CF Industries Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Martin Jarosick, Vice President of Investor Relations
• Tony Will, President and Chief Executive Officer
• Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development
• Chris Bohn, Senior Vice President and Chief Financial Officer

Analysts

• Adam Samuelson, The Goldman Sachs Group, Inc.
• P.J. Juvekar, Smith Barney Citigroup
• Josh Spector, UBS Group AG
• Chris Parkinson, Mizuho Securities
• Michael Piken, Cleveland Research
• Steve Byrne, Bank of America Co.
• Andrew Wong, RBC Capital
• Vincent Andrews, Morgan Stanley
• Jeffrey Zekauskas, JPMorgan Chase & Co.
• Joel Jackson, BMO Capital Markets

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the CF Industries First Quarter 2022 Earnings Conference Call. My name is Michelle, and I will be your coordinator for today. [Operator Instructions]

I would now like to turn the presentation over to our host for today, Mr. Martin Jarosick, with CF Investor Relations. Sir, please proceed.

[Martin Jarosick, Vice President of Investor Relations at CF Industries]

Good morning, and thanks for joining the CF Industries Earnings Conference Call. With me today are Tony Will, CEO; Chris Bohn, CFO; and Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain. CF Industries reported its results for the first quarter of 2022 yesterday afternoon. On this call, we'll 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 our performance may be found in our filings with the SEC, which are available on our website. Also, you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.

Now let me introduce Tony Will, our President and CEO.

[Tony Will, President and Chief Executive Officer at CF Industries]

Thanks, Martin, and good morning, everyone. Yesterday afternoon, we posted our financial results for the first quarter of 2022, in which we generated a quarterly record adjusted EBITDA of $1.65 billion. Our trailing 12-month net cash from operations was $3.7 billion, and free cash flow was $2.8 billion. These results reflect continuing outstanding performance by the CF Industries team against the backdrop of a very tight global nitrogen supply demand balance and wide energy spreads between North America and marginal production in Europe.

We ran our assets extremely well. Our North American manufacturing plant set first quarter production records for gross ammonia, UAN and diesel exhaust fluid. We leveraged our extensive distribution network to serve customers in the corn belt and expanded our logistics capacity to serve customers on the East and West Coasts. Most importantly, we did this safely. Our trailing 12-month recordable incident rate was 0.25 incidents per 200,000 labor hours, significantly better than industry averages.

This level of exceptional execution will continue to serve our customers and shareholders well as we expect the global nitrogen supply demand balance to remain tight for the foreseeable future. Nitrogen demand will continue to be underpinned by the world's need to replenish global grain stocks. We believe it will take at least two years and possibly longer to accomplish this.

At the same time, high energy costs in Europe and Asia are likely to lower global operating rates at certain times of the year. So we expect nitrogen supply to remain tight with the marginal time being very high cost. Russia's invasion of Ukraine has exacerbated both demand and supply situations. First, by impairing Ukraine's grain production and exports; and second, by creating uncertainty about natural gas price and availability in Europe.

Taken together, these factors make it likely that global nitrogen supply demand balance will stay tighter for longer. Given these market dynamics, coupled with our position on the low end of the cost curve, we expect to generate significant free cash flow in the coming years. This will enable us to invest in our clean energy growth initiatives while also returning substantial cash to shareholders. We are excited about growth opportunities we see in the clean energy applications of ammonia.

Earlier this week, we announced in conjunction with Mitsui, a potential new blue ammonia facility in North America. We also continue to advance both our green and blue ammonia projects at our Donaldsonville, Louisiana facility. We expect to begin making green hydrogen and green ammonia in 2023 and have up to 1.7 million tons of blue ammonia production beginning in 2024. These are important steps forward in the development of this exciting new market opportunity, one where we are clearly leading the way. In a moment, Chris will provide more details on our approach to capital allocation moving forward, including our capital expenditure outlook and our return of capital program.

But first, let me turn it over to Bert, who will discuss the global nitrogen outlook in more detail. Bert?

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

Thanks, Tony. farm returns in North America for all crops are forecast to be historically high despite higher input costs, setting the stage for another strong year of farm incomes. This includes farmers who will be growing corn, wheat, cotton and rice. As you can see on slide nine, global coarse grain stocks-to-use ratios have not improved over the last six months, driving nitrogen-consuming crop prices toward record highs. The time line to replenish grain stock has been getting longer, not shorter.

We believe it will take at least two more years and trend yields to fully replenish global stocks, supporting continued strong agricultural-led demand for nitrogen. We continue to expect healthy planted acres of nitrogen-consuming crops this year. Looking at new crop futures, returns for corn exceed those of soybeans, which supports our projection of 91 million to 93 million acres of corn planted in the United States in 2022, if weather cooperates.

During the first quarter, our team leveraged the flexibility of our network to ensure that we were able to serve customers by helping prepare for this coming demand. Our rail utilization was at its highest level in years, and we increased UAN barge capacity. We also chartered three times our typical volume of U.S. flagged Jones Act vessels to move UAN efficiently to the East and West Coasts. Rail service to some of our customers has become a serious issue in the second quarter, and we continue to work through those challenges.

We believe that high crop prices and strong farm income will also drive demand for nitrogen in the world's largest urea export destinations. We expect the recent urea tender by India to be the first in a regular cadence of tender activity in the coming months. We also project urea consumption in Brazil to remain strong in 2022. We do not see many catalysts in the near term to significantly increase global nitrogen supply availability. We expect China to resume urea exports in the second half of the year.

