Intrepid Potash, Inc.
Q3 2018 Earnings Call Transcript

Published: 30 Oct 2018

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Third Quarter 2018 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead.

[Matthew Preston:]

Thank you. 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, our Vice President of Sales and Marketing, is also available for questions after our prepared remarks. Alex Wagner, our new Vice President of Business Development, Oilfield Services joins us on the call today as well. I'll now turn the call over to Bob.

[Robert Jornayvaz:]

Thank you, Matt, and good morning to everyone. We delivered a solid third quarter highlighted by higher potash and Trio pricing and healthy operating cash flow generation across the business. We also continue to make meaningful progress in diversifying as evidenced by strong performance from byproducts and water. The strong results across the business combined with our increasingly diversified product and service portfolio is helping to create a strong and more competitive Intrepid as we work to utilize all of our assets and available resources to grow and thrive long-term. During the third quarter, potash pricing continued to strengthen up 11% compared to the third quarter of last year. We anticipate that average net realized sales price will continue to increase through the balance of 2018, and into 2019 with the most recent $25 per ton price increase in full effect beginning in the first quarter of next year. In addition, all of our solar facilities are now back in production mode after a strong summer evaporation season, which included a best ever evaporation seasoning prospect. This has left more tons available for harvest in our ponds which in turn makes us well position to benefit from the expected price increases as we enter our key selling season ahead of the spring fall. Prices for Trio are up 5% from the second to third quarter of this year as we focused on North American markets which typically carry higher net realized sales prices. We believe there's ample support for current domestic Trio pricing and we still view it as undervalued compared to other fertilizers and its nutrient components. We continue to focus on a price of a volume strategy in our international markets and have become increasingly selective as we choose which international markets to sell into. Our water business was solid again this quarter yielding a record $9.7 million in cash received bringing total cash received for the water year-to-date to $23.1 million. As a result, we now expect $28 million to $35 million in cash received for water this year and look forward to a strong 2019. We also delivered a record quarter for by-product sales which offsets 18% of third quarters total cost of sales. Our success this quarter was highlighted by healthy magnesium chloride sales, as well as increasing sales of water and brine. We continue to see positive momentum for our oilfield services businesses. We delivered a record quarter for brine sales which is now generating revenue at a rate of $150,000 a month which is more than the total initial capital cost to entire - install the entire brine's business. We also continue to educate the market on the positive impacts KCl usage in initial well production particularly in fracs, in higher clay formations and have seen our trucking and high-speed mixing services grow significantly in the past few months with multiple frac jobs completed and more on the books for the fourth quarter. We're continuing to invest in synergistic oilfield services through a dedicated sales team and as we announced earlier this month, we hope to accelerate that growth through a centralized leadership structure headed by Alex Wagner, our new Vice President of Business Development, Oilfield Services. Alex's background includes experience in drilling and completion of production activities, and especially also in fracing, as well as midstream opportunities, saltwater disposal systems and water handling and treatment technologies. Alex also brings with him significant M&A experience which will lean well to its leadership position as we focus on both organic growth and potential value enhancing bolt-on acquisitions. Welcome Alex, and I'll turn it over to him for a brief introduction.

[Alex Wagner:]

Thank you, Bob. Intrepid's locations in Southeast and New Mexico, and Utah combined with its position as the only U.S. producer of potash provide a unique touch point with the oil and gas industry. Intrepid offers as diverse a set of products and services as I have seen in my 20-years of experience which differentiates it from other providers of oilfield services. I am excited about the potential to grow these revenue streams and look forward to building upon the team's successes in my new role.

[Robert Jornayvaz:]

Thank you, Alex, and once again welcome to the team. Before I wrap up my comments, a quick update on our lithium progress and Wendover. We received the full report of the bench scale testing and remain significantly encouraged by the potential of iron exchange technology as a commercially viable method of production. Our next step is to methodically evaluate our options including the potential for a pilot plant to further verify the potential of our modest lithium reserve in Wendover. As we head into 2019, the work we've done to diversify our business lower our production costs and strengthen our balance sheet, have us well positioned to capitalize on the strengthening market for fertilizers, and other essential minerals. In 2019, we plan to continue to build upon solid foundation we have laid for our diversified product line, and look forward to updating you on that progress. I’ll now turn the call over to Joseph who will discuss our financial results and our outlook.

