Welcome back. It's a pleasure for me to host this next session with CF, and I'm delighted to have Greg Cameron, CFO, and Bert Frost, Chief Commercial Officer, at least that's what I refer to you as.
Take it.
It's good. Greg has been with the company less than a year, but he was at Bloom Energy for four years, and he was at GE for 26 years. So, we got a newcomer in the Management team there, so I'm going to pick his brain on that. Bert's been with CF for almost 20 years?
16.
And you had a long career with ADM before that. Bert is absolutely one of my go-to guys on fertilizer. So good to have you both here.
Thanks.
Thanks.
Greg, I'd like to start off with you. The 16 years that Bert mentioned, I would suspect is pretty similar with Tony Will and Chris Bohn. The three of you have been kind of a unit for a long time. I mean, it's a standout, in my view, in the chemicals sector. Greg, you're new in this team. I guess my question for you is, when you come in and you see the operations, is there anything that surprises you or that you see as potential opportunities?
So, I consider myself very fortunate to be a member of the team. And Bert, and Chris, and Tony, and the whole Senior Leadership team has done nothing but invite me into the discussion. If anything, encouraged me to talk more, faster, express my opinion more so quickly. I would tell you that the company's position I underappreciated, even through my due diligence process. Just where we produce, where we sell, how we do that, we are probably one of the best-run companies I've ever seen throughout my career.
And I think the execution focus is clearly there, and it's obvious in the numbers. And just the size of the company, it's small enough that it can make decisions very quickly, inform decisions across the organization very quickly, but has the organizational reach to implement those decisions and cause change rather quickly. So, I'm very excited to be here, and have been nothing more than surprised by how well it's executed and how much opportunity we have going forward.
I will give a shout-out to, because they're not here, so I can say this, but Tony and Chris, and I have been together for the whole time, and it's been a pleasure working with them. We have different skill sets, we have different focuses, and we leverage each other. And it's been to the betterment. We have some spirited debates, but it's a very healthy work environment and good culture. And I can tell you, I covered CF right after it became public, right after it was a co-op. And the difference between the way it was operated post-co-op to now is amazing.
Yeah. Let's talk about the pending FID.
Yeah.
The Blue Point project, the Greenfield Blue Ammonia project down in Louisiana. How do you view that fitting strategically into the business, and how do you expect to fund it?
So, when I think about our capital allocation strategy, right, and that's really what this is about, and I think about how we prioritize where that marginal dollar goes, we spend a lot of time looking at our existing portfolio of assets and trying to figure out how we can make them run not only safely, but be more productive, and where are there opportunities to grow. And I feel as though the opportunity that we have with Blue Point fits into that kind of core strategy very well. We'll also look at opportunities to do inorganic growth, as we did with Waggaman, and we'll obviously look at opportunities to return cash to shareholders. But when you look at the core business itself and where there's opportunities to continue to grow, this fits in the strategy very well. Why is that?
One, when you look out over the next five years, our expectation is you're going to continue to see a growing need for ammonia, for nitrogen. We think that the plants that have been announced are not enough to meet that need. And then when you take into account what is likely to close within Europe over that time period, we think that the world needs eight to nine world-scale ammonia plants to come online by then to meet the need. You then take into account.
By when?
At 2030.
Okay.
You then take into account that the world needs to decarbonize. We can debate it, we can talk about it, but we need to decarbonize. And if you're going to invest money into a new plant, why would you invest in technology that doesn't allow you to produce this ammonia and the upgraded products down the road at near-zero carbon? So that is a tremendous opportunity for us to do it. And then you look at where those plants are going to get built. They're likely to get built here in North America. So we think the market need and where that need is going to get met is very much within our core business and very close to us. So the discussion has been how to approach that opportunity.
And we've taken a view that we want to do that with partners, not only to help bring them along to lessen the amount of capital burden on the company, but also because they will speak for their pro-rata view, their pro-rata portion of those tons and bring them to the market. And the people that we've been talking about that we're going to partner with, we expect them to bring it to a new source of demand. So, depending upon where the ownership size is, we've talked about us being anywhere from 75%-40%. The offset of that is wherever the other part of that goes, it's not going to go compete with some of the traditional sources likely that we've had before. So we can bring that online.
