As the new year approaches many investors begin to reevaluate their portfolio. Taking profits (or losses) and searching for those new investments for the upcoming year is all a part of the game. Aside from making lots of money, searching for and evaluating potential investments can be the best part of being an active investor. I personally look forward to December as it tends to be a time of reflection on the year and to examine what worked and more importantly what didn't. One such investment that hasn't worked out this year is CVR Partners (UAN). For those who see themselves as contrarians that like to stay away from the herd, like myself, a substantial drop in a companies stock price during a year of huge gains in the overall markets tends to pique my interest.
For those that aren't familiar with CVR Partners, it is a limited partnership formed by CVR Energy (CVI) in 2007 to operate its growth oriented nitrogen fertilizer business. CVR Partners owns and operates a state of the art nitrogen fertilizer facility in Coffeyville, Kansas and produces both ammonia and urea ammonia nitrate. The company produced a record 239,300 tons at $259 per ton of urea ammonia nitrate during the third quarter after a recent plant expansion. It also produced 104,200 tons of ammonia at a price of $505 per ton during the third quarter. The volume increases slightly offset the substantial drop is prices from $290 per ton during Q3 2012 to $259 per ton for urea ammonia nitrogen. Prices for ammonia also dropped from $578 to $505 during the same periods.
(Source: Yahoo Finance)
Currently, UAN is trading around its 52-week low of $15.11 which is also its all-time low since going public in 2011. Doing quick math, this is a nearly 50% decline from its YTD high of around $30 back in January. As stated earlier, since I often play the contrarian point of view and look for opportunities in the oversold and overbought, I see the most recent sell off as simply investors eliminating "loser" investments from this year and not a trend.
UAN is a unique investment since it offers a couple things; growth and a relatively large distribution. Despite a dramatic drop in fertilizer prices in 2013, UAN has paid out $1.55 per share combined for the last three quarters this year. Management has also reiterated a guidance of $1.85 to $2.00 per share for full year 2013 distribution which would equate to a $.30 to $.45 fourth quarter distribution.
From a growth perspective UAN is able to satisfy only 8% of the urea ammonia nitrogen demand in the U.S. at current capacity. Imports of urea ammonia still accounted for 23% of total U.S. demand in 2012 mainly due to lack of supply domestically. This leaves a lot of room for growth in a relatively large market. Not to mention the fact that UAN has nearly doubled its capacity in the last couple years and I expect UAN to continue to grow capacity into next year.
Looking forward, as UAN is able to stabilize its production levels, an investor should see more even quarterly distributions. One large advantage that UAN has compared to its peers Rentech (RNF) and Terra Nitrogen (TNH) is the fact that it does not use natural gas as it primary feedstock during the refining process. Instead, it uses petroleum coke or petcoke, a byproduct of the oil refining process. Pricing for petcoke is more stable than natural gas and UAN has already contracted 70% of its required petcoke through 2027. This seemingly small detail is the big difference in why I like UAN over TNH and RNF in the long run.
There are still some risks involved with UAN, including continued decreases in fertilizer prices and output restrictions due to shutdowns at UANs only refining facility. The realistic case for UAN going into 2014 is that urea ammonia prices remain around current levels but still at a premium compared to traditional fertilizers. The growth for UAN will continue to come from output increases and the transition to 100% urea ammonia nitrate production. This transition is expected to bring a $70 premium per ton of urea ammonia from converting the remaining 30% of NH3 (Ammonia) production.
As we move into 2014, look to find opportunities in stocks that the market has thrown out into the "garbage" and take advantage. Things to keep in mind is that UAN will pay an investor to wait and that the overall fertilizer industry is in cyclical downturn. Despite the pressure on the industry, I still expect to see UAN back above $20 next year and giving investors who buy in now a 30-40% return. In my view, the market is currently giving investors an a early Christmas gift by discounting UAN without factoring in its continued increases in capacity, its use of petcoke as feedstock instead of natural gas, and its transition to 100% urea ammonia nitrate. So my advice, instead of following the herd into 2014, look at the stocks left behind in 2013 and play the contrarian.