[Joseph Montoya:]

Thank you, Bob, and good morning everyone. During the third quarter we generated net income of $3.4 million or $0.03 per diluted share largely driven by increased pricing on potash and Trio and solid delivery of by-products, water and brine. Our potash segment generated $7.1 million in gross margin during the quarter. That's the highest gross margin we reported since we became a segment two years ago. Potash price increases and by-products sales drove a gross margin higher when compared to the third quarter of last year more than offsetting a slight year-over-year volume decline in potash sales. Our solar facilities came back online for production in August and early September and look to benefit from the strong evaporation season, and improvements in potash processing. Accordingly, we anticipate these facilities will yield more tons to harvest in the 2018-2019 solar production year than in the prior-year setting us up to capitalize on higher potash pricing as we enter 2019. Our Trio segment was close to breakeven this quarter predominantly as a result of the increase in fuel pricing as we intentionally focused on geographies with higher net realized sales prices. These near breakeven results were vast improvement from the $2.2 million gross deficit this segment yielded in the second quarter of this year and the $1.2 million gross deficit from Q3 of 2017. Trio sales volumes were down 7,000 tons during the third quarter compared with the third quarter of last year primarily due to lower international sales. Looking ahead, we expect continued pricing improvement for Trio domestically. The price increase we announced in early October will be effective November 1, and is expected to improve our Q1 2019 domestic net realized sales price. Overall, average realized sales prices may fluctuate to the extent that we sell it to international markets as we continue to build upon our established relationships to broad and also in order to manage inventories. For both the potash and Trio segments, our results were impacted by increasing freight rate driven by higher fuel prices and carriers operating at near full capacity. Although others operating similar geographies have been heavily impacted by trucking labor shortages, we have seen cost increases but we have not had any meaningful service disruptions. During the third quarter, we delivered $3.0 million in water sales and an additional $900,000 of water deliveries recorded as by-product. This brings our year-to-date water to $14.7 million in sales and cash received from water to $23.1 million. As Bob mentioned, we now expect cash received for water this year to be $28 million to $35 million. Exiting the quarter we had $9.1 million in contract liabilities relating to water representing cash received for future water deliveries. Third year SG&A expense was higher than the third quarter year ago but down compared to the second quarter of this year as expected. As we discussed last quarter, the reinstatement of the bonus program and the timing of equity grants drove this year-over-year increase for the nine-month period. We continue to expect our full year SG&A expense to be approximately $20 million to $21 million. Our liquidity position remained strong having increased our cash balance by $36 million during the first nine months of the year, and ending the quarter with no outstanding balance on our credit facility. Earlier this month, we amended our credit facility to extend its maturity to October 2023 to reduce the interest rates and the facility, and to increase available borrowing capacity from $35 million to $50 million. We remain well-positioned to pay the scheduled $10 million prepayment on our senior notes by year-end using cash on hand, and anticipate exiting the year in a continued strong liquidity position. Operator, that concludes our prepared remarks and we're ready to take questions.

[Operator:]

[Operator Instructions] Our first question comes from Mark Connelly with Stephens Inc. Please go ahead.

[Mark Connelly:]

Couple of questions. Once again you've produced substantially more Trio than you actually sold which has happened a couple of times in the last two years. How do you think about the inventory levels and what you need and where are you keeping that inventory?

[Robert Jornayvaz:]

Well first and foremost we've got plenty room to keep it at our mine sites and various warehouse relationships that we have. But we continue to look at Trio in much more of a historical perspective. We're clearly not seeing any satisfactory competition from the polyhalite guys. Key is right it’s clearly a competitive factor and I think as you've seen with the last two price increases that we announced and have been followed the market is definitely recovering its foundation and we’re seeing people more willing to buy because they see it as a solid market in more of an upward moving arena. So while previous significant price decreases that occurred over the last 18 months to 24 months cause the people not to buy production because they're being told that the price might go down, it changes the buying habits. And so we’re seeing the opportunity, we’re just seeing a changed sentiment if you will in the market as once we announced our last price increase in October, it was followed up pretty rapidly and that generates orders. So we’re just seeing a changed sentiment and markets move very differently in an upward trending market versus the downward trending market. So we see the strength, we're encouraged by the strength and we continue to see this as a very opportunistic market.

[Mark Connelly:]

One more question, obviously there is some by-product cost in your potash operation, but it looks like if we estimate standalone those results were extremely strong especially on the cost side. Is there anything we should be thinking about in terms of the potash business costs seasonally that might have made this quarter look better than it was or that we should be thinking about for next quarter?

