CVR Partners Earnings Rocked by Plant Shutdown

As an investor in the nitrogen fertilizer master limited partnership CVR Partners (NYSE: UAN  ) , I was really hoping for the second quarter -- the strongest of the year for fertilizer producers -- to be a good one. In fact, after the recent expansion at the company's only facility, I expected a record second quarter. I realized that wasn't going to occur after management announced that the next payable distribution would only be $0.583 per share and distribution guidance was lowered substantially.

Source: CVR Partners.

That sinking feeling really took hold after I read an SEC filing on July 29 in which the company confessed that it ran into major production issues during the quarter. I think that is a pretty good (albeit depressing) way to preface the company's second-quarter earnings. Was there any good to be found?  

Financially speaking...
CVR Partners actually had a decent quarter, all things considered. The first full quarter with the plant expansion and upgrade in place allowed the company to convert nearly all of its ammonia into higher-valued urea ammonium nitrate, or UAN.

 

2Q13

2Q12

% Growth

Ammonia price per ton

$688

$568

21%

UAN price per ton

$331

$329

0.1%

Ammonia production (tons)

91,300

108,900

(16%)

Ammonia available for sale (tons)

2,200

34,900

(93%)

UAN available for sale

225,200

180,000

25%

Source: CVR Partners press release.

You may wonder why the company would convert ammonia worth $688 per ton into UAN that sells for just $331 per ton. Since it only takes 0.41 tons of ammonia to produce one ton of UAN, the company is able to increase profitability up to the breakeven price, which is defined by the UAN selling price divided by 0.41. For the second quarter, the ammonia-to-UAN breakeven price was about $807 per ton -- much higher than that for ammonia -- so it made sense to convert as much as possible.

Not even a record quarterly output of UAN could make up for nine days of downtime in May and June, which damaged the catalyst for producing ammonia and resulted in the loss of about 50 tons per day of ammonia thereafter. Financials still stacked up favorably to last year's second quarter.

 

2Q13

2Q12

% Growth

Revenue

$88.8 million

$81.4 million

9.1%

Operating income

$37.1 million

$36.1 million

2.8%

EPS

$0.48

$0.48

--

Source: CVR Partners press release.

The big black eye for shareholders -- and the reason for the muted enthusiasm surrounding shares -- was the lower distribution guidance. Previously expected to fall between $2.15 and $2.45 per unit, the MLP now expects to payout just $1.80 to $2.00 per unit. That would still represent a record distribution, but it is far from the previous guidance. Furthermore, with $1.19 already handed out to investors in the first half of 2013, management must be bracing for a pretty dismal second half. Lower-than-expected selling prices and the unexpected down time are cited as the culprits.

Industry funk
This is a rough time to be a fertilizer investor. Increasing competition and oversupply worldwide seem to be affecting all three major nutrients. India is taking an especially tough toll on potassium and phosphate, while overproduction of ammonia in China is reversing historical trading patterns for nitrogen. Just when you thought it couldn't get worse, it did. Potassium producers Potash (NYSE: POT  ) and Mosaic (NYSE: MOS  ) were already caught in a low-price contract environment when OAO Uralkali announced on Tuesday that it was selling more potash directly to China at even lower prices.

Overall, the trends for world population growth, shrinking farmland, and increasing demand for nutrients seem to support a long-term investment in the fertilizer industry. But perhaps investors need to consider that unforeseen threats, such as Russian and Chinese supply and slowing Indian demand, are more than just short-term trends.

Foolish bottom line
Nitrogen appears to be one of the safer nutrient investments at the moment. Producers tend to be insulated from international woes and more dependent on domestic demand. That being said, the second quarter proved that having a single production facility continues to be a pretty big liability for investors in CVR Partners. The company shut down its entire facility on July 27 to completely repair its catalysts. Ammonia production will resume on August 2 while UAN production will resume on August 3. If you still believe in the long-term trends for nitrogen demand, then you will have no problem lying low until next year's planting season. At least you can collect a hefty payout in the meantime.

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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On August 01, 2013, at 11:10 PM, rrrooobbb wrote:

    Wouldn't a plant shutdown back in May and June (for about 10% of the quarter) need to be disclosed by the company under SEC rules? It is a single plant company, how could this not be considered "newsworthy" to investors who were trading the shares with the previous guidance of $2.15-$2.45 in yearly distributions? Am I in left field, or did the management team not understand what 8K's or press releases were for? Borders on illegal, IMO.

  • Report this Comment On August 02, 2013, at 12:29 AM, TMFBlacknGold wrote:

    @rrrooobbb

    I was a bit disappointed to learn of the news on July 29th and not when it actually occurred as well. I'm not sure how the SEC views the disclosure, though, and the share price seems to have already taken that into account (since there was no big move on the news). You may be right though.

    --Maxxwell

  • Report this Comment On August 02, 2013, at 2:04 PM, tgfgnut wrote:

    I'm very surprised UAN hasn't declined more since the news about lowered dividend expectations.....

    Using midpoints, going from $2.30 p/a to $1.90 p/a is a 21.7% reduction....significant....

    Are people just holding on to get the $0.583 div?

    I sold on the news and am looking to get back in under $20/sh.

    TGFGNUT

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