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

Welcome back. It's a pleasure for me to host this discussion with CF Industries. I got Bert Frost up here, Head of Commercial; Martin Jarosick, Head of Investor Relations. For those of you that were in our -- in this room yesterday, we had a really interesting discussion with [ Melih Keyman ] and Don Lambert and the topic was largely around nitrogen. And I have to say that 2 of them were had some very strong about nitrogen. So why don't we kind of kind of kick it off about with your near-term outlook for nitrogen supply and demand in the U.S. market.

So where we are today, March 1, looking over almost March 1, but looking at the spring demand, and it's going to be robust. Even at [ $4.50 corn, $4.60 corn ] for December harvest, we're expecting good demand in weak country. There's been good soil moisture in those markets as well as pasture. So demand profile is solid, but it's the supply side that I think is driving this equation and discussion and I just came from the fertilizer institute meetings in Orlando and a lot of prompt discussion of, how do I get tons now because spring is coming early. We've had 70-degree temperatures in the Midwest. Field work is open for to do and that implies applying fertilizer as well as just your groundwork. But it's the supply side of the equation that's interesting for this year. As we've talked about in previous discussions, the carry-in of inventory for the North American market from June -- our fertilizer year is July through June. From June and July it was lower than normal, and we can quantify that by obviously talking to our customers and doing field visits and site visits as well as our own inventory. And then month-by-month, and this is also quantifiable, is the import ton that has not come in, and that's urea, UAN and ammonia, all the nitrogen products and ammonium nitrate, month in month out. Why has that happened? Well, we've been the lowest priced market in the world and traders and producers have had options in other markets, better demand in Brazil or Argentina or Australia or Europe. And then you feather in higher level of exports from companies like CF as our customers weren't demanding the product, we have the capability to export from our Donaldsonville as well as load from our Oklahoma facility, push it down by barge and put that on a vessel, and we've exported a record amount of tons. And then January hit, which was the freeze off that was -- it was difficult, where temperatures dropped at some point below minus 30, and we had some gas disruption issues, which led to the plant disruption issues, which led to plants being offline. And when you go from a 2,000-degree operation to 0 or even minus, you have issues, and that's the thermal expansion contraction of the assets. And we are in kind of fix-it mode and getting the plants back online, and so we lost some tons, we as well as others. We can track gas and look at some of our competitive plants. And so lower imports or lower level of inventory, lower imports, higher exports, lower level of production. And now you brought forward spring, maybe a month early. So that takes a 12-month shipping cycle makes an 11-month shipping cycle, product is tight. And so what you're seeing when product is tight, the reflection is price, you have a supply-demand imbalance and prices moved from $300 a short ton in NOLA to, today, $375, $400 a short ton. And that type of end balance is reflected in the UAN and ammonia. So -- and then the positive for a company like CF Industries, I know you're going to ask this as gas today is $1.80. So the margin opportunity for a North American producer is very positive.

And that $300 to $375 move, that's NOLA. Was it a greater -- has there been a greater spread in the mid-corn volume?

Most definitely. So the normal spread between NOLA and, let's say, Iowa would be $30 plus or minus $5 or $10. Today, that's over $100. And that's a reflection of lack of supply.

Okay. And as far as the timing goes, is there -- and the level of inventory in the North American market, do you think there's going to be enough to meet demand? Or does it have to get pulled in and pulled in pretty darn soon?

Well, if you're going to pull in an extra ton, we're an import-dependent country or a consumer, and that can only come from North Africa or Middle East and those origins throwing the difficulties in the Red Sea, which is adding 2 to 3 weeks of shipping time, if you're to load -- well, most of the filings are sold. So if you're going to load in the Middle East, late March loading, you're not arriving until May on a barge and then you have to push it up into the Midwest, I would say that's too late. And if not, it's on the margin of being too late. So will we have enough? We generally are very creative. I give the U.S. system, and that's out of respect for our wholesale trader, retail, customers as well as our colleagues that produce. We do a lot of things to serve the farmer, and we want to serve the farmer and have it there on time. That does not mean it might be a few weeks late of desire. But when you look at the insurance planting dates for corn, there's a lot of time to move product. It just may not be there in the week that someone would want it might be there the next week.

