IPI (2019 - Q2)

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash Inc. Second Quarter 2019 Earnings Conference Call. As a reminder all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead. Matt Pre

Thanks, Carl. Good morning and welcome everyone. I remind you that parts of our discussion today will include forward-looking statements as defined by the U.S. Securities Laws. These statements are not guarantees of future performance and are based on a number of assumptions which we believe are reasonable. These statements are based on the information available to us today, and we assume no obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the SEC. During today's call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in this morning's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. Presenting on the call today are Bob Jornayvaz, our Co-Founder, Executive Chairman, President and CEO; and Joseph Montoya, Vice President and Chief Accounting Officer. Mark McDonald, Vice President of Sales and Marketing; and Alex Wagner, Vice President of Business Development, are also available for questions. I'll now turn the call over to Bob.

Thank you, Matt, and good morning to everyone and thank you for joining us. This quarter we delivered a solid second quarter as our diversified revenue streams provided a solid boost to overall results. And potash and Trio produced good margins despite a first half of the year that saw record wet weather and flooding throughout much of the United States. As we detailed in two press releases last week, we recently took additional steps in expanding our oil field footprint on Intrepid South partnering with NGL Energy Partners, in a joint marketing agreement of our water and jointly acquiring land in Texas for the development of produced water disposal facilities. Under the joint marketing agreement Intrepid will be responsible for the development, gathering, transportation and sale of the combined water from the Intrepid South property and NGLs neighboring Beckham and McCloy ranches. Together these ranches cover a contiguous 185,000 acres, servicing approximately 20-oil and gas operators in the heart of northern Delaware Basin. By combining the water systems of our two companies, we will improve the efficiency of our operations and expect to reduce the operating costs of our overall water operations. Together with NGL, we also acquired land in Texas for the purpose of building a produced water disposal facility to gather and transfer produced water from our three collective ranches in the neighboring oilfield activity. We have already permitted five disposal wells and we'll begin construction in the third quarter. Once complete, we expect facility will have a capacity of a 100,000 to 125,000 barrels of produced water disposal per day. We expect the first wells to be completed in the first half of 2020. Intrepid South got off to a great start during the second quarter with water sales ramping up considerably towards the end of June and strong sales from other revenue streams of caliche, a produced water disposal royalty, right-of-ways, easements and surface use agreements. This provided a boost to our oilfield solutions segment revenue in the second quarter as we saw another quarter of steady water sales from our expansive legacy water rights, despite decreased activity in the Delaware Basin. Fluctuating oil prices during the second quarter led to a decrease in frac crews and completion activity as operators pushed frac schedules to later this year although, we expect increased sales in the second half of 2019. Despite the volatile market environment of the past few days, Intrepid has numerous positive developments including the recognition of oil inventories being back to their approximate five-year averages, frac crews increasing in the northern Delaware, increasing infrastructure projects like the Select Energy pipeline being completed, which Select recently announced has increased capacity to 150,000 barrels per day and we are fortunate to have the ability to meet this growth. On top of that, we are seeing an approximate 15% increase in water used per completion compared to last year and pipeline takeaway capacity is rapidly improving and expected to exceed production in the first half of 2020, alleviating another bottleneck in the region. We have already seen significantly reduced basis differentials, which increased each operator's profitability. With these numerous positive tailwinds, we maintain our full-year water sales guidance towards the high-end of the previously announced range of $20 million to $30 million and anticipate substantially increasing that number for 2020. Moving to our fertilizer business, both potash and Trio delivered a solid quarter in the face of record, wet weather across the country that prevented us from making up all the tons that were pushed back from the first quarter. Higher pricing and cost containment drove improvements in both potash and Trio gross margins compared to last year. The recent summer fill price announcements for potash and Trio got us off to a great start in the third quarter and we have a full order book for both products. Excess potash inventory from our Canadian competitors that couldn't get to ground in the spring because of the wet weather is clearing out. And we're seeing farmers eager to replenish nutrients in the soil after two consecutive application periods in the Midwest hampered by adverse weather. Overall, we delivered solid results in the second quarter and believe we are extremely well positioned for a good second half of the year. Our recent partnership with NGL for water sales and the joint acquisition of land for the development of produced water disposal facility are significant steps in expanding our oilfield footprint to grow our produced and recycled water offerings capitalizing on the diverse opportunities available on and around Intrepid South. As we said in our last few calls, we planned to continually and thoughtfully pursue additional opportunities across our business segments. We look forward to updating you on that progress on future calls. I'll now turn the call over to Joseph, who will discuss our financial results and our outlook.

