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CFA, master limited partnerships, small-cap, medium-term horizon
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Summary

  • Growth in the global demand for soda ash and long-lived reserves makes OCI Resources a valuable business.
  • The partnership trades at attractive EV/EBITDA and Price/DCF valuations.
  • The 9.1% distribution is adequately covered and growth in the payout is possible.
  • This MLP provides good diversification for an energy-heavy portfolio.

Business Background

OCI Resources (NYSE:OCIR) is a master limited partnership involved in the trona ore mining and soda ash production business. Soda ash is an essential raw material in flat glass, container glass, detergents, chemicals, paper and other consumer and industrial products.

Soda ash prices are economically sensitive and have ranged from a low of $128 per short ton in 2008 to a high of $159 in 2013. Global demand is expected to grow at a rate of 3-4% over the next ten years with emerging markets driving much of the growth.

Because of domestic deposits of trona ore, US producers have a cost advantage over foreign producers. Foreign producers must use a more expensive synthetic process which is much more energy intensive. Natural gas is the primary energy source used in soda ash production.

Independent estimates put the partnership's recoverable reserves at 263 million short tons of trona ore. At current recovery rates, implied mine life is 66 years. Because of the nature of their mine, OCIR is a low cost producer in the business. The depth of OCI's mining beds is shallower than other actively mined beds in the Green River basin, reducing the cost of production. FMC, Solvay and Tata are the other operators in the basin.

OCIR conducts all of its operations at the Green River facility. An operational mishap or severe weather could potentially disrupt operations. In addition, the partnership relies on a single rail line, which transports 95% of the production.

Market and Valuation Data

With a market cap of approximately $431 million OCIR is a small-cap MLP, and is smaller than peers CVR Partners (NYSE:UAN), Terra Nitrogen (NYSE:TNH) and Rentech (NYSE:RNF). Selected financial information on OCIR is summarized in the table below:

OCI Resources2013
Unit Price 4/22/1421.99
Market Cap431
Net Debt155
Cash & Investments47
Enterprise Value539
EBITDA104
EV/EBITDA5.2
DCF/Quarter13.2
Price/DCF8.2

OCI Resources has appreciated over 20% since its IPO in 2013 but still is reasonably valued. The firm trades at less than 9X distributable cash flow. Enterprise Value to EBITDA is 5.2X.

The partnership declared a distribution of $.50 per unit on April 17. At the current price of $21.99 the dividend yield is 9.1%. Distribution coverage was 1.32X for the fourth quarter of 2013 and 1.23X for the full year.

The firm expressed confidence in February that they would be able to maintain the $.50 quarterly distribution through 2014. Given a market, which should grow at 3-4% per year over the next several years the distribution is sustainable. In my opinion, if production meets expectations and costs are controlled, some growth in the payout is possible.

Prospective investors should be aware that OCIR will produce a K-1 each year. Per the recent 10-K, most of the distributed income is expected to be UBTI, making the partnership less appropriate for IRA investors.

Investment Thesis

OCI Resources makes a lot of sense as an addition to an MLP portfolio. The 9.1% yield and the 1.23X distribution coverage are very competitive in the MLP universe, as is the EV/EBITDA of 5.2X. The soda ash business is a great diversifier to an otherwise energy-heavy portfolio. I am a holder at current levels, but would consider adding at lower prices.

Source: OCI Resources - An MLP With A 9% Yield And Potential To Grow

Additional disclosure: I hold a small position in OCIR as part of a diversified portfolio of MLPs and other investments. I have no plans to make changes to this holding in the next 72 hours.