However, it is unclear how large the volumes will be given the Chinese government's focus on keeping food inflation under control and balancing the environmental impact of coal-based urea production. Marginal production in Europe that cannot export to the Southern Hemisphere will face difficult operating decisions during the Northern Hemisphere off-season if natural gas costs continue to be high.

We expect Russian fertilizer producers to continue to export but at reduced rate due to sanctions, limited internal logistics and port outlets, difficulty arranging insurance and vessel shipping. CF Industries remained well positioned in this environment, even as natural gas costs in North America have increased. Natural gas forward curve suggests continued favorable energy spreads for North American producers compared to marginal production in Europe as you can see on slide 12.

We continue to work with customers on their requirements for the spring fertilizer application season as weather has largely delayed planting so far. Farmers have proven that they are able to plant their acres in a short amount of time once that weather window opens. While most customers are prepared for first applications, we will leverage our expertise and extend the distribution network to meet the top dress and side dress demand that will emerge after planting.

With that, let me turn the call over to Chris.

[Chris Bohn, Senior Vice President and Chief Financial Officer at CF Industries]

Thanks, Bert. For the first quarter of 2022, the company reported net earnings attributable to common stockholders of $883 million or $4.21 per diluted share. EBITDA was $1.68 billion and adjusted EBITDA was $1.65 billion. The trailing 12-month net cash from operations was $3.7 billion and free cash flow was $2.8 billion. Given the substantial free cash flow we are generating today and our confidence in the company's long-term free cash flow outlook, I want to walk you through our expectations for capital allocation moving forward.

First, we reached our long-term gross debt target of $3 billion in April after we repaid the final $500 million of our 2023 notes. This level of debt and the work we've done over the years on lowering fixed charges provides us with financial flexibility now and through the cycle. We expect capital expenditures to remain in the range of $500 million to $550 million per year. This estimate includes planned maintenance activity as well as our investments in clean energy initiatives that are in progress.

We continue to advance the Green Ammonia project at Donaldsonville Complex and have placed orders for all major equipment. The construction of the CO2 compression and dehydration facility at Donaldsonville is expected to be complete in 2024, enabling us to be first to market with the significant volume of blue ammonia once sequestration is initiated. While we leveraged our existing network to create decarbonized ammonia capacity, we're excited to pursue organic growth in blue ammonia capacity through a joint venture with Mitsui.

We believe the investment related to this effort in the next two years will be measured with a FEED study beginning shortly and FID in 2023. The nearly 50-50 joint venture will support our ongoing commitment to discipline investments in the emerging clean energy market and provide supply of low-carbon ammonia to support the global transition of clean energy. Given these relatively modest calls on capital, we expect to have ample capital to return to shareholders through our quarterly dividend and share repurchases.

The Board's decision to increase the dividend by 33% was driven by two main factors: the more positive outlook for cash generation across the cycle and the significant reduction in fixed charges we have achieved through debt reduction, share repurchases and other initiatives to eliminate frictional costs in the business. We also continue to view share repurchases as an important way to provide shareholders a return on and return of capital. During the first quarter, we repurchased approximately 1.3 million shares for $100 million.

This represented the ratable portion of our share repurchase program for the quarter. Based on our free cash flow generation outlook, we expect to increase the ratable portion of our share repurchase program to $175 million per quarter. Along with the higher quarterly dividend, this positions us to return greater than $1 billion to shareholders on an annualized basis. We are also prepared to opportunistically repurchase additional shares at attractive levels as we have in the past.

With that, Tony will provide some closing remarks before we open the call to Q&A.

[Tony Will, President and Chief Executive Officer at CF Industries]

Thanks, Chris. Before we move on to your questions, I want to recognize the entire team here at CF Industries for their outstanding work during the quarter. Our focus continues to be on operating safely and leveraging our manufacturing and distribution network to serve customers, a role that is even more critically important today than ever. The North American agriculture sector, including CF Industries, is poised for strong results over the next several years as we collectively work to replenish global grain stocks.

The geopolitical issues in Europe, particularly Russia's invasion of Ukraine only increases the importance of the role North American farmers play as well as the rest of the supply chain in providing food for the world. The last year has underscored the critically important role of ammonia to the world, both for fertilizer and industrial applications.

It has also confirmed our belief that new demand for ammonia in clean energy applications will grow significantly in the coming years. CF Industries will be a leader in supplying blue and green ammonia to meet this emerging demand, and we are excited about our progress in this area. We have tremendous opportunities before us and we intend to capitalize on them to create meaningful shareholder value in both the near and longer term.

With that, operator, we will now open the call to your questions.

Questions and Answers

[Operator]

[Operator Instructions] The first question comes from Adam Samuelson with Goldman Sachs. Your line is open. Please proceed.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Yes. Thanks. Good morning, everyone.

[Tony Will, President and Chief Executive Officer at CF Industries]

Good morning, Adam.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

So I was hoping to maybe dig in a little bit more on the decision to pursue the blue ammonia project with Mitsui. And maybe understanding that you have to still go through the full FEED study and FID next year, can you provide some rough parameters around capital cost that you've thought about to even announce this, how you maybe have ranked -- how -- why the blue ammonia project with Mitsui at the U.S. Gulf as a greenfield and the first one you would have done in green lit in about a decade would have been the highest priority kind of opportunity of capital versus other things you could have done in the portfolio? And yes, maybe I'll leave it there.