[Joseph Montoya:]

This is Joseph Mark, thanks for the question. I don’t think necessarily. We continue to produce good results relative to our by-products, as well as our core production. And so while you generally speed lower costs in the fall and in early spring and higher as we go into evaporation season, that's generally what you expect. So a little bit of cyclicality but also there were low volumes in Q3 because of the shutdown at the beginning of the evaporation close I guess I should call at the beginning of Q3. So, but nothing more than the normal cyclicality.

[Operator:]

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

[Joel Jackson:]

Don, can you help us maybe handicap a little bit more with good evaporation season and expecting have better production year-over-year give us an idea of so where you're probably trending for next couple of quarters and maybe for 2019 how much better it could be?

[Mark McDonald:]

I guess I'm reluctant to do that Joel, just because of the uncertainty in the weather. We’ve had good evap season and therefore have decent kind of work in process in the ponds if you will. But we believe also that the monsoon season may have shifted in our New Mexico facilities causing a little bit more rain early in October than we usually get. We still think we’re going to have strong numbers in terms of production for Q4 going into Q1 but reluctant to put a number on it.

[Robert Jornayvaz:]

At the end of the day, we had an extremely strong evaporation season and Joel as you know you've been following us for several years. When you have a strong evaporation season and that puts plenty of tons into the ponds. We look forward to a strong upcoming next set of quarters and a very strong spring.

[Joel Jackson:]

And Don - thanks for that Bob. And Don, it looks like I mean trying to get all your water, different water numbers together. I mean are we in the next sort of while trending around 5 million a quarter of sales, are we’re going to see a step-up at some point in next couple of quarters like. How should we think about a charge with all the different data pieces you gave?

[Mark McDonald:]

Well as we’ve said repeatedly, the accounting and modeling for the water piece is going to continue to be difficult given changing frac schedules. But I would say that if you look at the overall trend, it continues to be upward and we have every reason to believe it’s going to an upward trajectory given the various things that we’re working on. And so we believe that it's an area that has a lot runway for us in various parts of our water system that water runway gets clearer and clearer. And as those water numbers become more significant as we've discussed, it may turn into its own segment reporting at some point. We're not sure if and when that will happen but we try to give as much color around cash received versus actual sales so that you can attempt to model both, but I do see a good strong clear runway for 2019.

[Joseph Montoya:]

I would certainly agree with that Joel, but I’ll also just add also that the topic that we've discussed in prior quarters relative to the volatility of the oil and gas industry in the areas in which we operate, we believe that they’re investing billions and billions of dollars. They are investing billions and billions of dollars and so we know that the need for the water is going to come and is going to continue, we’re just reluctant because of the volatility of their schedules to put numbers out there.

[Joel Jackson:]

Now only in the lithium pilot plant that I think you said you're going to build the next year or next quarters coming up. What is the purpose of pilot plant is it to produce carbonate, hydroxide and what kind of scale would you be looking at running here?

[Robert Jornayvaz:]

Well Joel I think if anyone knows more about lithium than you do I be - on lithium resources. So the first part is the bench test results look really good. I think we lean much more towards the carbonate plant if you will. We know we have a pretty good reserve that we referred to as modest, it's clearly there. We just - there is a lot of different opportunities as to how you might structure a pilot plant. So as we continue to update folks, we’re just going to continue on the update process. As you know there is evolving technologies, there's evolving companies all over the world especially in South America that are trying out new technology and if you look at some of the companies that are working on technologies here. The good news is we continue to see the opportunity for commercially viable production. So we're just going to keep updating as we move forward.

[Joel Jackson:]

You’ve got - I mean the point now where you’ve got a lot of cash build up, you hit on keeping on the debt. You seem to be out of the turn over some of the difficulty you had a couple years ago I mean what do…

[Robert Jornayvaz:]

We’re definitely are.

[Joel Jackson:]

What do you want to do next?

[Robert Jornayvaz:]

Well I think we’re pretty clear and we’re going to expand our water sales. We’re going to continue reducing our cost on our potash and Trio segment. We’re going to continue to diversify oil field services and midstream opportunity base that are clearly synergistic with our KCl and high speed mixing. So I think we've laid it out pretty clearly is there part that a segment that I didn’t cover.

[Joel Jackson:]

No, I’m just trying to see if you get your point where you want to buy back some stock, you feel comfortable doing that or something else in the cap allocation as you keep sort of generating cash?

