CVR Partners is a variable distribution master limited partnership that makes and sells nitrogen fertilizers in the United States.
In an oversupplied and rational market, as currently, the marginal cash delivered cost of nitrogen fertilizers should determine their market price.
In an import dependent market like the United States, the marginal cash delivered cost of nitrogen fertilizers is determined by two elements:
- the marginal importer's feedstock cost; and
- the marginal importer's cash cost to insure, transport, and store the fertilizer product.
and therefore, given CVR Partners' 2017 product mix and $3 Henry Hub gas price:
note: "CAFD" = cash available for distributions, i.e. dividends.
Or, assuming for the sake of argument that (a) the natural gas price faced by the marginal importer is $9/mmbtu; and (b) CVR Partners' product mix reverts back to its historical pattern:
Investors motivated to look two or four years ahead may find that the feedstock cost faced by marginal importers is likely greater than $9/mmbtu equivalent.
For example, translating Chinese lump anthracite producers' feedstock equivalent pricing yields the following translation:
Alternatively, as demand growth absorbs the capacity added in the last few years and as capacity utilization rates rise, the list of marginal producers will increasingly include older European plants that are less efficient at converting natural gas into nitrogen:
So at $70/barrel Brent oil one might expect $7.50/mmbtu natural gas prices in Europe. But the older plants consume 35% more gas per ton of nitrogen so the $/mmbtu on an equivalent basis is $7.50 x 1.35 = $10. And so on.
That was the overview and what follows is the investment case for CVR Partners at the price that it is trading at today.
This is what the relationship between importers' marginal cash delivered cost and CVR Partners' average selling price ("ASP") looks like for anhydrous ammonia ("ammonia") and for urea ammonium nitrate ("UAN"):
The contention of this write up is that the gap between fair values and actual ASPs, representing as it does cash variable costs borne by financially motivated agents is not sustainable and will close.
This series of charts is a useful additional clue as to the peculiarity of the situation in 2017.
CVR Partners' 2017 performance would have looked like this in the absence of the logistics gap:
I have set aside the associated improvements in urea and nitric acid pricing for the sake of simplicity.
95 million in distributions should be good for >$10 unit prices.
The risks to this thesis are NAFTA-dissolution and China trade war related. Mexico is the principal consumer of US corn and China is the principal consumer of US soybeans. A trade war with either country will likely disrupt nitrogen fertilizer trade flows and may prolong the time required for the logistics gap to close.
China's response to a tariff war may be to allow the yuan to devalue. That would flatten the cost curve so that the longer term upside potential outlined in the "overview" section above would be reduced.
On the other hand, a potential opportunity outside the scope of this write up is the development of a Chinese ethanol industry which would cause a substantial increase in corn, and therefore, nitrogen demand.
Weekly ammonia and urea prices at the US Gulf Coast http://www.mosaicco.com/resources/3185.htm
Quarterly AN and Urea prices at Black Sea ==> quarterly implied UAN price at Black Sea (using the formula 45% AN plus 35% urea):
Monthly urea and UAN prices in the US interior
Anything put out by CF Industries is worth paying careful attention to.
Additional data source for those interested in what's going on in China -- i.e. everyoneReplyDelete
Fortnightly release titled "Market Price of Important Means of Production in Circulation" presents domestic urea prices (metric tonne) and coal prices.
So. for example, thelatest bulletin reports anthracite at RMB 1324/t and urea at RMB 1972/MT
Urea at RMB 1972/MT translates to ~$280 per short ton. Etc
Glad to see a new post! Really appreciate your ideas and analysis.ReplyDelete
I am so happy you are back. I missed your posts!You are one of the most independent minds in the value investing arena.ReplyDelete
Yara Q1 2018ReplyDelete
Thanks for sharing, red. From my ignorant point of view, most interesting was slide 16 on the slowing capacity additions in the medium term (and possibly the first question/answer). Do you think China will be able to fill demand in 2020/21, say? And if so, at what cost?Delete
Well I think one can retrace China utilization rates to come to a first approximation of the incentive price for increased Chinese production. And then fine tune it by adjusting for increased electricity rates, decreased rail transport subsidies, increased environmental compliance costs, higher ocean freight rates, increased labor costs, and so on. And, of course, the sheer cash cost of restarting idled plants. CF's presentations over the last, say 8 quarters, are good sources for this.Delete
I think it would be very hard to come up with an incentive price that is lower than RMB 1800/st or RMB 1985/MT for urea, all things considered.