We've thought about doing that in a way in which you partner with good folks that can help you execute. We'll run the plants, we'll build the plants, and partner with them to get that done. Then at the same time, most of that will go to new sources of demand, and we will manage our process around that. You asked about, do you want to. I'll stop and take a breath.
Oh, go ahead.
You asked about how we're going to fund it. So when we look at it, and let's just use it for example, say we're 50%, just to talk about it. So that is about $2 billion of investment dollars for the plants, plus about another $500 million that we would need for common facilities based on our study. And you asked a question before about coming to CF and what I found about it. One thing I found is this company takes the safety mindset into all aspects of the company. One of the ways is which is how we model. So when we look at what the capital requirement's going to be and what the return is going to be, it's very conservative on how it thinks about modeling those out.
When we look at the needs over the next four to five years that it'll take to build it, you first look to the balance sheet of the company. We ended the year with $1.6 billion in cash. We obviously have a share repurchase this year that's going to consume some cash. But then we look at the free cash flow that's coming off of the company. Last year, that was $1.4 billion. And if you think about what our share of this plant investment will be, it's going to average about, call it, $400 million-$500 million a year over that four to five-year period at the 50% ownership.
So if we're spending $500 million today in CapEx, it would obviously increase from that number up to maybe $1 billion a year, which, based on the way the company is operating today, ought to be able to pay for it over that time period based on the cash flow of the company, as well as where we start. We may think about making sure that we've got enough liquidity because in a commodity business, you need to always think about the trough periods, and we'll evaluate that, and I'll talk to the Senior Leadership team about that. We'll bring that to the Board in the spring, but there ought to be, through normal operations, a way to finance that out of our current operations.
As you think about it, one final point, and then I'll take a breath, is from a scale standpoint, in 2023, we paid $1.7 billion in consideration for the Waggaman facility. And then last year, we returned $1.9 billion to shareholders between dividends and share repurchases. So, as you start thinking about $400 million-$500 million a year in the context of what we've done traditionally, it's manageable.
Since you, I heard you say it's going to be a 50%.
I just use that as an example. We said it's still 75% to %40.
But I took it as being 50%.
I used it as merely a.
Both partners are interested in this project. I mean, I get the impression from you that it seems kind of likely that you might have both.
So the range comes [crosstalk]
Not immediately.
Yeah.
Eventually.
So the range comes from, we said we weren't going to announce without one partner, at least one partner. So that gives the upper bound at 75%. And 40% is likely if we bring both partners around. We've been working with them far before I've been there for eight months. It's been a two-year process with them. They're both very excited about the opportunity. The Prime Minister of Japan was in the U.S., what was it, two weeks ago, talking about exporting clean ammonia into Japan for this purpose. And at this point, I'm sure I'll be on a call on the way back to the airport tonight to talk about where the latest the team is on getting the contracts locked down. There's a lot to get done here, but there's a lot of excitement across all the partners that we're talking to about pulling this project together.
One more on capital allocation. Assuming you increase your expenditures to $500 million a year, does that mean you have to back off on your share repo?
We will complete the share repurchase. We came into the year with $1.6 billion left in the $3 billion authorization. We are committed to get that completed by December of this year. As we look forward, after we complete that, I'm sure there'll be a discussion with the Board. Share repurchase remains a key part of our capital allocation decisions, but in any given year, we may lever that up or lever that down based on the capital needs of the core business.
So Bert, where are you getting the most interest and traction on your share of what this Blue Point project would generate?
So when you look at what we've been doing over the last several years, Greg articulated very well the process that we've gone through from FEED or idea to FEED to partners to destinations. Parallel to that, we've been working with customers because as you look on the carbon understanding in the world, what's happening in Europe, what's happening in the U.K., what's happening in the United States with government actions and/or company pronouncements of pursuing a low carbon path with different scopes; s cope one, two, or three, we've had discussions with, you name the industrial customer that is currently a customer or wants to be, whether that be ammonia, nitric acid, ammonium nitrate, or UAN, as well as agricultural customers, and specifically targeting the corn value chain.
