Nitrogen fertilizer company CVR Partners (UAN +5.79%) released financial results shortly after the closing bell on Wednesday. The master limited partnership announced muted results for the fourth quarter in the face of a biannual turnaround of its sole facility in Koffeyville, Kan. That should have been no surprise to investors, who have been prepped for the weak end to the year since the last turnaround in 2010. That doesn't mean 2012 was a boring year. The company faces a tax dispute with the town of Koffeyville and encountered a delay in starting up its plant expansion in the beginning of the year. Should investors be concerned?
Expectations
CVR Partners bucked the trend of mixed results around the fertilizer industry by besting earnings and revenue expectations. The company reported fourth quarter EPS of $0.21 and revenue of $67.6 million versus expectations of $0.18 per share and $54.35 million, respectively.
By contrast, CF Industries (CF +4.46%) beat earnings but missed on revenues, while closer peer and fellow nitrogen limited partnership Terra Nitrogen (NYSE: TNH) showed mixed results. Even the mighty PotashCorp (POT +0.00%) had a tough time delivering big results. The company missed on revenue and earnings, which has contributed to a fall in share price in the last month. However, Potash may be a great long-term option with major capital expenditures and upgrades out of the way. In fact, short-term volatility aside I believe all three companies made great moves in 2012 that will continue to reward investors for years to come.
Financials
Here's how CVR Partners exited 2012:
|
4Q12 |
4Q11 |
2012 |
2011 | |
|---|---|---|---|---|
|
Revenue |
$67.6 million |
$87.6 million |
$302.3 million |
$302.9 million |
|
Net income |
$15.3 million |
$41.2 million |
$112.2 million |
$132.4 million |
|
Diluted EPS |
$0.21 |
$0.56 |
$1.53 |
$1.48 |
Source: CVR Partners
The numbers for 2012 represent a steep drop over the prior year, but don't fret. Remember that facility turnaround that occurred for three weeks in October? Don't make the same stupid mistake I made last week by following auto-generated news articles that will likely report how dreadful the results were. Perhaps the best way to quantify the effect of the biannual house cleaning is to compare on-stream factors -- the amount of operating time a given unit is creating product during the total time in a period – from 2012 and 2011.
|
Production Unit |
4Q 2012 |
Full Year 2012 |
Full Year 2011 |
|---|---|---|---|
|
Gasifiers |
79.0% |
92.6% |
99.0% |
|
Ammonium synthesis loop |
76.6% |
91.1% |
97.7% |
|
UAN conversion |
68.6% |
86.4% |
95.5% |
Source: CVR Partners
When you look at how dependent the facility can be without interruptions it may be easier to stay cool and collected about the reported figures.
Payout
One big reason to invest in master limited partnerships in the first place is for the hefty payout. Despite the turnaround, CVR Partners returned $1.81 per share, which actually beat its last guidance for full year distributions by one penny.
Don't forget about...
The company has already encountered two major events in 2013. First, the recent plant expansion that is expected to allow the company to produce nearly 50% more urea-ammonium-nitrate, hit a setback earlier this year after commissioning delays. Management expects the delay to chop off $0.05 from the 2013 distribution.
The expansion is on track to "reach full production rates of 3,000 tons per day in March." New equipment always needs to be tested, and the units will mark an improvement over the available capacity of prior periods, but investors will have to make sure commissioning doesn't spill into the second quarter.
The second big event was a partial settlement in a tax dispute with its native county. While CVR Partners escaped less favorable outcomes for disputed tax rates from 2009 to 2016, the company is still battling the county over rates for fiscal years 2008 and post-2016. How big of a deal is the settlement? Pretty big. It saves the fertilizer producer $10.5 million per year in taxes, which represents about 6% of the company's 2013 distribution guidance (see below). Bear in mind that depending on negotiated terms for the years still in question, those extra savings could quickly be transformed into added expenses.
Distribution outlook
Management guided for a distribution between $2.15 per share and $2.45 per share, which is a 27% increase (using the midpoint) over the 2012 payout. That is great news for investors. However, I would caution that, historically speaking, CVR Partners' payout ratio has exceeded 100%. Given the recent 50% expansion, it wouldn't be difficult for the company's income to mirror its distribution in 2013. Just keep an eye on the sustainability of payouts.
Foolish bottom line
Even if it is cyclical I am confident in the long-term success of the fertilizer industry and think CVR Partners is set to have a good run in 2013. Remember to give some serious thought to the risks I outlined above. Should the company fail to negotiate favorable tax terms after 2016 investors may be in for some added turbulence.
Nonetheless, the outlook for nitrogen prices remains strong as farmers attempt to make up ground lost during last year's historic drought. That bodes well for smaller, more specialized producers such as CVR Partners and Terra Nitrogen. Being small has its drawbacks though. Do smaller producers have the flexibility to respond to abrupt changes in the fertilizer market?
