Seeking Alpha
Long/short equity, contrarian, value, growth
Profile| Send Message|
( followers)  

CVR Partners, LP (NYSE:UAN) reported solid third quarter results giving some relief to investors over to-date performance and future outlook. While fertilizer prices into 2014 remains an area of uncertainty and concern, it's comforting to know that at least operationally, UAN continues its solid operational performance.

Results - while worse YoY on plant maintenance downtime - still came in above analyst expectations on both top and bottom lines. The company further raised its bottom line fiscal year (FY) 2013 expectations for distributable cashflow (DCF) on year-to-date (YTD) results and orders into Q4, with all fourth quarter production being fully booked. During the earnings call, management's expectations into 2014 were muted: 2013 harvesting period has been delayed with only 59% corn harvested YTD (vs 91% in 2012) and planting expectations for 2014 thus still being uncertain. Even so, company's future outlook is optimistic on expansion and efficiency projects in scope and negative price impact from international fertilizer imports expected to be lower.

Analysis:

First thing to certainly note is the relief from the earlier fallout last Friday, when company's shares tumbled more than 11% on dividend cut and lowered guidance from rival Rentech Nitrogen Partners (NYSE:RNF). Although reasons provided by RNF appeared company-specific, the shadow still lingered over UAN during the week. I believe any fears should now have vanished, especially with the raised guidance.

Overall company has reported a solid and profitable quarter, expectedly lower on impact from catalyst replacement maintenance downtime. With that aside, operational factors are all in check, company continues to expand its production base and invest into the business.

The big question still on the table is what the expectation for revenues should be going forth? Unfortunately, both metrics that drive the net dollar figure - volumes and price - are in-flux. While Chinese and Ukrainian exports are expected at much lower rates in 2014, there is no certainty as to what positive impact on ammonia pricing this will have. And uncertainty around 2014 planting acreage (as 2013 market data has been delayed on government shutdown and delayed harvest season) keeps volume expectations muted as well. I would very much like to side with management in the optimistic fashion in a more upside than downside tone, but I'm not sure it is a prudent decision at this point. Fourth quarter will likely give a better impression, but that will take another several months of wait time.

Brief Summary:

  • Q3 2013: EPS $0.27 vs $0.26 est., Rev $69.2 mil vs $64.65 mil est., GPM 81.2% vs 84.93% YoY, OPM 30.78% vs 43.07% YoY
  • Est. FY 2013: DCF $1.85-2.00 from $1.80-2.00 - upped lower end on YoY "actual results reported and orders in place", with production fully booked for the remainder of 2013.
  • Prices of ammonia and urea are both down YoY - mixed on a year-to-date basis.
  • Record production of more profitable urea, but overall ammonia base was down YoY on lower utilization due to unplanned catalyst replacement downtime (utilization in line with benchmarks when adjusted).
  • Muted outlook for 2014 - uncertainty around 2013 late harvest and planting expectations for 2014.
  • Optimistic on pricing going forth - given lower Chinese exports expectations (higher coal prices and increased regulation) and spot prices witnessed in the third quarter.
  • Several projects in 2014 to enhance productivity and lower maintenance downtime, as well as DEF expansion which will expand production margins.

Investment Thesis:

CVR Partners shares are down 15-some percent since its Q2 report when company lowered its FY 2013 guidance due to operational issues and maintenance downtime. With guidance being restated and slightly raised post-Q3 and operational issues being confidently out of the way, I see UAN's picture a bit more optimistic, although still shadowed by uncertainty over 2014 stated above. I believe shares are poised for a rally here after the unprecedented and overdone decline, but I would remain cautious in the near term and into 2014.

Source: CVR Partners' Q3: Down YoY, But Better Than Feared