[Robert Jornayvaz:]

That's a great question and we continue to evaluate our capital structure with every board meeting. And we continue to generate great opportunities as evidenced by our result. So there is a mixture of looking at all the tools in the toolbox.

[Operator:]

Our next question comes from Christopher Perrella with Bloomberg Intelligence. Please go ahead.

[Christopher Perrella:]

Thank you for taking the call. Question on the Trio business guys, when do you expect that to return to profitability. Is that spring 2019 or with the way sales are going can you hit that in the fourth quarter?

[Robert Jornayvaz:]

That's a great question. Let’s look at the positives and that that the price has stopped going down and is reversed and is now going back up. And so as we continue to work on cost containment and cost reduction, as well as leading the market on price increases, that market or that segment continues to improve as indicated by quarter-over-quarter and year-over-year results. And so we continue to expect the same path. So exactly which quarter that's going to occur in, I can't tell you but the trend is obviously in the right direction with an upward trajectory. And so that's what we're focused.

[Christopher Perrella:]

Question on the water cash, should we think of 2018 as sort of the base share for cash generation of that water business or are there some puts and takes that would move the cash collection around going forward?

[Robert Jornayvaz:]

As I said earlier, I expect a strong clear runway given bringing on Alex and the connections if you will, the agreements that we're working on. We just - we feel like we have a lot of room to grow that segment of our business. In terms of differentiating between cash and sales, I think we've spent a lot of time trying to articulate those differences and why we're reporting both. I guess I don't understand the last part of your question.

[Christopher Perrella:]

I guess the question is, is there anything that would - are there any risks to that cash generation from the water business to that being lower next year versus this year?

[Robert Jornayvaz:]

There's always risk. I mean you've got the opportunity - we could have the oil and gas business totally crater. And so if the oil and gas business were to totally crater and we could see prices go back down into the high $40s, then yes that could obviously have an impact. So if the oil and gas industry stays in the high $40s, $50s, $60 oil, our discussions with various operators giving the high commerciality of the wells that are in our neighborhood, we don't see anyone we're talking to in 2019, talking about reduced capital budgets in our neighborhoods. So I don't know if I'm answering your question but in the commodity world I've yet to find a commodity that doesn't have risks.

[Christopher Perrella:]

And then on the water how much of that business is coming from New Mexico and how much of that is coming from Colorado? Trying to keep politics out of it but with the ballot initiative over in Colorado, what's your exposure in each of the base and other states?

[Robert Jornayvaz:]

Zero exposure in Colorado. We don't have any water that we're marketing, selling or producing in the state of Colorado. In New Mexico that's where our water sales are. And so we don't see any risk politically. I guess is that your question given the ballot initiatives in Colorado versus the elections in New Mexico?

[Christopher Perrella:]

Yes. New Mexico, all the water sales in New Mexico and then you have some potash sales to oilfield customers in Colorado.

[Robert Jornayvaz:]

Well, that's correct. Colorado, Wyoming, Montana, Utah, so we do have minimal KCL sales into the Niobrara and the DJ Basin in Colorado. We've got a lot more going into the Powder River Basin up in Wyoming, the Piceance Basin, the Uintah Basin. So I can't give you a lot more color on which basins and why. But I think we have very little exposure to the Colorado ballot initiative.

[Joseph Montoya:]

And back to your kind of original question Chris, just a reminder, our Carlsbad facility is in Southeast New Mexico, which is part of the Delaware Basin, part of the bigger Permian Basin, one of the most prolific basins in the industry right now. So our exposure to Colorado as Bob mentioned minimal and where it continues just to service that area in and around our Carlsbad facility.

[Christopher Perrella:]

And just one clarifying comment then. So assuming no major swing in commodity oil prices, cash generation should be pretty much staying the course from water sales?

[Robert Jornayvaz:]

Yes, and hopefully growing.

[Operator:]

Our next question comes from Josh Spector with UBS. Please go ahead.

[Josh Spector:]

I apologize for another one on water here but I was just looking at the gross margins in the quarter relative to the first-half of the year. I mean I believe you guys talked about margins in the mid 80s, they were around 50%. I was just curios, is there something else in the other segment costs that isn't related water we should remove or is there something that I'm missing when I'm looking at that number for this quarter?

