Will Terra Nitrogen Make Your Portfolio Grow in 2013?

As 2013 begins, now's a good time to look at the future prospects for the stocks you own. If you don't know where a company's headed in the next year and beyond, then it's impossible to make an informed decision about whether you should add the stock to your portfolio -- or sell it if you already own it.

Today, I'll look at Terra Nitrogen (NYSE: TNH  ) . The fertilizer master limited partnership grew like a weed in 2012 as the combination of low natural gas prices and high demand for yield-enhancing farm products produced strong performance. But will the coming year be as favorable for the industry? Below, you'll learn more about Terra Nitrogen's prospects for 2013.

Will Terra Nitrogen keep growing in 2013?
For whatever reason, it's hard to find analyst estimates for Terra Nitrogen. One possible cause could be that its status as a master limited partnership clouds its financial picture somewhat, although analysts don't have similar problems with other MLPs. If expectations for Terra parent CF Industries (NYSE: CF  ) are any indication, though, Terra could have a mixed year, as analysts see CF posting modest gains in share price but suffering from declining earnings per share.

Much of the appeal of Terra Nitrogen and fellow fertilizer MLPs CVR Partners (NYSE: UAN  ) and Rentech Nitrogen Partners (NYSE: RNF  ) comes from their high dividend yields. In terms of sustainability, all three companies raise some concerns, as distribution rates are above earnings per share. Still, Terra Nitrogen distributes only a few pennies more per share than it earns, which puts it in better shape than CVR or Rentech Nitrogen in terms of having a manageable distribution rate. That in turn should support shares as long as the company keeps profits up.

On the profits front, though, the future is much cloudier. Natural gas prices rebounded significantly from their lows of last year, and although prices have fallen back a bit more recently, huge future demand for plentiful natural gas should help bring the supply demand equation back into equilibrium. The resulting input cost increases would cut margins and reduce the competitive advantage that Terra and its nitrogen fertilizer peers have had against companies specializing in other types of fertilizer, such as potash-producing Mosaic (NYSE: MOS  ) and PotashCorp (NYSE: POT  ) .

As always, the big unknown for the ag industry is the weather. After last year's drought, farmers are preparing for whatever Mother Nature throws at them. Increasingly, though, fertilizers have become a constant part of the equation for farms regardless of weather conditions, and with farmers still relatively prosperous, they have the money to spend to enhance yields.

Terra Nitrogen remains an intriguing agricultural play, and one that has potential to keep rising. As long as the world needs food, Terra will have opportunities to grow.

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Click here to add Terra Nitrogen to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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  • Report this Comment On January 10, 2013, at 2:33 PM, GrimRebuke2 wrote:

    Another challenge in properly risk pricing or forecasting results with many of these companies is that they are externally-managed. And in the case of Terra this is particularly true because of a few factors. First, the external management has a conflict of interest in that they are the management of the parent, CF. As a result of this arrangement, TNH is bound into an exclusive contract to only sell to CF at whatever prices CF is offering. So if management at CF wants to make their own profitability look better, they can drastically lower the price they are paying to TNH and increase CF's profits (and likely bonuses for key executives) by cutting into the money that would be going to partnership shareholders in the subsidiary. This perverse incentive is exacerbated by the fact that the partnership's agreement was amended to state that the management can not be held liable for failing to meet their fiduciary duties to the partnership. These factors together make it very difficult to predict future performance, as simply knowing the industry drivers is not nearly enough. If incentives to drive profit margins at the parent outweigh incentives to generate dividends from the subsidiary (and bear in mind that the parent keeps only a little over half of the dividends of the subsidiary versus 100% of its own direct profits), then TNH could perform very badly even as the industry is soaring.

    In the interests of full disclosure, I currently hold a small long position in TNH.

  • Report this Comment On January 14, 2013, at 8:11 AM, WillardMR wrote:

    I'm as cynical as the next guy, but I am confident that the board of the partnership has a fiduciary responsibility to secure a fair price for the limited partners. Moreover TNH in its history pre-CF and subsequently has in fact realized prices commensurate with the open market.

  • Report this Comment On April 13, 2013, at 1:13 PM, GrimRebuke2 wrote:

    Willard - actually, they changed the partnership rules explicitly to state that they have no fiduciary duty to the partnership. It was in one of their releases a while back.

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