It appeared that nitrogen producers were going to have a rough third quarter when Rentech Nitrogen Partners (NYSE: RNF) announced it was slashing its quarterly distribution to just $0.27 per share last week -- almost half of the previous lowest distribution ever and well below the average historical payout of $0.86 per share. The news sent shares to 52-week lows and also weighed on shares of CVR Partners (UAN 3.61%), which were already near annual lows.
Fortunately, CVR Partners restored some faith when it reported earnings this morning and raised the lower end of its distribution guidance for the year. It wasn't a spectacular quarter: President and CEO Byron Kelley is stepping down at the end of the year and production was affected by repairs in the beginning of July. But weak nitrogen prices for ammonia and urea ammonium nitrate, or UAN, are affecting the entire industry. Take a look at share performance including cash distributions for the two smaller producers and larger peer Terra Nitrogen (NYSE: TNH) in the past year.
UAN Total Return Price data by YCharts
Are operations really as troubled as the CVR share price predicts? I'll point investors to the company's press release for all of the financial numbers, but the numbers I'm focusing on are below:
|
3Q13 |
3Q12 |
% Change | |
|---|---|---|---|
|
Revenue |
$69.2 million |
$75 million |
(7.7%) |
|
Operating income |
$21.3 million |
$32.3 million |
(34%) |
|
EPS |
$0.27 |
$0.43 |
(37.2%) |
Source: CVR Partners press release
That doesn't look so pretty, but remember that CVR Partners' business is dependent on selling prices and the efficiency of operations. How did production fair last quarter?
|
3Q13 |
3Q12 |
% Change | |
|---|---|---|---|
|
Ammonia price per ton |
$505 |
$578 |
(12.6%) |
|
UAN price per ton |
$259 |
$290 |
(10.7%) |
|
Ammonia production (tons) |
100,400 |
104,200 |
(3.6%) |
|
Ammonia available for sale (tons) |
3,400 |
29,400 |
(88.4%) |
|
UAN production (tons) |
239,300 |
181,900 |
31.6% |
|
On-stream, gasification |
91.2% |
99.1% |
(7.9%) |
|
On-stream, ammonia |
90.1% |
98.4% |
(8.4%) |
|
On-stream, UAN |
89.5% |
96.9% |
(7.6%) |
Source: CVR Partners
Both selling prices and on-stream factors (process efficiency) were down for the quarter compared to last year, which dragged on sales and income. I wouldn't be too concerned with prices when taking a long-term view, however, since the company has no control over market forces. On-stream factors were smacked by repairs required for the gasification unit, which affected ammonia and UAN downstream. It appears that the problem, which first arose in May, is finally fixed and the company can return to full operations with limited interruptions.
Ammonia production was affected by downtime, but investors shouldn't worry that ammonia available for sale was down 88% compared to last year. Why not? Because that was the plan all along. CVR Partners improved its facility in late 2012 to allow it to upgrade all of its ammonia to higher value UAN. By all accounts it appears the decision has paid off.
Consider that year-over-year sales were only down by about 8%, despite an 11% drop in selling prices and 4% drop in ammonia production. The improvement has allowed the company to raise the lower end of its full-year distribution guidance from $1.80 per share to $1.85 per share. The high end remains at $2 per share and the total distribution for the first nine months stands at $1.55 per share. Not too bad, all things considered.
Been there, done that
While the troubles seem to be behind CVR Partners, investors in Rentech Nitrogen are just beginning to feel the pain caused by downtime due to expansion projects. Larger companies such as Terra Nitrogen can deal with production interruptions much better than the two smaller companies, which combined only own three facilities. Rentech's two facilities, East Dubuque and Pasadena, are both being expanded on time and on budget. Unfortunately, East Dubuque needs to undergo an unscheduled repair that will slash ammonia production from 1,100 tons per day to 790 tons per day. Pasadena will be shut down for two weeks for scheduled downtime. Sound familiar?
Rentech investors will pay heavily in the near term: the fourth-quarter distribution could be as low as zero. However, I would encourage investors to take a long-term view. Increasing capacity will pay enormous dividends in the long run and allow CVR Partners and Rentech Nitrogen to take advantage of the market when prices rise again. Don't be too concerned over short-term obstacles.
CEO departure
CVR announced that Kelley will step down at the end of the year. I don't see this as a problem for two reasons. First, Kelley was coaxed out of retirement in May 2011 to head the company after its IPO. Second, he'll be replaced by Jack Lipinski, current president and CEO of CVR Energy and the former president and CEO of the company. Since CVR Energy owns a majority of the company's shares this could actually work in the favor of shareholders by better aligning the two organizations.
Foolish takeaway
Hopefully next year investors will finally reap the benefits of the CVR plant expansion, which increased UAN capacity by 50%. I've been patiently waiting to see the company grow its operations since I became a shareholder in 2011. Even if nitrogen prices remain weak heading into next year I know that the expansion will eventually provide a big boost to revenue and income. It has been a rockier road than many expected in 2013 so far, but the advantage of taking the long-term view is that this will all just be a blip on the radar years from now.