[Joseph Montoya:]

Well, it's a couple of things. As Bob mentioned in the prepared remarks, we had more frac jobs this quarter than we've had in any period prior. So there's a piece of it related to that. There were some additional kind of onetime costs related to water delivery that we don't expect to recur. So we would ask that you continue looking and modeling our business on the water on a pretty high margin basis similar to Q1, Q2.

[Josh Spector:]

And is there any make up for that in fourth quarter, like would you expect higher or just normal fourth quarter?

[Joseph Montoya:]

No, we would expect it to return to normal in the fourth quarter.

[Josh Spector:]

And then one on Trio. In terms of the transportation costs for the quarter, how much of that increase would you say was related with onetime items with the delays in 3Q and how much is just higher base case pricing?

[Joseph Montoya:]

That’s a tough one, I would say probably just generally speaking it's regular increased pricing. I don't know that there are any specific one-offs in Q3 relative to freight.

[Robert Jornayvaz:]

Mark is there - I mean there wasn't anything significant if you want to add any color to that?

[Mark McDonald:]

I think the one piece that was mentioned was some of the weather related events that we saw on the east coast and up through the Georgia area. Goodly part of our shipping goes into that area by rail. So there's going to be some freight related expenses related to the increase.

[Robert Jornayvaz:]

The two hurricanes?

[Mark McDonald:]

Correct.

[Operator:]

Our next question comes from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

[Jason Ursaner:]

First on the MLP business just following-up on some of the questions you got on production. You mentioned the best evaporation season ever at Carlsbad with more tons available next year, and then Joseph, you were kind of reluctant to estimate a production figure because of weather going forward. So I'm not asking to ping me down on a number but what type of variance could you get overall and given the strong evaporation grades you've seen so far would it be something on the order of 400,000 tons from the three ponds if weather were to stay, yes I guess within like a historical norm versus I guess what's the downside if you do get rain, is it 350 or is the variance something substantially larger than that?

[Robert Jornayvaz:]

I guess I would start with, we've always tried to explain the offset to lower cost through evaporation is weather variability. And so what we've always tried to give you is that we kind of build in a 10% variability concept that can be as high as 20% when you have very, very significant events. But the good news is given the evaporation season we know how much potash is actually in the ponds and so we feel very comfortable that our run rate and ramp up if you will for lack of a better term going into the first quarter and into the spring should continue to be as strong as it appears to be right now.

[Jason Ursaner:]

And then you kind of answered it in one of the previous questions but the initiatives in oilfield services with selling KCl into the drill fluids and mixing and the brine activity. I just got the sense there's some confusion on that versus the pure fresh water activity that you're doing in the Permian just because I think both are oil and gas related. So the oil field service activity that's lowering the net backs in potash. How much of that is coming from Carlsbad versus Moab Wendover. You mentioned going into the Powder River basin and the Mallory shell et cetera. And how much overlap do you see between the oilfield services piece versus just a pure freshwater piece?

[Robert Jornayvaz:]

Well the good news is as we’re using the freshwater piece to really build on the relationships and we started out with a high-speed mixing in the Rockies because we built our own equipment and have patents pending on the equipment that we designed and built ourselves at our Moab facility and then put into use in the Rocky Mountains. So we’ve been able to use our truck fleet and our work staff to help us execute on the high-speed mixing in the Rockies because of the synergies that exist with our Moab facility and our Wendover facility and the geographic locations. We’re seeing the same questions sales calls and so we’re building additional pieces of equipment at our Carlsbad facility as we intend to grow out that business in the same way that we did coming out of Moab and Wendover. So we will see the growth in that part of our business and when you include the water and the touch-points, we just now have so many more and ever increasing touch points with folks in the oil and gas industry whether it's their procurement teams or exploration teams, their drilling and completion teams. So the more touch-points and contacts and sales offerings that you have for them the more that you become an integral part of their businesses continue. So I don’t know if that answers it or gives you any more clarity.

[Jason Ursaner:]

No I appreciate the details. And what type of opportunity do you think that can continue to deliver I guess either on the revenue side or on the cost side over the next couple of years. I mean I know you guys don't really talk too much about cash cost but it looks like this quarter you were down to something on the order below $50 a ton which is pretty phenomenal as it is?