Of course that's separate from the main thrust of the investment case for the North American fertilizer producers. NA urea prices, for example, are currently (April 2018) $57/st below what would be parity with Chinese prices.
I thought I'd share Bruce Berger's video on CVR:
I watched it. Thx for posting. I'd caution that he has more things wrong than right -- the causes of oversupply, CVRP's cost structure, ete etc. I'd recommend to anyone interested in this stock that they simply read the S-1s for the cost structure and read through CF's materials for an understanding of the industry dynamics.Delete
Gets to conclusions I agree with but not a rigorous path there. Talked about fertilizer pricing in technical analysis terms, not supplier cost curvesDelete
cf pp 9-18
Differences between Yara and CF presentations of future capacity accounted for by difference between plants' commissioning CF's materials) and those plants' production"ramp up" (Yara's materials)
NB CF doesn't like to change the cost curve assumptions once they've been set in the fall of the prior year. The assumed drivers (coal price, USDCNY etc) are higher and much higher than they were then.
Etc and so on. Worth listening to the call tomorrow of course
What do you think the market is missing? If I'm reading what you posted correctly UAN prices have no where to go but up yet the stock is trading at 52 week lows.ReplyDelete
Levered cyclical in the later stages of the economic cycle + its natural unitholder base is dividend-seeking? That's some of it no doubt. Why own it now rather than later?Delete
Methanex a couple of years ago, for example, was in a similar sort of situation: also a beneficiary of the North American gas feedstock advantage although operating in a shakier end market. The market liked Methanex and then didn't and then did again.
Also there was a credit fund that owned several million units of CVRP -- a depressing story that I won't trouble you with -- and it has sold all (or virtually all) of those units over the last few months.
Funds managd by GSO Capital Partners, a Blackstone entity. Rentech Inc owned ~7 million units of CVR Partners. These units were pledged as security for loans extented to Rentech by GSO Capital Partners. When Rentech was close to being bust GSO took ownership of the units and sold them off more or less immediately at prices ranging from $4.25 to $2.90. They show up as a long series of 13-fs in CVRP's recent filings history.Delete
An opportunty to guage how "the market" feels about annual $1.40/unit distributions at an assumed $250/MT ammonia selling priceDelete
Also just wanted to say +1 to you posting again hope it continues as I do find your posts though provoking.ReplyDelete
Anyone find this interesting from the CC?ReplyDelete
"We had carryover tons that we hadn't delivered yet from the fall season and that blends down that average price in the first quarter for UAN. Ammonia was higher than last year, but UAN I recalled a blended number of fill [ph] tons at much lower prices and then everything we sold this year has been at much higher prices than the fill [ph]. So, it's kind of blended number. So those are the two dynamics in that. And as we get into the second quarter, we will benefit from 100% at the higher pricing"
"And so, you will see a very different price profile in the second quarter versus the first."
Assuming normal operating rates at East Dubuque 2Q pricing should be close to pricing realized in Q2 2016ReplyDelete
And maybe not. I agree with this piece.
Thanks for sharing Red.ReplyDelete
USA playing with international market. Not too fair for Iranian people.
What are your views on the debt. If fertilizer prices don't recover can they make interest coverage and refi maturities?ReplyDelete
It was me with the account of my wife.ReplyDelete
"What are your views on the debt. If fertilizer prices don't recover can they make interest coverage and refi maturities?"ReplyDelete
If fertilizer prices stay at 2017 levels for five years and there is no prospect that they will recover at the end of those five years the most useful hypothesis to go with is that they won't be able to refi maturities in 2023.
Starting to see the light in the food and catering business, and good news for the development project of Henqind Island in spite of the delays.
