Prepared remarks
Good day, ladies and gentlemen, and welcome to CF Industries First Half and Second Quarter of 2020. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key. We will facilitate a question-and-answer session toward the end of the presentation. I would now like to turn the presentation over to the host for today, Mr. Martin A. Jarosick with CF Investor Relations. Sir, please proceed.
Good morning, and thanks for joining the CF Industries earnings conference call. With me today are Christopher D. Bohn, President and CEO; Bert A. Frost, Executive Vice President and Chief Commercial Officer; and Andrew T. Scribner, Executive Vice President and Chief Financial Officer. CF Industries reported its results for the first half and second quarter of 2020 yesterday afternoon. On this call, we will review the results, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect your performance may be found in our filings with the SEC, which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.
Now let me introduce Christopher D. Bohn.
Thanks, Martin. Good morning, everyone. Yesterday afternoon, we posted results for the first half of 2020, in which we generated adjusted EBITDA of $2.2 billion. These results reflect the CF Industries team's strong operational performance and a tight global nitrogen supply-demand balance, which was further strained by the conflict with Iran. Most importantly, our teams continue to embrace our 'do it right' culture to deliver outstanding safety performance. We closed the quarter with a trailing 12-month incident rate of 0.16 incidents per 200,000 hours worked, well below industry averages. That focus on safety directly supported high asset utilization in the first half. We operated our available ammonia capacity at nearly 98%, enabling us to meet demand from our domestic retail, wholesale, and cooperative customers who supply North American farmers. In addition to our strong operating performance, we are making steady progress on our strategic initiatives. At BluePoint, we have received all necessary permits to begin construction. Nearly all long-lead items are ordered, and module fabrication is set to begin later this year. Within our existing network, we expect our Yazoo City complex to resume operations in 2026 after completing work to improve the site's long-term sustainability and operational flexibility. We also continue to be disciplined as we evaluate high-return projects across our network to unlock further value. As you saw in our presentation, we have raised our mid-cycle EBITDA and free cash flow expectations. In a moment, Andrew will address more of this, but I want to address the broader market context first. Right now, we believe the market views a disproportionate amount of our EBITDA and free cash flow growth primarily through the lens of short-term geopolitical friction in the Middle East. That view misses a fundamental structural shift in our industry that has been occurring over the years and was exposed through the recent global nitrogen supply chain dislocation. Higher global capital costs have structurally raised the incentive price for new global nitrogen capacity, lifting CF Industries' baseline mid-cycle earnings power while reinforcing the value of our existing manufacturing and distribution network. This is before we factor in any geopolitical premium. To be clear, our low-cost, low-risk North American asset base—and not geopolitical risk—is the foundation of our profitability. Our ability to operate at high utilization rates during disruptions enhances our stable mid-cycle return profile above and beyond the strong free cash flow generation already embedded in our outlook. This, in turn, augments our ability to invest in high-return projects and return capital to shareholders. With that, I will turn it over to Bert to discuss the global nitrogen market. Bert?
Thanks, Christopher. The first half of 2020 saw rapidly changing global nitrogen market dynamics. Global prices rose significantly as an already tight supply-demand balance was further constrained by supply disruptions from the conflict with Iran. In regions where application seasons occur in the second half of the year, many customers deferred purchases. In North America, agricultural demand remained strong through most of the first half of 2020, led by ammonia and urea. Our team created significant value by leveraging our operational flexibility to prioritize urea production over UAN. It also enabled us to deliver our second-highest DEF volumes in the first half—our highest-margin product. In June, however, our customers slowed purchases of nitrogen, and channel inventories were drawn down to very low levels. Those low inventory levels ultimately drove strong participation in our UAN and ammonia fill programs in July. As a result, we built a substantial UAN order book that extends into November and expect a strong fall ammonia season. Looking at the broader market, global nitrogen fundamentals remain tight even before factoring in geopolitical conflicts. Rising capital costs, permanent closures, and the limited pace of new capacity additions have kept supply growth constrained relative to demand. Additionally, a meaningful portion of global nitrogen capacity remains exposed to geopolitical uncertainty, and this exposure has further tightened the global nitrogen supply-demand balance. We believe this will continue to affect supply availability, delivery confidence, and pricing due to higher logistics and insurance costs. Additionally, high LNG prices continue to pressure production economics for marginal nitrogen and are likely to limit operating rates. We do expect China to export urea volumes similar to last year. Those exports are necessary to meet global demand, but they are not enough to materially loosen market fundamentals. On the demand side, we expect purchasing activity to recover in deferred regions such as Brazil and India. We also expect North American demand to remain firm through the upcoming application seasons. Taken together, we expect the global nitrogen market to remain tight into 2027. Looking further ahead, we see continued structural tightening through the end of the decade as nitrogen capacity currently under construction falls short of historical demand growth. Finally, our low-carbon sales program continues to gain momentum. Approximately 10% of our ammonia sales volumes in the first half were low carbon and earned an average premium of more than $20 per ton. With that, I will turn it over to Andrew.
