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

Next session, the [ 20-wells ] CF Industries. I know Martin and Darla are also on the line with us. Also, my colleagues, Julien Dumoulin-Smith is on with us, [ Rock ] Hoffman is on with us, Alex Jones, so there's a bunch here. If you want to jump in and ask a question to Tony, you can raise your hand, it's a function at the bottom of the screen, and we'll pull you in or you can [ IB ] any one of us and we'll ask your question.

So it's just terrific to have you back, Tony. I've been -- I've covered CF for a long time ever since it used to be a co-op, and you have really transformed this company over the years, and it's clearly in another state of transformation. I think I'd like to hear your view kind of high level, where do you want to take CF with respect to clean ammonia, whether it's blue or green, whether it's hydrogen or ammonia, where do you want to take this? Clearly, you have expertise in steam methane reformers. So you know how to produce hydrogen and ammonia. But the path that you want to take the company on blue and green and the opportunity you see ahead, give us your high-level outlook.

Yes. You bet, Stephen. And first, let me just thank you for the invite to be here today and have appreciated the continuity and the, I would say, disciplined analytics with which you approached the segment and the space and with us. So I have enjoyed our interactions over the years. I'm really excited about where we sit today and the path forward. We are in the process of executing a number of projects to significantly decrease our carbon intensity from an emission Scope 1 and Scope 2 standpoint. And we will begin the first initiative of that early next year. So we are completing mechanical tie-ins and mechanical completion on our green ammonia electrolysis facility in Donaldsonville. That should be ready to turn on first week of January. And we're looking forward to making that the largest commercially be operable electrolysis unit in North America, 20 megawatts, and we think it will be a tremendous stepping stone for us, from a business standpoint. Following up about a year later is going to be our large CCS project at Donaldsonville, so we're building dehydration compression to be able to move 2 million metric tons a year of CO2 via our partnership and agreement with ExxonMobil to sequester CO2. And that will make a dramatic reduction in our Scope 1 emissions and also have fantastic economics around it, thanks to the 45Q tax credit that was initially established in the Infrastructure Bill and later enhanced as part of the Inflation Reduction Act. And so that one is not only good for the environment, but it's very, very shareholder-friendly as well. And our focus, as we move forward, is to continue to take steps to reduce our overall emissions intensity, both Scope 1 and Scope 2, is where our focus is. And we have a number of projects that are diagrammed out for execution over the next couple of years to have really fantastic shareholder return profiles associated with them. We are working longer term on some more difficult-to-abate aspects of our footprint. But we do believe that over time, those will become more economic as we go. And our view is to continue to decarbonize our network to be able to provide clean energy to both feed and to fuel the world sustainably. And we're really at the forefront of using clean or decarbonized ammonia as a clean energy source in a number of, I would say, alternative or developing unique applications, anything from marine propulsion to co-firing with coal in order to reduce emissions output at power plants in Asia. And we're in pretty detailed discussions with some -- both CPG and other ag companies to look at reducing the carbon intensity and the value chain of creating not only certain consumer food products, but also things like alcohol-to-jet fuel in Brazil that qualifies for the European standard on sustainable aviation fuel and to look at decarbonizing the ethanol production stream in order to be able to qualify for the California Low Carbon Fuel Standard. And so there's a number of new applications that we are targeting in addition to our historical market share. And I think the operating capability and performance of the organization from the standpoint of having among the lowest recordable incident rate in the industry, sort of one of the best safety operators as well as the highest onstream factors suggest that we are the best operators of these kind of assets globally. And so we're excited about the recent addition to our fleet of assets at Waggaman, Louisiana and look forward to continuing to find opportunities to grow our production base as well as [ decarbonates ]. So that's where we're headed, in a nutshell.

And out of all of those end-market opportunities for the blue ammonia that you mentioned, Tony, which of them do you think you could sell into today if your brownfield modifications down into Donaldsonville? You said early 2025. If they were completed today, where could you sell out right now?