However there´s a long way to run till reach the numbers of 2014 first quarter. The Gross operating profit was nearly double.
Nafta talks set to drag in to next year after missed deadlineReplyDelete
Ah. Obrador v Donald, then.ReplyDelete
thanks for bloggingReplyDelete
some counterpoints to your thesis and wondered how you counter this.
1) i read somewhere that the currently global nitrogen capacity utilisation stands at 78%. and that it would have to reach 85% before the pricing regine changes.
2) for about 8 months US imports very little or no chinese nitorgen. for those months the pricing signal would be to dissuade the anthracite coal producers from sending supplies to US, i.e. that cost is the ceiling as opposed to the floor.
3) and for those 4 good months - from nitrogen pricing perspective its bad that china is being push out of the cost curve i.e. it would matter less and the more cost efficient chinese bituminous coal or europeans becomes more relevant pricing wise. and as capacity is added in non-chinese locations in the next couple of years this point will become more relevant.
in the short term - steeping of the curve will be great. i.e. higher coal prices/tariff. but, it is expected that the chinese coal prices are likely to come down.
from the long term adjustment of supply might be a longer process. i.e. if say the pricing improves in the next year i suspect the chinese supply will probably come back online. things need to get dismantled, put to different use, etc.
all this is moot if you think you are buying a dollar for 10c.
Thanks for the questions:Delete
re: 1) Which pricing regime?
My "thesis" at this price is not concerned with the global cost curve but about the deficit between North American prices and international parity.
You will not, I think, find any analysis from any source arguing that global fertilizer prices will be at or below 2017 levels. My write up above explicitly assumes global prices at 2017 levels and then posits that North American prices will rise to parity with that global price level. Consequently I'm going to set aside 2) and 3) because the questions aren't relevant to the thesis.
I recognize your questions from conf call transcripts and discussion boards and such. My recommendation -- since this is a volatile stock -- is to just put some numbers together.
(1) Either the marginal cost is $X or it isn't.
(2) Either NA traded below parity or it didn't.
(3)Either marginal producers do their best to price according to marginal cost or they don't.
These are the three propositions to be tested. I've provided some data sources above. Test them and decide -- that's the best way for a long-only investor to approach this, in my opinion.
the point i was trying to make wasDelete
1) the marginal delivered cost is different at different points/months in the year.
2) going forward as more middle eastern/african supplies comes in the marginal cost only goes lower for more months.
i guess the main difference is you are looking at marginal delivered cost as one number based on annual numbers. but given the level of oversupply dicing it further may be worthwhile.
re. "pricing regime" - from a oversupply based/marginal cost pricing to a more demand led.
just to be clear the reason the marginal cost will be different at different points of the year is because WHO the marginal supplier is jamaica/canada vs me/africa vs eu vs chinaDelete
Fertilizer demand and pricing is seasonal, yes.Delete
It is seasonal because storage costs cash money.
And because storage costs cash money importers and traders try to approximate just in time delivery and thereby cause peak/congestion pricing at each of tanker, barge, and and truck levels.
There is a trade off: storage cost v incremental freight & handling cost. So, assuming profit-seeking importers/traders/producers etc it is not easy to see how a regime of global oversupply can cause planned or repeated distortions from normal patterns of seasonality.
One time shocks can happen as in late 2016 to early 2017 when importers underestimated the amount/timing of domestic supply that came on stream.
There's a market share mindset that CF reports some Middle Eastern producers have and we'll see how long that persists when they see their product re-exported month in month out, to Brazil and Europe and, why not?, China, at a $40/t spread.
I guess Future Bright's finally re-rating?ReplyDelete
Seems like the NAFTA situation is deteriorating, even though Mexiko excludes corn and soybean for now...ReplyDelete
I think the way that the Renenwable Fuel Standard fight ended up is a leading indicator for how things will play out with MexicoReplyDelete
You have recently bought Best Pacific International.ReplyDelete
It looks cheap after the recent collapse in share price. Do you know why it's falling? Can't find a reason. Trade war?
Also they have some prominent customers. Do you consider the business to be high quality and the costumers to be sticky?