Thank you, Bob. And I’ll add my good morning to everyone and thanks for joining. During the second quarter, we generated net income of $5.6 million or $0.04 per diluted share has higher realized prices and increased sales of byproducts drove an improvement of $6.6 million or $0.05 per share over the prior year second quarter. Our potash segment generated $8.2 million in gross margin during the quarter. A $2 million improvement compared to the prior year due to increased average net realized sales price and more diverse targeted marketing to higher end customers. Looking to the third quarter, the summer fill pricing announcement which reduced potash price $45 per ton for our ag sales is expected to lower our overall net realized price by $35 to $40 per ton. Our solar solution mines are wrapping up the summer of operation season with our HB mine beginning production this week and Moab and Wendover are expected to start early in September. Trio also saw improved results in the second quarter with $1.5 million of gross margin being generated. This compares to a gross deficit of $2.2 million in the prior year second quarter. This $3.7 million improvement was driven by increased byproduct sales, improved production costs and higher average net realized sales price per ton. Second quarter sales volume increased slightly compared to the prior year as we saw good demand in domestic markets for most of the spring season and increased international shipments. As expected, international shipments offset higher domestic prices and lowered our overall average net realized sales price compared to the first quarter of this year. In early July, we matched our competitor’s summer fill pricing announcement for langbeinite. And similar to potash, we saw a great subscription with the nutrient content of Trio representing a compelling value for farmers. We expect our average net realized sales price in the third quarter to be similar to the second quarter. Oilfield solutions delivered a good quarter with $3.5 million in gross margin as a $1.7 million increase in sales was offset by start-up expenses related to the acquisition of Intrepid South and costs related to our high-speed mixing and trucking services. As we've discussed before, the oil and gas activity and resulting demand for water on the Intrepid South property outgrew the existing infrastructure. And we are actively and aggressively upgrading and installing more permanent infrastructure to meet this demand. This infrastructure will improve our operating efficiency and is expected to cut our water transportation costs significantly over the next couple of quarters. Turning to liquidity. On August 1, we entered into a new revolving credit agreement with Bank of Montreal, moving from a $50 million asset-backed facility to a $75 million cash flow revolver with improved interest rates and less restrictive covenants. The new facility also includes an incremental $75 million accordion available to us. This facility reflects our improved financial performance in recent quarters and positions us to pursue additional growth opportunities across our diverse businesses. Cash provided by operations was $24 million during the second quarter of 2019 and cash spent on investing activities was $62 million, primarily due to the Intrepid South acquisition in May. We expect our CapEx excluding acquisitions for 2019 to be approximately $25 million to $35 million, which includes opportunity capital investment related to our newly acquired assets. That concludes our prepared remarks, operator. And we are ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Connelly of Stephens Inc. Please go ahead.

This is Joan Tong on for Mark Connelly. A couple of questions on the water side, can you just tell us what's the contributions – revenue contribution from Dinwiddie in the quarter?

As you know, we took over the first weekend May on Dinwiddie. And so Joseph, do you have those numbers handy?

I do. So we sold in the quarter. Well, let me just look at year-to-date, that's what I have handy and obviously it'll include the piece that we captured in with Dinwiddie. We sold a comparable amount year-over-year and with some of the issues and scheduling – fracking scheduling issues that Bob mentioned, we're at comparable amounts, a 26 million barrels year-over-year, of that about 2 million barrels was from the South ranch.

Okay.

And that's going to ramp up significantly as we take over, we build out the infrastructure to use the first, call it 30 or 45 days is any kind of a benchmark is way premature. We fully anticipate selling out water, increasing the water down at the Intrepid South.

The thing to focus on Joan is not necessarily barrels, but one of the reasons we acquired South is because of its proximity to the oil and gas activity. And what we're enjoying is increased dollars per barrel. And so if you look at our revenue year-over-year, quarter-to-quarter, although barrels were comparable, water sales were up significantly.

I see. Got it, got it. And then if I were to think about your sort of like all the water rights you have right now after obviously these new NGL JV and by the way, congratulations on that. How much coverage you actually have now in terms of like servicing the need in the area. I remember you used to say like 20% to 25% of last year or in the past in terms of your coverage. I'm just trying to gauge like how much more opportunities you still have there?

