Terra Nitrogen, L.P. (TNH) is a pure play on US nitrogen fertilizers and its units appear poised to rally with a key competitor's plant taken out of service yesterday. Newly released November trade data indicates less off-shore urea imports. A key USDA crop production report is due to be released tomorrow at noon and could be a catalyst.
Terra Nitrogen hit a two year low of $132.51 on December 19, a month after I wrote a bearish article, and has since rallied to close today at $158.22 up $4.72 on 37,900 volume traded.
I think TNH will go higher, although this stock is notoriously volatile and is hard to buy on the bid price, as trading volumes are low and the spread is wide. The float on TNH is approximately 4.55 million common units, as CF Industries (CF) owns 75.3% of the 18.4 common million outstanding and is also the General Partner and controls this MLP.
The selling in November was caused by a weak Q3, down 45% year over year reported by Terra Nitrogen on November 6. The MLP's all important cash distribution was cut to $2.02 per unit, versus $4.02 the previous quarter, and $4.12 in Q3 of 2012.
The cash flow shortfall was partly caused by a major plant turnaround which is largely out of the way now, and some of the spending was to improve facilities. My estimate is another $22.5 million will be spent this quarter on upgrades to rail infrastructure and storage capacity.
The key driver of the units however, is nitrogen fertilizer demand and pricing. Terra Nitrogen has one plant complex on 650 acres in Verdegris, OK, and the plant's largest product is its 2 million short ton per year capacity to make Urea Ammonium Nitrate 32% solution (UAN). The plant also sells about 350-400,000 tons of merchant ammonia to industrial and agricultural customers. All sales are made via Terra Nitrogen's General Partner CF Industries Holdings.
Approximately 40 kilometers away sits the LSB Industries (LXU) Pryor, Oklahoma nitrogen plant, which also produces UAN and was taken out of service yesterday. This was unexpected, as the plant had just been restarted on December 30, and although management says the plant will be restarted by the end of January, past history has shown these projections to be optimistic. I would have expected Pryor to make 20,000 tons of ammonia in January and build as much as 50,000 tons of UAN inventories for spring application season. Now, that product may not be available, and if the plant shutdown is extended, the market may be tighter than expected.
Offsetting this to some degree, is that CVR Partners' Coffeyville, KS plant is running well at its expanded annual capacity rate of just over 1 million tons of UAN. Coffeyville sits approximately 100 km north of the other two competitor plants.
Farm Futures magazine reports that UAN solution prices have perked up to $255/st at NOLA, and spring month swaps are $5 to $10 higher.
I have been concerned about Chinese urea exports swamping world markets due to the reduction in the export tax to 15%, which kicks in January 1, 2014. However, it may take at least a couple of months for Chinese export product to reach traditional customers such as India.
Benchmark dry urea prices help determine UAN-32% solution prices, as the two fertilizers contain 46% and 32% pure nitrogen respectively.
The lastest trade data for November show an easing in urea imports to the United States from China, partly due to lack of demand, and partly due to the higher 77% export tax to the end of the year.
|In 1,000 Units of Quantity|
|.||United Arab Em||0||82||33||32||44||0||0||0||0||0||44|
|.||Trinidad & Tobago||43||12||56||54||19||7||11||9||37||7||4|
|Subtotal - metric tons||526||356||594||642||371||80||97||276||524||614||448|
The U.S. also imports UAN-32%, but due to the water content, they are heavy to ship long distances. Therefore, UAN imports are generally not as important to the market as domestic production.
|In 1,000 Units of Quantity|
|.||Trinidad & Tobago||67||90||35||99||69||62||69||55||42||0||0|
|Subtotal metric tons||320||262||455||428||371||173||103||222||184||137||284|
US dealers and farmers are beginning to order nitrogen fertilizers at this time of year as it takes time to get product up the Mississippi River. Harsh weather and problems navigating the upper river make pre-ordering necessary. In addition, reports are rail traffic is congested.
Traders are waiting for the January USDA annual crop production report to be released tomorrow. The average estimate for the 2013 corn crop is 14.05 billion bushels based on 161.1 bushel/acre yield, according to DTN/Telnet. The average "carryout" of corn stocks after this crop is marketed, is 1.844 billion bushels.
The released numbers will influence the 2014 new corn crop price as reflected by the December 2014 futures, which has been weak all year.
In turn, a higher or lower new corn price will influence how much money farmers can budget for 2014 spring fertilizer purchases.
All three factors, lower imports, a key competitor outage, and higher corn prices, could give lift to a rally in nitrogen MLP prices.
The reason why I prefer Terra Nitrogen, is because it is coming out of a maintenance turnaround period, which depressed the unit price, but could improve operating performance going forward. In addition, Terra Nitrogen has very high gross margins due to its size and low natural gas feedstocks. Terra Nitrogen typically hedges a large part of its natural gas requirements, and therefore was probably not impacted by the recent spike in prices due to cold weather.
My $10.92 forward estimate for Terra Nitrogen, L.P.'s available cash for distribution to common units before growth capex (explained in the prior article mentioned above) was based on conservative $400 ammonia, $200 UAN-32% and $4 natural gas prices.
I am raising my target annualized CAD for TNH to $15/unit based on $450 ammonia and $250 UAN-32% and $4 gas. With a 12.5 times multiple (8% implied yield), my 2014 target price is $187.50, for an appreciation potential of 18.6%.
This MLP unit is volatile and is for investors with a high tolerance for risk and trades with a wider than average spread. The MLP management has limited interaction with investors and does not provide guidance nor earnings conference calls, and has limited analyst research coverage. Non-USA residents will pay a high withholding tax on distributions. The Q4 distribution is expected to be reduced by capital expenditures relating to the partnership's infrastructure spend.