With where we are with corn today and how corn is used in feed and ethanol and DDGS and exports, there is a desire in that value chain for how we can improve, and ammonia, low carbon and no carbon ammonia in that feeding of the corn can have a significant improvement in your carbon scores for California and for other states that are mandating ethanol changes, so that in conjunction with the ethanol producers decarbonizing their plants, you have a significant opportunity to improve that structure, and so how we're talking with customers is there's limited tons.
There will be tons coming out this year that are low carbon, and then as Greg talked about, by 2029, 2030, very low carbon product, but that's in the scale of the 10 million tons we produce today, which with the new plant will be over 11 million tons. There's really only going to be about 3 million of those that will be low or no carbon. I believe there will be substantial demand for those tons, and that premium that we're already communicating, which we expect, will be low at the start, and then it'll build as demand competes for supply.
And is it more likely that it'll be ag or industrial, or equal?
Yes.
Okay. You threw out on your call last week this to generate your return on capital, your WACC, $450 price.
Yeah.
We have our own algorithm on it, and we came up with the same thing. That return is well into the teens. If you can get closer to Corn Belt pricing like it is right now, is that a realistic scenario for you to be able to move your share of that through the NuStar pipeline and put it up into your storage tanks in the Midwest and put it down as low-carbon ammonia?
I'll give you the structure of ammonia as it currently stands. We are moving approximately 1.2-1.5 million tons of ammonia to ag, to our terminals that go to the ground of the four million tons of ammonia we produce. We'll be producing with the new plant over five million tons. We export tons today to OCP, to Europe, to our own facility in the U.K. , and so when you look at where that ton will go, it goes back to the economics and the competition for that ton. If you look at Europe today and the constrained ton in the world or the high cost, the marginal ton is that European production.
If you throw in not only the cost of gas, older plants, inefficient plants, and then the cost of carbon, that's going to be a very attractive market if you can backfill it with very, very low, 95% decarbonized products. So we believe the homes for these products will not only be attractive on a basis of desired, but on an economic position advantaged. So, hence a premium.
Are you lining up any of these customers for the second half of this year when your brownfield project is on stream?
I would say we're in conversations and in contractual discussions, and we have the same level of interest on the ag space. And so yes, we're having those. Do we have contracts today for those tons? No, because those tons aren't produced yet.
But it's soon.
It is soon. We're saying Q3.
The FEED study, is this an autothermal? We had Topsoe on our hydrogen conference a couple of months ago, and they're basically pitching their technology as 99% CO2 capture. Is that in the realm of what your FEED study concluded?
Yeah, so the technology that we've looked at is the ATR technology, and we see it in the high 90s%, mid to high 90s% in what we'd be able to do in reduction of CO2. Now, where the slippages are and what we actually execute at versus where maybe somebody is willing to give us a warranty at might be different, but we are striving for as little CO2 in the process as possible.
To be fair to them, that hot 99%, some of the hydrogen produced is then used to preheat the methane.
Yes.
So you wouldn't have to do that if you didn't want to get to 99%. You could go to mid 90s% %, but.
Yeah. We are building that plan in order to make sure it meets the needs specifically in the Japanese market and potentially other markets.
90% or above, is that roughly what they're expecting?
Roughly, yes. There's other markets that are evolving in that area as well.
I got to ask you about the green ammonia project. I mean, it's been, what, almost five years since you started that project to put in an electrolyzer. This ATR technology that can generate 95% or better CO2 capture and produce blue ammonia that's got a very, very low carbon footprint, does it render the path forward on green just really of more limited value?
Let me handle it from a technical side because in my former life at Bloom, I sold electrolyzers, right? So as you look at that space and you look at the project that we're doing in Dville, I would say we've learned a ton, not only in how to produce it, but where the market would be and how you integrate that into an ammonia loop. So I would say that was money well spent as we think about this market. As you think about green longer term, though, right, and you think about the cost comparison. So in a conventional ton of ammonia, call it $3.50, gas price, you've got about $90 in that ton of ammonia in energy costs associated with the hydrogen from the natural gas.
If you think about it from using an electrolyzer and using renewables to do that, it's about $0.01 a kilowatt, $100 a ton. So if you had $0.05 a kilowatt-hour energy cost, that would add $500, or you'd be at $400 additional cost on green versus blue. So I think the market has thought, and I agree with, that blue will be the first mover advantage given its cost benefit and its availability. As the world continues to build out renewables and harden those renewables to the point you can get those 24 hours a day and rely upon them at a reasonable cost, there'll be then some movement to green, but blue is where the action is going to be for the foreseeable future.