Yes. It's interesting because I think a year ago, I might have given you a slightly different answer on this one in terms of [ mill firing ] or electricity, power generation and Japan and followed shortly, thereafter, in Korea. I'd say today, what's really moved up the ladder is agricultural use for specific products that have attributes that are attractive into various end markets, in particular, looking at sustainable aviation, fuel, and California's Low Carbon Fuel Standards. And so I think the ag use for specialized output products where you need chain of custody visibility into the carbon intensity is trumping some of those other newer applications, although in a lot of ways, even though it's going into ag, this is a new application for -- or a new demand source that's specific to decarbonized products. And again, we're on the front end of this from an industry supply perspective.

Do you have a view as to how much you reduce the carbon footprint of, say, the production of corn that would then be used to produce ethanol, if the nitrogen fertilizer was blue or green?

So using our blue production, which is going to have a lot more volume associated with it than our green production, will at least initially, we have calculated that somewhere in the neighborhood of kind of 10% to 15% reduction in carbon intensity overall of corn production, can be attributed just to using low-carbon or sort of blue-based nitrogen as part of that process. So it is a meaningful...

Right. And that could drop ethanol below the level, where it could qualify for the California standards?

Yes, I think that is part of the process to get there. In and of itself, final variant is to qualify, but it's certainly part of the recipe on how to get there.

Okay. Maybe with some carbon capture on the ethanol. Okay. That's interesting. I had not heard that before. Let's drill into the first one that you have, and that's the retrofit of your existing complex in Donaldsonville. You mentioned Exxon is your partner for the Class VI injection well. I believe that's 100-and-some miles from your plant. So you need pipeline. They need an injection well that you have some modifications to your plan. What out of all of that is really the rate-limiting steps that would mean unlikely to be in production of blue ammonia until early 2025?

Yes. Steve, I think there's been some pretty exciting developments in terms of this partnership and the flexibility in terms of where we can go with it. You're right, the initial announcement was that ExxonMobil was going to utilize some leased pipeline capacity from, I think it was Enbridge, to be able to move CO2 to a point that they would build incremental roughly about 40 miles of pipe down to a place called Pecan Island in Louisiana, where they've owned the [ for-space ] range since, I want to say, the [ '40s ] or [ '50s ], and they've applied for a Class VI permit there. Recently, they've closed on the acquisition of Denbury, which gives them an access to the green line as well as some ancillary laterals off of the CO2 pipeline of the Denbury network. And that gives them access to a point that is within about a mile of the fence line of Donaldsonville. So it's a very short hookup to connect to the green line. And that allows transportation into several different directions. There is some permit activity also going on in Mississippi. Our understanding is the number of applications for Class VI permits in Mississippi is a very small fraction of the ones that have shown up in Louisiana. So we think that process will actually happen on a more expedited basis. And our thinking is both our ability to complete from a mechanical standpoint, dehydration compression, get connected to the green line as well as having the permitting done will all sort of [ coalesce ] around the first half of 2025. I think the permitting on the Class VI well is still probably the long pole of the tent right now, but we're discussing a number of different alternatives that would allow us either to wait until that permit is done or possibly begin in EOR applications and move to Class VI when that permit is eventually granted, but in any event, be able to move pretty quickly into generating real revenue and cash flow off of this investment and also importantly, taking a lot of CO2 that's currently vented out of the atmosphere and putting it under the ground.

And given Denbury is already involved in EOR, is there any value to the ammonia? I mean does it have any color to it at all if the CO2 is captured and put into enhanced oil recovery? Is that something that you could at least get started with customers that were interested in buying the light-blue ammonia or something along those lines?

This is one that I think the rules of the road are still being constructed as we go. And I think beauty is in the eye of the beholder. It's, I think, very customer specific about what the mechanism of CCS is required. I think our argument would be that's oil that would be produced anyway, and we're still taking tons that used to be emitted and putting them underground. The way Denbury operated is they would take CO2 from both industrial sources, but the predominant source of that was actually a naturally occurring source of CO2 at Jackson Dome, Mississippi. And so this is just reducing the amount of CO2 that they would take out of the ground and put back into the ground and instead taking CO2 that would be in the atmosphere and putting it into the ground. So net-net, you actually end up in exactly the same position as going into a Class VI well. And the same amount of barrels of oil was produced at the end of the day. So our argument is very much one of "Look, let's focus on benefits to the environment that's clearly checks all those boxes." But I think at the end of the day, it's going to come down to what the buyers' requirements are. And that will lead into our decision in terms of whether we go early into EOR, whether we wait for the Class VI to be fully permitted and ready to go.

