure out kind of where we're running the cables and pipe racks and so forth. So it's a good beginning. We continue to believe that we'll be online by 2023 with that project. And what we're excited about is not only the prospect of being able to produce green ammonia from that electrolysis unit we're putting in, but also the possibility of participating in straight up just the green hydrogen market. The electrolysis unit will provide a very pure stream of hydrogen. It gives us the optionality and flexibility to either convert that hydrogen stream into ammonia or sell it directly as green hydrogen, depending upon what demand looks like in those various segments. So it provides us some interesting optionality.

That's interesting. I had heard you to talk about that one before. When we've talked about this in the past, Tony, and you've described what you saw as potential end markets for at least the green ammonia piece out of this, the green hydrogen may be yet other end markets. But in the topic of green ammonia, you've mentioned several potential end markets, such as marine shipping fuel, power production, such as in Japan, various end markets that want to move to decarbonized source of ammonia, and then there's ag. As you've been building this project and talking to prospective customers, how would you rank those potential opportunities? And maybe throw green hydrogen in the mix, are you beginning to think that there might be more options on the hydrogen side than on the ammonia side?

Well, I think oftentimes when you begin conversations with people that have a view toward decarbonization and a cleaner environment and a sustainable energy source, the bias initially is to go all the way to the perfect end state in this case, being green hydrogen because there's no carbon that's even produced upfront, right? It's just the electrolysis of water. And I think once you get a little bit deeper layers of conversation with the users of that product, all of a sudden, you do see that there is some level of pricing sensitivity at a point that they would say, all right, I didn't realize the production cost of green ammonia is basically 4 to 5x that of blue ammonia. And as long as we're capturing and sequestering all of the carbon that's produced through blue ammonia, and I can get it at a relatively deep discount from the standpoint of climate change and sustainability, that sounds like a good middle step. And so I think what happens is you do begin to see pricing sensitivity in some of these end markets. And I think there will continue to be some applications for which green ammonia is highly desired. And those segments are willing to pay the big premium that's associated with it. But I also believe that the vast majority of applications are perfectly happy using blue ammonia. And because all of the carbon is captured and sequestered in from a climate perspective, equally as appropriate and sustainable is bringing and yet it's at a much different price point, at least, on the production cost end of the world. So we do think it's important to gain experience and capabilities on the green side. We think that there will be niche markets for green. We think, by and large, the lion's share of volume will sit in the blue space instead of in green. And that's one of the reasons why we're beginning to think about green hydrogen and blue hydrogen production as opposed to necessarily converting it all the way to the end state of ammonia because there tend to be, in particular, in certain energy applications, I think a higher willingness to pay incremental value for green hydrogen as opposed to just green ammonia.

So let's talk a little bit about the blue option that you're talking about here, Tony. And I think you helping you with it the last time, Chris, just the economics of blue, help us figure out what do you need to do? What kind of capital is necessary to capture the CO2 coming off of the reformer. Capture it, dehumidify it, compress it, whatever? And then find a carbon or a CO2 pipeline that you can pump it into, how feasible is all of that? And how much capital will it require?

Yes. So we already capture all of the process CO2 that is produced as part of the ammonia production process. And that has to be extracted out of the synthesis gas in order to be able to produce ammonia. And so we do capture that today. Some of it we use to upgrade ammonia into urea. The rest of it today, we end up venting, which is a substantial percentage of the total amount of our CO2 footprint. As you said, what we need to do is put in some dehydration and then compression in order to be able to pump it over a pipeline. There is an existing pipeline network that's very close to 2 of our facilities. And we've been contacted by a whole host of other industry participants about potential Class VI permanent geological sequestration projects that are in the vicinity of a couple of our plants. And I think there is a ready appetite as those facilities get permitted to begin doing local area kind of gathering network. So the ability to achieve takeaway capacity and sequestration, I think will be -- we'll have multiple options within 3 or 4 years. It will take probably somewhere between 18 months and 24 months to build the dehydration and compression. And I think that's likely to be in the $70 million to $100 million range as well. I think Chris might have a little more current numbers on that specifically. But it's not a huge investment relative to getting access to the 45Q credits of $35 a ton for sequestration on the CO2, that actually pays itself back relatively efficiently. And so I think blue ammonia is imminently doable and within the next 3 or 4 years, we ought to have the capacity to do a couple of million tons of blue. In order to get to full blue ammonia, it would require us to do blue gas capture on the CO2 that currently is used as the energy source or the combustion CO2. To make that feasible either we need a relatively high price on carbon cost or we need a higher incentive on the 45Qs. But I think most of the rest of the world is viewing carbon price to continue to escalate, which will provide the economic incentive to industrial companies and others to make those investments and capture the CO2 as opposed to continue to vent it. And if and when that happens, we could get to a situation where all of our production becomes blue. I do think that that's subject to governmental policy and regs that's a little bit longer down the road would be my estimation. But I think the first couple of million tons of blue ammonia is really just around the corner.