[Robert Jornayvaz:]

Well we just - we feel that everything we’re working on has the opportunity to grow and so we’re in a position where I think our product revenues have strong visibility to grow. Our Trio revenues have strong visibility to grow, our water has is a good runway, our oilfield services is now clicking and humming and clearly growing on a quarter-over-quarter basis. The additions we made to mag chloride opportunities are salt opportunities. Everyone of those various product lines now have a dedicated sales person, a comprehensive strategy and the results that we’re showing you quarter-over-quarter in our ability to not grow these very diversified line to make for a much, much stronger set of an income stream.

[Joseph Montoya:]

So Bob touched on all the elements of the income. I guess I would add to that the efforts we continue to exercise in projects we continue to execute on from the cost side as well for the core business. As you know part of our cost of good sales reduction has to do with the by-product credits that we’re taking but it also has a lot to do with their cost curtailment projects that we continue to work on.

[Jason Ursaner:]

And in freshwater you got to ask a little bit I guess going into next year kind of base year versus growth. And I guess just in your view there is a lot of news that’s been coming out about drilling and test walls very specifically in that Northern Delaware area. What do you see is kind of the opportunity for other major E&P to go to I guess a long-term procurement contract on water. Just what you see it taking for another customer to commit to something similar to the agreement you have with the first major customer.

[Joseph Montoya:]

I said the strong possibility and we continue to work on not only diversifying our water revenue from a very diverse set of customer base and well-financed well-capitalized customer base. I guess it's a clear runway as we've explained before we got multiple sources of water. Our water footprint covers about 3600/3800 square miles. So we just feel that in the area that we are and the very significant oil and gas wells that they're making in our neighborhood that there's just so much room for growth. I mean there's literally thousands of docks in the Permian and there’re continue to be increasing applications or permits to drill and the completion results continue to be outstanding. So we’re just very fortunate that we're in the part Delaware Basin that we’re in. The significance of the wells that they’re completing and the services that these companies are requiring provide additional opportunities for us.

[Robert Jornayvaz:]

Jason I would echo that and a little bit more color a very slight little bit more. There are several things that we’re continue to work on with different customers in terms of opportunities that will bolster 2019 results but it's too soon for us to give you any kind of guidance for 2019.

[Jason Ursaner:]

Would you anticipate providing for your guidance next quarter similar to how you did this year?

[Joseph Montoya:]

I hope so it helps everybody.

[Jason Ursaner:]

And just last question from me optically this was the first quarter you swung to GAAP profitability, but I guess it's a little meaningless capitalized because you’ve been generating cash all year because of the depreciation base. And you’ve done almost 40 million of cash for year-to-date which I guess that 10% yield. Do you get the sense talking with investors and analysts they are still a lot of people that view this as a company that's still emerging out of the stress though?

[Joseph Montoya:]

Absolutely. We've got - as we've said repeatedly we'd rather report results and report the success of our strategy rather than make promises. And so as we've given the market color as to opportunities and directions that we're headed, we've now very clearly begun to execute on those results and we’ll continue to as this strategy becomes very, very clearly evident and the results sustain themselves and provide more color around that. We’ll be out there explained to the market everything we intended to do.

[Operator:]

Our next question comes from Deforest Hinman with Walthausen. Please go ahead.

[Deforest Hinman:]

Couple of questions, on the potash side some headlines about some letter fall conditions maybe more in the Midwest than your geographies. But does that give us an outlook for maybe higher ton numbers in the fourth quarter versus third quarter or am I over thinking it?

[Robert Jornayvaz:]

In terms of sales?

[Deforest Hinman:]

Yes, sales volumes weather field conditions?

[Robert Jornayvaz:]

I don’t see that having a major impact on us given our geographies and the markets that we’re selling into. Rain always helps in the state of Texas and so when we look at our backyard markets they’ve all got adequate if not some substantial moisture. So we just - everything is pointing towards a very strong planting season for the spring.

[Deforest Hinman:]

And then just for clarity if you're willing to disclose it what was the announced Trio price increase for October?

[Robert Jornayvaz:]

Mark you want to walk through the details of that.

[Mark McDonald:]

So they announced - Deforest Mark here, they announced Trio price increased by Intrepid was a $15 price increase on our Trio products for an order period to the month of October followed by that price will take effect November 1.

[Deforest Hinman:]

And then does this one is for Alex I’d like to hear his opinion he has been there for not a long time, but what are the opportunities that you see going forward in your roll and how quickly do you think you can execute on those opportunities?

[Alex Wagner:]

Well you're absolutely correct I have been here very long in fact it’s only been a few days. So I appreciate the question it's probably a little early for me to begin to comment on some of these things. So if it's all right I'd like to perhaps reserve that from another time.

