CF Industries released their earnings report for the first half of 2023, reporting adjusted EBITDA of over $1.7 billion, net cash from operations of $3.2 billion, and free cash flow of $2.1 billion. The earnings call was hosted by Martin Jarosick and was attended by Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Executive Vice President of Sales, Market Development and Supply Chain. The call reviewed the results, discussed the outlook, and allowed for a question-and-answer session.

CF plans ran well and they were able to maximize results due to their system flexibility. Despite their good safety performance, they are aiming to ensure that all employees go home in the same condition as when they arrived. The energy markets have given them a margin advantage over other countries, which will enable them to invest in growth opportunities while still returning capital to shareholders. They are focusing on a clean energy growth platform and are expecting to make a final investment decision on a newbuild clean ammonia plant this year.

CF Industries experienced a strong spring application season and believes that demand for nitrogen products will remain strong in the second half of the year due to robust farm economics and low inventory levels. They estimate that Brazil and India will need to secure 5-6 million and 4-5 million tons of urea, respectively, by the end of the year. Urea spot prices have been rising rapidly in response to these conditions.

The company reported net earnings of $1.1 billion and EBITDA of $1.8 billion in the first half of 2023. Cash on the balance sheet was $3.2 billion and an additional $1.25 billion was earmarked for the acquisition of the Waggaman ammonia facility. The company paid a semi-annual distribution of $204 million to CHS Nitrogen Partnership and has $1.75 billion in pro forma available cash. Demand for nitrogen is strong and global supply is somewhat muted, with China participating in India urea tenders and Russian tons reaching limited buyers. Natural gas prices in North America are expected to be $2 to $4 per MMBtu lower than last year in the second half, keeping production costs in the first quartile globally.

Chris is looking ahead to the rest of 2023 and into 2024, which is expected to be favorable due to global nitrogen industry dynamics. The company is permanently closing the ammonia plant at the Billingham complex in the U.K., due to high energy and carbon costs, and will continue to import ammonia to produce UAN fertilizer and nitric acid. Capital expenditure requirements for the remainder of the year are expected to be between $500 million and $550 million, including the Donaldsonville complex projects, and a joint venture low-carbon ammonia facility with Mitsui. Chris also mentioned the company's commitment to returning excess capital to shareholders, having repurchased two million shares at an average price of $64 in the second quarter.

CF Industries has a large structural cost advantage and operating expertise that will drive significant free cash flow. They will use that cash to grow their business and return capital to shareholders. They are working with industry leaders such as ExxonMobil and JERA to decarbonize and are positioned to create value for shareholders. The company has three to four variables that could add to their normalized EBITDA in the next two to three years, such as Waggaman, carbon optionality, 45 queues for various projects, and an energy transition theme.

Tony Will explains that the Waggaman transaction, the 45Q tax credit associated with the CO2 sequestration project at Donaldsonville, and other opportunities at other facilities are expected to add to the company's EBITDA. He also mentions that the clean ammonia into clean energy applications will start taking off in reasonable volumes in 2025 and 2026 and that the D'Ville project will be up and running by then to meet the requirement.

The speaker discusses the potential for industrial companies to onshore their manufacturing operations in the U.S., as well as the potential for increased returns from ratable offtake of their products. They also mention their $3 billion authorization and the amount of free cash flow they are generating, which will lead to a significant decrease in the number of shares outstanding. They then discuss the variable changes in regional operating rates in Europe, India, North Africa, and Southeast Asia.

Tony Will and Bert Frost discuss the unusual experience of the last two years in terms of energy differentials, shutdowns, and the war in Ukraine resulting in a scarcity of nitrogen products and high prices globally. This led to reduced demand and consumption, but moderated pricing has reinvigorated some of the application rates and demand. There is a balance between building an appropriate order book and running the plants safely and efficiently, while not wanting to miss opportunities when the market strengthens. Supply is constrained in some areas.

India's production capacity has grown, leading to a projected annual import demand of 6-8 million tons, rather than the 10 million seen a few years ago. This is due to customers depleting their inventories and needing to acquire more product. Since February, the market has been falling, but there has been a recovery in June and July due to lack of supply in countries such as Nigeria, Egypt, and Trinidad. This has resulted in an order book for the third quarter, with some orders extending into the fourth quarter, and product prices increasing.