Any reply would be appreciated. Have looked though the 2017 presentation.
Still holding Texhong since 2014 :)
It first fell after revealing gross margin contraction. Gross margin conracted principally because of the cost of unused capacity as it "ramps up" production in its new Vietnam factory. The line item is spelled out in the financials. The gross margin at normal capacity utilization ought to be in the 31% to 33% range, (Sportswear material sales are growing at >70% per year and now make up almost half of its elastic fabrics sales).Delete
It then fell because of trade war fears. About 40% of its sales are directly or indirectly targeted to the United States. Offsetting that is that it could shift some US targeted production to its Vietnam factory. Its Vietnam factory accounts for 30% of the company's designed production capacity. The cost of any tariff would also be presumably shared up and down the supply chain - i.e. US consumers, US retailers, garment manufacturers, fabrics manufacturers, fabric manufacturers, yarn producers, and so on up the line. How it would be distributed among these parties is going to depend on relative market power. Best Pacific is a one-stop-shop, high quality, reliable producer with just in time capabilities and there's little reason to believe that it would bear the lion's share of the tariff burden.
So either growth overcomes margin compression or margins expand or both. Once uncertainty dies down the earnings multiple should expand to 12x or 13x.
That's the way that I see it.
The customers have proven to be sticky in the past. There is increasing cross selling of fabrics and webbing to its major customers. It has established a joint venture with a regional powerhouse customer ini Sri Lanka etc.
There are governance concerns. It bought into a life insurance venture, for example. The amount of capital allocated was small but it something not to be ignored in my opinion.
If I had to guess 'd say that sentiment and fx will improve after the presidential elections in Oct. Until then it's uncertainty + summer trading volumes ==> volatilityDelete
Numbers look fantastic.ReplyDelete
Watch Fibria and Suzano's share prices (they will be one entity soon enough). Weak BRL is very very good for them just as a weak BRL is a drag on Azul's profitability. There may be an opportunity in the summer / in this volatility to hedge by going long both.Delete
1.CF's swing capacity is at the US Guld
2. CF is netback focused
3. Inland & International freight costs are equal
==> CF sets the floor for domestic pricing of UAN
Thanks, I´ll take a look.ReplyDelete
Liked very much this one:ReplyDelete
Thanks for sharing, David!Delete
Yara Q2 https://www.yara.com/siteassets/investors/057-reports-and-presentations/quarterly-reports/2018/2q-2018/2018-2q18-web-presentation.pdfReplyDelete
Points of interest:
- Spreads between European, Asian, & NA nat gas (& LNG) prices
- Continued intimate relationship between Chinese anthracite & urea prices
- the negative Ammonia upgrading margin
- the North America discount to international parity, which appears to be running at $20/st of urea
Good info. Thanks Red.Delete
OCI is itself nicely set up for a 1.5x gain from here (at least) but of relevance to CVRP is the discussion on midwest premia:ReplyDelete
Nice outlook for CVRP. Thanks for sharing.ReplyDelete
+1. Thanks, Red.ReplyDelete
UAN > $200 at NOLA. Still at a rough $20 discount to international parity and Anhydrous is still lagging ureaReplyDelete
$2,025 per gross ammonia ton
15% required unlevered return implies $300/t in gross ammonia margin
Applied to UAN's 876t gross ammonia capacity at a blended return of $285/t to account for regional premium discount attributable to Coffeyville:
EBITDA minus MCX = $285 x 876 = 250 million and implied CAFD = 200 million
Not dispositive but it's another data point
I see this is written up here:ReplyDelete
The (1) midcycle fertilizer price forecasts, (2) relative netbacks by plant, and (3) CAFD implications of the assumed prices are incorrect. The Icahn / CVI discussion is worth thinking about, however.