And then Yazoo City , you're going down the path of blue as well. Is that plant primarily just sell ammonium nitrate? And who would you sell that to as blue ammonium nitrate?
So every plant starts with ammonia, and we're right next to the Denbury Line, so easy access for us to integrate that plant into the sequestration setup. But yes, we make. That's actually our most diverse plant. So it is a large producer of explosive and ag-grade ammonium nitrate. In 2016, we flipped the towers where it was big ag, small industrial. Now it's big industrial, small ag. And we have load-out capabilities for barge, truck, rail. But that plant also produces DEF, nitric acid, UAN, urea liquor. And so I think we have a lot of options for that plant, but predominantly, if today's market were to reflect low carbon product, it would be low carbon ammonium nitrate. And we have, I think, demand for that from the explosives and mining companies that we work with today.
Very good. Why don't we drill into your brain on where nitrogen is right now? How would you characterize the current supply and demand for nitrogen in the U.S.? Let's start with the U.S. Where are we at right now?
Yeah, I think you can't extract the U.S. out without thinking about the world, but we'll start with the U.S., and I think we're in an exciting place for nitrogen, and specific to our company and industry. It's because of some of the dynamics that are taking place across the world with gas and supply and demand, but in the United States, we generally apply and utilize our products March, April, May, and June, and then the rest of the period is an inventory build, so when you look at where we are structurally today, we know that there's been less imports of product, and we're an import-dependent market. We've lost some production, some of that public, some of it not. We have exported additional tons. We, as CF, and the industry has exported, and then we have a pretty good handle on where the inventory carry-in was.
We think that was lower, so lower imports, higher exports, lower production, and lower inventory makes for a tight market. Eight weeks ago, urea, which is the placeholder for most of the nitrogen, was selling for $300-$320 a short ton NOLA. Today, that's in the $400 range, so we've seen almost $100 escalation in a few months because of those dynamics of we're approaching spring planting, and there's a need for inventory to be in place for that planting and then multiple applications thereafter, but I think one dynamic that wasn't taken into consideration is the corn-to-soybean ratio, where today, when you look at what is the opportunity for a farmer in whether that be dry land or irrigated farming, the corn-to-soybean ratio is at a very attractive place for corn, so I would say a quarter ago, we would have said 91 million acres of corn.
Today, we've came, well, last week we came out with 93. I would say as to the upside, when you talk to the grain companies, the crop protection companies, or the fertilizer companies, possibly up to 95 million acres. Every million acres is 75,000 tons of nitrogen demand as pure nitrogen. Convert that to urea, that's 100,000-150,000 tons of additional urea needed. So when you look at that, let's just say 3-4 million acres of corn is 400,000-500,000 tons of additional urea that's needed before, let's say, June. We're behind on imports back to the structure I gave you. Our number in the quarter was we need to import 2.5 million tons of urea in the next three months. It can't come in June.
It needs to come by mid-May to make it into barge, to make it to be usable in the Midwest. S o, very tight supply, increased demand, and then you go to the globe, there's not supply anywhere else in the world of abundance. India needs to import. Brazil will continue to import, and the secondary or third-tier agricultural countries that have been major buyers over and above what they did in 2023, Australia, Argentina, South Africa, Thailand, Turkey, they have continued to purchase, and so you can see there is not inventory build at the producer level. There's not inventory build at the retail level, but we need to continue to move these tons, hence a tight market, so I'm very structurally positive, at least through the first half of this year for the nitrogen complex.
How do you run your business differently when your view is expecting that much tightness?
I love it. No, just kidding. So what I do during that period is, I mean, I talk to a lot of different people in the markets. We're not a broadly-traded product, so it's not easy to say, "Oh, the price of gas today is $4.02, and therefore I will hedge at this price." In fertilizer, you don't have that capability. And so you have to be a student of the market. You have to be reading what's happening and visiting what's going on. I was in Brazil last month. I talked to people in China, in Australia, some of the Middle Eastern producers.