Well, as we said, we cover 185,000 acres in the most productive part of the Northern Delaware Basin and we have over 20 plus operators that we're servicing. So we fully anticipate on the three ranches selling the water out that's produced on those three ranches. And one of the beauties of our select agreement is select your pipeline comes down from the northern mines and brings our water down that basically dead ends at the beginning of those three ranches that we now are doing the marketing on that area. So our footprint has expanded dramatically in the Northern Delaware. Towards the end of the week, we'll be putting out a set up of just water deck slides that show you, the immense amount of infrastructure that we can now connect into and can deliver water into. So we've got the whole Southeast New Mexico portion of the Northern Delaware now covered with infrastructure in our water.

Okay. Got it. Got it. And then switch over on the ag side. Just looking at potash obviously is a tough quarter for everybody given the blade planning and but on the cost side, it just seems to me that it's a little bit higher than last quarter. Like given maybe there’s some volume issue there, but are you in general pretty happy with where you are in terms of cost of the potash production operation?

Joan, I would say that our costs are flat on a comparable basis on increased sales in relatively comparable productions. So this is an improved situation where we were seeing costs increasing. We're now seeing them flat to decreasing. So I would say, yes, we are happy with the results of our operators in the production facilities.

And I would also add to that that our one New Mexico strategy with our employee workforce in Carlsbad, we now have employees that we're taking down to the Intrepid South ranch, they're participating in the construction projects. So we have the ability to utilize our vast workforce that lives in Carlsbad in a very unique way, unlike many other oil and gas companies moving into the region. So we look forward to being able to utilize that workforce in a much more constructive and economic way.

Okay. Got it. And then finally on Trio, nice quarter, actually couple of quarters in a row that you are – you saw some profitability in that business. And if I hear it correctly, I think you mentioned that the prize realization for the third quarter is similar to the second quarter. Is it like a normal trend because I'm just wondering if the quarter, its seasonally weak and you are still maintaining a good pricing realization, are we seeing strengthening in that particular business. And can you talk a little bit about maybe the mix going forward? How should we think about international versus domestic? Thank you.

We are really focused on the domestic market. And so our goal is to really focus on the higher net back opportunities in the domestic market and leave the some of the lower priced or lower net back pricing to other folks and focus on the United States where we've – Mark has done a great job of expanding our footprint. Our one competitor did take the price down for no apparent reason. And so we've responded to that and that was theoretical fill program and the price is already coming back up. So that's why we anticipate third quarter pricing being similar to second quarter pricing. I don't know, Joseph, if you want to add anything to that.

Yes, I was just going to say, Joan, that I would not say that our pricing is cyclical. It's more strategic as Bob mentioned the strategy that Mark has laid out will be to really focus on the domestic customers, which is just a matter of execution and not necessarily correlate to time periods.

Thank you.

Thank you.

Our next question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Hi, this is Robin on for Joel. Thanks for taking my questions. So the oilfield solutions segment has been delivering a gross margin, give or take about $3 million to $4 million a quarter over the past year or so. I appreciate that there's been always acquisitions and partnerships being made that will obviously take some time to ramp. But can you give us a sense of how we should think about gross margin growth. In the second half of this year as well as next year, we should think about water sales growth and how that translates to gross margin growth? Thank you.

I would say they're both increasing, expected to increase for the second half of the year, although not correspondingly. In other words, I think our sales will increase and our cost of sales will not, because of the infrastructure things that we've talked about putting in place and we're working on those right now. And so we expect the gross margin to increase with increased sales and lower cost of sales, not only on the water side but as Bob mentioned, there are other revenue streams that we have on the South ranch and therefore in oilfield solutions, caliche sales right away agreement, surface use agreements, easements, that are all complimentary to the area in the oil and gas industry and we're executing on as we speak.

Yes. Most importantly, if we just once again look at the select pipeline that went from zero to 150,000 barrels of capacity that we have the water to supply that capacity. So that one agreement should see a significant bump in revenue. If you look at the Intrepid South, which hooks into that system and covers the area of the three ranch AMI with NGL, gives us an additional opportunity to market water down there as well as enter into the produced and recycled water businesses as well. And then you look at our western edge of our property with our infrastructure of Heron Ponds and the pipelines that we've built. So we now cover with infrastructure, the entire part. That's why as I mentioned earlier, we're remaining with our 2019 guidance of $20 million to $30 million and think we'll hit higher, but we look forward in our third quarter call to substantially increasing that number for 2020.

