Nitrogen producing companies are profitable if natural gas prices are low and fertilizer prices are high. Fertilizer prices in turn are dependent on grain prices. Hence, in the last couple of years, nitrogen-producing companies have seen strong growth in their operational performance as well as their stock prices. A company that benefited from the above is Rentech Nitrogen Partners (RNF). Rentech Nitrogen has strong potential for growth given its expansion opportunities and its location in the heart of the Corn Belt. However, the stock price is witnessing a downtrend in the recent months, down 7% in the YTD period as compared to a 23% gain in the last one year. Let us find out why.
Rentech Nitrogen Partners was spun off from Rentech Inc. in November 2011. Rentech owns the general partner and 60% of Rentech Nitrogen Partners' common units, which represents the limited partner interests. Rentech has been gaining strong cash flows from Rentech Nitrogen Partners, and as a result in a much-expected move, it recently announced a $25 million share repurchase program.
Rentech Nitrogen Partners benefits from the strategic location of its production facilities. It owns and operates two fertilizer production facilities - East Dubuque, Illinois and Pasadena, Texas (acquired in November 2012). Its East Dubuque facility is in the heart of the Corn Belt region, which is the largest market for nitrogen fertilizers. Its Pasadena Texas plant is the third largest producer of ammonia sulfate fertilizer.
Its East Dubuque facility is strategically located with its core markets within a 200-mile radius. As a result, it is not required to maintain a huge shipping fleet or incur storage costs. Further, most of its customers arrange the pickup of the product by truck, thereby saving on the freight cost from Gulf Coast into Mid Corn Belt, which typically ranges between $80 - $120 per ton for ammonia and $35 - $50 per ton for urea ammonium nitrate (source: company presentation). As Rentech Nitrogen Partners is able to provide the materials within hours, as compared to several days in other cases, it can charge a premium.
Its Pasadena facility, which was acquired in November 2012 for $138 million, is expected to be accretive to per unit cash distributions beginning in 2013 with expected EBITDA of $25 million in 2013.
The most important advantage for Rentech Nitrogen Partners is that it has two production plants as compared to its competitors Terra Nitrogen (TNH) and CVR Partners (UAN) that have a single production plant each. As mentioned earlier, the company is also able to charge a premium as seen in its 4-year average ammonia sales price per ton of $558 versus Terra Nitrogen's $448 and CVR Partners' $441 (Source: company presentation). Further, the company's Texas plant is expected to benefit from the recent explosion at the Texas plant of West Fertilizer, a significant nitrogenous fertilizer supplier in Texas.
The company performed well in the last couple of years. In 2012, revenue increased 23% to $261 million leading to improved margins. Despite lower margins from the newly acquired Pasadena facility, EBITDA increased 30% and EBITDA margins increased 400bps to 43%. This strong increase was mainly an outcome of the lower natural gas prices in 2012. Though natural gas prices are not expected to remain at the same level in 2013, but still they are historically low which should benefit Rentech Nitrogen Partners in 2013.
The company has ammonia capacity and storage expansion plans, which are expected to be completed by fourth-quarter 2013. It plans to increase ammonia production capacity by 23% or 70,000 tons annually, bringing total ammonia production capacity to 370,000 tons and increase on-site ammonia storage capacity by 20,000 tons, bringing total on-site storage to 60,000 tons. The total cost of this expansion plan is expected to be $100 million, which will be financed by its multiple draw capex facility (Source: company presentation).
For its Pasadena facility, it has planned a debottlenecking project, which it plans to start in 2013. It will increase ammonia sulfate capacity by 20% from 1,750 tpd to 2,100 tpd. This expansion is expected to contribute to distributions in second half 2014.
The main problem for Rentech Nitrogen Partners is the competition.
CVR Partners' most important competitive advantage is the use of petroleum coke instead of natural gas as its feedstock. Petroleum coke is a much lower cost raw material as compared to natural gas. Research analysts feel good about CVR Partners and expect its first-quarter EPS to increase by almost 15%. The company is also expected to benefit from the retreating coke prices, which will definitely benefit its bottom line growth as compared to its peers whose margins are being pressured by the rising natural gas prices. Further, the company has already pre-booked orders for nearly all of its expected UAN production for the first quarter. This will definitely benefit the sales volumes as UAN accounts for 80% of its sales. Despite the lower UAN prices, the company is optimistic about the market and expects prices to increase due to slow domestic production, which has lead to tightening supplies.
On comparing Rentech Nitrogen Partners to Terra Nitrogen, the latter wins hands down for its handsome yield of 8.1% with a zero debt balance sheet. Though its dividend yield is lower than that of Rentech Nitrogen Partners' 11%, the company has a better operational performance. Its gross and operating margins, 74% and 72%, respectively, are much higher versus RNF's 51% and 45%, respectively. Further, the company has a much better balance sheet with a strong cash balance of $149 million and, as mentioned earlier, zero debt. It is owned by CF Industries, which is the largest nitrogen producer in North America with the best margins and solid financial fundamentals. To top it, all of this is available at the lowest PE among the three of 11.8.
Rentech Nitrogen Partners guided for a lower distribution at $2.60 per unit versus its $3.30 per unit distribution in the previous year. The lower distribution guidance is largely related to the company's turnaround plan for its East Dubuque facility. Going forward, if the company lowers its payout, its share prices may experience a downward trajectory. However, benefits of owning the stock will be derived as the company finishes its turnaround and expansion projects in 2014, assuming that the fertilizer and natural gas prices stay at their current levels. So if you already own the stock, remain on the sidelines, but don't expect many benefits in 2013. If you wish to invest, look for the dips in the stock price and expect higher distribution in the outer years.