Thanks, Bert, and good morning, everyone. For the first half of 2020 the company reported net earnings attributable to common stockholders of $1.3 billion, or $8.71 per diluted share. EBITDA and adjusted EBITDA were both $2.2 billion. For the second quarter of 2020, the company reported net earnings attributable to common stockholders of $727 million, or $4.73 per diluted share. EBITDA and adjusted EBITDA were both $1.2 billion. We continue to efficiently convert EBITDA into free cash flow. Our trailing 12-month net cash from operations was approximately $3 billion and free cash flow was approximately $1.8 billion. As you can see on Slide 10, our EBITDA to free cash conversion is consistently high, producing predictable and stable free cash flow. Over the last 12 months, we have returned nearly $1.3 billion of free cash flow to shareholders. This includes repurchasing 10.6 million shares for $958 million and $314 million in dividend payments. In July, the board increased our quarterly dividend by 20% to $0.60 per share. As we have reduced the number of shares outstanding over time, we are able to reward the remaining shareholders with a higher dividend. For context, since the start of 2021, shares outstanding have decreased 29%, and over that time, our dividend has doubled. Looking ahead, we continue to project approximately $1.3 billion of capital expenditures in 2026, of which CF Industries' portion is approximately $950 million. With construction at BluePoint expected to begin in August, the pace of capital expenditures will accelerate. We continue to focus on mitigating our cost exposure through fixed-fee contracts. As we have advanced BluePoint activities and evaluated additional projects, it has become clear that the cost of building new nitrogen capacity in regions with low-cost natural gas has increased, narrowing the construction cost advantage those regions have historically enjoyed. As you can see on Slide 9, these higher costs mean that the urea price required to bring new capacity online has gone up as well. Based on our analysis, this supports a baseline mid-cycle EBITDA for CF Industries of approximately $2.9 billion and free cash flow of $1.7 billion. You can also see that decarbonization, BluePoint, and other margin-enhancing projects provide upside to our baseline. By 2030, we expect these strategic initiatives that are in flight to raise our mid-cycle EBITDA to approximately $3.3 billion. And as Christopher noted, this is before any geopolitical premium for higher freight and insurance costs and constrained global supply. These near-term dynamics provide fuel for growth and a greater ability to return capital to shareholders. With that, I will hand it back to Christopher before we open the Q&A. Thanks, Andrew.
I want to thank CF Industries employees for their commitment and dedication during the first half of 2020. The team continues to deliver safety and operational excellence while skillfully navigating our ever-changing global marketplace. As you can see on Slide 12, CF Industries has a long track record of driving value for long-term shareholders by increasing production capacity and decreasing the number of shares outstanding. This has increased investor participation in our underlying assets by more than 40% since 2020. We expect to build on this track record in the near and long term. We have a premium-grade asset base, proven operational capabilities, financial strength, and substantial high-return strategic opportunities. The global nitrogen fertilizer supply-demand balance remains tight, and rising capital costs across the globe have structurally elevated our baseline mid-cycle earnings. Against that backdrop, we believe CF Industries stands apart. Our mid-cycle EBITDA expectations continue to strengthen, our free cash flow generation remains highly predictable and durable, and we are well positioned to continue to create value for long-term shareholders. With that, operator, we will open the call to questions.
