CF Industries (NYSE:CF), the world's second largest nitrogen fertilizer producer, continues to operate well both from an operational and cash flow generation perspective. The company continues to aggressively buy back shares and is sticking to its capex budget for its expansion projects, Donaldsonville and Port Neal. CF Industries is also an advantaged nitrogen producer and a beneficiary of a long-term trend for low North American energy costs. While the company's execution remains strong, the market is likely to focus on the seasonal uncertainty ahead with accelerating supply from China as the primary concern.

The value of CF's extensive logistics assets and savvy natural gas hedging strategy was apparent in the company's most recent results. The company reported adjusted first quarter EPS of $4.76, beating consensus estimates of $4.54 by 5%. The headline EPS of $12.90 was adjusted for an $8.39 per share gain from the sale of the phosphate business to Mosaic (NYSE:MOS), a $0.01 per share gain from FX, and a $0.26 per share loss on natural gas derivatives.

CF is known as a top operator in the industry, and the company pushed through a number of challenges, including delayed planting, weather disruptions, and uncertainty among farmers to ship total nitrogen volumes that were slightly above 1Q13. CF's peer, CVR Partners (NYSE:UAN), on the other hand, reported quarterly EPS of $0.29, lower than sell-side estimates of $0.33. 

Expansion projects on budget and on schedule
To further grow its nitrogen production capacity, CF Industries continues to make progress on its two major expansion projects at Donaldsonville and Port Neal. Both projects are on schedule and on budget. CF is set to be among the first companies to bring on sizable new capacity by the end of 2015, along with OCI NV. 

These projects, expected to come online in 2015 and 2016, will increase the company's nitrogen capacity by 25%. Moreover, these projects are also expected to leverage CF's existing asset base to grow the company's cash generation capacity with favorable return characteristics, even in difficult market conditions. 

Source: Company Documents

Aggressively buying back shares
CF Industries continues to buy back shares at an impressive rate. The company bought 3.2 million (for ~$800 million) through the quarter and added another 677,000 shares through April. This leaves CF with only $586 million remaining of the $3 billion authorization issued in the fall of 2012. Since 2011, the company has reduced its share count by over 25% through share repurchases. 

Although buybacks should slow down in the second half of 2014 due to more cash outlays for its expansion projects, the CEO, Tony Will, has been very consistent in stating his intention to fulfill as much of the existing buyback program as possible during 2014.

CF Industries continues to generate strong cash from operations and still has substantial flexibility on its balance sheet. As certainty emerges regarding the final cost for the expansion projects and the potential EBITDA contribution, there is potential for additional buybacks in 2015.

Tough 2H14
As Agrium (NYSE:AGU) also mentioned in its earnings call, CF expects higher Chinese urea exports (also explicitly mentioning lower Chinese coal prices) to potentially lower global urea prices, with U.S. prices likely to decline toward international parity as inventory levels normalize. 

Senior Vice President of Sales & Market Development, Bert A. Frost, said during the call:

As we look beyond the spring application season, we expect North American nitrogen prices, as represented at the U.S. Gulf, to decline to global parity. These prices are being affected by current Chinese urea exports, which are expected to increase during their low export tariff season. This market view is consistent with Chinese new tariff policy and the recent declines in Chinese coal prices. When the Chinese low tariff export season opens in July, we could see urea full prices similar to what we saw last year in the U.S. Gulf.

 While operationally the company remains strong, its cautious outlook on 2H14 global urea markets highlights the near-term challenges to the fertilizer producer.

Bottom line
CF Industries is rightly known as the top operator in the industry. The company delivered a strong quarter, despite logistics challenges and harsh winter in the heart of the Corn Belt alleviating a key inventory concern entering the year.

The company is on pace to complete its $3 billion authorization by year-end with potential for additional cash return announcements in 2015. Moreover, there is improved visibility to longer-term capital allocation plans under the new CEO, Tony Will. Finally, CF's balance sheet remains strong, which provides the company a valuable offset to these headwinds in the near-term while presenting long-term optionality for further capital allocation catalysts.


Jan-e- Alam has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.