Sunday, February 14, 2016

Rentech Nitrogen Partners LP - Fertilizers

There is a wealth of information in the  Rentech Nitrogen Partners' and CVR Partners' investor presentations and Form S-4 filings that I won't reproduce here. The basic outline of the investment case, however, is as follows:

  • UAN plans to merge with (i.e. acquire) RNF;
  • RNF's unitholders would receive $2.57 per unit in cash consideration, retain 100% of the value of the Pasadena facility,  and would have a 35.6% interest in the post-merger entity;
  • the merged entity should be able to deliver average annual distributions of ~$248 million representing $2.18 per pre-merger RNF unit, for a yield of >60%.  
  • A 12% yield is more apropriate, valuing the new, post-merger CVR Partners at the marginal cost of supply of new fertilizer capacity in the United States;
  • Sum of the parts -- cash consideration, value of the Pasadena facility, and share of the MergerCo's dividends at 12% yield values RNF's units at ~$22;
  • UAN is similarly undervalued in case the merger succeeds (the merger proposal has the votes, only regulator intervention could prevent it) but less so if the merger doesn't succeed.
  • Price action: some part of it is attributable to UAN's dividend suspension, some part to the sell off of MLPs and yield vehicles generally, and some part is attributable to RTK's distress. 

The partnerships' own estimates of future numbers can be found here and here. I have assumed that RNF's debt is refinanced at 3.5% in line with UAN's debt.

The shale revolution has spurred new investments in North American fertilizer capacity. I have chosen two of these investments as representative of the marginal cost of supply: the Dynatec facility on the Gulf Coast, and the facility at Wever, IA that is now owned by CF Industries. The latter is a close comparable to RNF's East Dubuque facility. The economics of the Incitec Pivot facility are, because of transportation cost differentials, ~25% inferior to UAN's fertilizer plant in the Southern Plains. 

Other projects with economics similar to Dynatec facility have been delayed because EPC costs have gone up by 20%, suggesting that an IRR of 12% at 8% cost of capital does, in fact, represent the marginal cost of supply.

So we might say that the reproduction value of the East Dubuque and Coffeyville plants = 1283 + 1055 = 2,388 million. Plus the MLP tax advantage of, say, 30% = 3,039. This implies an equity value of $2,580, or ~$23 per RNF unit.   Plus or minus, give or take. The scale is more relevant more than exact amount.

Disclosure: I own some RNF units