Will Rentech Nitrogen Partners Keep Leading Its Peers Downward?

Rentech Nitrogen Partners (NYSE: RNF) will release its quarterly report on Thursday, and shareholders are already bracing for the worst, given the big hit that units of the fertilizer master limited partnership have taken lately. Even as peers CVR Partners (UAN 3.61%) and Terra Nitrogen (NYSE: TNH) have also seen their unit prices under pressure, Rentech Nitrogen's losses are far worse, pointing to something more than just the general conditions facing the industry to explain its specific problems.

For years, nitrogen-based fertilizer stocks have benefited from two major tailwinds. First, rising crop prices have raised farm incomes, putting farmers in better position to spend money on yield-enhancing products like fertilizer. Second, the drop in natural gas prices has made nitrogen-based fertilizers cheaper to produce and more attractive for users than more expensive alternatives like potash and phosphates. Yet recently, some of those broader industry dynamics have reversed themselves, putting new pressure on Rentech Nitrogen and its peers. Let's take an early look at what's been happening with Rentech Nitrogen Partners over the past quarter and what we're likely to see in its report.

Stats on Rentech Nitrogen Partners

Source: Yahoo! Finance.

What's next for Rentech Nitrogen Partners?
Analysts have gotten less optimistic about Rentech Nitrogen Partners and its earnings prospects recently, cutting their third-quarter estimates and their full-year 2013 projections by about 15%. The units have continued their downward plunge, falling 37% since early August.

Rentech Nitrogen has taken investors on a big roller-coaster ride in recent years, soaring during the fertilizer boom but giving back ground over the past year. The MLP's second-quarter results only added fuel to the fire, with solid sales gains of 47% but a drop in net income of 30% from the previous year. Revenue rose largely because of the acquisition of a second nitrogen-producing facility in Texas, with sales from its existing East Dubuque facility falling 13%.

High dividend yields continue to be a big draw for Rentech Nitrogen, Terra Nitrogen, and CVR Partners, as the MLP structure leads to high payouts. Rentech's trailing-12-month yield of 15% leads CVR's 10% and Terra Nitrogen's 8%, but the variable payouts that all three entities use introduces substantial uncertainty about future distributions. Rentech's most recently announced distribution of $0.27 per unit will be a big drop from the $0.85 per unit it paid for last year's quarter.

The biggest concern with Rentech Nitrogen is that it's seeing problems that even its nitrogen-fertilizer peers aren't. CF Industries (CF 0.91%) actually reported an increase in nitrogen-division revenue, and Rentech's average cost for natural gas was 10% higher than CF's. Similarly, Rentech boosted its position in the ammonium sulfate fertilizer market with its acquisition of Agrifos, but rival Agrium (NYSE: AGU) captured more than 50% higher prices for its ammonium sulfate than Rentech did.

Last week, Rentech Nitrogen confirmed those concerns, giving an update that sent shares down sharply. Repairs to its East Dubuque facility will cut ammonia production by almost 30% over a three-month period, and weakness in ammonium sulfate prices will continue to weigh on its fourth-quarter results.

In the Rentech Nitrogen Partners earnings report, watch to see if the MLP gives further guidance that suggests problems that rivals CVR Partners and Terra Nitrogen aren't facing. If Rentech Nitrogen can't right its ship quickly, then its unit-price returns might never catch up with its competitors.

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