And just one more on this, Tony. If you did decide to go into -- do this earlier than expected with EOR, are the retrofits to your existing plants on track to be able to start putting CO2 into a pipeline sometime in the next year?

Yes. So the dehydration and compression specs were created with the possibility of being able to access the Denbury network. It certainly also was appropriate for the partnership with ExxonMobil, assuming it was going to go through the Enbridge pipeline and then ultimately, through new pipe that ExxonMobil was going to install. And so we've built in the right kind of specifications upfront into the equipment to give us a lot of flexibility in terms of connection points. So it really is just a matter of when that the equipment is delivered, installed and ready to go. And we think that will be roughly about a year from now, and we'll be ready.

Okay. Very good. All right. Let's shift to the several partnerships that you have in development to build a greenfield, a greenfield blue ammonia plant. And you own some property that's a little bit up the river, on the same side of the river as your Donaldsonville plant. So you have the land area, you have partnerships with Mitsui, Pasco, JERA, LOTTE. Where do you see this going? Is this multiple greenfield plants? Is this all part of 1 greenfield? How would you see this likely playing out?

Yes. I think the timeline on demand from our partners' perspective varies a little bit by geography. I think Mitsui and CF, which was the first original agreement and partnership, are very much aligned in terms of our view of the future, not only from the standpoint of new applications for clean ammonia, but the view that says, particularly with energy crisis in Europe and the shutdown or curtailment of a bunch of ammonia production in Europe, that looking at the slate of projects that are currently under production or are under construction and looking at where demand growth is headed as well as capacity takeouts that the world is going to be short on ammonia, even in traditional applications. And so there is a view that says we can move forward on this project just based on where we think the overall S&D balances, going forward, for ammonia and nitrogen, in general, and in particular, decarbonized ammonia, what this plant would be. And then when you layer on top additional demand sources in new applications, it becomes that much more attractive from the standpoint of moving forward. I think if you look at that slide of partnerships that you talked about, Mitsui and CF are very much aligned and able to move, I think, fastest. JERA is a little bit at the whim, to some extent, of the Japanese parliament, Medi and the Diet to be able to finalize the rules around carbon intensity requirements for the ammonia as well as what the subsidy scheme is ultimately going to look like. And then I would say South Korea, so in this case, Pasco and LOTTE are a couple of years delayed behind that. So it's, I think, a rolling sequence of demand that is going to evolve. And we'll make decisions on investment and new capacity based on the development and the cadence of how that is coming along, along with the desires of our partners or potential partners in this case. So we're excited about where it's headed. We haven't made any FID decisions yet. But we think that there's a pathway here, where the world is going to become really a desperate need of a product that we're in a fairly unique position to be able to provide. And it provides an opportunity to reinvest capital and growth in the core aspect of the business, in something we are uniquely capable of doing on a global basis. So we're really excited about the prospect. And I look forward to continuing to work with our potential partners as these things become clearer in the coming months and years.

And is the rationale behind going down the path of a joint venture with Mitsui, does that kind of give you the freedom to go down, whether it's just supplying legacy ammonia markets? Or is it really going to be marketed by Mitsui as a blue product?