If in doubt look through the filings of RNF and UAN and create a pro forma picture of EBITDA, cash flows and whatnot at different fertilizer prices. (RNF's Q1 2016 results were filed as an 8-k by UAN)
Texhong written up today alsoReplyDelete
in case it's not immediately clear, they've sold only about 78% of Q3 production in Q3. The remainder is/was presumably held back to sell into the higher prices in Q4 18 and Q1 19. Looks to be about $14 million worth at Q3 prices.Delete
Let's see how the market reacts. Need some joy.ReplyDelete
2019 cost curve (slides 15 and 16)ReplyDelete
The Petrobras closures (slide 9) represent 1.5 million MT of urea equivalent
I don't think there's anything more to say about UAN so I'll end the commentary here.
Maybe you find this one interesting:
They produce children television content. 43% down YTD. P/E 5.6, growing 20% Y/Y. No debt and familly owned. They export 80% of his sales. I think is a fantastic company at fantastic price. Seems great opportunity.
Thanks for sharing, David. I'll myself be most likely be spending the next couple of years adding to what I already own and their biosimilars - CVRP, Fortress; LXU, Texhong; maybe Flybe depending on events. Others reading this may be interested, though. Make sure you count the FCF. Very easy for companies of this kind to burn cash today with the promise of cash returns later: the important thing is to assessing whether there is a more than reasonable expectation of future cash returns on that investment. Don't buy the "it is small and undiscovered" narrative.It is almost never true and the later in the cycle the less true it tends to be.ReplyDelete
I meant to add:Delete
This is a good time to get to grips with Berkshire Hathaway and to keep it in mind as a reference point when assessing the risk/reward of any new potential investment.
Thanks for your advice. Didn't understand the meaning of the second comment.ReplyDelete
Dumb question, but how do you work out the transportation/logistics cost of China fertilizers? A pointer to the right direction would be appreciated.
Latest presentation by CF Industries, Slide #15. Grey shaded area of "China Advanced Coastal" is a good proxy for transocean freight costDelete
Can this gap between US and int. parity be due to the gap in gas price? Thus the marketing is expecting a covergence first through an increase of US gas vs. gas elsewhere? In that case CVR profits won't rerate as much.ReplyDelete
Did youread through the CF Investor presentation that I linked to?Delete
[Apologies for posting here, but couldn't think of a better place...]ReplyDelete
Too bad about FLYB.
However, looking forward, I wondered whether you have done some research into opportunities which may present themselves as a consequence of Brexit? I assume that the downside must be limited in some cases, even in the case of a no-deal scenario. Is this something you looked into and if so, do you have any favourites? Just as an example, could WINE.L be attractive in some cases in the longer run?
2. Future Bright:
I'd be interested in how you see this at the moment.
Thanks for this blog!
Sure -- i follow a number of UK companies. I think there may be some that are worth writing up in the advent of a disorderly Brexit. For those not tied to an ISA continental and Irish stocks may present better opportunities.Delete
Yes, someone (else?) linked to that write up. There have been a cluster of write ups over the last couple of years -- on seeking alpha and I don't remember where else - valuing this at $1.40 to $2.00.
While fertilizer prices have climbed recently, so did gas prices. Any view on that over the next year?Delete
Also, you mentioned they held back some sales in Q3; how much do you think has been sold in Q4?
CVRP is less exposed to unit nat gas cost than others. Here is a model. Play around with the values in the yellow cells.Delete
They held back 22% of production in Q3 and another 7% in Q4. Here's my view on the next 4 quarters
Why CVR PARTNERS don´t repay debt instead of the dividends they announced?
They have said that they intend to refinance their debt at a lower interest rate. The bonds currently yield less than 6%Delete
Conference call discussion on pricing may have seemed a bit confused so here's an aid to make sense of itReplyDelete
Thanks for sharing, red! Let's hope the future turns out to be close to your numbers.Delete
From LXU call: they're selling into Q2 at + $50/t (NH3) and + $60/t (UAN) year over year. Updated my forecasts accordinglyReplyDelete
Thanks for the update, red.Delete
So the application window seems to be tight this year given the prevailing weather conditions; also, the European Commission is apparently set to impose a 22.6% duty on UAN imports from the US, meaning CF etc will probably sell more domestically.
Would you say the current price weakness in CVRP allows for a good entry?
Thanks for sharing all your hard work!