[Tony Will, President and Chief Executive Officer at CF Industries]

Yes, Adam, so one of the reasons why it's going to be a greenfield instead of a brownfield is we do want a little bit of geographic separation from the Donaldsonville facility for reasons like we had last year with Hurricane Ida when it came through and basically took the entire facility out for three weeks. And I think the combination of having a geographically separate location to produce blue ammonia combined with the blue and green ammonia project at Donaldsonville give us some continuity of supply regardless of weather events like that such that we can enter into very reliable, long-term supply agreements for production of low and 0 carbon ammonia with counterparties. And that's really the reason why that put it at a different location than D'ville.

In terms of why blue ammonia as opposed to a full-blown fertilizer plant with upgrades and everything, it really speaks to both ours as well as Mitsui's conviction that this is an area of not only emerging demand but very strong demand as we get out into the future. And so we believe the world is going to need this. We think that, particularly given that the U.S. does not have a structured regulatory cost of carbon today, but most of the rest of the world or much of the rest of the world does, that an export-oriented facility where we can move those tons into the international marketplace and really leverage the skill set and capabilities that Mitsui brings as a partner is critically important and will serve us really well.

And I think from an overall kind of, you had mentioned economics or capital. The reason we're going through the FEED stage is to really get a much better handle on what the cost of the project is going to be. But just based on our recent experience, both at Donaldsonville and Port Neal, adjusting for inflation that's taking place, it wouldn't surprise me if we -- for a greenfield facility, we're in the neighborhood of $2 billion plus or minus for this.

But remember, it's basically a 50-50 investment for both of us. And it's paced out over five years. So think about that from our perspective as even though the money doesn't go out the door ratably like that, but you're talking about $200 million a year in terms of capital over the next five years. That's a relatively -- I mean, it's a significant amount of money. But given the fact that we generated $2.8 billion of free cash flow in the last 12 months, it's imminently affordable and not a crazy amount, and I feel really good about the prospects for that plant having a fantastic return profile for shareholders.

[Adam Samuelson, Analyst at The Goldman Sachs Group]

Okay. That's really helpful color. I'll pass it on. Thank you.

[Tony Will, President and Chief Executive Officer at CF Industries]

Thanks.

[Operator]

Thank you. The next question in the queue is from P.J. Juvekar with Citigroup. Your line is open. P.J., we cannot hear response.

[P.J. Juvekar, Analyst at Smith Barney Citigroup]

Sorry about that. Good morning Tony, Bert and Chris. Another quick question on this blue ammonia facility with Mitsui. On top of your blue ammonia at D'ville and Yazoo City, is the demand for blue ammonia in your mind going up? Or do you think your -- the current 45Qs can cover these incremental costs, and you can make it financially attractive? And can you give some details on this incremental cost because others in the chemical industry, don't agree that you can really cover the incremental cost with 45Q credits.

[Tony Will, President and Chief Executive Officer at CF Industries]

Yes, P.J., I think the big difference between ammonia production and most of the rest of the industrial emitters is that as a byproduct of the ammonia production process, we capture and extract 2/3 of the CO2 from the process anyway. It's the process waste stream that comes from ammonia production using a steam methane reformer. And so we've already captured that.

In some instances, we use that CO2 for urea production and others, we end up venting the excess CO2 that we don't need. But the most capital intensive and costly aspect of CO2 sequestration is the capturing of CO2 to begin with. And because that's already baked into how an ammonia plant operates, the incremental cost that we're looking at is really just the dehydration and compression of the CO2 stream so that it's suitable for injection into geological sequestration wells.

And so for us, as we announced at Donaldsonville, we're looking at roughly $200 million for dehydration and compression and it's probably going to be in the neighborhood of $5 to $10 per ton of CO2 of incremental utility costs down there. And then there's going to be some transport and some injection costs as well. But that still leaves plenty of money available within the current framework of the 45Q tax credit to earn a very favorable return on the incremental capital that we need to put in place, which is only $200 million.

And for a greenfield facility or a brand-new facility, it's basically the same plant, whether you're doing conventional or blue, we're just adding the additional dehydration compression. So again, call it another roughly $200 million. And again, on that kind of basis, the 45Q tax credit provides a very attractive return profile for us. So that's why ammonia production is pretty unique in the industrial landscape in terms of most likely able to take advantage of the 45Q credit.

I think if you were doing flue gas capture or other things, you're talking about probably $120 to $150 a ton that you need the credit to get to in order to justify it based on today's technologies. Now I do think that there will likely be ongoing improvements and developments to reduce the capital and operating costs going forward on flue gas. But where we are today, you need a much higher 45Q tax credit. Fortunately, we're not encumbered by that given that we already capture so much CO2.

[P.J. Juvekar, Analyst at Smith Barney Citigroup]

Great. Thank you for the detailed explanation, Tony. I will pass it along.

[Operator]

Thank you, sir. The next question comes from Chris Parkinson from Mizuho Securities. Your line is open. And the next question comes from Josh Spector with UBS. Your line is open. Please proceed.

[Josh Spector, Analyst at UBS Group]

Yeah. Hi. Thanks for taking my question. I'm just curious about some of your assumptions around China urea exports in the second half. I mean you seem convinced that there'll be at least some that hits the market. I don't know from your thinking, what are some of the gating factors that drives whether material comes out of China or not, given the moves that they've made over the past six months?