And maybe just to add to that, Steve, as we've talked about before, that's really the clear advantage CF has over a lot of other industrial chemical producers is that, that process CO2 is already being captured and it allows us, from a cash cost standpoint, at least, initially to be in line with conventional ammonia production, so that the blue cost per ton on a cash cost initially should be somewhere similar to what we have for conventional.

So does that mean that those geologic formations and those folks that are trying to get permits for sequestration, they would not charge you anything above $35 a ton, is that the way it would work? Or is that -- does that 45Q cover your capital costs? Just how do you make that work so that your incremental operating costs don't go up?

Yes. I mean I think near term, the $35 going up to, I think, $45, think about that as covering mostly the operating cost. I think capital cost recovery would necessitate a slightly higher value on the 45Q. But current discussions in place on a couple of the different deals that have been proposed, ranges from kind of $85 up to $100 a ton. And anything in that range provides appropriate economic incentive for everyone along the value cap for the CO2 capture and disposal supply chain to have real incentive to deploy capital. And so I think it is coming. It may initially start off as an op cost net back to 0 and then longer term grow into appropriate return on capital. But to your point, exactly right, at $45, it's not enough to sort of kiss all of the rates.

And Tony, you talked about capturing the CO2, a lot of the -- I referred to it as just the furnace, the production of the steam. So you have exhaust from the SMR that is really coming out of a combustion system versus what's coming out of the reformer, which is more readily captured. Can you actually capture that CO2 out of that furnace exhaust? Is that technically feasible?

It's feasible because it's relatively low pressure and relatively lower concentration. The size of the units and the capital intensity is pretty high, which means that today's value of the 45Q, you're not really going to see anybody make those level of investments. Once you get to a higher level of kind of 45Q credits or if there was a real cost to corporations on carbon emissions, whether it's a carbon tax or carbon infiltrate program or something. Then I think again, at high enough levels, you'll see industrial companies and other hard-to-abate industries make those level of investments. But today, there's just the capital equipment is too expensive to warrant doing that. Now as I said, technology continues to develop and evolve. And I think there's a lot of people looking at how to develop intellectual property around carbon capture from flue gas emissions is what we would call it. And so I do believe that longer term, the technology will evolve and the cost, both in terms of capital and op cost to capture the flue gas emissions will continue to come down as well. And we're working with a number of companies on that very prospect. But I think that's probably a little bit longer time duration.

So it sounds like your electrolyzer will be on stream before you're in a position to sell anything that's blue. And it's what you're evaluating right now for prospective customers, does it include green hydrogen as potential sales? And what kind of end markets are you considering or are you looking at there for the green hydrogen that could be coming off of that electrolyzer versus the green ammonia?

Yes. It's certainly one of the things that we're beginning to explore again, partly because the deeper we get into conversation with folks around green ammonia and value proposition, there's a little bit of, "Oh, wow, we didn't think it was going to be that much. So let's talk about blue instead." And so I think as we go down that path, the initial plant is 20,000 tons per annum.

I can't hear you, Tony.

I'm sorry, the initial plant is 20,000 tons per annum, and I think that we can find home for 20,000 tons of green a month. But as we're beginning to think about what's the highest and best use in the most profitable segments, it's one of those things we're beginning to explore, which is the hydrogen market as opposed to the ammonia market.

