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

Welcome back. My name is Steve Byrne. It's a pleasure for me to continue this Hydrogen Conference that Julie and I have co-hosted. This is our fourth one. And our next presentation and discussion is with CF Industries. So I'm delighted to have such a strong team from CF to join me on this discussion. This is a group that's been working together for a long time. So let me quickly introduce the team here. Tony Will is CEO. He joined CF in 2007, I believe. You got Bert Frost across the table from him, joined, I believe, 1 year later. Chris Bohn, CFO back on the right there, joined 1 year after that. So this is a team that's been together a long time. Martin Jarosick heads IR also at the table. So this is a company that -- it's hard to believe 20 years ago was a co-op. I was familiar with them shortly after they went public, and I can't describe to you how much different this company is now than it was then. But we have so much to talk about here, and I'm delighted to have all you guys here with me today. So we have a Hydrogen Conference here and -- we have lots to talk about with your blue and green ammonia initiatives. I hope you don't mind, but with $1,400 a ton ammonia prices in the corn belt right now, I just got to ask you a little bit about that. It had a 2 in the front in the third quarter of 2020 and it's now just significantly up there. Lots and lots of sources of disruption globally. [ Midstream ] shows natural gas prices in Europe at $48 per million Btu. But I'd like to just throw that out at you.

Before we get into the blue ammonia project, I'd like to hear your view on these sources of disruption globally in nitrogen markets, whether it's gas prices in Europe or the export block in China? What's your outlook? Do you think that this tightness globally continues for the next few months, the next couple of quarters? What's your view on that?

So Steve, always a pleasure. Thanks for having us. Great to be here. I'll talk a little bit about maybe supply side disruption, and then we'll kick it over to Bert and let him give you the view into the crystal ball in terms of what happens on the look forward. 2020, obviously, a strange year. There was a lot of deferred maintenance that got pushed into 2021. The last thing you wanted to do in the middle of a COVID pandemic when we were still trying to figure it all out was to bring 500 contractors on to a site and do a big turnaround. So a lot of deferred maintenance, not only from our own system, but I would say, worldwide. So moving into 2021, already, you're running at a pretty substantial deficit on an annualized basis from a supply side just given the amount of global turnarounds that were happening. Add to that, you've got Winter Storm Yuri that max out a big chunk of production in the U.S. for a couple of weeks. Hurricane Ida, that knocks out the Gulf Coast for about 3 weeks. You've got gas price that you mentioned is well north of $40 in Europe right now that spiked to the high 20s and into the 30s back in September, where you saw about 11 million tons of annualized capacity that run offline. And then you had high coal prices in China. And then just recently, now you've got export bans out of China, out of Russia, out of Egypt and out Turkey. So all those factors continue to squeeze the supply availability of nitrogen and prices have done exactly what you said, which is we've gone up three or fourfold relative to where we were a year ago. And the marketplace has got a little bit of sloppiness in it. It's a little bit like oil. You take 1 million or 2 million barrels a day off of production and all of a sudden prices go up. Same thing with ammonia and nitrogen when you squeeze the supply side that much, there is an instantaneous price response. So that's what's going on right now. And Bert, why don't you talk about what we see going forward?

We're clearly in a supply-driven market and it's a supply deficit for all the issues that Tony articulated and they will continue. China is not going to come back in for the government response or communication until June. China is 10% of the global exportable supply and then you have the other countries and the other issues. The difference between this market and the previous spiked markets of '08 and '12, where those were the demand-driven markets, demand-driven pulling forward in fertilizer. This is a supply-driven market or lack thereof and there's not inventory anywhere in the world and stocks-to-use ratios of corn and wheat, cotton, grains and oilseeds are very low, and there are areas that will have to import those materials instead of fertilizer because of lack of food stuffs. So we see this market, we would have said 22% to 23%. Today, I'd say 23% to 24% and very positive. It is a commodity. It is dynamic but we have substantial demand in different parts of the world for different reasons. India is a subsidized market on the input. Europe's a subsidized market on the output. They're going to buy fertilizer. With Brazil and Argentina having positive economics and a devalued currency, they're going to plant and use maximum amount of fertilizers and same in North America. So this trend is exciting, but it is a global commodity. And we're actually the lowest priced market in the world. And these issues need to settle out. There's an India tender announced today for January shipment. It's going to keep the global supply further tightened into spring, and then we go into the high season for North America. So what are we doing at CF today is those numbers that you communicated, $1,200 to $1,400 for ammonia for spring, we have those offers out in the market. We're taking orders for Q2. And at this kind of pricing level, we're going to roll that up. We've been taking orders for Q1 probably the last several months and kind of rolled that. I think we'll finish that up by early January at $4 gas. So a very positive environment going forward.

