Seeking Alpha
Recommended for you:
Research analyst, growth, large-cap, long-term horizon
Profile| Send Message|
( followers)  

CF Industries (NYSE:CF), the largest producer of nitrogen fertilizers in North America, is committed to take action on the company's capital structure to reduce its cost of capital and create shareholder value.

The company recently held a sell-side dinner in New York and informally introduced its newly appointed CEO, Tony Will, to the analyst community. Tony Will joined CF in 2007 and has been involved in every major strategic decision for the company over that period. Will, as one of the leaders of CF's $3.8 billion expansion project, has been very active in negotiating contracts with suppliers and he reiterated his confidence in starting the new plants by 2016. In addition to getting the plants operational, one of the key visions of the new CEO is to increase transparency, and the company's capital deployment comments in December were the first step towards that goal. Going forward, greater clarity and engagement with the market and with investors will be a persistent focus of the company.

The Deerfield, Illinois based company has a number of levers that it can pull to increase shareholder value. Increasing overall communication transparency is just one of those themes. The company can utilize the under-levered balance sheet, increase the common dividend to alter how the equity is valued, monetize or increase the value of the existing TNH MLP common units and/or the TNH General Partner Stake; drop existing and future assets, not just plants, but barges and terminals as well, into TNH or another MLP structure. The positive news for CF current and potential investors is that the management wants to pull as many of these levers as possible to create shareholder value. The company is willing to explore all options aggressively.

CF's long-term aim is to find the lowest cost of capital. As disclosed in the previously filed 8-K document in December, the MLP study is continuing, however, this study is part of a larger company wide initiative to work out the best way to reduce the company's cost of capital, increase the trading multiples, and provide the most incremental value to shareholders in the process. As mentioned above, a number of options are available to the company, and there are no preferences, everything is on the table. If the company thinks MLP is not the solution, it would work on something else that would create more value on a risk-adjusted basis. The only restriction that the company so far has placed on the analysis is that given the intractability of many of the potential scenarios, there must be a high degree of intellectually grounded conviction in moving towards any scenario. We think that CF would provide some clarity this year and it would not come as a surprise if the company eventually evaluates its long-term strategic options for its UK or Trinidad assets.

The nitrogen producer is also investing in sales and marketing for a bigger CF. Most of the company's sales are concentrated in North America, but the company is planning on expanding its net, particularly as the new capacity comes online in 2016. CF is adding staff in Latin America to facilitate export sales, using the Donaldsonville facility as an export option when the U.S. market is weak or seasonally slow. The company has already grown its distribution footprints on the U.S. coasts and in Canada. CF Industries' new management in particular sees the company as a global leader in a global market, using the company's sales staff and the relationship with Keytrade to maximize netbacks.

Conclusion

We have a buy rating on CF. CF is an advantaged nitrogen producer and a beneficiary of a long-term trend for low North American energy costs. The company is positioning itself as a pure play nitrogen producer, in its efforts to attract more of a traditional long-term shareholder base. The company's capital structure transformation is taking place. It is willing to explore any and all options to optimize its capital structure and achieve the most efficient cost of capital and maximize the long-term value of its large North American nitrogen asset base. In addition to the traditional investment grade debt issuance, the company continues to evaluate a range of financing options, including MLP, project finance, and securitizations. As mentioned earlier in the article that everything is on the table, however, there is a clear management emphasis on the importance of long-term strategic flexibility in any eventual capital corporate structure actions. CF is not interested in any change simply for the sake of short-term shareholder gain that would limit the company's operational or financial flexibility.

Source: CF Industries Actively Evaluating Options To Reduce Its Cost Of Capital