Okay. So if we just talk about hydrogen here for a minute and we compare your natural gas costs versus what in Europe right now, which is getting close to $11 per million Btu. And if my math is right, the cost to produce gray hydrogen off of $11 gas, you could produce that with $0.04 per kilowatt hour electricity, which I think is the rate you're able to get for renewable power. So is that roughly seem right to you that you could produce green hydrogen at an operating cost now, if indeed, your electrolyzer was on stream that was roughly at parity with gray hydrogen costs in Europe now? Does that seem roughly right? And does that give you maybe a little more conviction about this opportunity? Now we don't know where European gas is going to be down the road. But -- and we also don't know where your renewable power costs are going to be, but they're unlikely to go any direction other than down. And if you're at $0.04 now, you got a relatively attractive operating cost there. Is that a fair statement?

Yes. I mean that's clearly a fair statement. It's one of the reasons why when you began the conversation today talking to bird around why is urea $460 in the U.S. Gulf. It's because gas into Europe and Asia is $10 or $11. But remember, a year ago, we were paying less for gas in the U.K. than we were in Louisiana, despite the fact that a lot of the gas in the U.K. was actually LNG shipped from the Gulf Coast. So look, I think when you see a steeper hydrocarbon spread around the world, kind of all of the options available to low-cost producers look attractive. Fertilizer looks great. Industrial chemicals look really attractive and potentially the prospect of selling hydrogen into different markets look really great as well. Now the minute you start talking about moving hydrogen from the U.S. into Europe, which I think is one of those things that could happen, may happen economically, ammonia kind of comes back into the conversation because hydrogen is very difficult to ship long distances either as a compressed gas or as a liquid, extremely low boiling point, you lose a lot due to boil-off and the capital required to refrigerate it and turn it back into a liquid is extraordinarily high and doesn't fit well onto a ship. And so if we're talking about moving hydrogen to Europe, a lot of that's probably going to happen via ammonia would be my assessment at this point.

Is there any timing that you might have a view on now with respect to when you might add on another 20-megawatt electrolyzer? Is it too soon to be thinking about that? Or I know a lot of the CapEx right now is to build out that infrastructure. But once you have that in place, adding another 20-megawatt or more for that matter, seems like that could be relatively straightforward. Do you share that view? And if so, do you have any idea when you might be moving down the next step of capital investment?

Yes. I mean it certainly becomes much easier to add a second, the third unit. If we want to do it, a lot of the kind of base level infrastructure would already be in place and it would be a simple matter to kind of continue the daisy chain. I think the bigger issue is even at $0.04 a kilowatt hour, which is remarkably cheap energy, as you've pointed out, versus other forms of energy in the rest of the world, you're still talking about a production cost that's 4 to 5x higher than conventional ammonia or blue ammonia using North American natural gas. And I think, again, that just points to the huge strategic advantage we have with most of our production assets being based in North America running off low-cost gas and being highly efficient. And so again, it really gives us a lot of optionality in terms of how to think about where those molecules go and they go into the clean energy market in the form of blue hydrogen or blue ammonia. Do they go into fertilizer? Do they go into marine transport? Do they go into utility generation in other parts of the world? And like we do today, and Bert manages extremely well in terms of our mix shift and what we think about our slate of products that we produce, I think, we will see a similar kind of decision matrix around how we choose to serve different segments in the future.

And as you start selling ammonia out of Donaldsonville that's either blue or green in the next couple of years. Well, those incremental tons of sales into these clean energy markets, cannibalize your existing ammonia customers? Or would it be more likely a diversion of that ammonium molecule away from urea or UAN. How are you thinking about it will impact your existing markets?

Well, I'll turn this over to Bert here in just a minute to give his thoughts on that topic. But about roughly two-thirds to 70% of our product today goes into agricultural applications, and about 30% to 35% of our production today goes into industrial application, including ammonia into various industrial applications. And so in a lot of ways, it's a redeployment of those tons, but at some level of demand becomes high enough then I do think you see a competition for who values that product more. But Bert, why don't you give Steve your thoughts on this?