[Deforest Hinman:]

And then on the DUCs in the fracing outlook. I mean it seems like a lot of things are aligning, there's been a lot of headlines about takeaway capacity, but an earlier question from Jason on the geographies of where the drilling is occurring, can you help us understand those two factors and whether they're at all limiting those water sales from a revenue perspective?

[Robert Jornayvaz:]

I want to make it really clear that in the northern part of the Delaware where we're located are some of the best wells in the Permian basin. If you look at Devon's big bone wells they are white paged anywhere from 9 to 12,000 barrels a day. So what was your question about the oil and gas activity around us limiting is.

[Deforest Hinman:]

So, I mean I think a lot of people want to see from the optics. The cash flow is great obviously. The revenues in that water business really take off and there's been numerous articles about takeaway capacity and there's all these DUCs, but the way you're seeing is it limited by takeaway capacity or they're four or five miles further to the west once that takeaway capacity - concerned into revenue.

[Robert Jornayvaz:]

Yes, if you look at the takeaway capacity, there are two major pipelines under construction coming out of the Permian. And so I think the takeaway capacity because of the very clear arbitrage, I just see the midstream part of the business in terms of takeaway of oil and gas produced in the Permian basin as an extremely solid opportunity as evidenced by the fact that two major pipelines are under construction as we speak. And as you look at the need for salt water disposal and the systems around that, the great thing about having Alex on board now is our opportunity to participate in areas where we have land, we have employees, we have experience and opportunities in terms of our ability to drill things and operate things. We move 100s and 100s of miles of complex brine pipelines already. So our ability to take our technical team and given our geographic location and turn some of those opportunities into midstream opportunities for ourselves, as well as provide services. We just couldn't be located in a better geographic locale. So I'm still - I don't see takeaway as being a major issue when you look at the long-term nature of our assets and the long-term nature of our play. It may provide for quarter-over-quarter bumpiness but the good news is the substantial takeaway capacity being constructed.

[Deforest Hinman:]

And then the last question you talked about the lithium project briefly but just very, very high level. Is that something that you feel you need a partner to work with to do that project or would you be willing to go on your own from a capital perspective if we were to move forward investing in that project?

[Robert Jornayvaz:]

Well, I think that project has numerous options. And so there are partners out there that would like to partner with us. We have the opportunity to do it ourselves. So as we continue to look at it and talk to other people in the industry, we realized the opportunity in front of us. So the great thing is that we've created optionality for ourselves and that's always where you want to be. So, we know that there is a reserve there, we've categorized it as modest. The bench testing has yielded solid results. And so once again I think with just with a minimal amount of cash proven up a nice opportunity for us that now has optionality in terms of how we finance. So those are all good things that are moving in a positive direction.

[Operator:]

Our next question comes from John Evans with SG Capital. Please go ahead.

[John Evans:]

I was curious, can you just give us the same kind of trajectory on the pricing that you did on Trio. And if Trio is $15 and it's going to go up on November 1, so does that mean you get about two-thirds of that price realized in Q4 and then you'll get all of it in Q1 roughly?

[Robert Jornayvaz:]

I think that's a fair way to look at it. Mark if you want to give any additional color in that but I just want to remind you that we're still at about $120 to $130 variance between the value of the nutrient components and the price of Trio. So I think that when we look at the other markets that we're competing against and the value of the nutrients that are in Trio, because you're delivering all the essential nutrients of potassium, magnesium and the sulfur with no chlorides in one granule, I think that there's great opportunity as evidenced by what the price was in the middle of 2016. Mark, I don't know if you want to add some color to that.

[Mark McDonald:]

Certainly when we look at Trio as Bob mentioned the value equation there's opportunity for some price growth. As we look at the fourth quarter, some of the orders that we've taken here in October were shipped through the remainder of this quarter. So there might be a slight muting affect on the full effect to that $50 price increase. That being said, we're well positioned to take advantage of some the spot - orders of spot tons that may occur in the marketplace. So I'm certainly in good shape through the fourth quarter and into the first quarter.

[John Evans:]

And then can you give us the same kind of outlook for potash. So of the price increase you spoke of, how much was it and when does that go into effect and how do you kind of see it playing out in Q4 and Q1?