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

This is Bert. And I think some of those gating factors are real and pronounced today with what's going on with inflation and the government's desire to control that internally and not really looking externally for how that is impacted. And there was an announcement today or information in the trade publications about a continued enforcement of those export bans possibly through or into 2023.

So it's not clear how many tons will come out, when they'll come out. The previous position was in June that the export ban will be lifted. And so what we have seen is a very tight control of product, both [NNP]coming out of China. And China represents about 10% of the global trade, so a significant portion taken off the market. What we've seen internally to China is the price is controlled, almost half of what has been traded on the international market.

So again, a reflection of controlling costs to the farmers and keeping that product in China. So we've been open that economically and from incentives as a marginal producer that they should be exporting on, again, on an economic basis. But on a governmental action basis, that probably will not happen. So let's just say we had probably expected three million to four million tons. It could be half or less than that, looking at it today.

[Josh Spector, Analyst at UBS Group]

Thank you. Very helpful.

[Operator]

Thank you. And the next question is from Chris Parkinson with Mizuho Securities. Please proceed.

[Chris Parkinson, Analyst at Mizuho Securities]

Great. Can you - hopefully hear me?

[Tony Will, President and Chief Executive Officer at CF Industries]

Yeah. We can hear you.

[Operator]

Yes, sir.

[Chris Parkinson, Analyst at Mizuho Securities]

All right. Just checking. All right. So Tony and Chris, you're posing to generate a lot of free cash flow over the next two, three years. I mean, we could all go back and forth about spreads. But I think the conclusion there is pretty clear. When you think about all the opportunities you have with both -- some of these smaller, high-return, low-risk brownfields, what you're looking mostly, obviously, share buybacks, which Chris hit on. How should we think about, let's say, over a rolling two to three year period, the balance of capital allocation versus projects versus return to shareholders versus the last three to 5, it seems like you're still juggling a lot of opportunities. So I'd really appreciate some intermediate to long-term color.

[Chris Bohn, Senior Vice President and Chief Financial Officer at CF Industries]

This is Chris speaking here. As Tony outlined and I did in our remarks, we have a number of projects that are laid out for the blue ammonia that will be happening over the next couple of years. That will take a couple of hundred million dollars. But as you point out, the amount of free cash flow that we have we'll be able to do everything from the share repurchases to the increased dividend that we just announced and also these projects.

I think the one thing is there's -- we're just talking about the projects that we've laid out here. We consistently look at other organic and inorganic projects. Over this past 12-month period, we've had almost $3 billion of free cash flow generation. And as Bert mentioned, some of the outlook that we see, that will be even greater. So I think it provides us a lot of opportunities to do a lot of different things. One, is to do the growth plans that we talked about here.

And then two, is to also move into some of the share repurchase and return of capital that we talked about, not only the ratable portion, which is going to be $700 million this year but also the opportunistic piece. And given the volatility in our share price, I think we're looking at potential opportunities, not only this year but in the coming years where we can get in and get quite a bit of shares out at favorable return for shareholders.

[Tony Will, President and Chief Executive Officer at CF Industries]

And Chris, I would just add, and I agree with everything Chris Bohn said. But we are now at our desired level of long-term debt of $3 billion. We think we're well into the investment-grade ratings, even though we haven't been moved there yet. But if you just look at the strength of the business and how we're performing in the relatively small amount of debt that we're carrying, we feel very comfortable with that.

And so as Chris said, even if we're ultimately decided to move forward on this new blue ammonia project, it adds roughly, as I said, kind of $200 million plus or minus per year to a range that's $500 to $550 million of capital per year. We don't really have additional debt reduction, so call it, $700 million to $750 million of capital going out the door that we've earmarked already. And as Chris pointed out, in the last 12 months, we did $2.8 billion of free cash flow. So that still leaves a very healthy amount for return of capital to shareholders. And I think based on how the business is performing, we can do all of the above.

[Chris Parkinson, Analyst at Mizuho Securities]

Got it. And just as a quick follow-up. There's obviously a lot of different dynamics going on with the UAN market. I mean some of the major producers, and obviously, Central and Eastern Europe are now completely cut off-line. You've got, obviously, a lot of other trade considerations as well, which have evolved over the last year.

And I think a lot of us couldn't help this year, mix this quarter. Tony and Bert, how are you thinking about not just the season but also the intermediate term outlook for UAN versus urea on end unit spreads and just how that's evolving? It seems like it's pretty favorable, but just any additional thoughts would be greatly appreciated.

[Tony Will, President and Chief Executive Officer at CF Industries]

Yes, I'll give you my just quick two cents and then I'll turn it over to Bert. But I think one of the things that we're seeing is return to appropriate valuation for UAN, where it belongs compared to urea. It is a more costly product to make than urea given that there's significantly more capital involved in the production process. It also offers farmers a tremendous product with great efficacy from an agronomic standpoint but also gives them some efficiencies in terms of application of other chemicals, whether it's fungicides or herbicides or insecticides or whatever can be mixed in with the UAN.

And so it provides benefits to the grower, it's higher cost to the producer. Therefore, auto trade, generally speaking, at a premium to urea on a per unit of nitrogen basis. And that's where it is, again, and I think largely because of the fact that the Commerce Department and the International Trade Commission put in the duties on product that was being dumped illegally by the Russians and the Trinidadians. And so our expectation, and I think generally speaking, as UAN should trade at this level premium to urea. In terms of kind of our plans going forward, I'll turn it over to Bert.