So did I hear you correctly that a ship ordered 2 weeks from now is potentially too late. So we have 2 weeks to have imports ordered? The rest of...

Well, how it normally works is those tons are already sold. Those tons are already allocated to -- like Australia has been a big buyer. Brazil is a consistent buyer. A lot of these markets are import dependent, Argentina, Europe, Turkey. So we're all -- and in North America, Mexico, all these markets are import dependent and how the system works is that a ton is allocated because you have to nominate a vessel. The vessel has to arrive, you have a laycan where the vessel loads and then it ships. And so that doesn't happen overnight. And so I would project, this is a projection, that most producers are forward sold a month. And so what they would be selling is late March, early April loading, which would arrive late.

Okay. And does that lead to any kind of a change in what gets put down and what's available between anhydrous urea, UAN, could any of that change because of the tight market?

It could, generally anhydrous goes first. We have fall applications. We had a very good application. So those farmers who applied in the fall are prepared. And then there are spring markets, more of your sandy soils, your different soil composition that prefer to be spring applications, we will have tons in place for that what we had expected for demand. But I would say this will probably move to a higher UAN consumption year. And so that's where it falls to the retailer and his equipment and what type of applications. And that's beneficial also to crop protection because you can put some of those products together with UAN and do multiple applications over the growth cycle of the plant.

I wanted to bring in your use of the NuStar pipeline. We toured your ammonia plant up in Indiana a few months back. And that product is the middle of Indiana, but the ammonia is produced down in D'ville. You had highlighted on your last call, what you view CF being valued relative to production capacity compared to what some of the recent transactions have gone for in terms of dollars per ton of capacity. You also have these distribution assets, the storage tanks and it kind of just I thought of that because of your comment about UAN, there could be a shift there. Talk a little bit about what you do have in terms of distribution assets in the U.S.? And how is that differentiated versus other producers?

So CF is a unique company in the nitrogen space. We make a commodity. We use a commodity to make a commodity that makes a commodity, that makes a commodity. So no false pretenses. We're in a commodity market. So we buy gas to make different -- make ammonia, urea, UAN, ammonium nitrate, DEF that goes to make corn, that goes to make ethanol that goes to make protein. So it's a commodity space. We operate well in that environment. But the difference between CF and other operators is we have leveraging capabilities that exist beyond our plants. So we have plants that are dispersed amongst the United States, whether that be Donaldsonville, Louisiana, we have 6 ammonia plants. We have our Oklahoma operations in Woodward and Tulsa. We have our Yazoo City, Mississippi; Port Neal, Iowa; Medicine Hat, Alberta; and -- Courtright, Ontario as well as our international assets in Trinidad and the U.K. But it's one thing to produce a ton, it's another thing to move it. And the NuStar pipeline is a decades old pipeline that NuStar does a great job of keeping that safe and investing in it, but it stretches over 2,000 miles and tees off into Indiana and then into Iowa and Nebraska, and we are at various junctions of that pipeline, and we can supply it from our plant in Donaldsonville and pipe thousands of tons as well as we have our barge served terminals that are on the rivers, the Illinois, the Ohio, the Mississippi. And so we can resupply that way into the pipeline through our Palmyra Missouri. And we also have Garner, Iowa, which is on the pipeline, which we can rail Medicine Hat, Alberta tons to that junction and input into the pipeline there. So we can supply a lot of tons at a very quick pace to serve the farmer, but the distribution system is an amazing system in that we also have UAN, urea, as we talked about ammonia, all served in various points, all dispersed. And so capabilities to produce the tons, and we're the safest, highest operating rate production company in the world, able to move that ton, we can export it. We can put it on a pipe, we can put it on a barge. We can put it on a railcar, we can put it on a truck. And then we have these distribution facilities. So we have many different leverage points to make sure that we serve the American farmer or our industrial customers with product. And so what's the value of that? I think it's incalculable because it's one thing to have tons to produce, but if you can't move it, it makes it very difficult. We always move our tons.