And I think the other piece of this is, particularly with the political and legal wranglings going on around Nord Stream 2, we don't see there being a quick fix to the situation in terms of gas cost in Europe. So it's really that spread that sets the margin for us. And given that that spread looks like it's wider today than people had thought it was going to be, that sets us up for a very optimistic view in terms of what 2022 holds and, as Bert said, into '23 as well.

So maybe just one more on this -- the fundamental outlook. We ran an Ag retailer survey a couple of weeks ago, and the retailer response was acreage shifts from corn to soybeans and the retailers are expecting lower application rates of all the fertilizers. And there was a meaningful response that I heard from it of oh, we got a demand shock coming or these prices are driving demand destruction. And so your view on that. Is this less consumption in 2022 out of necessity in some parts of the world or just not able to get the product? Or are you expecting some balancing of the supply/demand because of less use?

I mean I think when you are in a supply-constrained environment price has got to be the arbiter of where the product ends up going. What you're not going to see is a lot of excess material sitting around on in bins or in tanks. It's all going to go down. And based on the kind of demand that we've seen for ammonia, both in the fall as well as forward selling into the spring, we expect a pretty robust corn planting just based on the numbers because you're not going to put down ammonia if you're not planting corn. Now that said, to the extent that there are some acres on the margin that shift out of corn into beans, that just further pressure stacks to use as we go into the following season. So from our perspective, we're going to run the plants safely, but as hard as we can to get optimal production coming out of it. And the fact that this is setting up now for a couple of year runway is very attractive. And at some level, having a few less corn acres out there is not a bad thing from my perspective. But we're very optimistic about what the next growing season or 2 holds.

And I actually don't see that we'll have fewer corn acres. We project higher corn acres as compared to 2021. And we are seeing, like Tony said, good uptake for all of our programs. I don't think you're going to see skimping in those Tier 1 countries. There are areas that are unable to acquire the fertilizer that they need due to credit issues or governmental policies or just limits, but that's not the same issue that you articulated. So we'll see, and we'll have more clarity in our February call.

Okay. All right. Very good. So let's dig in a little bit on your outlook to move blue in Donaldsonville and Yazoo City. Can you give us an update on those projects? And I guess from my perspective, I think there's less uncertainty about your capability to capture the carbon, since you already do that for urea production, but to then dehumidify it, compress it and so forth. Not that so much so as what's your outlook for having a Class 6 injection well proximal to those 2 manufacturing sites that you could actually start creating blue?

Yes, you bet. So we announced in October that Board had authorized 2 big projects, as you said CO2 dehydration compression. We already capture and strip out the CO2 stream from the ammonia production process, and we have quite a bit of excess CO2 in both locations well above what we need for urea production. And so we are putting in enough capacity to dehydrate, compress and inject about 2 million tons of CO2 per year coming out of Donaldsonville and about 0.5 million tons at Yazoo City. Our expectation is that within kind of 3 or 4 years, we'll have Class 6 wells that are up and operating, might be a little bit faster than that. But in the near term, there are plenty of EOR applications that are available and while those don't pay quite the same level as Class 6 do, you do get basically more than variable cost recovery from injecting into EOR. And it also is, from a climate perspective, very real sequestration of carbon because that oil would be produced regardless. So we'll be able to begin producing blue ammonia within about 2.5 to 3 years. That's the timeline that we're on in order to get those dehydration and compression plants up and running. And we think that there is, based on all the conversations we're having with potential partners, very strong demand that we should not have an issue finding a home for all of that where there is a clean energy application as opposed to just moving it into the Ag marketplace.