Here's the price outlook for the rest of the year as of mid March:Delete
Note from the panels on the left hand side that while NOLA prices have come down the spread between NOLA and Midwest prices have widened. Net effect is a much moderated price decline in the Midwest. At the same time, ASPs lag prompt prices and we therefore have yet to see the benefits of the price run up in Q4.
The EC 22.6% provisional duty on UAN implies $110 netbacks for CF. So in the medium term CF will make more urea and less UAN -- see slide 23
What effect this has on Q2 UAN prices is going to depend on how much unsold inventory they're holding. Given that the EC duty is not a surprise and given that the duty, if imposed, would have been backdated to the beginning of the calendar year, I imagine that they would not have maximized UAN production.
Farmers have to plant before the May 31 deadline in order to qualify for crop insurance.
The latest corn planting outlook is 91.5 million acres, down from 94 million. So there may, barring further unfavourable weather, be a rush for fertilizer in the next 7 weeks.
All things considered I think this is a favourable entry/add point.
Okay, thanks again (for judgment & links)!Delete
Hope you don't mind 2 follow-up questions:
1) How much do ASPs lag prompt prices by your analysis? Do you have a graph, lag must vary over time, I imagine.
2) And how (based on what data source) do you compute the price forcasts (including variance)?
Let's hope for surprisingly good spring weather. =)
Lag is a function of management's decision making wrt to inventory mgmt, forward booking, barge/trucking availability etc so exactitude isn't possible. The last 3 years have looked like this:Delete
I posted my best estimate, including the whys and wherefores for that estimate, on feb 21 above but here it is again:
24 minute video on the spring outlook for North American nitrogenReplyDelete
Q1 2019 for CVR is out and I´m trying to figure the numbers for Q2, assuming:
200$ and 345.000 ton for UAN, 360$ and 41.000 tons for ammonia -> 3M$ more in FCF vs q1.
NAT GAS 2,85 -> 1.400 MMBtusx(3,85q1 -2.85q2)-> 1M$ more in FCF. I just take the MMBtus used in production, is it right this way?
Pet coke 138 x (38q1-32q2) -> 0,8M$
So adding all we have more or less 4-5 M$ more in FCF for q2.
The prices of UAN and AMMONIA are an assumption given that the conference call has not been very clear, however prices are starting to rise.
I have updated the worsheet
1) they sold $63 million of product at Dec & Jan prices (i.e. $450 ammonia, $230 UAN)
2) they sold very little in March
3) they'll sell the bulk of the remainder in May
Have a look at the spreadsheet and let me know where you disagree or have questions
Cleared up Red, Thanks for sharing.ReplyDelete
Last question Red,ReplyDelete
Your Fixed opex is a little bit lower than Direct operating expenses (exclusive of depreciation and amortization) reported for CVR. Is there anything I´m missing?
The difference is freight revenue/cost (page 12 of the 10-Q). CVRP adds freight charges in the revenue line and in the direct opex line. They cancel out; it's a pass-through item. I remove freight from both revenue and cost.Delete
A useful reference for pricing outlookDelete
UAN = x 32
NH3 = x 82.2
Urea = x 45.8
Get it, thanks.ReplyDelete
In the conference call LSB projects good prices for UAN and AMMONIA, although those of CVR will be better for the volume that they already sold in November-December of last year for Q2. Anyway, I'm worried about what they are saying about EU tariffs. They are causing producers who sell in the EU to divert their production to the USA. I think it's a serious problem and I would not know how to quantify it exactly, could you give me your point of view on this matter?
FBH has not published any news and its shares have risen 14% with an unusual volume of 5M; Insider information of some?
1) they're expecting $8 to $10/ton above Q2 2018 so about $200. CVRP's weighted ASP runs at about $8 to $10 above LXU's so that would imply $218 for CVRP's Q2.ReplyDelete
2) CF is better placed to discuss global trade flows and prices than are LXU or CVRP's so I'd listen to their commentary in their call this morning. (They had anticipated this risk and have not sold UAN in Europe this year). Remember that UAN is manufactured from urea. So the equilibrium price of UAN must be at least (32/45.8) x urea price.