I have a friend who's sitting right over here who I talk to very frequently, MELI, when we'll be at a panel later on today. And so it's the information flow that comes in. Then at some point, you have to take a point of view and execute on that point of view. Early on in this process, we determined that the market was positively moving in our favor, and we executed accordingly, raised prices, and are expecting that demand to carry through at least through June.
So you raise pricing, and do you only lock in forward orders to a limited extent because you intend to raise your price again?
So this is a business that works off of logistics and movement. So you cannot say, "I'm going to wait for this market to move next week." You have to have an order book on that because we're shipping pipe, barge, rail, truck, and vessel. So you have to have an order book that extends for a period of time. But you're right, it's how far forward does that book go, or how pulled back is that book, depending on the point of view and how you execute against it.
I wanted to better understand Waggaman, how that is integrating into your business. Is it going in the direction that you thought? And are you able to increase the production rate given it's a similar technology what you have in Dville, and you've certainly learned plenty on how to increase operating rates and online capacity?
Yeah. So when we took the plant in December of 2023, very quickly in the first quarter in that area, we had suffered some weather events that disrupted our production. During that time, though, the team took the opportunity to make some changes to the plant that they had planned to do later in the year. So we accelerated that. Since we have brought that plant up and through the course of the year, we've gone from operating it, being operated at, call it 10% below nameplate. We have it up at 10% above nameplate, which is where we operate the majority of our facilities.
And that's really the benefit of bringing it into the system, taking not only the best practices of the engineering team and having them focus on it, but just having it part of a larger plan and leveraging spare parts and other things. Taking an orphan plant and bringing it in. So we've been very, very pleased with how we're operating it. We're doing all the work you would expect us to do in my world behind the scenes of integrating it into the system. And the team is executing on that. But from a plant operational standpoint, commercial view, we're quite happy with it.
Now we look at it just like we look at all of our business. We did tuck it in, but there was a time delay of looking at the contract, looking at how we maximize the value of that investment logistically, operationally, and Greg touched on many of those factors that CF can bring to the party and bring to a new asset and make that much more valued in our system than it is outside of our system. So we're leveraging all those points to improve the operational performance as well as the commercial.
Are you able to move that ammonia in through the NuStar pipeline?
Mm-hmm. Previous to us owning it, they were actually a large customer of ours because the pipeline could go that way as well. So yes, now those tons are integrated into the system of how we move and where we move and with whom.
Anybody want to jump in here?
I'm curious to get your thoughts. I mean, you're trading at about $1,500 a ton with free cash. You painted a pretty robust picture near term, which maybe take it to $1,400 per ton. The project, $4 billion, I think it was 1.4 million tons, is almost double that, $2,800 per ton. So understand your point on the shortfall long term, but how do you weigh that in terms of this capital decision? And what is the margin uplift versus your sort of on a through-cycle basis, if you can give us any color there to justify entry into a project that's 2x where you're trading at?
Yeah. So Steve didn't write about it, but a couple of other folks did. So we were kicking around thinking about this over the last couple of days. If you think about where we trade today, and you did it on a simple ammonia basis, you're missing a couple of different components of it, whether it be the value of the upgrade, capacity we have within the company, or just on an enterprise value. So just I think we can all agree Waggaman was a good acquisition based on how we've integrated that into the company and how that's added value. Depending on whether you use nameplate or where it's operating today, call that about $2,000 a ton. And it's ammonia to ammonia, so I think it's a good thing. If you look at then on the gross side, a couple of things I would challenge on the math.
At least you did it on short tons versus metric tons, which is usually the first correction I need to make from 32 down to the 28. The next thing I would challenge, though, is there's about $500 million of infrastructure investment in there for common facilities. The way that is structured, that will come back to us as a fixed return for the project at a return we're quite happy with, and that is leverageable for future projects if we choose to do them. So you really got to look at the core $4 billion net, which takes you down to about $2,500 a ton. The other thing I'll tell you is that $2,500 a ton versus the $2,000 a ton at Waggaman, you're looking at conventional ammonia versus 95%- 99%, depending upon where we come out, carbon-free ammonia. So how to value that?