[Robert Jornayvaz:]

Well, as you know from reading, everything that's out there in the public. Mosaic announced a $15 price increase and then Nutrient took that price from $15 up to $25 up. And that pricing has been achieved already in our spot markets. So we expect to fully realize the entire $25 especially seeing what we're seeing in the Brazilian market and the international. The strength in the international market we're clearly saying Nova and the Midwest markets firm up. So we fully anticipate the full realization of that $25.

[John Evans:]

And then just on the water side, the receivable was 9.1 this quarter. Last quarter it was 7.3.

[Robert Jornayvaz:]

No, no. You missed that. So the 9.1 that we've talked about is the contract liability. That's cash we received actually in the bank for future water deliveries. That's not a receivable.

[John Evans:]

I'm sorry. But that's from your big customer, right, the 9.1?

[Robert Jornayvaz:]

Right. But as you know we don't carry water on our balance sheet. So there's no value that appears on our balance sheet for the value of our vast water rights, and so that's what makes that peace little confusing to a lot of people.

[John Evans:]

I'm sorry I misspoke on how I said it, but it was 9.1 this quarter, last one it was 7.3. So the difference is 1.8, so it looks like your big customer took the most water that they've taken all year so far what they did in Q3; is that right just roughly the math?

[Joseph Montoya:]

Yes. In that you're spot on.

[Robert Jornayvaz:]

Yes. And it's ramping up. And so they're taking more and more as their frac schedule kicks in.

[John Evans:]

And I'm sure it's not you divide by four but basically that customer is supposed to get about little under $4 million, $3.75 million a quarter or something, right?

[Robert Jornayvaz:]

Yes, that's right.

[Joseph Montoya:]

That's higher than that.

[John Evans:]

And then just relative to that question, let's say we get to the end of the year and you can pick a number whatever this contract liability is. How are your accountants going to have you, have it for the next year? So is that contract liability going to continue to grow, does it just wash away? And I mean I know that you don't have to give the money back but does it just continue to build over time if for some reason they slow down?

[Joseph Montoya:]

So you're kind of getting into a very technical accounting realm but I'll give you the cliff notes. There will be a point in time from a revenue recognition perspective that we would start converting that liability into revenue even if they didn't take it just by the nature of the underlying contract. That being said, we don't think we were close to that yet and we will continue to calculate the contract liability on the quarter-to-quarter basis. As you know this is a five-year agreement and so just doesn't stop at the end of this year and wash away to use a term or start over, it's something that will continue to manage over the five-year period.

[Robert Jornayvaz:]

I just want reiterate a high-class problem.

[John Evans:]

Yes, no I understand. Just and then last question I have and it's a little bit in the weeds but last quarter you guys took a reserve because you thought a customer over accrued et cetera for water. And then you ran it through the P&L, have you figured out anything if they didn't take that water et cetera or what was the resolution?

[Joseph Montoya:]

Yes, I don’t want to give into it's too much detail there is the agreement with us and the customer but it all have been resolved in the third quarter.

[John Evans:]

And you'll have more detail of it in the Q then?

[Joseph Montoya:]

There is some language in the Q that speaks to it yes.

[Operator:]

Our next question comes from Mark Connelly with Stephens Inc. Please go ahead.

[Mark Connelly:]

Just two more questions on Trio. You've talked about overseas sales as being an opportunity. Are you still seeing the encouraging signs that you saw earlier. And related to that you mentioned that you are changing the way you were thinking about freight and scheduling for overseas, are you getting the benefits from that that you were looking for?

[Robert Jornayvaz:]

It's starting to happen absolutely. I think you'll see we’re not giving guidance some more sales in the fourth quarter that are profitable. And so we've really zeroed in on the market, but equally it’s important is that our major competitor in the international markets has begun raising prices in the international markets instead of taking pricing down. So once again we’re seeing the reversal of price decreases to price increases in the international market. And as we've said on a lot of our calls, we felt like we needed to wait out the storm and we clearly done that and now the proof is in the pudding. I just would continue to remind you that we’re saying strong pricing in the components that make up Trio. And so the value differential is still significant between Trio and its nutrient components. So we’re seeing price increases internationally and we’re seeing some of the benefits of working towards larger shipments to specific customers to reduce the freight costs and those two combined make certain markets much more attractive.

[Operator:]

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

[Robert Jornayvaz:]

I just want to thank everyone for their time. We really appreciate your time and interest in Intrepid and look forward to reporting our fourth quarter results early next year. So thank you again.

[Operator:]

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