What happened
Remember when nitrogen fertilizer selling prices slipped to multiyear lows in the second half of 2016 before sharply recovering entering into this year? Well, the recovery proved to be a temporary affair. Spot prices are now threatening the lows from last year, which would mark the absolute lowest market prices in well over 10 years save for the brief depth of the Great Recession.
That helps to explain why nitrogen fertilizer specialist CVR Partners LP (UAN 0.96%) dropped nearly 27% in August. Continuously falling revenue and earnings have kept the master limited partnership from distributing its profits to shareholders because, well, it hasn't actually made any money in the first half of 2017. The company did manage to distribute $0.02 per share recently -- the first payment in nearly one year -- but that's a far cry from the days when four payments of at least $0.40 per share were made in a single calendar year.
Image source: Getty Images.
So what
CVR Partners LP released its second-quarter 2017 financial results in late July, which demonstrated just how badly the market has deteriorated. Selling prices for ammonia and urea ammonium nitrate, or UAN, fell 21% and 19%, respectively, from the year-ago period. The company increased production 39% and 8%, respectively, but that wasn't enough to make up the difference.
Revenue slipped 5% in the first half of 2017 compared to the year-ago period, while earnings per share swung to a loss of $0.13 compared to a net gain of $0.01 in the first half of last year.
While the entire industry is suffering from oversupply and competition from imports, things may about to get even worse. Why? New nitrogen fertilizer production capacity continues to come on line. That includes a planned world-scale $2.8 billion production facility in the heart of America's Corn Belt. The proximity of the proposed plant to customers would only make the industry's glut even more profound.
Now what
Investors are right to be heading for the exits when it comes to CVR Partners LP. The nitrogen fertilizer market remains challenged with no recovery in sight (although a slight bump from the fall fertilizer application could occur), which is awful news considering the pricing rut is about to enter its fourth year. Although many producers have made a difficult but necessary decision to ride out the down cycle, there are fewer options on the table with each passing quarter. Long story short, things may continue to get worse for the industry.