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

Chris, looking at what is going on in the UAN market, we're at the precipice of planting in applications, which are late in North America. But product continues to flow and move to the interior. And as Tony said, it is trading in a premium to urea. And we have benefited or moved to a higher production and remain that way through first quarter favoring UAN over urea. And as long as that spread maintains, we will continue to do that.

The outlook is favorable. The demand is there with 91 million to 93 million acres of corn and what is taking place with restrictions of feed grains coming out of Russia and Ukraine, the world where we rely on Argentina, Brazil and the United States and to a lesser degree, India and Australia to supply the wheat and some of the corn out of South America, especially. And that will take a lot of nitrogen.

And we're seeing growth in UAN in those markets and continued demand in North America. Europe is constrained. With the gas spreads taking place today at $30 TTF against $7 to $8 in North America, it is difficult to produce and participate in the global market from Europe as they have in the past. So we expect trade flows to change, especially as a result of Russia and then UAN from the United States to possibly go what's most urgently needed in a food-constrained world.

[Chris Parkinson, Analyst at Mizuho Securities]

It's great detail. Thank you so much.

[Operator]

The next question in the queue comes from Michael Piken. One moment sir.

[Michael Piken, Analyst at Cleveland Research]

Catch a little bit on kind of what's happening from a logistical standpoint with the delayed spring and some of the issues on the rail lines. I mean do you guys have sufficient urea, ammonia with your in-market storage up in the Midwest. And I guess, how is the delayed planting season, potentially playing a role into some of your outlook for the spring.

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

Bert. And you're right, logistical issues have been front and center when we went public a week or so ago with some of the delays from the Union Pacific and some other rail carriers. We have been working with our rail providers to have good solutions in place, whether that be service and railcars and that is a work in progress today. And so we've been communicating with our customers on any potential delays or movements.

But because of that, we've geared up with additional UAN large capacity as well as I mentioned in my prepared remarks vessels to go to the East and West Coast to just expand our capability to fully supply North America with needed UAN, and we've ramped up production, as we talked about in previous quarters. What I think is taking place then it gets to the delays because of weather.

And we've had cool wet weather, which has delayed access to the fields, and that impacts ammonia. And so the conversations with customers today are very real of do you have enough in place? And if you're asking us to move it, don't rely necessarily on the railroads today, but what we can do with our distribution network. And I do think ammonia will be challenged.

We still have a good portion of our ammonia to be applied to the ground. But I think you're going to quickly go to putting the seed in the ground, especially as we get closer to the middle of May and potential yield impacts of late planting. So yes, we have sufficient storage. Yes, we have sufficient product. We are running our plants at 100% capacity and working very long hours to make sure that we supply our customers with the nitrogen nutrients that they need.

[Operator]

Okay. We'll go with the next, the next question in the queue comes from Steve Byrne. Your line is open. Please proceed.

[Steve Byrne, Analyst at Bank of America]

Yes. I just wanted to ask a little bit about this project with Mitsui. Do you think that they will be able to secure long-term contracts with the Japanese utilities, either at a fixed price or maybe a fixed tolling fee with gas pass-through so that this project could ultimately give you a fixed return and on the capital, is this a POX or autothermal unit so that you can capture all the CO2?

[Tony Will, President and Chief Executive Officer at CF Industries]

Steve. I'd say we're still in final short stroke review and negotiations with various technology providers. So we haven't announced the vendor and the particular approach that we're taking at. And I think that we're taking all those things into consideration as we make those final determinations. But I couldn't be happier in terms of the partner we have here. I think there's no better partner to have out there than Mitsui with their capabilities and access and knowledge of the region in their contacts.

I think we're -- we are in a very, very strong position, and we're really pleased about it. We're discussing a number of different alternatives, but the one that you talked about certainly is not out of the question in terms of more of a gas plus arrangement that earns a fair rate of return on the capital being deployed for us. But there's a number of different things that we're taking into consideration and more to come, so stay tuned.

[Steve Byrne, Analyst at Bank of America]

And then maybe a question about your use of free cash flow, the outlook relative to what you have as a commitment for share repo leaves a pretty big opportunity and gap. Would you say that you're just keeping your options open and thus could engage in a much more aggressive share repo? or do you want to keep your powder dry in case you want to go more aggressive on capacity expansions? And/or do you see any M&A opportunities down the road?

[Tony Will, President and Chief Executive Officer at CF Industries]

Yes. The good news here, Steve, is I think we're generating so much cash, it's all of the above. But we're focused right now on the first $1.5 billion of repurchase authorization that the Board's put there given that our debt is now where we want it to be and we're generating so much cash, our expectation is we'll get through that in pretty short order here. And then don't be surprised if we put another one in on the heels of it.

[Chris Bohn, Senior Vice President and Chief Financial Officer at CF Industries]

Yes. I'm with Tony on that one, Steve that I think there's enough to do a lot of different things, both organically, inorganically. But from a share repurchase standpoint, as I mentioned earlier, just the volatility that we see in our shares that really aren't backed by the fundamentals. We've seen that all the way back to December where we stepped in pretty heavy and bought $500 million worth of shares within like a 20-day trading period.

So I wouldn't be surprised to see that type of activity when we see disconnects along the way. But even doing that, as Tony mentioned, these next few years with what we see from a free cash flow generation and really with where capex is in a pretty manageable band, we should have plenty of opportunity to do some share repurchases and return of capital.