That's helpful, thanks. And just one last question from me. So what is the expected CapEx associated with the water system improvements for next year and how will that be split between 2019 and 2020, is that more front loaded?

No, I'd say it's pretty even. I think a total net to Intrepid right now is sort of in the $7 million to $10 million range and the returns on those dollars are pretty prolific, in terms of the entry that we're making into the produced water and the recycled arenas as well as the fresh water arena. And so just the one single permanent infrastructure pipeline at the Intrepid South ranch should cut our water delivery costs by almost 60% from one big major pit, the Beckham pit to the [indiscernible], I don't want to get into the weeds but we're not talking about big dollars for very significant returns.

Thank you.

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Hey guys, this is Jeremy Rosenberg on for Vincent. Thanks for taking my questions. I want to start out on the fall application season. Maybe just get your thoughts on what your volume expectations are in potash and langbeinite for the second half?

Mark, do you want to take that?

Sure. Thanks, Jeremy. We had going into the summer fill season, we have a very good subscription on both of those products. We expect a very strong application season. I think as Bob mentioned in his opening remarks, a poor fall of 2018 followed by a challenging spring due to wet weather has led to a nutrient removal in the soil or not enough nutrients being applied. So to that point, both potash and langbeinite applications that should be strong going into fall and we expect – and leading up to that, actually, I think prognostications or forecasts for corn planting next spring in the mid-95 or 95 million acre range will also lead to a strong nutrient applications as well.

Okay. That's helpful. And just going back on the comment in the prepared remarks on potash prices being down, I think it was maybe $35 to $40 a ton. Was that a comment specifically for the third quarter or is that for the back half?

That was specifically for agricultural tons. So I want to make that really clear that that is not affecting all of our tons. I don't know if I'm answering your question but that was the decrease that nutrient took down in their summer fill program and they've already bounced it back up 20, which we're now saying, so we're just trying to reiterate the fill program that our Canadian competitors put into place.

And yes, the answer to your question, Jeremy is yes, that's only for third quarter. All the pricing, summer fill programs that were announced also included announcement to bounce back up in the fourth quarter. So we'll follow along.

Okay. In terms of just the overall potash pricing level, I mean, should we be thinking about it more like 4Q 2018 or actually I would assume it'd be coming down versus the sort of the decrease saw this past quarter?

Well, assuming we have a normal fall weather system, we see every indication that it's going to be a very firm fall season and then going into the spring season because of how much did not get put down in the fall of 2018 nor in the spring of 2019. So there's every reason to anticipate firmness in the potash market.

Okay. Got it. And then just last one, in terms of freight expenses, do we think those come down in the back half? I know they've been running a bit high the past few quarters. Just wanted to get your thoughts on that, thanks.

I don't think we've seen any material changes. I mean, right now if you look at – read Wall Street Journal articles, et cetera, there has been a little bit of over capacity built into the trucking market. So there's – we're not seeing a compelling reason, be it either diesel prices or fuel prices for freight rates to change for any substantial reason.

Okay, great. Thank you.

The next question comes from Josh Spector of UBS. Please go ahead.

Yes. Hey guys, just on the water side. I was curious if you could help us understand maybe some of the economics around the water disposal of recycling side of the business versus the sales side. Is that something that you see a pretty significant opportunity from or is it more about serving the customer from the beginning to end from a life cycle perspective?

I think you hit the nail on the head. It's providing a diverse set of products for the variety, the produced water side is just an absolute given in terms of with the activity. They've got to do something with the produced water. Now let me back up. Don't forget that everything starts with fresh water. And so we're seeing an uptick of approximately 15%. And in the wells being completed in 2019 over 2018 in the amount of fresh water that they're using – they're then taking the produced water and some of that stream is going into recycle pits and they're trying to recycle a small portion of that water. I would say right now, depending upon the operator, it's anywhere from as low as 0%, include as much as 12% to 15%. And then the rest of that water goes into produced water disposal. So it's a system that enables you to service all the needs of the operator at the location.