Questions and answers
We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your touch-tone phone. The first question comes from Ben Isaacson of Scotiabank. Go ahead please.
Thank you very much and good morning. My question is on your new mid-cycle price of $410 a short ton for CF. Can you talk about how much of that change is related to capital cost inflation versus how much is related to any structural or sticky changes that you see as a result of the conflict in the Middle East? Thank you.
Yeah. Thanks, Benjamin. Maybe for starters, I would just take a step back and say as I look back at our performance since the beginning of 2020, we have averaged over and above that $1.7 billion free cash flow that we have as the mid-cycle by quite some amount. So it is not as if the empirical data and how we have performed and really how we have set up the company by increasing our production capacity and also lowering our fixed charges to get our free cash flow conversion where it is has not been successful. Sometimes we do not always feel like that is being recognized, but we have been performing at that. What I would say is construction costs and the gap between the U.S. and the rest of the world has closed. You are seeing labor, procurement timing, different things with being able to use module yards where that difference between a U.S. project and a global project has changed drastically. Then, to your point, there are certain costs associated with this geopolitical event that are going to remain structural. If you look at freight, for instance, freight from the Gulf to the U.S. is about $70 where a year ago it was $35. Do we expect that to snap back to $35 and not have any type of structural piece to that? Probably not. But is that $5 to $10 there? Is there a few dollars in insurance cost? Different vessel configurations and a risk premium based on where those assets and really the supply offtake is happening. I think as we look at it, really from a NOLA price perspective, we are saying we have moved from $355 per short ton to $385. Of that $30, there is probably $10 that may be associated with structural changes that do not go away as a result of these geopolitical events. Then the remaining amount probably exists due to higher capital cost and really a closing of that gap between U.S. construction and outside the U.S.
And maybe let me add a little color. Hi, Benjamin. This is Andrew as well. As you look at that price going from $3.55 to $3.85, the underlying assumptions we have are this is for a call it, 1.3 to 1.4 million ton capacity site with a CapEx estimate of about $2.6 to $2.8 billion. If we assume $3.50 natural gas and a 10% to 12% financial return, that is how you get to the $3.85 price. You then use our economics and it gets to our EBITDA of $2.9 billion. One piece that I want to call out of what is in there and what is not in there is, you know, we also gave some color around $400 million over time by 2030 that will get you to $3.3 billion. Out of that $400 million, $300 million of that is BluePoint and $100 million is additional carbon capture benefits we will get out of Donaldsonville and Yazoo City. The way to think about that—what is not in there, and I will do this illustratively—you likely saw that we are pursuing a FEED study for DEF. Because that has not been officially greenlit yet, that is not in that $400 million. If we get to that point through an investment decision, it will go in there. Likewise, as we are starting to realize the benefits at Donaldsonville on carbon capture, that should shift left into that $2.9 billion. It is really a function of the capital cost. And as Christopher mentioned, there is probably some context around a little bit of a geopolitical premium there, but it is really capital costs and realizing the benefits on carbon capture. So hopefully that helps.
That is great. Thank you.
The next question comes from Joel Jackson of BMO Capital Markets. Go ahead, please.
Hi. Good morning. It seems like looking at yourself and your peers' results, ignoring some of the lower volumes in Yazoo City, there is a bit of a buyer's holiday in nitrogen in Q2, and we all know what happened with commodity prices—nitrogen prices—across the quarter. Urea, the war started and prices came down. Wonder if you could talk about that. What does that set up for the second half of the year coming out of the last, I do not know, five, six months of volatility?
Yeah. Interesting view, Joel, and I think that did happen in different places around the world. As prices escalated, especially in April and May, you definitely had a pullback in Central and South America, where the necessity to purchase was really to put into inventory because applications are later in the year, specifically for the big applications in Brazil. But you also had pullbacks from Australia and Southeast Asia, and the Northern Hemisphere was completing the application season. We did see some movement in North America, as I mentioned in my comments, with movements among products with additional urea. So we pivoted and produced more urea as well as DEF, and that limited a little bit what our UAN availability was. But I think overall prices did impact some places where you could defer demand, and we saw that happen. As the data's coming in, there may be a possible small cut in consumption in North America, but not as big relative to the other nutrients. Then the second half, we are bullish. When you look at what we have put together with our UAN fill program, the team did a great job of working with our customers, organizing that, and getting it executed well. The average price on that is probably close to $300, and our program extends into Q4. So good solid demand and good movement—we are already seeing that. I mentioned in my prepared remarks about the fall ammonia season with very good uptake, and we are just now positioning product in our terminals to serve that demand in November. When we look at the ag cycle, pricing, and customer uptake on the retail and wholesale side, which we know has been pushed down into the farmer, we see good positive traction through 2027.