So let's drill into that a little bit, Tony. And can you talk about the various end market opportunities for the blue ammonia? Are these existing customers or what fraction of them would you say are potentially new customers where it really does or could represent incremental demand?

Yes. So I would say the first one that we think has the highest likelihood of showing up in the near term is based on our MOU relationship with Mitsui. So we signed an agreement that we're going to explore opportunities for blue ammonia across the entirety of the supply chain. And what they're principally focused on is moving blue and green ammonia into Japan and Korea to run it in co-fired production with coal and power plants and displace some carbon emissions that are happening. They're running those verification tests kind of on an ongoing basis right now. But the expectation is they could be consuming up to what about 5 million tons of ammonia within the next 5 years. And so we're working closely with them to begin kind of helping to facilitate some of that testing as well as set up some longer-term supply agreements and look at how to participate across the supply chain in that regard. So that one is very near-term and probably developing concurrently or maybe even faster than our blue projects. In addition, we've got a number of initiatives going on, on marine applications of ammonia. As you know, the IMO has stipulated both sulfur and CO2 emissions restrictions that tighten as you get to 2030 and then further as you get to 2050. And by the time you get to the 50 ammonia really is the only solution that's viable today. Methanol does not take care of it because of the CO2 molecule that's embedded in methanol. And so we're working with shipping companies as well as the propulsion manufacturers on ammonia as a fuel that is suitable for internal combustion, propulsion, and we think it represents an outstanding option in the marine space. So those are the 2 that are, I think, front and center, very real, and we'll see some sizable demand in the next 3, 4, 5 years.

Okay. And between now and that 3 or 4 or 5 years from now, is it really small volumes for pilot testing? Is that -- is it -- are we really that far away, a few years before it might impact your shipments?

Well, I mean, there's a little bit of a chicken and an egg situation here because there's not that much blue ammonia that's actually produced globally. Despite the Aramco television commercial out there, they're only shipping about 40 tons. And while there's a little bit of other miscellaneous production here and there, ours is really going to be the first commercial scale volume that's available and that's about 2.5 years out. So we are providing some conventional -- some people call it gray ammonia for some of these testing applications but as the technology kind of develops is right as our production will ramp into it. So that's really syncing up the supply-demand side on that front. And I think we do need more supply, otherwise we'll choke off development of additional demand because this is all incremental demand for the world in terms of new applications for ammonia. And so ultimately, what it means is we need -- the world is going to need to build additional ammonia capacity.

And to that point, Tony, I had Air Products on a chat earlier this morning. And as you know, they're building a greenfield blue hydrogen plant, not far, I can only assume that it's very close to your Donaldsonville plant just given it's in the same Parish, but they were also going to put an ammonia reactor on that project. So is that the type of, I guess, support for new supply of blue ammonia that you're talking about that might encourage some of these end markets to go down this path?

Yes, absolutely. I think there's that project. There's the NEOM project that's green ammonia. That's probably a little farther out. But then there's several other announcements out there about people doing blue projects. And I think that is actually helpful to us. We don't view those as being competitive because I do believe that you've got to have a sizable volume in order to really help stimulate development on the demand side. If we choke off the supply, we're just not going to get the level of interest in R&D on different applications downstream. So I'm optimistic about the fact that you see other -- or well-capitalized market intelligent company is seeing the same things that we're seeing in making those kind of investments. And I think that actually is lifting all boats as opposed to fighting it out for market share.

All right. So Yazoo City was added. It's not just Donaldsonville. You have other facilities that could be added into this. The capital that -- at least from my perspective, the amount of capital required for these projects is not prohibitive for the carbon capture. What would be other facilities that you have that you would say are kind of next in line, at least for being considered for moving blue?