[Steve Byrne, Analyst at Bank of America]

Thank you.

[Operator]

Thank you. The next question in the queue comes from Andrew Wong with RBC Capital. Please proceed.

[Andrew Wong, Analyst at RBC Capital]

Hi, good morning. So has there been any change in some of the conversations you have with potential customers around the low carbon ammonia market or maybe potential for long-term agreements and that's what kind of gave you more confidence to kind of move forward with a pretty large project here?

[Tony Will, President and Chief Executive Officer at CF Industries]

Yes. I mean what we're having conversations on a daily basis with all kinds of potential customers and others that are working through technology innovations and applications. And I would say the first two that we see developing in pretty large quantities are ammonia being co-fired with coal for electricity generation. And I think both Japan and Korea are going to be the epicenters for where that begins, but it's likely to spread.

And then as marine fuel because it's got 0 carbon emissions. And so I think those are the places where we see demand developing and the marine application is so large that it could with pretty, I would say, realistic assumptions double the amount of ammonia that is used in the world today. And so we're really focused on those two applications. Again, I think we've got the right partner with Mitsui to go after them. And our intent is to lead from the front on this.

[Andrew Wong, Analyst at RBC Capital]

Okay. That's great. And then maybe just more around some of the more near-term operations kind of question. Given that we're seeing higher prices internationally, are you considering more export sales this year? And then just also with the wet weather and the start to the planting season may be a little bit slower. Do you have any view on the inventory levels as we exit the spring season?

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

Yes. So this is Bert. And when you're looking at the market, we're -- as I said earlier, we're at the precipice of planting and you'll have stages of applications, whether that be for corn, wheat, cotton, rice, canola. And as we move from south to north, the applications are already taking place in Texas, Oklahoma and Kansas. And we'll, I'd say, just next week, be going very strong in Iowa and then up in the Dakotas and Canada. And so when we're looking at where we're going to move our product, it's where it's most urgently needed and where it's highly valued.

And we continue to do that to look at our opportunities and leverage each of those. We're in conversations with people globally, and we have very solid, strong relationships with our customers and want to make sure they are well supplied. That's why we have inventory throughout the United States and in Canada, prepared to ship. And we have the logistical assets locked up, and they're moving daily. And so when we look at the opportunities for CF, they're very positive and will continue to be, we believe, for the next -- I'd say, for the next couple of years.

[Andrew Wong, Analyst at RBC Capital]

Great. Thanks.

[Operator]

Thank you, sir. [Operator Instructions] The last question I have in queue at this time is from Vincent Andrews. Your line is open. Please proceed.

[Vincent Andrews, Analyst at Morgan Stanley]

Thank you. Tony, maybe I could just ask a few more questions on the Mitsui situation. Could you maybe tell us a little bit more about the site? And I guess what I mean by that is, you threw out a $2 billion potential total number. Could you talk a little bit about how much volume you're anticipating for the $2 billion? And the site that you're looking at, maybe you don't want to tell us too much about it, but how much expansion capabilities are there? Is this sort of the opportunity to have multiple phases over an extended period of time. And so maybe we could just start there.

[Tony Will, President and Chief Executive Officer at CF Industries]

Yes, you bet, Vincent. So we are actually in some pretty advanced conversations with governments, both at the state and local regional levels in a couple of different areas that will dictate where we ultimately end up. We've got sites in different states that have been identified, and this should be a competitive process like anything else is. And so we're heading down that path to get the best terms that we can because this is a significant economic boom to wherever it is that we end up putting the plant.

The sites that have been identified are capable of supporting multiple units, I would say, four to five units based on the original land acquisition with possible extensions beyond that if and when appropriate and fantastic logistics in terms of people at dock access to make it export-oriented. And so that's really our focus in that way around the export marketplace. And I don't want to go too much more specific on location because we're come into the, again, a short straws here or strokes in terms of negotiating the package deal that looks attractive.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay. No, understood. But just on the amount of volume you think you're going to get for $2 billion, any insight there?

[Tony Will, President and Chief Executive Officer at CF Industries]

Yes. I mean I think if you think about the equivalent volume the new Port Neal Ammonia two plant would be the low end of it and the Donaldsonville Ammonia six new plant would be sort of the higher level of it, that's really the state of the art in terms of volume today. But again, we haven't really finalized the technology provider and the different firms have slightly different approaches and rates and so forth. But in that range, $1 million to $1.4 million tons a year is kind of what we're targeting.

[Vincent Andrews, Analyst at Morgan Stanley]

Okay, great. Thanks very much.

[Operator]

Thank you, sir. And the last question I have in the queue is from Jeffrey Zekauskas from JPMorgan. Your line is open.

[Jeffrey Zekauskas, Analyst at JPMorgan Chase & Co.]

Thanks very much. There's so much constraint in fertilizer production and trade, in all the three major nutrients. Do you think that these constraints will have any effect on global yield of the major crops over the coming year?

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

Jeff, this is Bert. And you asked -- you're asking the question that we've all been trying to answer and have been doing a lot of work globally to put that quantitatively together to make decisions on movements of products and expectations for the forward curves. And when you look at what's taking place with restrictions out of the Black Sea on grains and oilseeds and even processed products, the world needs to increase the rest of the world's production and ability to ship, and that needs to happen in the Northern Hemisphere in the spring.

