IPO Pick of the Week: CVR Partners Expects 14.8% Dividend Payout

| About: CVR Partners, (UAN)

CVR Partners, LP (NYSE:UAN) is scheduling a $250 million IPO with a market capitalization of $949 million at the price range mid-point of $13, for Friday, April 8, 2011 (see valuation metrics here).

CONCLUSION -- UAN’s partnership projects a payout of 14.8% for the 12 months ending March 31, 2012, which looks achievable. The public will own 26% post-IPO. UAN is a nitrogen fertilizer spin-off from CVR Energy (NYSE:CVI).

PARENT -- CVR Energy, Inc. (CVI), the parent, has a market capitalization of $2.07 billion. The stock as increased 190% in the last six months. CVI refines, markets and transports transportation fuel, in addition to its nitrogen fertilzer business.

CVI believes it is the only operation in North America that utilizes a petroleum coke gasification process to produce nitrogen fertilizer. Petroleum coke (often abbreviated pet coke or petcoke) is a carbonaceous solid derived from oil refinery coker units or other cracking processes. Petcoke is ‘waste’ from the refining process. ‘Waste’ provides CVI and UAN with a production cost advantage.

BUSINESS -- UAN is a Delaware limited partnership formed by CVR Energy (CVI) to own, operate and grow the nitrogen fertilizer business.

Strategically located adjacent to CVR Energy’s refinery in Coffeyville, Kansas, UAN’s nitrogen fertilizer manufacturing facility is the only operation in North America that utilizes a petroleum coke, or pet coke, gasification process to produce nitrogen fertilizer.

UAN’s facility includes a 1,225 ton-per-day ammonia unit, a 2,025 ton-per-day urea ammonium nitrate, or UAN, unit, and a gasifier complex having a capacity of 84 million standard cubic feet per day. UAN’s gasifier is a dual-train facility, with each gasifier able to function independently of the other, thereby providing redundancy and improving our reliability.

DIVIDENT PAYOUT – 14.8% expected.

UAN expects to pay out 100% of available cash each quarter. UAN’s expected payout for the 12 months ending March 31, 2012 is 14.8%, which is $1.92 per unit divided by the price range mid-point of $13.

Publicly traded competitors across the broader fertilizer sector, such as Agrium, Potash Corporation, CF Industries, Yara and Terra Nitrogen provide an average dividend yield of 0.1%, 0.3%, 0.4%, 1.6% and 6.9%, respectively

FORECASTED CASH – Enough to pay $1.92 dividends per unit for the 12 months ending March 21, 2012. P60 in the March 31, 2010 SEC filing.

UAN is the proposed stock symbol.

UAN is a solution of urea and ammonium nitrate in water used as a fertilizer. The combination of urea and ammonium nitrate has an extremely low critical relative humidity (18% at 30°C) and can therefore only be used in liquid fertilizers.

MARKET -- Nitrogen is an essential element for plant growth because it is the primary determinant of crop yield. Nitrogen fertilizer production is a higher margin, growing business with more stable demand compared to the production of the two other essential crop nutrients, potassium and phosphate, because nitrogen must be reapplied annually.

During the last five years, ammonia and UAN prices averaged $467 and $292 per ton, respectively, which is a substantial increase from the average prices of $276 and $159 per ton, respectively, during the prior five-year period.

HIGH MARGINS - UAN believes its unique combination of pet coke raw material usage, premium product focus and transportation cost advantage has helped to keep costs low and has enabled UAN to generate high margins. . In 2010, 2009 and 2008, our operating margins were 11%, 23% and 44%, respectively

2010 operating margins were negatively affected by downtime associated with the Linde air separation outage, the rupture of a high-pressure UAN vessel and the major scheduled turnaround

RISK -- UAN pricing in the first quarter of 2011 was adversely impacted by the outage of a high-pressure UAN vessel that occurred in September 2010. This caused UAN to shift delivery of lower priced tons from the fourth quarter of 2010 to the first and second quarters of 2011.

EXPANSION - UAN expects to move forward with an expansion of its nitrogen fertilizer plant that is designed to increase UAN production capacity by 400,000 tons, or 50%, per year.

The cost is $135 million for which approximately $31 million had been spent as of December 31, 2010. UAN expects that this additional UAN production capacity will improve margins, because UAN has historically been a higher margin product than ammonia.

UAN expects that the UAN expansion will take 18 to 24 months to complete and will be funded with $91.4 million from the IPO.

HISTORY - UAN’s nitrogen fertilizer plant was completed in 2000 and, based on data supplied by Blue Johnson, is the newest nitrogen fertilizer plant built in North America. Prior to the plant’s construction in 2000, the last ammonia plant built in the United States was constructed in 1977.

UAN’s nitrogen fertilizer facility was built with the dual objectives of being low cost and reliable. UAN’s facility has low maintenance costs, with maintenance capital expenditures ranging between approximately $3 million and $9 million per year from 2007 through 2010.

UAN has configured the plant to have a dual-train gasifier complex to provide redundancy and improve reliability. In 2010, the gasifier had an on-stream factor, which is defined as the total number of hours operated divided by the total number of hours in the reporting period, in excess of 97% excluding the impact of downtime associated with the Linde air separation outage, the rupture of a high-pressure UAN vessel and the major scheduled turnaround.

COMPETITION - Agrium (NYSE:AGU), Potash Corporation (NYSE:POT), Yara (OTCPK:YARIY) (excluding blended fertilizers) and CF Industries (NYSE:CF) (after giving effect to its acquisition of Terra Industries) derived 90%, 91%, 47% and 22% of their sales in 2010, respectively, from the sale of products other than nitrogen fertilizer used in the agricultural market.

USE OF PROCEEDS -- $228mm.

  • $107.7 to Coffeyville Resources. Coffeyville Resources is a wholly owned subsidiary of the parent, CVI
  • $26 million to purchase (and subsequently extinguish) the incentive distribution rights currently owned by UAN’s general partner;
  • $3 million for financing fees for the new credit facility
  • Balance for general partnership purposes, including $91.4 million to fund the intended $135 million UAN expansion, for which $31 million had been spent as of December 31, 2010.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.