The next question comes from Lucas Charles Beaumont of UBS. Go ahead, please.
Thanks. Good morning. I just wanted to follow up on the outlook. Given the soft demand in the second quarter, a more compressed timeframe for deliveries in the second half, still impacted global supply issues, and increasing cost curve support as well from European gas—how do you see the setup for pricing as we move into the fall and the spring? Is there a point where the market will rapidly tighten and expose low inventory levels as demand picks up? When would that timing be? And is that setting us up for much higher in-season U.S. premiums again coming up? Thanks.
Good morning, Lucas. Regarding the soft Q2 demand and the deferrals in the Southern Hemisphere, we do believe that is going to catch up. You are seeing that in India with the most recent tender. We anticipate India to be an import demand of 9 to 10 million tons, which is over what they were last year. We are seeing positive movement in South America, and we expect some grain price movements to incentivize additional consumption. The compressed deliveries are going to be a poor lineup for some of these folks, but the values have come back down to attractive levels, and lower pricing will incentivize demand. You are right that EU gas structure is at a disadvantage with $18 to $20 gas at a differential to the world that makes European operations constrained; we believe it will result in a higher level of imports there. With where we are in the ag cycle and the pricing for feed grains and nitrogen consumption, we're constructive for the back half of this year as well as 2027. I do think there will be some tight pricing to come. We still lost about 5 million tons from the Gulf area or from countries that were unable to get LNG. We are seeing a little bit of movement out of China for exports to replace some of that, but probably in the 5 to 6 million ton range, so kind of a net zero. With places constrained with LNG or that cannot afford LNG, you will see some production cutbacks. On balance, we see a tight market through next year.
And I think Bert talked about what is happening in Europe—seeing prices come down but not feedstock costs come down—you will probably see more constraints there, as we have seen over the years where curtailments and shutdowns occur. On top of that is one area we do not know: what happens in the Gulf area. As Bert mentioned, that is a significant amount of volume that needs to supply the world. If you see curtailments in Europe and still some on-and-off-again disruptions in the Gulf area, that will determine pricing. Volume-wise, as he mentioned, we feel very strong about what we are seeing.
Thanks. And then just on Yazoo City: the repairs have been pushed back a little into the first half of 2027. What are the swing factors in terms of hitting the timeline, including the business interruption insurance covering income and costs? Are you looking to do anything different at the site with the rebuild that could deliver benefits after it is finished? Thanks.
Yeah. I will take this. As we put out that we thought it would be late 2026, that was preliminary information on what needed to be done and the procurement timelines. As we've seen with many projects globally, procurement timelines have extended, primarily for electrical gear, and that is why we've moved it into the first half of next year from a timing standpoint. As we have gained more information and better insight, that influenced the change. Related to the site itself, we are changing how the site's configured. We will no longer be pulling ammonium nitrate down there; we will be producing ammonium nitrate solution along with ammonia and DEF. We are building out increased flexibility both from an operational and logistics standpoint where we will have a broader customer base to supply throughout the year. We are excited about the opportunities and changes at that site to make it more sustainable long term. I will turn it over to Andrew now to talk through some of the insurance side.
