CVR Partners (NYSE:UAN) reported operational results for its fourth quarter and full year 2013 on February 20th. Company beat expectations on both top and bottom lines, helped by the record UAN production and excellent operational metrics.
With urea and UAN pricing aside, the quarter can be considered stellar. There were no operational cataclysms that surfaced in prior quarters and required downtime, resulting in record production of ammonia (12.8% higher than in Q4 2012) and record UAN conversion (112% higher than Q4 2012) in the fourth quarter. As a result company posted topline growth of 7.1% for the year even as realized prices for both ammonia and UAN products declined.
Most importantly, against all fears the company announced distribution of $0.43 per share, bringing the total to $1.98 for 2013, at the top range of $1.85-2.00 guided range. All of the above certainly impressed investors, sending the shares up 6% on the day of the report, and 14.3% by the end of Monday, February 24th.
The earnings conference call, while fairly brief, contained a few notions of exceptional importance.
1. Improved outlook:
As the expected level of corn inventory has decreased, we have seen corn and UAN prices increase. According to grain markets Gulf, NOLA spot prices that's New Orleans Louisiana spot prices, are currently between $290 and $295 per ton.
This has been certainly long awaited as continued declines in ammonia and UAN prices have had CVR Partners share price decline 33.7% in 2013. While the company has been successfully battling the trend by increasing conversion to higher margin UAN, the negative trend and overall weak outlook for the industry have certainly taken its toll. To note, UAN price has outperformed ammonia realizations, declining just 8.7% ($337/ton in 2013 from $369/ton in 2012) compared to 10.2% decline in ammonia ($581/ton in 2013 from $647/ton in 2012). In the fourth quarter, this indicator has been much more drastic - on the quarter-over-quarter basis UAN prices declined 20.5% while ammonia saw a whopping 35.4% decline compared to Q4 2012.
The bullish outlook for corn prices and resulting higher plantings are certainly a positive sign hinting at least towards the commodity price stabilization.
2. Continued Production Expansion:
In 2014, the company plans to produce 1 million tons of UAN, up 10.5% from 2013 record 904.6 thousands. Management has also identified small projects that "that will incrementally benefit our 2014 results". And finally: "We're also expanding our DEF stores and load-out facilities". DEF, or Diesel Exhaust Fuels, is a premium product to UAN just as UAN is a premium to ammonia, meaning that converting to DEF potentially holds even higher margins.
Takeaway and Outlook:
CVR Partners has executed flawlessly in the last quarter of 2013. For 2014, maintaining that level of excellence and successfully expanding margins through expanded conversions to premium product lines will be essential to boost the company's image. With the potential recovery in ammonia and UAN prices given by the storage shortfalls and colder-than-expected winter this poses an excellent opportunity for share price recovery to the $25+ levels witnessed in 2012.
As always there are risks. CVR Partners operates a single refinery and reemergence of operational issues or critical failures may significantly hamper production and resulting distributions. Further yet, realized prices may continue to decline with the recent stabilization being a head-fake. Further yet, the 14.3% appreciation in just a few days also brings anxiety - as short term traders may potentially sell-off for a quick profit.
With an average buy-in at ~$22, I remain long and optimistic. Assuming the company can match the $2/share distribution in 2014 - that's an almost 10% yield at $20.51/share close (as of 02/24).