And I think that's going to be constrained in Europe just with some limits on nutrients. I think we're fully supplied in North America and having good weather would be very helpful to a bountiful crop. And then it moves to South America, who plants in September, October, November, December, January for second crop and then the harvest thereafter. So it's -- to us, it's a 2023 issue. When these potential shortages can materialize, and it could be constrained because of lack of nutrients.

With what's going on with restrictions or sanctions out of Belarus and Russia, and then you factor in 100% limitation because of the war out of Ukraine and then shipments out of the Black Sea and then governmental restrictions from China, you've taken out of urea, 25% of the urea supply. So you then need to move things around, maybe use more ammonium sulfate to different applications and price probably will have to impact some of that.

I do think some of your third world countries that are planting non-dollar-denominated exportable products probably will have yield impacts that will require food imports. That's still to happen. And so these are things that we are watching, paying very close attention to and talking to our industry partners, whether that be grain companies, processing companies as well as distribution companies to make sure we're at the forefront of supplying the nutrients that we're capable of supplying on time and with a reasonable cost.

[Jeffrey Zekauskas, Analyst at JPMorgan Chase & Co.]

Okay. You mentioned at the start of the call that the TTF price in Europe was $30 a MMBtu. If you look at the curve, I think next year, it's in the 20s. Do you have a hedging strategy in Europe for gas? Or do you have a philosophical view about gas? And in terms of the state of urea and ammonia shipments out of Russia today, could you describe them what's coming out of the Black Sea, what's coming out of the Baltic? So I guess there are two questions stuck in there.

[Tony Will, President and Chief Executive Officer at CF Industries]

So Jeff, our view is because Europe is not self-sufficient in the way of gas, if you don't count Russian supply as part of native European production then it logically during periods of the year is going to be in the third and fourth quartile on the cost curve. And that's why our view is that those assets will be running more intermittently, and you'll see lower operating rates as a result of it, which ends up making the supply-demand situation globally tight on an ongoing basis and even when it runs pretty high-cost marginal tons that are coming out of Europe.

And the spread of -- even if the spread collapses down to $10 between North America and Europe, $10 x 34 MMBtus per ton of ammonia x 10 million tons of ammonia. You're talking about $3.4 billion just an ammonia value for us before you even get into the upgrades and the value of the logistics network. And that's only on a $10 spread. On a $20 spread obviously it's twice that. So the kind of energy curves that we're looking at going forward give us a lot of confidence about the cash generation of this business.

And our U.K. assets are pretty de minimis in terms of the contribution they make to the overall profitability of the enterprise as well as the ammonia production volume. It's really North America that carries the freight in terms of what drives this company. So we are okay running our European business, our U.K. business and assets when it's profitable to do so.

And we're also okay taking those plants off-line when it's not profitable to do so. And so our view is we want to be, generally speaking, more daily buyers of gas in Europe, given where they sit on the cost curve and not try to take a long position on gas hedging there because we think those plants ought to cycle on and cycle off given where they sit in the global cost curve.

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

But to your general question on gas and hedging and -- this is Bert. We are students of the market globally, just like we are with fertilizers, the key component of our cost. And it behooves us to be watching that diligently and buying and positioning ourselves appropriately. And today, as Tony said, that spread from North America to Europe is over $20, but even on the $23, $24 forward curve, it still is $20.

So that's why you're going to see European production continue to be constrained and especially in the absence of Russian gas as we approach winter this coming fall and winter, I think it's going to be very challenged. Your question about Russian shipments, yes, we are tracking what's being loaded and where it's being loaded. And I think the -- there are several limitations.

And as you take away the logistical capabilities and movements and flexibility of the Russian producers coming out of whether that be Siberia in the Perm area or where they're loading internally to move to the external market, there's a tremendous change that has taken place due to the invasion and that's the limit of ports. So you had Black Sea ports, Mykolaiv, Odessa and others that have been load ports, but that product has to get through there.

Those are no longer available. Same thing with ports that have been like in Riga and other places in the north, they're not Russian owned or accessed. And so when you take the port capabilities down to probably 30% of the available outlets that then has a backup process of logistics, a backup process of storage and an inability to consistently move nitrogen phosphate and potash out as they did before.

That will become more material as we move forward. Then you layer on, on top of that insurance costs and vessel -- inability to get vessels or vessels not desiring to load in those ports and thereby pushing pricing up. Today, it's -- I think, like a St. Pete to Brazil is close to $200 a ton that was less than $50 just a few months ago. And so these issues will continue to constrain Russian production on top of sanctions as we roll forward and if the sanctions do continue to be applied through 2022 and forward.

[Jeffrey Zekauskas, Analyst at JPMorgan Chase & Co.]

Thanks so much.

[Operator]

Thank you. The next question in the queue comes from Joel Jackson with BMO. Please proceed.

[Joel Jackson, Analyst at BMO Capital Markets]

Hi, good morning. Bert, when we look at application rates for nitrogen this spring. Can you talk about any trends you're seeing in anybody, any farmers maybe dialing back then? I mean, are you seeing any difference between maybe higher-yielding acres versus lower-yielding acres or anything you've seen, please let us know?

[Bert Frost, Senior Vice President, Sales, Supply Chain and Market Development at CF Industries]

Sure. I mean that is the -- that's actually a global question as well as a domestic question, domestic North America. And today, no, we're not seeing. At $8 corn and even looking at '22 and '23, [Indecipherable] and these ['23,] I don't know, 640, those are incredibly attractive. And with ethanol running at its current operating rate of close to 90% and the attractive price position for protein being beef and pork, you have a heavy demand drive domestically as well as now exports because of the issues we've articulated about Russia and Ukraine and their inability to move corn and wheat out.