Hi, Lucas. I will give a little color on three buckets: accounting, the insurance piece, and a bit about capital. From an accounting standpoint, in Q4 of last year we recorded $25 million in impairment on machinery and equipment. In Q2, we took another impairment of $23 million for equipment we will no longer be able to use. So total, that is just shy of $50 million of impairments we have taken. On the insurance recovery to date, it has been about $75 million. We had $25 million of property damage that we recorded in Q1 and received in Q2. We have had $50 million of business interruption insurance. To date, it has been about a 2-to-1 ratio. Longer term, it will probably play out closer to a 3-to-1 ratio. That business interruption insurance covers us for about 18 months. I want to make this clear: we are not including Yazoo City in our capital guidance for two fundamental reasons. One, we expect the insurance recovery to offset that capital build cost; and two, the timing is dynamic. The timing of the capital between the back half of this year and the first half of next year will be dynamic, and the insurance recovery will be dynamic. Over a longer timeframe, they will offset each other, which is why we are not specifically guiding that right now.
We are ready for the next question. The next question comes from Benjamin Theurer of Barclays. Go ahead, please.
Hi. This is Rahi on for Benjamin Theurer. Maybe on supply and demand: are you seeing any impacts from the extra Texas capacity this year, like Gulf Coast ammonia, Woodside? Or is this largely offsetting Trinidad volumes? And maybe medium to longer term, how do you expect this to affect supply and demand once the impacts on the Gulf region settle down? Thank you.
When you look at the Texas plants, there has been a long lead to their full production and I do not think they are still at full production. Those tons have been absorbed and moved around the world under contracts. With Yara purchasing the Gulf Coast plant, I assume a lot of that product will go to Europe, offsetting production cutbacks. Trinidad is one that took tonnage off the market. On the demand side, there have also been negative impacts from phosphate producers cutting back due to limited supply of sulfur and sulfuric acid, which has limited phosphate production and therefore ammonia consumption. The market came off the highs of Q2 and is today balanced in the $600 to $700 range depending on destinations. We see the Gulf Coast and Woodside plants coming up to full production and being absorbed into the market.
Longer term, we have discussed how global supply and demand is tightening independent of what happened in the Gulf. If you look at the slate of new projects projected to come online between now and 2029 or 2030, there is just not enough to meet demand. Even if there is some resolution in the Gulf, there are other issues—sulfur supply, etc.—that will sustain demand. We still think there is a structural tightening through the end of the decade in the nitrogen market.
Thanks for the color. Quick follow-up on Yazoo: can you walk us through the thought process of producing AN, UAN, etc., there? Why not produce only urea given urea's superior margins over the last decade?
From a urea standpoint, you are right: urea is a key catalyst for why we expect global nitrogen to tighten. The urea plant at Yazoo would have to be a full-blown new world-scale urea plant, and we evaluate the opportunities Bert's commercial team has put together for AN, UAN, and DEF. It would not make sense to put that type of capital at that particular site given the alternate opportunities. Courtright, for example, has an upgrade opportunity for DEF that is effectively a urea project. So the combination of logistics, product slate, and capital allocation drove our decision.
Also consider how we are configured and our distribution modes—rail, truck, barge, vessel, pipeline. Yazoo is a unique asset and is our main or only AN solution plant. As we reconfigure, we will improve load-outs, capabilities, and access to different modes, giving Yazoo City greater flexibility. It makes strategic sense beyond simple product margin comparisons.
Thank you.
The next question comes Kristen Owen of Oppenheimer. Go ahead, please.
Hi. Good morning. I wanted to follow up on capital allocation. This is clearly an 'and' strategy, not an 'or,' given the strong cash flow you have generated thus far—raised the dividend, increasing buybacks, and coming into a peak CapEx period. The one I wanted to ask about is the FEED study on DEF. Can you give background on your thinking about demand and economics for industrial applications versus over-the-road? I know we have some EPA changes coming up. A bit of color on the DEF study would be helpful.
I will let Bert start on the market view, then I will speak more to the project specifics.
DEF has been an interesting product for us; it is about 15 years old as an active part of our portfolio. We produce it at different plants. The growth from basically zero to today—2.2 million tons of urea-equivalent—means the market now consumes the equivalent of two world-scale plants of urea in North America that did not exist 15 years ago. As dosing rates increase and new power units replace older ones—power units last roughly nine to 11 years on average—the replacement is slow, but we see that taking place. With additional dosing rates improving emissions control and fuel efficiency, we see this market by the early next decade, around 2030-2031, hitting 3 million tons or more. That is a lot of growth opportunity. Courtright makes a lot of sense to serve the East Coast market, which is heavy demand.