Well, we're actively engaged in each of those avenues. When you look at what's before us, you've got transportation fuel and whether that goes into ammonia street or ammonia sharing with current bunker fuel, which we think could be an interim term solution to meet the IMO standards, you've got that avenue. You've got the energy avenue. It's -- Japan is pursuing or working with some of the trading houses to be a part of that solution, but I think that is something that will go or be available to other parts of the world. And then you've got agriculture with possible creation of a low value chain that starts with 0 carbon ammonia and then renewable diesel and then carbon sequestration of the crop or through the crop. And you've got a very good value chain to be a part of the carbon solution. So those 3 avenues we are pursuing. But you're right, we will look at that. As these things develop and as this demand develops, we believe we'll be in even more of a demand-driven market. And so we're positioning ourselves to meet those needs, meeting with those different industry people and that our company can supply, and that's through load-outs at our plants. That's why being positioned in Trinidad, in Donaldsonville, in the U.K. with the ability to load directly out into the ocean door market as well as on the pipe and barges, we think our company is uniquely positioned to satisfy each of those areas. But the next step would be and just how do you meet that demand? We've got a lot of debottlenecking opportunities, which are the lowest hanging fruit, probably in the world to expand that production. And then if we have to, you're right, we will look at the upgrades. Adding those value to the company. What segment is pursuing and paying that value. And if that meant decreasing upgrades to have more blue or green ammonia available, we would do that. So there's not a negative in this scenario and it's just how and that's how we're pursuing it.

So BofA has this ESG database. And what I pulled from it for CF has a, I think, a 25% greenhouse gas emissions reduction target by 2030. Is what we're talking about today, part of that strategy, part of your target for reducing CO2 emissions would be to convert your production facilities from gray over to either more blue or more green? Is this part of it? Or is there -- are there other initiatives that you have that are going to be primarily the driver this decade?

Yes. I mean there is a whole list of initiatives that we have in place. And I can put them in a couple of buckets for you. So about a -- ballpark about 1/3 of our CO2 equivalent emissions are driven by nitrous oxide emissions, most of which come off of nitric acid plants, so N2O emissions. N2O is an extremely potent greenhouse gas close to 400x per ton equivalency of CO2. And so there's a whole host of projects that we're looking at how to dramatically reduce or completely eliminate and abate N2O emissions out of our nitric acid plant. So that's kind of the -- some of the low-hanging fruit. The next piece of it is about a similar size, about another 1/3 of our emissions, Scope 1 emissions, are based on captured CO2 that we currently vent into the atmosphere today. And that's where sequestration in the form of -- to help produce blue ammonia and blue hydrogen, really is the solution on that. We already capture it. Yes, we need to dehydrate and compress it, but it's already captured, which is where the lion's share of the capital would typically have to go in most industrial settings. And we think we'll have a robust carbon capture and sequestration solution in place by 2030, and that's about 1/3 of our Scope 1 emissions. The other 1/3 of our Scope 1 is really the -- as we were talking about earlier, the furnace emissions or the flue gas emissions, and that is going to require both some technology development and also a higher price of carbon. So I would say that's more kind of 5 to 10 to 15 years out, may well end up being post 2030 by the time you've got the right intersection of carbon cost and incentive as well as technology that's been developed. And that's why we set the goal where we did. But personally, I would be disappointed if we only got 25%, I think, 50% or 60% is imminently achievable by 2030. And so we're not going to rest and be satisfied at 25%. So those are kind of the 3 buckets of our Scope 1 emissions.

Very clear to think on that. So just maybe shifting back to the broader outlook for CF. The 2 key questions that I've been getting recently. One is the price of nitrogen these days. Just where is it going from here? That was the first question I threw to you, Bert. The other question that I'll maybe send to you, Chris, and that is, what's CF going to do with this cash? And so maybe I'll throw that one over to you. I know you've been anxious to get back to IG and perhaps this is the year for that. But do you have other ideas for capital deployment?

