What is CVR Partners' (NYSE: UAN ) biggest attraction? Its awesome dividend yield of 7.5%, of course. But there are other things that suggest this one's worth betting on. Take a look.
High on corn
Corn will take the company far, as it requires the largest amounts of nitrogen, which is also the only nutrient CVR deals in. Several recent industry developments are suggesting that U.S. corn plantations could indeed hit record highs this year. So I won't be surprised if CVR's revenue heads further north, particularly in the second quarter when the planting season is in full swing.
True, this should benefit peers, too, especially CF Industries (NYSE: CF ) , which is the largest North American nitrogen producer. But CVR enjoys an added advantage that others don't. It is strategically located in the U.S. corn belt, closer to its customers. Additionally, it is close to Union Pacific's main line, which in turns means cheaper transportation than most peers.
High on UAN
There's another reason for CVR to do well in the future -- its move to convert larger quantities of ammonia to urea ammonium nitrate. It upgraded 72% of it during the first quarter.
UAN is a highly profitable nutrient that has seen an 88% surge in its last five-year average prices compared to the previous five-year period. During the first quarter, UAN prices were 51% higher than the year-ago quarter. Compare this to a mere 9% rise in ammonia prices, and the move makes a lot of sense. So profitable is the nutrient that even CF is upgrading a greater chunk of ammonia to it.
CVR is investing heavily on UAN expansion, targeting a 50% jump in annual capacity by early next year when the project gets completed.
Low on gas
Sadly, where there are gains, there are losses, too. CVR always took pride in the fact that unlike most peers, it uses pet coke as feedstock instead of natural gas. Sure, this shields it from natural gas price swings and gives it a cost advantage vis-a-vis competitors as pet coke has generally been a cheaper alternative.
But can CVR call this an advantage any more? I'm not sure about that. A sharp dip in natural gas prices is giving peers' numbers a good lift. CF Industries had a stellar fourth quarter, and margins in PotashCorp's (NYSE: POT ) nitrogen division hit record highs in the first quarter thanks to low gas costs. Naturally, if competitors start gaining from something CVR cannot, chances are it will lose its competitiveness.
In fact, CVR's cost of pet coke has also been rising. It shelled out $42 per ton during the first quarter as compared to just $15 per ton in the same period last year. As it is, CVR is a comparatively new entrant into the market, and losing any kind of advantage over peers could be bad. It might do well by getting some natural gas into its system!
The Foolish bottom line
But what makes CVR a must-watch is none of the above reasons. It's the way things are unfolding between the parent company CVR Energy (NYSE: CVI ) and billionaire activist Carl Icahn. Chances of CVR Energy getting acquired by Icahn seem high, in which case, CVR Partners will go to Icahn, too. And then he might just want to sell off the fertilizer division, which I feel could be at good premiums.
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