To add: this is not just our view in isolation. We work with OEM engine manufacturers and retailers to ensure alignment on the growth path. Courtright provides a unique opportunity: today it has a net-long position in ammonia that is logistically constrained by its rail line and lower ammonia margin out of that plant. That provides a better opportunity to put in an upgrade there. The rail line can feed the East Coast and Mid-Atlantic better than other sites. Provided the FEED results look favorable on capital cost, we view this as a project that will grow into a ratable industrial market and be well above our cost of capital given the site's configuration.
That is super. My follow-up is on expectations for product mix in the back half of the year, given the fill programs and fall application. You moved around quite a bit in Q2. How are you thinking about mix of product in the back half? Thank you.
I would say we are looking at a normal slate in terms of economics by product and where the economic advantage is against our order book, which is very positive. I would anticipate a normal slate for the back half. We will work down the inventory that built up during Q2. That inventory was one issue—limited UAN volume while we moved more to urea and DEF in Q2. Any inventory we have, we expect to disgorge in the back half of the year and run at normal rates.
Thank you for the time.
The next question comes from Christopher Parkinson of Wolfe. Go ahead please.
Thanks so much for taking my question. I understand the second half outlook and lost tonnage out of the Gulf and Iran, and seeing the market tight for the foreseeable future. I'm curious about your interpretation of the U.S. and coastal benchmarks typically trading at a discount. It seems international opportunities, especially in Q3, should have been improving. I'd love your perspective across ammonia and downstream in terms of how dynamics play out from the lost production in prior quarters. Thank you.
When you look at the tonnage lost—urea and ammonia out of the Gulf, and tons lost due to lack of LNG to countries that rely on LNG to produce—it is substantial. How do you backfill that supply? Some of it is through Chinese exports that many expect. In terms of trading values and where we'd move tons, you mentioned we trade at a discount in NOLA; we are. You have seen us build an export book on urea that is probably higher than normal. When you look at where benchmarks go and pricing for the world, you will see a market that improves and tightens as deferred demand comes back in to be purchased and moved.
Got it. Just a quick follow-up: I would like to hear your perspective on the intermediate to longer-term outlook for low-carbon or blue ammonia projects. Several projects have been canceled in recent quarters. How are you thinking about BluePoint and incremental opportunities, given others may have given up? Thank you.
To start, many participants that have given up were not actually committed. A few years ago there were many announced green and blue plants, of which only a handful were realistic. There is a lot of hype—our analysis never showed more than perhaps seven of those announced projects would be built. We have been pragmatic. The clean energy market, similar to DEF, creates incremental demand—our partners JERA and Mitsui account for about a million tons of incremental demand that did not exist a few years ago. We continue to see growth opportunities in Japan and other parts of Asia, but it will be slower than original hype suggested.
Whether a ton is low carbon or conventional, we produce, store, and transport it the same way. Operational efficiencies, distribution, and the ability to move product globally accrue to us more than competitors. That is why we remain bullish on BluePoint and potential future projects: our assets, production, and logistics create a competitive advantage. Low-carbon value, especially in Europe, will continue to be valued and grow demand.
The next question comes from Vincent Andrews of Morgan Stanley. Go ahead please.
Thank you, and good morning. Christopher, I wanted to ask about the dividend and capital allocation. The share count has come down, so you can pay a higher dividend without spending more money. Is that the plan going forward? Should we anticipate more annual dividend increases? Separately, on M&A in the U.S., there's a limited number of assets—do you still have scope from a regulatory perspective to pursue acquisitions if assets became available, or should we expect volume growth to be more from DEF or BluePoint 2? Thanks.
I'll start with M&A and then address the dividend. On M&A scope, we saw the Gulf Coast ammonia plant transfer to Yara. We believe we still have room for acquisitions. CF has demonstrated that assets in our hands can produce more volume—look at past acquisitions and how we've improved operations. We prefer assets in low-cost, low-risk North America from a geopolitical standpoint. That's where we will focus both organically and inorganically. On the dividend, one underlying reason for the increase is confidence in our mid-cycle and free cash flow generation over the full cycle. We've been focused on reducing fixed charges, which dividends are part of. As free cash flow improves, it makes us more confident about increasing the dividend over time.