Yes. I think the benefit that we have by partnering with the strong partners that we have developed relationships with is that we're not reinventing capabilities that already exist. And instead, we're leveraging those capabilities. So one example is the partnership with ExxonMobil, who have some of the best geologists and subsurface technologists and ability to permit and operate pipelines and operate injection wells, if you monitor those things. We don't have to take on that burden. We can partner with them to access that capability set. And it makes sense for both of us. I would say that's very true in the case of Mitsui. They've got capabilities around logistics, relationships across Asia and other parts of the world, access to other kind of midstream assets from the standpoint of terminals and tanks. And instead of CF needing to build out those capabilities, we can bring those things together and do -- and focus on what we do best and rely on our partner to what -- in terms of what they bring to the party. And 1 plus 1 equals 3 in this situation instead of us being slowed down and increasing the cost to try to go it alone. It also, dramatically, is a risk-reduction movement. You're in -- sort of for half of the capital, you've got partners that are along the way with you, and they are focused on your success as well. And I think, honestly, we couldn't be happier with the suite of partners that we have joined forces with to try to make this happen.

Okay. That's really clear, Tony. There's also a couple of different technologies that you're considering for the production of the hydrogen and the ability to capture portions of that CO2. Obviously, you guys are experts in the steam methane reformers, which I believe is the technology that you are intending to use with Mitsui, where you can readily capture 60% or 65% of that CO2. If I'm correct on the Pasco concept, that would be an autothermal reformer, where you can -- you're not using steam, it's oxygen and you can capture more of the CO2. Am I right on that? And how do you view those 2 technologies? They differ in efficiency. I'm sure the capital costs are different, the size of the units can be very different. Which way do you lean one versus the other?

Yes. So we have finished up our FEED study on steam methane reformer, which is basically, call it, the sister plan of Donaldsonville #6. D'ville #6 is the largest operating ammonia plant in the world today. It's the same sort of nominal capacity or nameplate as 2 other plants in the world, but our operating rates are about 15% over nameplate, and that makes that the largest player in the world. So we think there's a lot of knowledge that we can leverage, based on D'ville 6. It's just down the road. Not only can we make it basically an exact replica, but we can share spare parts and commonality between them and in fact, train the exact operators on the operating unit that's going to be the identical one. So there's a lot of embedded efficiencies and synergies that we can get by replicating that plan. To your point, that plant, with CCS associated with it, can reduce the carbon intensity by about, call it, nominally 65% of what kind of conventional ammonia is today. And in certain applications that might be enough. And in others, that may not be. So we are also engaging in a FEED study on autothermal reforming technology, as you talked about. And we're also doing flue gas capture as an independent stream of work. So the idea being that if 65% carbon intensity reduction is sufficient initially, we would probably go with SMR technology, the copy of D'ville 6, as I said, there's a lot of synergies and efficiencies that go along with that. If something more than that is required in terms of reduction in carbon intensity, it gives us two different options: One is to attach flue gas capture on an SMR unit and get us down to sort of 90%, 95% reduction in carbon intensity. The other alternative is to go autothermal reforming, as you mentioned. That one comes with a host of additional issues associated with it because autothermal reforming ends up being a very, very electrical consumer in the process because auto thermal reforming, while it gets you the 3 hydrogens that you need in order to be able to make ammonia, what it doesn't get is the nitrogen to the same extent. And so what you need is what's called the air separation unit, a separate unit that requires kind of a cold box on it, and that tends to be a huge energy hog. And the problem with consuming that level of energy is given what the grid looks like in that region, that might kick you out of the 90% to 95% carbon intensity. So it all starts getting very technical in terms of the different pieces that you're drawing on. So that then requires additional things you need to do with autothermal. So we are investigating all of these different pathways to get to different levels of carbon intensity. We'll make a decision when we get to the back end, but at least it will be really informed about what's required to get there. And we'll do that in conjunction with our various partners.

That makes a lot of sense, Tony. It really does. We've been drilling into all of these newly innovative carbon capture technologies. The DOE is funding many of them. And these are large. I mean, these are 10 million tons CO2 emission points that are looking at carbon capture. It's very interesting, and it seems like a reasonable approach for you. I really do admit, it's an alternative to the [ ATR ]. So makes sense. The green project is starting up in coming weeks. Has your view on that changed, given how easily or difficult it might be to qualify for the green production tax credits, given the leaked Treasury guidance? Is it -- what is your view on that? And what is the fate of that product? Where do you think you're likely to be selling that primarily?

