It wouldn't be an exaggeration to call 2011 the biggest year for CVR Partners (NYSE: UAN ) . The fertilizer maker went public in April after getting spun off from CVR Energy (NYSE: CVI ) , and has remained a rock star throughout the year.
The new kid has raised expectations of many, and has even bagged a spot in my top three fertilizer picks. Here's what to expect from CVR in 2012.
Higher prices = heavier bottom line
CVR is a lucky chap, setting foot as an independent entity at a time when the industry it belongs to is experiencing one of its best times. Prices of the two key nutrients CVR deals in -- ammonia and urea ammonium nitrate (UAN) -- surged 75% and 79%, respectively, in the third quarter alone. This drove CVR's revenue up by an astounding 66.4% from the year-ago quarter, to $77.2 million.
Soaring prices of these two nutrients also took Terra Nitrogen's (NYSE: TNH ) third-quarter revenue up by nearly 50% from last year, encouraging the company to raise production. With demand remaining firm, prices of these nutrients is unlikely to slow down very soon. What needs to be noted is how most companies, including CVR, are investing in expansions to make the most of the opportunity.
Investors should keep track of the big UAN expansion project CVR is currently busy with. Out of the $47.6 million of capital expenditures for 2011, nearly $36.2 million went toward this expansion project. CVR's UAN capacity is expected to be boosted by 400,000 tons per year with this project, and 2012 should see a major portion of the project getting completed.
Apart from this, CVR is also converting a lot of ammonia it produces to the highly valued UAN. Considering how UAN prices have shot up, this is one move that could take CVR far.
How fast the global demand for nutrients is picking up was proved when countries like India started buying huge quantities of urea this year (apart from other chemicals such as potash). This proved to be a big boon for biggies like PotashCorp (NYSE: POT ) , Mosaic (NYSE: MOS ) , and Agrium (NYSE: AGU ) , who are members of the cartel that controls all potash exports out of Saskatchewan. These companies are also undertaking big expansions to tap the fertilizer boom.
This rise in demand for urea is definitely good news for CVR. CVR's expansion project will not only increase production, it will also help the company stand up better to these big competitors.
The power in CVR's hands
What makes CVR an interesting play is the unique advantages it enjoys over peers. One, it is shielded from natural gas price swings because it uses petroleum coke as feedstock, unlike most competitors. Moreover, almost 70% of this pet coke is sourced from CVR Energy's adjacent refinery, thereby resulting in further cost advantages.
Two, CVR is located in the U.S. Corn Belt, which increases proximity to Union Pacific's main line. This has resulted in two-fold benefits for CVR. It enjoys transportation cost advantage of approximately $25 per ton over competitors located in the U.S. Gulf Coast. And being in the middle of the Corn Belt takes CVR closer to farmers who grow corn.
Fertilizer companies have a keen interest in corn because it is one of the crops that require the highest level of nutrients. As a result, these companies bank a lot on corn, and keep a close watch on its plantation and price trends. The good part is, fertilizer giants like CF Industries (NYSE: CF ) have projected near-record levels of corn plantations next spring. This should bode well for CVR going ahead.
It's not just corn that will steer the way for CVR next year. I won't be surprised if 2012 turns out to be another good year for CVR, after the way the fertilizer industry has caught everyone's eye this year. Farmers across the world are going over the edge to grow more and make the most of rising crop prices and demand for food (fueled by burgeoning population and higher spending power, especially from the emerging markets).
Adding to the bullishness are some recent developments, particularly China's purchase of 900,000 metric tons of American corn this year -- its biggest such purchase so far. A move like this, coming from a nation that exported corn till a couple of years back, not only surprised many, but also provided evidence of the surging global demand for corn.
These reasons encourage me to remain optimistic on the demand for CVR's nutrients in 2012.
The Foolish bottom line
While CVR's line and pace of business sound good, what makes it even more tempting is its master limited partnership (MLP) structure, which enables the company to pass on any taxable income directly to shareholders in the form of dividends. CVR currently has an amazing 9.9% dividend yield.
It makes sense to keep a watch on how 2012 unfurls for this company that belongs to the hot fertilizer industry. Simply add it to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks. Also don't forget to check out The Motley Fool's latest special report to discover our top stock pick for 2012. It's free, but it won't be available for long, so get your copy now.