Let´s see what they say. I´ve taken a look at q1 2019 conference slides and they seem very optimistic.ReplyDelete
Thanks for sharing, red.Delete
I assume this actually underestimates what will be redirected to the US by quite some margin since the decision wasn't taken at the beginning of the quarter.
Any view on how this may resolve in the months to come? Do you think prices will tank again in July?
I've commented higher up in the comments section that CF witheld exports to the EU b/c (a) they had a good idea that the EC would rule this way; and (b) b/c they had a good idea that the proposed duty would be retroactive.Delete
Second, UAN is upgraded from urea. The marginal cost of upgrading from urea cannot stay below zero. The marginal cash upgrading cost per short ton is $12.
So, given that urea is 46% N and UAN is 32% N, UAN must be priced $12/46 = $0.26/N higher than urea. In other words $250 per short ton of urea translates to ((250/46)+26)*32 ==> minimum $182/st UAN price over a months long time frame. Producers have to see the spread go negative, recalibrate the production mix, and ship urea instead -- that's an 8 or 9 week process.
CF have also answered questions on this in the last earnings call. Their thinking is that the Russians will upgrade ammonia to NPKs instead and sell it into the Asian market. I recommend listening to that call.
That's the theory. In fact, the midwest wholesale UAN price bottomed out at $198 or so in mid-April. There were a couple or so weeks when the spread to urea went to zero on a $/N basis.
the way the weather has shaped up seems to indicate
a) a rush in may
b) planting extended into june (as indicated in the linked-to article)
c) favorable economic rationale for greater-than-usual nitrogen demand in the summer (Q3) months
Thanks for the speedy and unsurprisingly informed reply!Delete
I need to listen to the call again as I must have been too tired the first time...
(There is a typo in the formula. It should be ((250/46) + 0.26) * 32, obviously.)
Next step refinancing.
These last days news about bad weather in cornbelt and southestplains are showing up . The most pessimistic, report that the corn plantation could be reduced. It is really an important variable to keep in mind? Could CVR Partners lost some of the volumen produced?ReplyDelete
CF fireside chatReplyDelete
LXU, which you previously covered, now available for 4.30 USD/share. Did I miss some news or just a general negative sentiment?ReplyDelete
My first instinct is to say that there have been a number of tornado events in Arkansas. Given that plant reliability is/has been the biggest drag on LXU sentiment it may be that investors are taking a wait-and-see approach. El Dorado is a large share of LXU's total capacity.Delete
Here's my take on relative valuations of the 3 North American pure play nitrogen producers, fwiw.
CF'S marketing chiefReplyDelete
alright, that's probably it from me this quarter
Thanks for all the info, it's really appreciated. I understand the quarter isn't over yet, but I was hoping you may find a moment to briefly comment on what follows:
It almost looks like the market prices LXU as if it is going to go bust.
1) Do you think that is a likely scenario, assuming no major issues with plants? In particular, do you think there could be liquidity issues over the next months? How would the trade tariffs on Mexico affect the nitrogen market, especially UAN and LXU?
2) At what point would you consider switching (or partially switching) from UAN to LXU?
This is my view of LXU in numerical formReplyDelete
One issue is that a significant share of LXU's ASPs on the industrial side are fixed by the Tampa ammonia price. Separately, a sgnificant share of LXU's margins (also on the industrial side) are linked to the Tampa ammonia price. Merchant ammonia prices have decoupled from teh rest of the nitrogen value chain; and prices of all nitrogen products at the US Gulf have decoupled from both inland and international prices because of the weather-induced problems in transporting product into the interior. I have attempted to fairly represent these issues in the tab labelled "quarterly".
A recent note on the ammonia dislocation:
re: Mexico. A trade war with China hurts soybeans and a trade war with Mexico hurts corn. So, having both on the go at the same time is not good. However, this time next year is election season and Trump cannot win without the corn and soybean producing states.
I'm satisfied with holding on to all of my UAN shares for the next few months. LXU's performance turn is, I think, 10 months away. If LXU offers 2x the projected total return that UAN does then, I'll switch into it. CVRP may refinance their debt soon, should pay out substantial distributions, etc. I'd prefer to participate in that and then reassess.