Hi, this is Andrew. Our overall capital allocation strategy hasn't changed: priority is driving strategic growth, share repurchases, and dividends. On the dividend I think of two principles. First, we want to be competitive with the marketplace—our increase moved the yield from 1.8% to 2.1% compared to the S&P at 1.1%. Second, we're conscious of what we spend in absolute terms and tend to target a range (not a hard rule) that allows us to fuel growth. Those principles will be applied going forward. Also, as we've said before, we believe our shares remain undervalued, and we will continue to be aggressive with repurchases as our primary capital allocation to shareholders.
The next question comes from Andrew Wong of RBC Capital Markets. Go ahead, please.
Good morning. Following your comments and the presentation highlights showing a valuation disconnect versus peers, what is driving that disconnect and what can CF do to close the gap?
What we can do is keep performing at a high level. If you look at our free cash flow over the last six years on average, it is significantly higher than our new mid-cycle estimate. We have increased production volume by almost 40% and reduced share count by almost 60% since 2020. Our capital structure is much stronger and our free cash flow conversion very high due to methodical discipline—lower SG&A and working capital. Yet, I think some still trade us as if we're the old CF from ten years ago. As long as our shares remain undervalued, we will continue to buy our shares back.
There is also misunderstanding about our assets—the leverage points of our plant locations, product diversity, shipping modes, terminals, and ability to export globally. We have flexibility, low-cost gas, and access to prime farmland, which together make a unique competitive position that others cannot replicate. We believe valuation should reflect that uniqueness.
We are $500 million into a $2 billion program and, when we look at intrinsic value, DCFs, comps, replacement value, every calculation suggests there is upside. We will continue to be opportunistic with repurchases.
Thanks. A quick one on cost: COGS, including gas and D&A, trended up over the past couple of quarters. Can you speak to that? Is it mostly Yazoo City or extra turnarounds?
Let me give color on cost in Q2. If you strip out volume and gas, our fixed costs were up about $75 million. Illustratively, about $10 million of that was distribution and logistics—mode mix moving from barge to rail and higher rail rates. The other $60 million is about a 50/50 split between higher purchased ammonia costs flowing through and the rest is fixed-cost absorption tied to Yazoo City being down. Purchased ammonia flows through the revenue line and provides margin, but it does increase COGS. Additionally, one of the turnarounds we started was Ammonia 6, which is comparable to two plants; turnaround years will be slightly higher from a turnaround-cost standpoint. That gives you the three pieces from a COGS standpoint.
Thank you.
The next question comes from Matthew DeYoe of Bank of America. Go ahead, please.
Good morning. I wanted to reconfirm: for CapEx on BluePoint, what is your mix on fixed versus nonfixed EPC work? Also, labor and assembly—given modular fabrication overseas—will the labor portion in the Gulf be significantly lower than expansions from 2012 to 2016?
When we looked at BluePoint, we focused on mitigating overall cost in a couple of ways: partnerships (our partners provide administrative benefits), module yards in Asia, and fixed contracts. Roughly about 50% of the CapEx related to BluePoint is fixed. That includes engineering and module yard contracts, and some lump-sum turnkey infrastructure pieces like tanks and docks. We feel confident in how we are managing this and have purchased long-lead items. On the labor and assembly point, much of the modular fabrication will be done overseas, which reduces the high-cost local labor component compared to the 2012-2016 expansions. That reduces the overall U.S. labor exposure.
Quick follow-up: on India, you expect 9 to 10 million tons of imports this year—does that assume shipments from last year into this year or is that back-half loaded?
If you look at India's fertilizer year (April through March), they tendered 2.5 million and then 1.77 million so far—totaling about 4.27 million. They announced another tender last week for 1.7 million, bringing you to roughly 6 million. We expect another tender by year-end, and earlier in the calendar year they did about 2.2 million tons, which, when added together, gets you to 9 to 10 million tons expected. Remember, they were running domestic operations suboptimally due to LNG constraints; we estimate they lost 1.5 to 2 million tons of domestic production. Rolling all that up, 9 to 10 million tons is a reasonable estimate today.