You're either going to get value of that through a couple of different things. One is on a price premium that Bert is able to get, which I don't yet put into my analysis from a conservative standpoint. The other part of the value is, though, the 45Q credits and how you net present value back. We value the plant itself, after tipping and everything else, say we get 50% of those credits when you get back, NPV in 12 years of that at $10, bridges very closely from a $2,500 to a $2,000. So before the premium, I look at it and say, from a disinterested financial analysis, those things add up very well, and I can walk them forwards and backwards, and I feel good about it. Now, as that plant comes online, our expectation is that it'll be predominantly an export plant.
So the value in CBAM and where that comes out, that is an additional price that we haven't put into that analysis. I also haven't put into that analysis an improvement in the operations of that new facility to what we generally get, which is about 110% of nameplate. So all those things are yet included in those analyses, and I can bridge that gap.
Another question here, Roger.
Regarding the Waggaman facility, with what's going on, Röhm shutting down MMA, Cornerstone going through what it's going through, how does that impact the economics of your Waggaman facility? Does it have any impact at all, whether it be shared services or utilities, what have you?
I'll take it from a commercial standpoint. We have a relationship with Cornerstone. We do have shared site, and we do have a contract with them that we inherited. As they have changed their operation, there are some changes that impact the supply. We have plenty of homes for our product and feel very comfortable with all of that coming back to the market or back to us if needed. What that means to the site, I would say you probably should ask Cornerstone.
As we think about that site going forward and the investments we want to make into that, we've found them to be very good partners in helping us think about changes that we would like to see, what would be on their dollar versus our dollar, and how we progress on them. So we're just beginning those conversations with them as we've integrated it, but we found them to be a very good commercial partner on the operation side.
Thank you.
For the Dville Brownfield project, where you're putting in carbon capture, and you think sometime in the second half, third quarter, you're going to have product, will you likely sell the ammonia, assuming you're only targeting 60% capture efficiency of the CO2, and effectively sell blue ammonia that has a low carbon intensity, or would you sell more and just kind of dilute the carbon capture efficiency?
We do not desire to dilute the value of the carbon capture. There is a value to low carbon. This is the first real low- carbon product coming onto the market. And we believe, whether that's represented in ammonia or an upgraded product, that there will be demand for that and absorption into the market. Now, that may take some time, but no, I do not value, whether that's on any aspect of a business, diluting the value of what you've created.
Is it more than likely going to be U.S. destined, or do you think you could load a ship and send it to Japan?
I wouldn't say Japan because they've been wanting this 90%-95% that has driven our desire, not only of what we believe is a future market, but the current opportunity for us with Japan, with our Japanese partners for the co-combustion of ammonia with coal is an opportunity, but they have desired a higher decarbonized product, and so this product, whether we take it to the U.K., to the EU, or to our current North American base, still to be discussed.
And then maybe another one on near-term demand. You highlighted earlier that in your view, the U.S. market is low on inventory, so it's tight. What's your anticipation for spring demand? I think you made a comment last week that the fall application season was pretty good. Do you still see some spring ammonia application, or what's your outlook for any shifts in the robustness of the spring demand?
Many times, that's one determinant of that volume is weather. In the fall, do we have an open season? We kind of went through a little dry season, a little cold season, then December opened up, and we ended up with a very healthy season of and liquidating ammonia, at least for CF. What happens is, as we progress through Q1, we're refilling those spaces through the pipeline or barge system and anticipate having that fully ready for spring.
If it's an early spring, which has happened, where if you remember 2012 and 2013, we had applications in February and March, but if we were to start in March and have a longer dated, I think it'd be a challenge to supply all that because ammonia economically is a very attractive proposition relative to $400 NOLA urea. I think we're at $650 for ammonia in the Midwest, and so we have contracts on for ammonia for spring, and we have additional volume to take additional orders, so I see a robust spring, whether it's early or even later.
Can you make any comments about your demand from industrial customers at this point relative to historical levels?
Industrial demand is interesting in the United States in terms of where it is and for what products, and our industrial base is global in that we ship to North Africa and Europe, and some of it goes into South America, ammonia, that is, and our ammonium nitrate stays local, but we have seen very good demand on the mining side. We've seen very good demand on the chemical intermediate side, and we like that level or that tranche of that business in our system because it's ratable. It's 360, 24/7, but generally, that comes at a discount to the agricultural opportunities, so it's always a marrying of those two viewpoints to what we do, but we're seeing healthy demand in North America.
Very good. We're out of time. Please join me in thanking Bert and Greg.