Hope that helps
Curious if you've posted any thoughts on the Fortress convert purchase?ReplyDelete
I have not. I may write about the common shares in the period between Q2 and Q3 reporting.Delete
Suzano provides exposure to the same fundaments with less aggravation. SUZ is to FGE as CF is to LXU
LSB Q2 results. Slide 9 shows Q3 current/forecast selling prices.ReplyDelete
Looking like a really nice set up for LSB going into 2020Delete
- supportive corn prices
- demand into fall/spring will enable them to ship most if not all inventory
- no scheduled turnarounds in 2020 should boost production 5-8% if onstream remains steady
- Targeting onstream rates of 95%, 95% and 97% at Pryor, Cherokee and El Dorado respectively
Commentary from the conference call.
"Looking ahead to the second half of the year...corn prices have moved into the mid- $4 per bushel range. At those prices, industry resources anticipate that farmers will plant a significant amount of additional acres for the 2019-2020 planting season, which could mean a very heavy fall application season for ammonia, providing we don't see an early frost"
"Even with the planned turnarounds at our El Dorado and Pryor facilities...along with whatever lingering impacts remain from the past 8 months of weather-related product inventory buildup...I anticipate that we will deliver improved profitability year-over-year during the second half of 2019 and into 2020"
I agree & left a comment saying so in the LXU thread. Caveats are that (1) Q3 2019 won't be pretty (2) LXU is an EBITDA/FCF/etc multiples story so somewhat subject to sentiment over the next the couple of years. But if they keep operating rates steady 200MM ebitda in FY20 would not surprise me.Delete
Seems like quite a few donuts over the past couple of years, curious to see an analysis of what went wrong. Especially since this blog started off strong and uncovered a lot of hidden gems in the first few years.ReplyDelete
After all, what good is making mistakes, if we don't learn from them?
That would be great.ReplyDelete
Hi red, hope you're well! Your view on the latest results/earnings call would be greatly appreciated.ReplyDelete
Just in case you're not aware: http://www.rentechsecuritieslitigation.com/
Any idea anyone why we see the prices fall again? From CF Industries Oct 30 presentation one would assume that the long-term thesis still stands, no?ReplyDelete
Another question I had regards climate change. Nitrogen fertilizers contribute quite a bit to global warming (see, e.g. Yara 2019 Q3 presentation, p21, which refers to the IPCC special report about land use). I'd be keen to have your view on this.
"While UAN markets have been stable in Europe, US values are now at a level that will test the production costs of FSU suppliers. Indeed, CF Industries latest Q1 and Q2 offers at several river terminal locations reflect comfortably below $120ps ton fob Nola equivalent."
It doesn’t seem that the blog is maintained anymore.ReplyDelete
Looking at the Inventory page, it seems to me that on balance the higher quality companies (JDG, JHD Precia etc.) have performed outstandingly (a credit to the analysis undertaken on the blog) whereas the ideas/situations haven’t so much, partly thru lack of luck (a problem when running a concentrated portfolio), partly due to a lack of understanding of complex dynamics (Macau/HK), partly due to value stocks in general being out of favour. Overanalysing certain situations also hasn’t really helped. None of which is surprising.
As a whole, this is a great blog to ponder over as an 8 year case study.
My takeaways are:
1) Quality companies outperform in the long run: good management with skin in the game, high ROIC/growth prospects with long runaway, history of consistent performance.
2) Discipline matters immensely. Cutting losers (Future Bright) would have impacted IRR hugely.
3) Being concentrated is fun but extremely difficult to sustain unless you have 2) above sussed to perfection.
4) Avoid sub-scale businesses when running a concentrated portfolio.
This comment has been removed by the author.Delete
Can you elaborate a bit on #4?Delete
Well said. Hope red comes back soon.Delete
Which similar blogs do you recommend for us to learn?
What went wrong with UAN/LXU analysis and what do you think going forward? Thanks.
clearly he went bankruptReplyDelete
clearly he went bankruptReplyDelete
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