Thank you.
The next question comes from Maziyar Ahmadi of Rothschild and Company Redburn. Go ahead, please.
I wanted to ask a follow-up on the mid-cycle EBITDA targets: what sort of mid- to long-term market balance is assumed in that? For example, India is striving to be more self-sufficient in urea over the medium to long term. A number of projects are in development and theoretically could come online by the end of the decade and remove demand from the global market. Is such stuff factored in? How should we think about it?
When we look at supply growth over the next four to five years, India does have a few projects, some with uncertain timing. Even with all announced projects, we see a deficit or extreme tightness in the supply-demand balance through 2030. Countries announcing self-sufficiency still face capital costs and may find it more economic to continue imports; projects can be delayed. For mid-cycle planning we build in what is currently in flight with engineering visibility—typically five years is what we have good visibility on due to build times—and we reassess as time goes on.
Today there are some new plants—Qatar, UAE, our plant, and one in Nigeria—but others are at risk, such as some Russian or Indian projects that may not come online by 2030. Europe, given gas spreads and the age of certain plants, may see long-term viability issues. There are constrained areas that will remain challenged. So while new capacity exists, old capacity retirements and constraints mean supply growth likely falls short of demand growth.
Great, makes sense. Thank you.
I just wanted to sanity check something regarding 45Q.
So when I look at Q1, there is $19 million of 45Q income, which if I divide by the $85 a ton CO2 price gives me CO2 capture of slightly more than 200 thousand tons. As far as we know, Donaldsonville is around 500 thousand tons CO2 per quarter. Is that calculation missing something, or is Donaldsonville still ramping up?
A couple of points. First, revenue through the first half of the year is about $45 million associated with 45Q, not the $19 million number you mentioned. Second, we do expect CO2 sequestration this year to be lower at Donaldsonville primarily because of the turnarounds that took place there. Ammonia 6—comparable to two ammonia plants—went through a turnaround starting in June and into July, which lowered CO2 available to sequester during that time. The numbers through the other operating income line are correct at $45 million. Also, we are not yet at Class VI status; once that approval occurs later this year, the credit value will move to $85 per ton. Economically we are indifferent because our transfer today is at a zero cost with Exxon and it will move up to the contractual rate once Class VI is in place.
The next question comes from Edlain Rodriguez of Mizuho. Go ahead please.
Thank you. Good morning, everyone. Christopher, should we expect you to be more aggressive on buybacks in the second half of the year? The buyback pace seemed slower in the first half. Also, in late Q2 we saw global urea prices decline and surprising to me, in the U.S. prices declined below last year's levels despite global supply disruptions. How do we explain that?
On share repurchases: we have significant cash on our balance sheet and a program with plenty of room. We believe our shares are trading below intrinsic value, and we will be opportunistic in the market—we expect to be in the market more. Over the last six weeks, volatility has moved our share price a lot, so we will pick spots, but we remain committed to repurchases. On Q2 price correction: that was largely a trading move—trader liquidation on rumors of peace and openness in the Gulf, and we were at the tail end of our season with liquidation. I do not think many physical tons moved at those lows. Prices have since corrected back up to the $400-$415 level where we are today, and we expect continued tightness into the back half of the year.
Thank you very much.
The next question comes from David Symonds of BNP Paribas. Go ahead, please.
Thank you. Another one on the longer-term outlook: China is still adding capacity the rest of this decade. Can they start to export more than the 4 to 6 million tons you expect this year in the next few years, or are they adding capacity mainly to replace older plants?
I think yes and yes. China has proven ability to build new plants. Today their operating rates are around 82% to 83% while we run at 98% to 99%, so you have to factor operating rates into capacity figures. They have replaced older inefficient plants with newer, world-scale plants. Domestic prices in China are significantly lower than global prices, and the Chinese government has used export controls and quotas to manage exports and support domestic consumers and farmers. For the next year or two, the Chinese export level of 4 to 6 million tons is reasonable, but longer-term export behavior will be influenced by domestic policy and energy economics.
Thanks.
Ladies and gentlemen, that is all the time we have for questions today.