Yes. So part of the reason why Donaldsonville and Yazoo City were the first 2 up, not only do they have very large capacity of excess CO2 that today has just vented but also the approximate to EOR wells that are in operation today, CO2 pipeline connectivity as well as what we believe development of Class 6 permits are. The next couple of facilities for us where you see similar dynamics with excess CO2 in areas where the geology supports either EOR or Class 6 would be our Verdigris plant in Tulsa, Oklahoma, and then the Medicine Hat, Alberta plant, where we've got kind of 2 ammonia plants but only one urea plant. So there's a lot of excess CO2 up there as well. So those are kind of likely next candidates. Our Port Neal, Iowa plant does not have a lot of excess CO2 because of the very large urea plant that's out there running really well. And so that one is further down the list in terms of things to think about. And Woodward has got a little bit of CO2, but again, not a lot given that there was -- right before the Terra acquisition, they had launched an additional UAN plant build out there. And so again, there's not a lot of excess CO2 at Woodward. So we're thinking about other things that we can do in those locations, but the next 2 likely are going to be, as I said, Verdigris and Medicine Hat.

And Medicine Hat would tie into the province of Alberta's CO2 sequestration pipeline, right? So that one seems like there's a lot of momentum heading that way there, again, [ Air Products ] is heading down a similar path. But with respect to Verdigris and actually in Louisiana, do you have much visibility on these Class 6 injection well permit applications? Do you have confidence that these are going to materialize? And any idea how long it might take? Are you comfortable with your own timeline that it's going to take you 2 or 3 years to do all the infrastructure changes? By that time do you think that you'll have more options than just EOR?

Yes. I'm very confident, but I'm going to turn it over to Chris because he's the one who's doing these conversations real time.

Yes. So Steve, there's definitely -- you're starting to see already permits go in for permits to construct on a lot of these Class 6, specifically in Louisiana and in Texas. So we feel very confident in our discussions with some of the counterparties that we have looked to partner with in this that those Class 6s will be coming on, if not right when we have our dehydration and compression, not long after that. And that's taking into account the EPA timeline for permit approval, along with the construction time on tying in some of the laterals for transport. So as Tony mentioned, we're sort of initially -- if we finish a little early, we'll have the EOR side, where we'll be able to capture some sort of credit immediately. But over time, we feel there's enough opportunities with enough different players around the Class 6 that they're filing, some of which have been filed already, but many more in the first half of 2022.

And in general, what you're seeing is a lot of the oil majors that have fantastic subsurface capabilities looking at getting into carbon disposal as an area of expertise, and those are the companies that we're having pretty advanced discussions with.

So Tony, you went through your roster of plants, but didn't include the UK plants. And obviously, we have just prohibitively high gas costs over there. But what's your outlook for those plants longer term? Do you see this gas issue as being a challenge in 2022, but longer term maybe isn't such a problem? It wasn't that long ago that I remember the gas prices over there were only $1 per million BTU. So it's -- what is your outlook for those plants and whether they lend themselves to going down this path just because gas is so expensive?