So no, we're not seeing a decrease in applications. However, it is late. And as I said earlier, soil temperatures and application of nitrogen is delayed as well as P&K. It is going to be a very tight logistical window. And this is where CF shines. We have all the capabilities and the positions in place that others don't. So we have a lot of customers calling and sitting down and wanting to move products promptly. And I can tell you we're busy and working long hours to make sure that happens.

[Joel Jackson, Analyst at BMO Capital Markets]

Tony, Chris, could ask the question about capital allocation a little bit differently. Talk about $175 million a quarter ratable rate or $700 million. This year, you talked about maybe $1 billion spend possibly over five years for your part of that new JV. You're going to generate so much free cash in the next bunch of years that people have seen in this call already.

And this is -- this might be the best you're ever going to have. I mean you just said in your other project that you have so much cash on the balance sheet is going to build here. Why not in this peak year or I don't want to say peak but this is good as a guess here, let's say, why not be a little more aggressive on the buyback? Like what are you really seeing, what looks like billions of dollars for?

[Tony Will, President and Chief Executive Officer at CF Industries]

Well, let's not be too hasty to call this the top of the cycle. I mean I think there's a lot of runway left and a lot of uncertainty out there. And the longer you see these kind of energy spreads and the longer you've got, which obviously is a tragic, terrible situation with conflict. But the longer that persists, the more it pressures both the demand side because of grain availability as well as the supply side in terms of gas cost and availability.

And so I would hesitate to call the -- this is a one year situation. I think it puts us in a very enviable position. And as Chris said, we are focused on a ratable basis now between the dividend and the ratable portion of the share repurchase program, returning over $1 billion a year to shareholders. And that still gives us a lot of capacity to go in strong when we see drops in the share price and discontinuities like that.

When a couple of weeks ago, there was a rumor of ceasefire, we dropped $15 in one day, and then we ended up catching some of that back through the course of the day. But we have a highly volatile stock, and we want to be able to absolutely capitalize when there is drops in the share price that are not connected to the fundamentals of the financial performance of the business. And our belief is that, that is actually going to be in the best interest of our shareholders.

And if that means we carry a little bit of extra cash on the balance sheet from time to time, so be it, I think when they see us like we did in the fourth quarter, taking out as many shares as we did at the average price of $60-some, that's a pretty attractive move. And so the fact that we can continue to do that and return a big chunk of cash on a ratable basis just again proves, I think, the value of this organization and company and the asset base that we've got here.

[Joel Jackson, Analyst at BMO Capital Markets]

Thank you.

[Operator]

Thank you. And the last question, the queue comes from P.J. Juvekar. Your line is open. Please proceed.

[P.J. Juvekar, Analyst at Smith Barney Citigroup]

Yes. Hi, good morning. Thank you for taking my question. So my question is on your dividend, which you increased substantially, 33%, to $1.60 per year. I mean that's a big signal from a cyclical company. Because looking back, you would not have earned this dividend in 2017, 2018 and 2020 in the last five years. So I mean, to make that move, are you signaling that the nitrogen markets have stepped up permanently. That's sort of my question on capital allocation.

[Chris Bohn, Senior Vice President and Chief Financial Officer at CF Industries]

Yes, P.J., this is Chris. I would say, there's two reasons. One, we do think that the nitrogen market has stepped up here where, given some of the supply constraints that we are seeing even prior to some of the geopolitical events was tightening. And those are things that Bert and Tony have been talking about for over the past year. So we've seen a fundamental shift in what our outlook is on that and seeing that for a longer bit of time than maybe even what we saw a year ago.

But then additionally, I think it's all the work we've done on our fixed charges over time. The mantra we've had over the last three years is really to reduce our fixed charges both through not only the debt reduction but even the share repurchase where we had lower amount of aggregate dollars going out for dividends.

And then additionally, the work that Ashraf and his team have done through manufacturing to get our controllable costs down. So when you work all those things together, I think it's allowed us to increase the dividend without really changing our fixed charge outlook all that greatly. And then that, coupled with where we see the nitrogen market fundamentally shifting to -- made us feel very comfortable in -- and I think the Board is well with their approval of it.

[Tony Will, President and Chief Executive Officer at CF Industries]

And I would just add one other factor, P.J., and that is where the shares are trading and should trade to, we believe, based on our financial performance and outlook, that the old dividend was not as relevant from a dividend yield perspective, and we want the dividend to be relevant and comparable to other S&P companies and frankly under 2% yield is -- it is certainly at the low end of that range.

And so while I'm not forecasting another increase, it wouldn't surprise me if longer term based on the factors that Chris said, both lower fixed charges as well as better industry fundamentals, and a high share price, meaning a low dividend yield, that you wouldn't see it go up again at some point. So we're very bullish looking forward. And I think all of the moves that we're making are tangible evidence of how we feel about this business in the marketplace that we're in.

[Operator]

Thank you. Ladies and gentlemen, this is all the time that we have for questions today. I would like to turn the call back over to Martin Jarosick for closing remarks.

[Martin Jarosick, Vice President of Investor Relations at CF Industries]

Thanks, everyone, for joining us this morning, and we look forward to seeing you, hopefully, in person at upcoming conferences.

[Operator]

[Operator Closing Remarks]