Yes. So the leaked guidance, as you talked about, I think, set such a bar around additionality on a hourly temporal matching that's got to be direct connected to the facility such that it almost is -- this is one of those cases, I think, Steve, where perfect is the enemy of the good. And it may be so restrictive that you basically see all of these announcements die on the vine because they just get overwhelmed with the challenging economics of making all of those things happen. And I think that there is eventually a road to get to green that makes sense. I'm really happy that we're doing the project we are because I think it will give us an understanding and the capability and knowledge around this technology. I would say, on a broad-based scale, green is not really ready for prime time yet, even with a pretty substantial government subsidy around it. The amount of energy that's required to crack water in order to be able to make ammonia is going to be, just on energy cost alone, in the neighborhood of $600 plus, whereas the energy content associated with making a ton of conventional ammonia, even prior to the 45Q tax credit associated with CCS, is more on the order of about $100 today. And so the economics just dramatically favor moving toward blue with carbon capture instead of green. Again, I think eventually, we'll get there but not over the next decade or two. I think blue is definitely going to be the predominant source of decarbonized ammonia as we move forward over the next couple of decades here.

Very interesting, Tony. That's quite a stark contrast. Barry, do you want to jump in here with a question? Jump on, you're on mute.

Yes, Tony. Thanks, you guys, Steve and Julien, for this conference. This is really helpful. Tony, I definitely understand the power costs and really just the whole idea of green not being ready for prime time. Is that just because nuclear is just not included in terms of the power source? Or is it just still the economics still don't work again because you're cracking water?

Yes. I mean it's just such an energy-intensive process. And even if you get to some of the alternative electrolyzer, solid state, [ PEM ] and so forth, you're still looking at a huge amount of electricity. And at Donaldsonville, we're only paying, call it, $0.04 to $0.05 a kilowatt hour. I mean it's relatively competitive electricity cost, and it's still going to be on the order of $600 to make a ton of ammonia. . So without a substantial government subsidy to even get it close, it makes it tough. And then the amount of capital that you need to put into a complete system, where you've got hourly temporal matching along with additionality direct connect, is such that the aggregate amount of capital just drains that project of any kind of return compared to the low cost of natural gas that we're blessed to have in this country and an ability to execute CCS that also has favorable returns associated with it. So at any time in the next couple of decades, I think it's -- when you hear people talk about the benefit of green and Moore's Law applied to experience curve, I think the question ought to be "Yes, but at the end of the day, I could give you the electrolysis unit for free, and you still have to put all of the concrete in the ground. You still have to put all of the steel in the ground. You still need the rotating equipment to run the compressors and the chillers and all of the rest of the biggest [indiscernible] associated with ammonia production. And show me where the Moore's Law experience curve is driving down the cost of concrete today or driving down the cost of steel today." And the answer is it's not. So anyone that tries to sell you sort of the story of green is coming and you've got this great cost-reduction profile that looks amazing" as a consultant trying to sell you a project as opposed to really understanding what it takes to build an ammonia plant, and we've done now in electrolysis unit, we've built some ammonia plants. I think we're actually in a pretty unique position to be able to talk about the long-term economics of what green versus blue look like.

I just want to make sure. So $600 per ton of ammonia -- of green ammonia, right?

Just on the energy content alone.

Okay, just energy content. And -- but then if I look at blue ammonia, what's the energy content cost there?

About $100. So it's about 30, 33 MMBtu per ton of ammonia natural gas right now on the sub-3 box.

Yes. So just use that regular [ pipe ] because it's carbon sequestration, though, then that adds to that cost.

The carbon sequestration is a net benefit to us...

Because of the 45Q. Okay. But again, if I look at it just in terms of $3 gas or less than $3 gas in the United States versus $10 to whatever the gas is in Europe right now, U.S. has a huge advantage, is the way I was looking at it.

Okay, absolutely. But even at $10 or $15 of gas cost in Europe, you're talking then $300 to $450 of energy content to produce a ton of ammonia, again, versus more than 600 over there because energy cost -- electricity cost is higher over there than it is over here. So green is still -- again, I come back to my comment of it's not ready for prime time.