Okay. I mean, I guess, we are trying to go with it is, does that become a meaningful source of revenue for you guys at some point? Is that something you expand into or is it about, you'll get that incremental refresh sale for you guys?

Yes, if you look at the produced water space. There was an article in the Wall Street Journal literally every day about the expansion of the produced water space as well as just about every oil and gas journal that you'll read is talking about the produced water space and the margin availability on produced water. So in our next quarter call, we'll give you a lot more exacting capital forecasts and margin forecasts on those two parts of the business. But what's most important is to recognize our entree with a really good partner in NGL. It's got a lot of experience and we're building pits and we're moving forward on that infrastructure to compliment those three products as we speak today.

Okay. And then the last one, kind of in the same area as you talked about the incremental CapEx spend, is there incremental OpEx that you consider that you're spending kind of now over the next few quarters to build out your network that either drops off or becomes an ongoing part of your cost structure?

I think a lot of that has been spent, the infrastructure, the permanent water transfer infrastructure that we're building in the automation should dramatically bring down those, that OpEx. So you got to remember we bought facilities that had old lay flat lines that we're putting in permanent pipelines, we're automating all the pumps. We're just putting in a tremendous amount of automation, make it much more productive and by definition we'll reduce the operating costs.

Okay. Thanks.

[Operator Instructions] The next question comes from Jason Ursaner of Bumbershoot Holdings. Please go ahead.

Good morning. Just a few more follow-ups on the oilfield service segment. You mentioned the decreased short-term activity in the Delaware and some of the frac schedules moving later in the year. It seems like there's kind of been a big change in the narrative for EMPs to start living within their cash flow. Just given the amount of ducts that have already existed kind of in your backyard in the Delaware, do you see this helping sort of move from a building inventory of ducts to much higher completion rates, in the next six to 12 months?

Well, I would say there it's a multitude of factors that are going to enable the activity to take-off in our region. The first is the expanded takeaway capacity, the trunk the basis differential from approximately $13, 10 months ago to this morning it was trading at about $0.10 cents so that that $0.10 to $13 goes straight to the operators, bottom line. That's a recent phenomenon over the last few months. If you look at the water infrastructure that is being built and is now coming into service in the third quarter and fourth quarter, there's major water and produced water and recycled water infrastructure that's being built that allows as operators to come in and move multiple rigs in and go to work at once. There's just a variety. We now have a substantial gas pipeline that just got completed, it comes on service in the third and fourth quarter, that will move almost two BCF a day from the region. So there's just, there's a variety of tailwinds that are occurring as we speak. We're seeing frac crews move back into the area. We have literally, staff, sales staff that we've added that’s out talking to operators every day for updated frac calendars. So, I don't know if I'm answering your question, but, we do have an immense number of ducts and the reduced basis, the takeaway capacity, the ability to come in and start working on those ducts is now been streamlined. And so we highly anticipate in 2020, fourth quarter 2019 and 2020 a pretty substantial uptick in activity.

Okay. That does answer in terms of, I guess giving confidence for why you expect the pickup that you sort of mentioned earlier. And then, I apologize for kind of repeating a few of the other earlier questions, but I'm dealing with these specifically, just a reminder that, that ranch came with 700 permitted acres or that was a potential for its total permitted acres. And again, that's separate from all the legacy rights.

Yes, that number has increased. I'm going to let Alex Wagner speak to the exact numbers because the more work we do, those numbers continue to tick-up in terms of the available water to sell. But Alex, why don't you take that?

Certainly. The ranch actually came with a little over 1200-acre feet of permitted water rights and so we're working to a perfect 100% of that presently. We're able to sell over 1,000 acre feet of permitted rights, which is an excess of what we had originally anticipated, prior to the acquisition.

We're also drilling wells and permitting new wells to expand. We have additional water rights that we will continue to develop. So, we'll have a rig on location drilling a test well here within the next week to 10 days. So we're doing a lot of things behind the scenes to grow those water rights, which we have. And that's why we use the word development in our NGL deal is that we're helping on all three ranches to maximize and develop those additional water rights.

Okay. And, and you had mentioned anticipating selling through that allocation, does the agreement also pertain to, I guess some of the water coming through the pipeline that thing constructed or some of the legacy rights or that that's separate if you sell through the agreement?