Tony Will explains that the economics of the Billingham plant closure made sense due to the ability to import ammonia and upgrade it to nitric acid and ammonium nitrate, resulting in an upgrade margin. He states that some plants in Europe don't have access to imported ammonia, and may be making urea-based products that require CO2 in order to upgrade them. He believes this is why there is variability in operating rates for those able to import ammonia.

Tony Will explains that there have been a lot of announcements for new ammonia projects in the past, but only a few of them have been built. He believes that the new project they are working on is different because they are partnering with end users who will put the production into new clean energy applications, and this will help prevent an overhang situation.

Chris Bohn explains that the lower gas costs in Q2 were due to selling more product than they produced and buying gas daily rather than at the first of the month. This allowed them to go through the inventory overhang more quickly and get lower prices than expected. The strip is currently in the $2.50 to $2.75 range, and this is what they expect going forward.

Tony Will states that they typically target a low teens return rate on projects, which is above their cost of capital. He also mentions that due to the success of last year, projects that had been done in the past looked very profitable. Will also mentions that when bringing partners into the equation, it de-risks the project, but does not change the expected return profile.

Chris Bohn and Tony Will agree that risk-adjusted returns for projects should be mid-teens. Steve Byrne asks if ammonia pricing will remain lower than urea pricing due to less industrial demand, and Tony Will responds that it is usually lower because of the capital needed to upgrade it, but that there has been a reduction in industrial demand over the last year.

Tony mentioned that there is a limit to availability of ammonia for fall application, due to the storage capacity of end-market tanks. Bert Frost believes that ammonia demand will be robust due to the revenue opportunity of planting corn for harvest in 2024. Steve Byrne asked if there is anything that can be done to pull forward the Brownfield project in Donaldsonville ahead of the early 2025 guidance, and what the rate limiting factor is.

Tony Will discusses the timeline for the availability of low carbon ammonia, which will be available by 2025. He also outlines the challenges that come with the permitting process and the timeline for when the compression and dehydration equipment will be on-site and commissioned. He notes that Louisiana has been granted primacy from the EPA over their ability to permit injection wells, but it still takes time to get everything in place. He estimates that the injection process will begin in the first or second quarter of 2025.

Tony Will and Bert Frost are discussing the operating model for a new build project, which involves proportionate equity participation for offtake from the project. They are looking to de-risk the project by entering into a back-to-back take-or-pay agreement for the rest of the project. They are also in conversations with various companies and industries to supply low-carbon products as a feedstock or fertilizer to both the United States and European customers.

Chris Bohn explains that the company will be favoring opportunistic share repurchases over a ratable approach. He points to the mid-60s share repurchase in the past quarter, which he believes was an efficient use of capital. He also mentions that the company has repurchased 11 million shares in the past 12 months for about $1 billion.

Bert Frost discussed how the company needs to strategically plan for the months ahead when it comes to filling orders, and how they need to consider the components of gas, logistics, and the end price when making decisions. He also mentioned that the prices they launched for UAN fill programs were higher than the spot price at the end of the quarter, and they booked export values below the current values. In response to a question about the regulatory approval process for Waggaman, Frost did not provide any updates, but did not suggest any potential delays or acceleration of the process.

Tony Will explains that it is cheaper for CF Industries to buy ammonia than to produce it themselves in the U.K. due to the high cost of gas and carbon in Europe, as well as the cost of maintenance and turnaround of the equipment. He states that they can source ammonia from Algeria or other places and that they can sell ammonia from Donaldsonville at higher rates than moving it into Billingham.

Tony Will recharacterizes the question to focus on how Bert has navigated a challenging market with delayed purchasing patterns and volatile pricing. He is optimistic about the second half of the year and into next year due to tight inventory, attractive gas prices, and high farmer profitability. He does not have any major concerns and is focused on getting safety back to the usual level and executing normally.

Tony Will and Chris Bohn discuss the potential of blue and green ammonia as an alternative fuel for marine applications. They agree that it will take some time to retrofit existing vessels and develop new propulsion systems, but there are engines in testing now. They are optimistic, but believe that it won't be a major demand source in the next five years. They expect it to become more popular by 2030, due to the development of engines and the attrition rate of existing vessels.

Bert Frost discussed the assumptions behind their analysis, which are based on their understanding of the markets and conversations with India and Brazil. India is limiting their rice exports to keep pricing in control and Brazil will need to import substantial products for their cotton planting season and second crop corn. This creates a positive market for the end of the year and into 2024. The call concluded with Martin Jarosick thanking everyone for joining and looking forward to seeing them at upcoming conferences.

This summary was generated with AI and may contain some inaccuracies.