Yes. I mean there's certainly a move afoot to develop some carbon capture and sequestration projects in the UK. In fact, 2 of them have been announced with government support on funding, one is the HyNet North West project where that would serve our [ Ince ] location in the Northwest of England near Manchester. And the other one is a Teesside Net Zero project which is where our Billingham facility is in Teesside in the Northeast. And so there are a couple of projects going on right now. A bit of the irony is we turned the Billingham plant back on at the request of the UK government because they actually need the CO2. It's so integral to the economy. So on the one hand, we're getting taxed on the CO2 production and they're trying to find places to dispose of it -- the subsurface. And on the other hand, it's absolutely integral to the proper functioning of the economy. So clearly, something has got to change there longer term. I think the issue is, given the lack of available production of natural gas in the UK and Europe, long-term future for ammonia production in those regions, at least from conventional hydrocarbon sources, I think is a question mark. There's a recent study that has come out looking at decarbonization of the ammonia industry. And the speculation in that document was Europe would head more toward green because of the lack of availability of natural gas, whereas North America would head more toward blue because gas is plentiful, and blue is a perfectly suitable way to dispose of carbon. So I think you may see regional [ versability ] shake out in terms of how people try to decarbonize the network. And it wouldn't surprise me if things end up playing out that way. From our perspective, the Billingham plant continues to operate. We have the CO2 contracts in place. That $48 natural gas, it's pretty expensive to operate that plant. But we're able to do it. I think I question some of the operating decisions in some of the other European plants. There was some announcements that people have restarted. I hope they've hedged gas because at $48, you can't run very long given where -- even with $1,400 ammonia.

Yes. Very good. I thought the same -- I heard that yesterday that didn't make sense to me. What about agriculture? I wanted to ask your view about that. There are a few programs out there that I'm aware of where there's efforts to try to enable a farmer to generate a carbon credit that can get paid for either from sequestration of carbon into the soil or perhaps from purchasing low carbon nitrogen fertilizer. Is that an opportunity that you see as possible for you to sell blue ammonia through your network, your pipeline and storage facilities in the corn belt? Is that a possibility?

Most definitely. I think what you're hearing from us is there are multiple parallel paths, and we're pursuing each of them in conversation with industry participants, first-tier groups, whether that be in Asia or in transportation or in agriculture. And we have those relationships in place with the co-ops and the public and looking at the whole value chain, along with consultants to help us quantify and qualify for some of the programs we think that will be out there in the future. But it starts with, you're right, a zero to low carbon input, proper fertilization, seed technology, even renewable diesel for a zero carbon output and then you're capturing the carbon in the process and managing that, monitoring that. And the farmer gets credit, whether that's through the credit of the carbon or the higher-valued corn on the output. And the ethanol people are involved in this also. So I think it's very exciting. But in the end, it's going to be the value and where that value is created and the price paid for that segment. But just a further leg to our different stool of optionality for our business.

And I would just add to that. I think all of these applications get accelerated if and when the U.S. actually puts in place a structured regime around the cost of carbon. Right now, a number of these initiatives are being done on somewhat of a voluntary basis. Obviously, with the 45Q going in, there's real dollars associated with our blue projects. But on the Ag side, at the moment, as Bert said, it's either relying on CPG companies that believe there's value in carbon labeling, and so they'll pay a little more for an output product that is certified low carbon or selling credits in the voluntary market, which is relatively thinly traded and I would say not highly valued marketplace. But I think once we get a real cost of carbon embedded into the U.S. economy, then that's just going to accelerate all of these applications and demand for low carbon fertilizer.

Very good. I have a couple questions that came in here. And one of them is capital deployment, particularly given the current situation of -- as we were talking about $1,400 ammonia, not $200-and-some ammonia. Where is capital deployment going to be prioritized in 2022?

Yes. As you mentioned and as Tony and Bert have talked about here, the next couple of years we look at a very strong free cash flow coming in. And really what we've identified both from a debt reduction to get down to our target of $3 billion of debt, that would be about $500 million that we'll take care of in the next 18 months. And then the low carbon projects that we have announced, both from a dehydration and compression in the green project at Donaldsonville, which fit pretty much within our $500 million annual CapEx budget. So that allows us considerable amount of cash remaining to do return to shareholders and then also some of the growth opportunities that Tony mentioned. So from a return of capital to shareholders, as we mentioned on the third quarter, just given the volume of what we expect from free cash flow, not only that's occurring, but that we see over the next couple of years, we said that we'd probably have to go to more of a leg of the capital allocation to be a ratable amount that would happen over the year. And then along with what we've talked about in the past with opportunistic share repurchases during that particular timeframe as well. As you know, we had the Board authorize a $1.5 billion program for share repurchase that begins January 1, 2022. So that allows us that authorization to act on. And then from a growth standpoint, we've always continued to look at everything from acquisitions to brownfield debottlenecks that we could do and even some of the greenfields. I think the difference in what we're looking at now maybe from years past is, as Tony mentioned, given what we see from a supply side to help enable the demand side that -- what we're seeing at Air Products and others are seeing is to ensure that there is supply side there. But it would be probably ammonia based rather than what we've done in the past, which was building an ammonia plant within urea, UAN, nitric acid, [ unit-train ] capability, all this. You would probably look at something that's significantly less from a capital structure standpoint that would have export capability and would be solely an ammonia plant. So I think when you look at that along with the potential that you'd be partnering, that also fits into over the next couple of years of what we'd be looking to do with free cash flow.

