As an investor in the nitrogen fertilizer master limited partnership CVR Partners LP (NYSE:UAN), I was really hoping for the second quarter — the strongest of the year for fertilizer producers — to be a good one. In fact, after the recent expansion at the company’s only facility, I expected a record second quarter. I realized that wasn’t going to occur after management announced that the next payable distribution would only be $0.583 per share and distribution guidance was lowered substantially.
Source: CVR Partners.
That sinking feeling really took hold after I read an SEC filing on July 29 in which the company confessed that it ran into major production issues during the quarter. I think that is a pretty good (albeit depressing) way to preface the company’s second-quarter earnings. Was there any good to be found?
Financially speaking…
CVR Partners LP (NYSE:UAN) actually had a decent quarter, all things considered. The first full quarter with the plant expansion and upgrade in place allowed the company to convert nearly all of its ammonia into higher-valued urea ammonium nitrate, or UAN.
| 2Q13 | 2Q12 | % Growth | |
|---|---|---|---|
| Ammonia price per ton | $688 | $568 | 21% |
| UAN price per ton | $331 | $329 | 0.1% |
| Ammonia production (tons) | 91,300 | 108,900 | (16%) |
| Ammonia available for sale (tons) | 2,200 | 34,900 | (93%) |
| UAN available for sale | 225,200 | 180,000 | 25% |
Source: CVR Partners LP (NYSE:UAN) press release.
You may wonder why the company would convert ammonia worth $688 per ton into UAN that sells for just $331 per ton. Since it only takes 0.41 tons of ammonia to produce one ton of UAN, the company is able to increase profitability up to the breakeven price, which is defined by the UAN selling price divided by 0.41. For the second quarter, the ammonia-to-UAN breakeven price was about $807 per ton — much higher than that for ammonia — so it made sense to convert as much as possible.
Not even a record quarterly output of UAN could make up for nine days of downtime in May and June, which damaged the catalyst for producing ammonia and resulted in the loss of about 50 tons per day of ammonia thereafter. Financials still stacked up favorably to last year’s second quarter.
| 2Q13 | 2Q12 | % Growth | |
|---|---|---|---|
| Revenue | $88.8 million | $81.4 million | 9.1% |
| Operating income | $37.1 million | $36.1 million | 2.8% |
| EPS | $0.48 | $0.48 | — |
Source: CVR Partners LP (NYSE:UAN) press release.
The big black eye for shareholders — and the reason for the muted enthusiasm surrounding shares — was the lower distribution guidance. Previously expected to fall between $2.15 and $2.45 per unit, the MLP now expects to payout just $1.80 to $2.00 per unit. That would still represent a record distribution, but it is far from the previous guidance. Furthermore, with $1.19 already handed out to investors in the first half of 2013, management must be bracing for a pretty dismal second half. Lower-than-expected selling prices and the unexpected down time are cited as the culprits.
Industry funk
This is a rough time to be a fertilizer investor. Increasing competition and oversupply worldwide seem to be affecting all three major nutrients. India is taking an especially tough toll on potassium and phosphate, while overproduction of ammonia in China is reversing historical trading patterns for nitrogen. Just when you thought it couldn’t get worse, it did. Potassium producers Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic were already caught in a low-price contract environment when OAO Uralkali announced on Tuesday that it was selling more potash directly to China at even lower prices.
