Rentech Nitrogen Partners LP (RNF) is a nitrogen fertilizer company. It was spun off from Rentech (RTK) in November 2011. It owns and operates two fertilizer production facilities. One is in East Dubuque, Illinois; and the other is in Pasadena, Texas -- a recent purchase. The East Dubuque plant is in the heart of the Mid Corn Belt region, which is the largest market in the US for nitrogen fertilizers. The East Dubuque plant's two major products are ammonia and UAN (a solution of urea and ammonium nitrate). RNF services primarily Illinois, Iowa, and Wisconsin. Its core market is within a 200-mile radius of its facility. Most of its customers arrange transport by truck.
This means RNF does not have to maintain a huge shipping fleet, nor does it have to incur huge storage costs. Further, RNF gets to charge a premium because its products are readily accessible in a short period of time. This is important to many customers, who often want their products on the spur of the moment due to weather conditions. RNF's premiums are logically much the same as those of a local lumber yard. If you are trying to complete a weekend project, it won't bother you too much to pay a few dollars more to get your lumber quickly locally.
Most competitors have to ship their products to a train. They then ship them by train to a destination nearer a farm. Then they have to ship them possibly by truck to their final destination (or the customers arrange this part). This process can take several days compared to RNF's several hours to final delivery. The costs for this extra transportation can average $80-$120/ton more for ammonia and $35-$50/ton more for UAN. This is on top of the time costs. These are significant costs.
On top of this natural gas represents approximately 50% of the cost of nitrogen fertilizers sold. Natural gas prices fell dramatically in 2012, and they remain near historical lows. This gives US fertilizer producers a huge advantage over most foreign producers.
The graphic below shows RNF's local advantage.
The plant in Pasadena, Texas is the largest producer of ammonium sulfate in North America. It produces a high quality form of ammonium sulfate (about 82% of the Pasadena plant's revenue). This allows RNF to sell it at premium prices. It also produces Ammonium Thiosulfate (about 6% of revenue) and Sulfuric Acid (about 12% of revenue). The plant is strategically located along the Houston Ship Channel. This gives it access to vessels, barges, rail, and major highways. It gives RNF a significant freight advantage over competitors. Further, Ammonium Sulfate is applied to multiple crops in the US and Brazil that are grown throughout the year. In contrast, the East Dubuque plant's products are heavily weighted toward fall and spring application periods. Ammonium Sulfate prices and product margins generally have lower volatility than the products of the East Dubuque plant. Still the geographic advantages of the East Dubuque plant make it the major contributor to profits. The charts below show the break out of revenue and profit by product.
It is easy to see that Ammonium Sulfate is a big contributor to revenue. However, it is a relatively small contributor to RNF's gross profit. East Dubuque's products of Ammonia and UAN are the main sources of profit. Being located in the heart of the Mid Corn Belt has clear advantages. Still, the recently acquired Pasadena, Texas plant (formerly Agrifos) is expected to be significantly accretive to cash distributions per unit in 2013. Plus, the Pasadena plant acts as a hedge for the East Dubuque plant. It buys approximately as much Ammonia as East Dubuque sells. Ammonia Sulfate diversifies RNF's customer base. Ammonia Sulfate (Pasadena) is used for soybeans, potatoes, cotton, canola, alfalfa, wheat, and corn. East Dubuque's products are applied mostly to corn. RNF also has significant growth project opportunities such as a debottlenecking project, a cogeneration opportunity, and a terminalling opportunity.
RNF has been growing its East Dubuque business. For Q3 2012 operating income was $29.2 million compared to $10.4 million in Q3 2011. Net income was $28.8 million or $0.75 per unit versus 3.3 million in the year ago quarter. EBITDA was $32.9 million versus $12.9 million in Q3 2011. Average natural gas prices (including hedging) were $3.14/MMbtu versus $4.74/MMbtu in the year ago quarter. This, along with strong product prices, pushed margins to 58% versus 33% for the year ago quarter. As of the end of Q3 2012 RNF had delivered or had forward purchase agreements for 100% of its forecasted deliveries of ammonia and UAN for 2012.
RNF expects 2013 to benefit from market dynamics similar to those of 2012. However, the 2012 expansion projects for 2012 are expected to hurt sales volumes for both ammonia and UAN slightly in 2013. The ammonia expansion project will be brought on line during the turn around time, but it will extend the turn around time to perhaps four weeks. However, going forward it will increase the production of ammonia by approximately 23%. It will increase the on-site storage for ammonia by approximately 20,000 tons. It is scheduled to be completed by the end of 2013 after the bi-annual turn around. RNF is expecting to increase urea production at the East Dubuque plant by approximately 14% in 2013 or by 19,250 tons annually. This urea project is now complete.
Things are looking up for RNF long term. However, the Q4 earnings will be negatively impacted by two plant outages -- one at the East Dubuque plant and one at the Pasadena plant. EBITDA for the Pasadena plant is expected to be -$5.4 million as a result of the outage and a change in accounting practices. In a sense this is good news. It likely means that RNF has much tighter accounting standards. RNF recently revised its Q4 2012 guidance lower. 2013 sales will be impacted by the expansion projects coming on line. Even so, RNF is expected to grow EPS by 12.0% in 2013 and analysts expect 12.0% to be the five year EPS growth rate per annum too. RNF is a solid stock with a P/E of 17.84 and an FPE of 14.07. It pays a good dividend of 7.19%.
When you combine the above with the most recent WASDE (USDA) crop report, you get a very healthy picture. The January 11, 2013 WASDE-514 report projects lowered ending wheat stocks for the 2012/2013 season of 38 million bushels. Feed and residual use is projected 35 million bushels higher. Still, the season average price for all wheat was lowered by $0.10 per bushel to $7.65 to $8.15. Global wheat supplies for 2012/2013 are projected slightly lower based on reduced production prospects in Argentina and lower reported production in Russia.
Corn production is estimated to be up 55 million bushels. Sorghum production is estimated to be down 9 million bushels. However, feed and residual use are projected up 300 million bushels based on higher September - November disappearance. Corn exports are expected to be down 200 million bushels. All told, ending corn stocks are expected to be down 44 million bushels. Corn prices are projected to be unchanged at $6.80 to $8.00 per bushel. Sorghum price estimates were raised $0.20 to $6.70 to $7.90 per bushel. All rice season average farm price estimates were lowered $0.10 per cwt.
In sum, the crop report was bullish for fertilizers. The overall stocks of grains are low, and they are likely to remain low. This means RNF's business, especially in the Mid Corn Belt, will remain brisk.
The two year chart of RNF provides some technical direction for this trade.
The slow stochastic sub chart shows that RNF is overbought. The main chart shows that RNF has just broken out of a several month long consolidation pattern. The price line is far above its 50-day SMA. Its 50-day SMA is far above its 200-day SMA. This indicates a strong uptrend, but it also indicates that you probably want to wait for a pull back before buying RNF. The break out looks like it will continue, but the break out is so steep that it makes sense to wait for a pull back. If you can buy on a dip, it makes sense to start averaging in. You may want to average in over the next year or so.
The demand for fertilizer is expected to be strong; but more austerity in the US is expected to lead to a slower US economy, especially in 1H 2013. Such market seers as Warren Buffett are selling many of their consumer dependent stocks. It is smart to pay attention to such indicators. If the overall market makes a substantial retreat, RNF will probably follow it lower.
Note: Some of the financial information above comes from Yahoo Finance.
Good Luck Trading.