Okay. I've got another question here about Build Back Better tax credits. Would that -- what's your view there on facilitation of your shift towards blue? I know it just got through the house. So we don't know where it's going to go, but how helpful is it as it looks right now?

Yes. I mean with the existing regulations that are in place, our dehydration compression plants make good economic sense with an enhancement to the potential 45Q credit. It's just that much easier to move forward in some of the other areas where it might be a little bit longer of a pipeline haul or something else going on there. So I think we're optimistic about the fact that if something like that bill goes through, then that provides the right incentive for businesses like ours to really make some investment, put some real capital in the ground to help decarbonize the economy. And I think that's good for everyone concerned.

And going back to your -- the previous comment that you made, Tony, about -- actually, Chris, on the ammonia being a priority for new supply. Where do you think that might be? And that's a question not just for CF, but do you see new supply coming on globally because of we're in such a tight situation right now? If so, where?

Well, the places that are likely to add capacity are the ones that have been adding it where you've got low gas cost and export capabilities and an ability to contract labor on an LSTK basis. So you think about the places that have been adding capacity, Russia, Iran, Nigeria, I'd expect maybe more in Saudi. I expect those are the places where you would likely see more conventional ammonia for use in all sorts of applications, including fertilizer. I think when you get to looking at more specialized decarbonized approaches, you want to make sure if you're going to use -- if you're going down the blue path, then you've got the right sort of geology to be able to do carbon capture and the right infrastructure and the right kind of legal framework around that. But I think from that standpoint, the U.S. is in a really good spot. Canada not far behind. As you think about adding green capacity, you're probably looking at places where you've got excess renewable and/or very high cost of natural gas. So Europe would be a possibility. I think Australia is a possibility, maybe some areas of Latin America, Chile and so forth. So those are kind of where I would think about new capacity coming on and different flavors really of ammonia, depending upon where you are in the world.

Very helpful, Tony. I want to get in one more with you on your green ammonia project. Is it still on track? Has it been sidelined any because of your interest in going blue? Just a quick update on the electrolyzer project at Donaldsonville.

Yes. No, we're continuing to move ahead with that project on schedule. We do have the ability now, if we want to, just to sell that as green hydrogen and not put it into ammonia production. So we've got some flexibility in terms of how we think about ultimately selling and marketing that product. Some of the exciting pieces of new legislation that's coming out are around hydrogen hubs and around trying to put money into hydrogen production. So I think that's exciting for us as well. But I think this is a great opportunity for us to become really knowledgeable and operationally comfortable with running that size plant and we'll be among the first in the world to have a scale 20-megawatt electrolyzer up and running. So we think it's a great project. And I do think that it's going to have application in a lot of different ways, but we also want to make sure that we leverage the terrific competitive advantage that we have being located in North America with plentiful natural gas and lots of places to go ahead and inject the CO2 for sequestration. So we want to really leverage both sides of that.

Makes a lot of sense. We had Plug Power on earlier this morning, and I think they would very much welcome that new source of green hydrogen. Listen fellows, we're out of time, but really, really appreciate the opportunity to get caught up with you. My best to you for the holidays and thanks for joining us today.

Always a pleasure and happy holidays to you as well, Steve.

Very good. Thank you.