And Tony, what is your outlook for the global ammonia supply and demand? Do you see the market tightening within the next couple of years? And if you start selling some blue, let's say, in 2025 or maybe there's a little bit before then, but as you start moving down the path of blue, does that have an effect on this global supply and demand for global ammonia?

Yes. So if we just step back and kind of take a look at the big picture, nutrient demand in nitrogen is growing about 1.5%. Sometimes, it's closer to 2%; sometimes, it's closer to 1%. But think about 1.5% organic growth rate in terms of nitrogen demand. If you look at the number of new plants that are under construction globally, and you have very good visibility in terms of what the next 4 years of new production looks like because it takes roughly 4 years to build an ammonia complex. We can [ chart ] that out along with how much production is coming online. And that in and of itself does not keep up with the pace of growth of about 1.5% per year. Add to that, all of the capacity that's come offline in Europe, in Trinidad, in Latin America, and it shows that you're in a real deficit situation in the next 4 years. And so that's why when we look at global S&D, we're saying potentially a new project that we refer to it as [ Project Blue Point ] because that's the name of the complex, it can be justified based on just the existing S&D balance in the core markets, let alone potentially new applications for decarbonized ammonia as a clean energy source in others. As we begin marketing and selling blue ammonia, again, to the extent that it is going into agricultural applications, for specialized products, whether it's sustainable aviation, fuel or Low Carbon Fuel Standard-qualified ethanol or other CPG products, that's just a substitution of one form for another in an existing application. So that really doesn't change the S&D balance. It's only what some of these new sources of demand show up in the way of co-firing for energy generation in Asia or marine shipments or a couple of other ones that we've had some preliminary discussions about, that's when you start further pressuring the S&D balance because now you're opening up a whole new set of demand outlets for the product without the corresponding supply that goes along with it. And so that's what we find really exciting about being in the position that we're in today, which is the opportunity to participate in that growth, leveraging our, I would say, world-class capabilities in operating, maintenance and safety.

All right. And maybe one more for you, Tony, and that is, do you have opportunity at your other plants to either do some more debottlenecking or to engage in carbon capture and sequestration and convert blue? You mentioned Waggaman, it's right on the river, it's not far from Donaldsonville. I know that plant, I worked there a little bit back in the '90s. But you've got Yazoo City, you got Medicine Hat. Where else -- [ Waggaman ], where else might you debottleneck or put on carbon capture?

Yes. The 3 that you mentioned initially are the primary candidates for us right now to do carbon capture and sequestration. And a lot of that has to do with what the upgraded product mix looks like. So Steve, as you know, if you're going to make a lot of urea on site, either as granular or to put into UAN, you need a lot of the processed CO2 to be able to make urea. And that means the amount of process CO2 that you're venting, that quantum starts contracting to a point that CCS may or may not make sense at a site like that. And so if you look at Yazoo City, we end up venting a lot of processed CO2. That facility is clearly appropriate to put in carbon capture and sequestration, and we're advancing conversations along those lines in order to do that. The same thing with Medicine Hat. We have 2 ammonia plants there, only 1 urea plant. We're basically a full-ammonia plant [indiscernible] from a processed CO2 perspective. So we're in pretty advanced conversations there. There, it's a little bit different because the economics are not driven off of the 45Q tax incentive, given that it's Canada. There, the economics are really driven off of the Canadian federal backstop and provincial cost of carbon that continues to increase over time. And so that one is more of a cost avoidance. And then there's an ability to monetize the excess credits that you generate, whereas in the U.S., it really is a subsidy directly from the government. And so those are the 3: Waggaman, Med Hat and Yazoo City. And we hope to be able to announce agreements to move forward on the CCS framework on all 3 of those as we go through this year and next. But the team is certainly working hard to try to make that happen.

All right. Very good. Tony, as always, enjoyed the discussion. So thanks for giving us some time. Our best to you. Okay. Have a nice holiday.

Thanks very much. Happy holidays to you. And I always appreciate the invite. Thanks.

Our pleasure.