Basically the NGL and Intrepid Group will buy water at the end of the [Gera] Select pipeline. And so that's fortunately our water coming down that pipeline. So there'll be a point at which at the [Gera] pit three and once again we're getting into the weeds in terms of locations, but that [Gera] pit three dead ends at the north end of the McCloy ranch, which then comes into our 185,000 continuous, AMI acres serving approximately 20 operators. So, being able to go from selling tens of thousands of barrels on the east side of our mine with the opportunity to sell up to 150,000 barrels with the [Gera] pipeline is a big step for us. Okay.

And for NGL, I know in their presentation they disclosed I think 11.6 million barrels, which I think is around 1,500 acre feet. So, when I think about it proportionally, is it kind of a 40, 60 split or so on the initial combined groups water, and then anything above that, above 3000 per feet.

It has a monthly adjustment provision in it because we know what we have in terms of water rights and we also know what we have in terms of pump capacity, so that's an everchanging ratio that we're on top of and monitoring and measuring as we meter those wells and market that water. So, you'll see slight fluctuations. But I think the starting point is about 60, 40. I think you'll see that go to 50, 50 pretty quick. I don't know if I'm answering your question, but it, as we develop those additional water rights on the various properties, those numbers, it's provided in the agreement that those numbers will be ever changing.

I guess on more asking, once you sell through the combined allocation then you're supplementing that way, I mean, there's going to be a lot of activity in that land area. If you sell through the allocated water, you're then buying additional water coming down the pipeline, which also I guess happens to be yours.

Correct.

Is that the right way to think. Okay.

That's the right way to think about it so that we get paid, we get paid once by Select and then Select resells the water. But we will have already made a significant margin on that water that goes through the Select pipeline.

Okay. And then just quickly on the balance sheet. Congrats on the refinance, does that change your rates at all?

Yes, the rates improved about 50 basis points but really the key is moving from an asset backed facility to a cash flow revolver and, alleviating some of the covenant restraints that we had before.

And accordion features are big.

Yes, absolutely. And really point being we now have capacity to pursue other opportunities.

And I guess just more broadly, pursuing those opportunities what are some additional details, if any, you can give kind of high-level plan for capital allocation?

Well, as we continue to have the discussion, we're looking at some, at some great bold, what we're seeing in Intrepid South is Alex Wagner's phone is literally ringing every day with additional opportunities that are highly synergistic. And so, we liked the bolt-on opportunities that we can buy a very reasonable multiples and increased the cash flow and increased the multiple capacity of those assets. And, so increased diversified cash flow, provides for a much firmer foundation to begin to answer some of the questions that we get around capital allocation in returning capital to shareholders. So, the first step in that was to create a very strong, not only balance sheet but diversified revenue stream, so that one blip in Trio or a blip in potash or a blip in water isn't going to have a major impact on us.

The only other thing I would add to that is looking for opportunities that are immediately accretive to EBITDA as we did with the Dinwiddie Ranch.

Okay, great. Thank you for taking my question.

The next question comes from DeForest Hinman of Walthausen & Co. Please go ahead.

Hi, I'm going to start off by apologizing, got on the call a little bit late. Some of this may have already been asked and answered, but a lot of interesting developments, like you said over the last three months on the water side, you've mentioned Select Energy business with NGL, we've already disclosed the previous take-or-pay. When we start to think about 2020, is there any metric you can frame for expectations in terms of contracted water sales are or take-or-pay so we can just frame up this opportunity, you’ve been saying it's quite large, but just to help us understand it better.

Well, if you were to just look at volumes, it's very easy to show how our volumes could, could actually double and so, all the infrastructure is in place to easily double those volumes. As we said in our prepared remarks, we look forward in our third quarter call to giving, substantially higher guidance for 2020. I don't know if that answers your question, but we'd like to dissect a little bit more of the opportunities that we've done and give you better cost controls around the capital that’s going to be required and the kinds of returns that we're looking at and the cash flow that we're going to generate from the substantially increased water sales.

Yes, and when we think about the capital allocation and we've used this JV structure, but I'm also mindful in the past that, we were being very careful with our capital spend. Do you still envision, I don't want to put words in your mouth, but a somewhat capital light model where the cash allocations for the investments might be lower, but the economics change as a result or maybe more capital intensive with better, ability to borrow money.