All right. Let's look a little bit longer term in terms of the outlook for supply and demand for nitrogen over the next few years. What's your view?

Kind of popcorn back and forth. But my view is it's very interesting. And one, you have to go on the energy spreads for where we are today in the natural gas world, and that's what it takes to make nitrogen. And the countries that don't have the energy, they're now importing LNG and they have old assets that are 40, 50 and 60 years old and are high maintenance. Do those assets remain in operation. So the energy spreads today, if you take TTF and MVP in Europe at $8 an MMBtu and we're $1.80, it's a tremendous earnings opportunity for CF Industries in a North American producer. But the corollary to that is what's happening in energy. And so 40 -- let's say, 20, 30 years ago, if you had natural gas, the first thing you did was build a nitrogen plant. It was the most economic decision to make. Today, it's putting in an LNG train. And that LNG molecule is competing with your nitrogen molecule, and we're seeing this in the state-owned enterprises and how they're valuing their resource of natural gas, whether that's the SABICs of the world, the Qataris or others. And so long term, when I look at the horizon, you're seeing less investment in new plants and who's building them are the Russians, the Iranians and the Indians. And the Russians and the Iranians are limited on technology and vessels. So those are going to be delayed. And you're seeing a lot more investment in natural gases in the form of LNG. And as we grow at 1% to 2% per year of demand, and that's consistent, you need several plants to be built per year. So the question comes in 1, 2, 5, 10 years, do those plants get built? Where do they get built and how do they supply the world? That's a question.

Okay. All right, let's add on to that, the potential for this new market in blue, right? So maybe kind of high level on that, where do you see the potential for demand for blue ammonia?

Well, I think you can break it into a couple of different markets. You've got the existing uses and applications of ammonia that are also asking for low-carbon versions of the products that they already consume, but you do have new applications that are currently in development and are pretty large opportunities as they build out. But the first and foremost in the time line is going to be using ammonia to displace coal in electric power plants and electric generation primarily probably starting in Japan and then moving to South Korea. And that's why you see the MOUs that we have with Mitsui to evaluate building a blue ammonia plant, supply MOU with JERA for 500,000 tons and the MOUs with the POSCO and LOTTE Chemical. Longer dated, there's an effort in shipping to decarbonize and reduce the carbon footprint of global shipping and ammonia is being evaluated as a long-term solution for powering ships. There are engines that have been developed, and I think you're starting to see ships ordered that have the flexibility to burn ammonia. And so that's an interesting -- an exciting longer-term opportunity.

I just like where we're at in terms of decarbonization. We're going to have the first decarbonized product available in 2025. We've invested for it. We've got the wells and the partnership with Exxon. And so how this market develops, we're doing the right thing, we're decarbonizing, and we'll be able to supply that to Europe as a feedstock into the markets that he just discussed in the prompt and in the future. So it's pretty exciting.

And how about the Class 6 injection wells? What's your outlook for having access to one or more? Is this taking longer than you thought?

Well, I think it's a regulatory process. So it's always hard to put a concrete time line on it. We did have Louisiana receive primacy. And our partner, Exxon, is looking at developing Class 6 wells in Louisiana. So that's a positive development. And I think there -- they have extensive experience in the field and in handling CO2. And I think that they're an excellent partner to get to that finish line with Class 6.

And would you anticipate them being the collector of the tax credit for 45Q and they pay you if you deliver CO2 to them? Or are you paying them for a service and you would be the one to interact with the agency and get the 45Q. Which way are you likely to go?

