Terra Nitrogen (NYSE: TNH) released results from 2012 after the market closed Tuesday. All in all, the company did a great job in generating cash for shareholders – vitally important for a master limited partnership – in light of lower production volumes and price fluctuations. Here's a brief recap of earnings and an outlook for the year ahead.
Financials
The specialty nutrient company saw increased pricing volatility in the fourth quarter for its two products, ammonia and urea-ammonium-nitrate, or UAN. Average ammonia pries increased 28% while UAN prices slipped 16%. For the full year, average selling prices increased 16% for ammonia while falling 4% for UAN. Terra Nitrogen left 2012 behind with the following comparisons from the year ago periods:
|
4Q11 |
4Q12 |
2011 |
2012 | |
|---|---|---|---|---|
|
Net Sales |
$200.8 million |
$204.6 million |
$797.9 million |
$776.7 million |
|
Gross Margin |
66.5% |
74.5% |
65.6% |
74.1% |
|
Net EPS |
$3.87 |
$4.61 |
$15.33 |
$17.06 |
Source: SEC filings
Similar to its parent CF Industries (CF +2.95%), Terra Nitrogen enjoyed a boost from favorable natural gas prices, which fell 23% for the year. The parent may have left shareholders of its subsidiary a little jealous, as it set new records for sales, earnings, EBITDA, and EPS. The larger CF Industries enjoys more financial flexibility than Terra Nitrogen, but it comes at the expense of a sizable dividend.
Nonetheless, investors worried about last year's volatile fertilizer prices should be comforted by the company's performance. An 11% improvement in EPS always helps, but a distribution that is trending downward may have investors nervous about the future of the nitrogen market.
Outlook
Terra Nitrogen expects 2013 capital expenditures, or capex, to be between $75 million and $100 million as it expands its rail yard, installs new product holding tanks, and various process control upgrades. That is markedly higher than the $46.7 million in capex from last year, which could eat into earnings. I still think investors should view the expansion expenses as investments into the business. For instance, CF Industries is spending $3.8 billion expanding its nitrogen capacity over the next several years. The outlook for nitrogen should make the upgrades for both companies welcomed news.
According the United States Department of Agriculture, nitrogen "is the single most important input a farmer can control to increase crop yields on non-irrigated fields." Management at both companies noted that farmers will feel the pressure to make up losses stemming from last year's historic drought, which will keep corn, soybeans, and wheat prices high and planting near record levels. That is a great development for both companies; especially the nitrogen-focused limited partnership.
Considering that approximately 54% of all nitrogen used in the United States in 2011 was imported, which means there is plenty of demand for domestic sources of the nutrient. Therefore, ammonia and UAN prices are expected to remain strong for 2013 barring unforeseen market disruptions (weather and the like). Fertilizer companies should also benefit from continually low natural gas contracts, which will remain near $3.31 per million BTU for Terra Nitrogen through April.
Products
Lower production volumes for 2012 compared to the previous year's watermark were mostly attributable to a one-time off-take agreement in early 2011 with the company's parent. The company sold 371,000 tons of ammonia and 1,999,000 tons of UAN in 2012 – down from 385,000 tons and 2,047,000 tons, respectively, in 2011.
The dominating presence of UAN in the product mix overmatched a 16% increase in ammonia prices, despite the price of UAN dropping a measly 4% over 2011. The discrepancy resulted in a year-over-year product sales slide of $18.4 million.
Alternative investments
Investors hungry for more investments in high-demand nutrient markets will want to keep an eye on bigger players. Despite recently whiffing on revenues, PotashCorp (POT +0.00%) has grown its dividend 700% since 2011. The company will begin to see improvements in margins as it puts its largest capex projects behind it and looks to enjoy increased production volumes and efficiency.
Perhaps you are attracted to the fertilizer market by a combination of growth and high yields. Another specialty nutrient master limited partnership focusing solely on nitrogen is CVR Partners (UAN +0.26%). The company is smaller than even Terra Nitrogen, but it enters 2013 with 50% more UAN capacity and a facility that just completed its quad-annual turnaround. Investors are looking to earnings on Feb. 27 to ease concerns over a slowing distribution there, too.
Foolish bottom line
Relatively small producers like Terra Nitrogen and CVR Partners may be able to cruise when the tide is high, but lack flexibility to react to big changes in the market. Some things – such as falling fertilizer prices – are out of management's control. While investors should always keep a watchful eye over long-term trends in the nitrogen markets, I don't see much reason to panic over short-term fluctuations that are attributed to a host of variables. Over the long-term, farmers will continue to steadily increase crop plantings as the world's demand for food marches upward, which will undoubtedly lift fertilizer prices.