Well, what we're saying in as we guided to, other than the actual acquisition of the, Texas property and the Dinwiddie, those were the major capital expenditures on an ongoing capital basis. You saw a very slight bump up in our capital yet, we've tried to give you a feel for the magnitude of the increase in potential products sales. So I don't know if I'm answering your question, but we're not talking about going up multiples in capital spend. We tried to state pretty clearly that we have a lot of bolt-on opportunities that we're seeing that are smaller bite sized capital pieces that have great returns.

DeForest I would say the answer to your question is yes, we're absolutely, watching our capital spend very closely and investing in things that are providing solid returns, whether it's this five to seven or seven to 10 that Bob referenced earlier or potentially bigger acquisitions that we come across it. So, we continue to be mindful of our CapEx, and if it goes beyond the range it's going to be because we identify some, great opportunity that we think is going to return shareholder value.

Yes. And everything we're doing is a accretive. I mean, we're buying cash flowing assets that are accretive.

Okay. That's helpful. And then in one of the press releases, you talked about rig count in the northern Permian, I think it's over a hundred rigs. Obviously, we're having conversations with different customers, which we're also probably looking at all sorts of different, headlines and things like that. Is your expectation for rig count, to go up, be flat, go down, on a forward basis?

Well, obviously that's, um, probably most dependent upon oil prices, but, as we mentioned in our prepared remarks, the substantial reduction in the basis differential, which was really a $10 decrease or $13 decrease over the last six to eight months goes right to operators bottom lines. Take away capacity, new gas pipeline capacity, which helps with flaring, new water infrastructure, produced water infrastructure. I mean all of these things, lead to most importantly the completion of the hundreds and hundreds of docs that exist out here. And so, I think our downside if you will, is that the docs just continue to grow. So, I don't know if I'm answering your question, but to tell you our oil prices are going to go over the next quarter. I'm not that good. But I do think that that will have an impact on activity.

Okay. Thank you. If I have additional questions, I'll follow-up online, but thank you for taking my questions even though I got on late.

No, thank you.

The next question comes from Jon Evans of SG Capital. Please go ahead.

I'm sorry, this may be redundant, but could you just walk through again what's going to happen in potash? So, nutrient took a down for the summer. What do you expect kind of your mix will be and then they've taken the price-up. And so can you give us some sense of your thoughts about, fourth quarter also pricing because it seems like demand is pretty strong. At least that's what nutrient said on their call. Well, demand is very strong, we've seen a really strong order book, so we fully believe that there's no demand reason why price can't return to where it was. And so it's already snapped back. Mark, correct me, but $20 to $25 and you can discuss our third and fourth quarter order books and how they're shaping up in the pricing. But we're seeing very firm, extremely firm demand, which should lead to firm pricing. Mark, do you want to add to that?

Sure. Jon, I think just stepping back a little, I think on a global stage, we see very good stability throughout most of the good potash regions. And I think that in combination with what Bob mentioned, I think again, we saw poor application fall of 2018, weather related issues in spring of 2019 and a reasonably good crop coming on here with the both corn and beans. So, given that and the nutrient removal, we've had good demand, pricing as Bob mentioned, has moved back up off of the fill program. And as we move through, into the fall season with a good forecast for strong corn planting next year, we certainly believe that the fall bodes well for application. I think as Bob mentioned, our order book supports that right now.

Jon, if may add, this is Joseph. The thing also to remember as Bob mentioned earlier, is this really is not impacting our pricing on our industrial and our feed tons. And as you know, for the 25% of our potash tons go into the industrial and feed. So we'll have less of an impact than it might on some of the other producers that are more ag focused.

Got it. And just a follow-up with kind of $4 over $4 corn do you expect more acreage to go corn next year or do you expect potash demand to be pretty strong for next spring.

Well we see because of the low application rate in the fall of 2018 and the very low rates and in the spring of 2019, there's clear nutrient demand on whatever the acreage figure is, whether it's 88 or 92, whatever that number is, it's going to require a lot of potash. That's good news. So, we've seen two application seasons, that have experienced lower application rates, because these are flooding or wet weather and so we have every reason to believe that the fall and the spring should be very robust from a demand perspective.

Thank you so much.

This concludes the question-and-answer session. I would now like to turn the conference back over to Bob Jornayvaz for any closing remarks.

I just want to thank everyone for taking the time and the interest in Intrepid. We look forward to speaking with you on our next quarterly call. And we're just proud of the results we delivered and continue to deliver quarter-over-quarter. So thank you for your interest and your time and have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.