It's already set. We are the entity that will collect the 45Q tax credit because we're the one that -- we're the taxpayer that meets all the qualifications to receive the credit. We're the ones that are collecting the CO2. Our partner will be paid a service fee per ton for transportation and permanent geological sequestration.

Okay. And any impact do you think that, that could have in the market in 2025 as you can start selling some ship loads of blue ammonia. And would this start out as tiny quantities? Or could these be ship loads?

Ship loads. And it's exciting. And when you talk to customers, whether that be synthetic fibers, explosives, farmers and farmers more I think that's more of the value chain question, but then exports to Europe, whether on that be ammonia or UAN. And the exciting thing is that the decarbonization of the economy is taking place whether that's with CPGs or people -- different groups looking at their scope 1, 2 and 3 emissions. Our product will play a role in that effort and movement, and we're having those conversations in real time.

And what's the outlook for Waggaman with respect to maybe going down the path of blue, where is that product going to end up?

The product, I'll address. It's -- we bought that facility with contracts associated with it. And we're working with our customers as we do with all our customers in a very positive and good way supplying their product, but we want to move that plant to a decarbonized facility as well. And that is in process of evaluation.

And just to add on to your earlier comment about the NuStar pipeline, Steve, Waggaman is on the NuStar pipeline as well. So those tons can be moved in any direction physically moved in. They can show up as exports in Donaldsonville. They can show up in the system. And as Bert mentioned, it's on the list of we've got 4 plants, including Donaldsonville, that we're evaluating carbon capture and sequestration. It's definitely on the list. It's in Louisiana and it doesn't -- because it doesn't make urea on that site, it doesn't consume a lot of CO2. So it's a good candidate.

Has that plant ever shipped ammonia in the NuStar? I can tell you back in the '90s when I was involved in that plant, it did not.

So product has gone to them on the NuStar from us when they've been down what the market doesn't see many times is how we backfill some of our producer colleagues, and Waggaman has had issues in the past, and we have supplied them -- we have not taken product the reverse flow.

But it's functional?

Yes.

Yes. That's how we ship today and that's where the original owner built it to supply their ammonium nitrate facility in Missouri by pipeline. When you were there, Steve, that was the old ammonia plant that was torn down. This is the brand new one.

Two plants. Let's talk a little bit about your decarbonization plans you're evaluating, and I think you're the only one looking at this, where an SMR with carbon capture versus an autothermal reformer, that's -- it's an interesting analysis. You have a hunch as to which way likely is a lower capital cost?

I'll address one aspect of this. And I think this just goes to the CF Industries operating methodology and culture. We get a lot of questions about that. Why are you looking at this and why are you adding on? No, it's being holistic. It's taking a step back, looking at all the technology that's available to the company and to the industry and doing a detailed and just not a quick glance. It's a very detailed analysis of what we can get in a new economy. The decarbonized world is a new economy. And so to meet that long term, these plants are long lived at 20, 30, 40, 50 years. So you want to make the right step on step 1 of what is the best technology, and there's technology out there ATR, for example, that has not been applied to an ammonia plant yet. You want to make sure you get that right and flue gas capture is very exciting. But how does it work? What does it look like? What is the cost? And then we can come back to investors and people like you and have a very confident story that you can buy into.

And when you look at the way the low-carbon market is developing, it is still in the development phase. You've got exciting opportunities in a variety of new applications. You've also got Europe in the process of putting in a carbon border adjustment mechanism. And so understanding all the different ways of maximizing the reduction in carbon to come up with what is the most economic choice for possible new construction is the right move. And that's why we're doing the -- taking the extra time and doing the 2 additional FEED studies.

I got one more for you, and then I'll open it up and see if anybody wants to jump in with a question. And that is yesterday, we had a couple of panel discussions with the DOE, and they are very actively funding and supporting a lot of new carbon capture projects. And some of them are pretty challenging. Like a combustion device flue gas, which I think would probably be the type of approach for if you bolted something on to an SMR, you got to capture the CO2 coming out of that boiler, but there seems to be a lot of innovation going down that path, it's all new. So it's a reasonable approach to take it seems like, as opposed to what seems like a less efficient hydrogen producer with an ATR. So interesting. Anybody want to jump in here with a question?