I'm going to let Chris answer that question in just a minute. I'm just going to make one gratuitous comment here, which is, wow, am I -- do I love to hear that question about what are we going to do with all of the cash we generate. And I contrast that to 2016 and '17, where all of our investor calls were shrouded under this dark cloud of are you going to have to cut the dividend? What's going on with kind of the business performance? It's a great spot to be in to have to talk about what we're going to do with all of our cash.

That's a great segue. And as Bert was describing earlier, I think, Steve, the important thing here is this is just not a second half of '21 in order to get the grain stocks back to where is a normalized level. It could go into '22 and into '23. So as we're looking at our cash flow, as you mentioned, we're looking at pretty strong cash flow for the next several years. Getting to investment grade is important to us. I think we have the metrics where we should be there right now, but there's probably a little bit more work we have to do. As we've talked about on other calls, we have 2023 notes coming due, we'll probably chip away at a little bit of that in order to get us to where we believe that. The rating agencies may view it and change their rating on us as investment grade. Outside of that, the projects that Tony described, largely because of the infrastructure we have in place right now fit within our normalized CapEx, maybe a little bit out of that but not all that much. So it leaves us a pretty good amount given our cash flow conversion to look at everything from return to shareholders, which we've sort of altered how we go about that being a little bit more opportunistic given the volatility of our share price. But then also other strategic they may be inorganic that we continue to look at from a growth perspective. So I think as Tony sort of laid out there, we're in a very good place right now. We have a balance sheet which is much stronger than it was during the time frame that he talked about, that gives us a lot of financial flexibility to achieve not only the clean energy strategy, but also a lot of the other attributes that we've done historically as well.

And I would just add one thing, which is, as Chris said, although our normal CapEx budget incorporates a fair bit of capacity to do improvement projects and expansion projects. Going back to one of your questions earlier, which is if the world ends up ammonia short, as Bert talked about, we do have a lot of debottleneck opportunities that are very cost effective compared to building new. We also have the opportunity, as we discussed, to put in some dehydration and compression around our CO2 streams in order to reduce our Scope 1 emissions and get to blue ammonia faster. So it's great to be able to think about high-return projects where we can deploy capital back into the base business again. And so we're excited about not only the cash generation over the next couple of years, but really being able to grow the business in a way that benefits shareholders.

And we're running out of time, but I just want to also ask what you're doing in Donaldsonville if you had to pick other facilities that you have that you might go down this path of blue or green, which ones would be fairly high on the list?

Well, if you think about the plants where we have limited demand for CO2 for upgrades, they tend to be the plants that for which you get sort of the most bang for the buck in terms of doing carbon sequestration. So our Yazoo City, Mississippi facility is mostly ammonium nitrate, which doesn't use any CO2 for upgrade. There's a very small urea and UAN facility there, but most of that CO2 get vented. And so we've got a very large capacity there. Our U.K. plants have a lot of unused because there's no urea capacity at all in the U.K. The challenge with the U.K. is electricity cost is pretty high over there. On the other hand, that's for green. But on the blue side, we're working with the government, both that what used to be called the Teesside Net Zero project in the Northeast and then also the HyNet North West project, which covers both our Billingham and Ince facilities to be able to do carbon sequestration there. And there, you get, again, full utilization of the excess CO2 because we don't upgrade anything at either one of those facilities. So those are the ones that, first and foremost, jump out, then kind of second order would be our Medicine Hat, Alberta facility, and we're in some conversations up there around carbon sequestration. And then the next one down the line would be Verdigris, again, based on the CO2 excess balance that we have at that facility. So those are the places that we would look to first in terms of, again, the best return on incremental capital and ability to convert more ammonia over to blue.

All right. We're very good. I look forward to hearing updates on all 6 of those plants, Tony. So listen fellows, thanks for giving us the time today. It was great to catch up with you. Our best to you and look forward to catching up with you soon.

Thanks, Steve, and I look forward to seeing you hopefully in the near future and can't wait for the BofA conference to get back to in-person in the future because miss the interpersonal interaction.

Thank you, Tony. I'd share your thoughts exactly. Thank you.