Just curious when you talk about the gas spread. When you think about -- you referenced kind of the $1.80, but in the 12 month or December, it's $3.50 -- between $3.50 and $4. Can you help us think about what type of -- and then the TTF, if there's an ability for European production to come back online and how we can think about S&Ds kind of moving forward? Obviously, a ton came off. Just curious, your expectation for production to come back online, if any?

So the industry perspectives and as well as our own that during 2023 you had a significant amount of capacity come offline, both announced and not announced in Europe. Up to 40% was probably our number as you trended through Q4 and those gas spreads were pronounced. When we were at $3, they were at $15 or even higher. So a significant spread. That would be $10 per MMBtu would be $300 in cost and ammonia. As we've trended now into Q1 and as we get closer to Q2 in Europe, those spreads have narrowed. We're now at $8, let's say, of TTF values maybe a little higher, and you're right, we're at $1.80. So that has been, I would say, that is -- the bet is that those gas spreads that times will compress and expand. And as we get into the winter months, obviously, they expand, they did not have much of a winter and nor have we in North America, and those both were reflected down. But our view is that Europe is the marginal producer and probably will continue to be and those spreads will at times expand out.

I think the issue will be if you're in the fourth quartile so if you're a European producer and your cost of gas goes down, you also have to look at what is the clearing price for ammonia and the products is not static either. So if that comes down with you, then you really haven't gotten any margin opportunity. So it's a really difficult decision for anyone in the fourth quartile to decide to turn back on because if they turn back on and now they're putting a little bit too much product into their local market, the price collapses, their margin goes negative and they have to shut back off again. So it's -- that's the life of every plant that exists in the fourth quartile as they try to navigate the way to maximize their cash generation without starting and stopping the plant so much that they drive their maintenance costs through the roof.

The questions to answer, do you burn gas for several days to fire up the plant, costing millions of dollars the thermal expansion and contraction of starting and stopping those plants is not healthy, then you have additional maintenance work and then as where are you in the turnaround cycle. And if you have a $40 million to $50 million turnaround coming and you're not making any money, that just goes to the negative. So it's not just the gas, it's -- many components are put into that calculation.

Just staying with Europe and supply. Obviously, you guys with your assets in the U.S. is a fantastic place to be. A lot of uncertainty around Europe. And I guess what I'm wondering is, in the past cycles, very interesting urbanization and different uses for ammonia. There were periods where the industry added a lot of capacity. And so I'm just curious, like what is like the mindset like how do you evaluate capacity additions? Obviously, there's been a big change in the market with the differentials like what's preventing people effectively from adding capacity in North America? Because it would seem like a fantastic place to be, frankly.

I think when you looked at capacity in the past, you had an expectation of how many -- how much that would cost? I think what you've seen is people, like ourselves, have done FEED studies and not gotten to FID yet, you're realizing it's quite a different calculation than what it was 10 years ago. Of the 26 plants that were announced in 2012 and '13 to be built in North America, 4 got built, we built 2 of them. We bought the third one and one is just being bought by Coke Industries from OCI. There are capacity -- there is capacity coming on in different places of the world that might be cheaper to produce. But again, it goes to the -- what is your use for that molecule? Is it the best use of urea and ammonia what it used to be? Or is it LNG? Or maybe even energy for your growing population and demand for that -- for air-conditioning and heating? So it's a different calculus than even 10 or 20 years ago, especially 20 years ago. The announcements that have been made for ammonia plants are focused on clean energy. And that's for -- as Martin explained, the Japanese, Korean and other markets that are looking at co-combustion. That's a whole new demand position, and that's still to be evaluated.

And with that, we're out of time. Please join me in thanking the CF folks here for the presentation.

Thanks.