Income investors looking for diversification in their retirement portfolio should consider shares of the new limited partnership CVR Partners (UAN). This partnership recently completed its initial public offering on April 13, 2011 and sold 22.1 million common units for $16 per unit. The partnership was derived from CVR Energy Inc. and spun off to operate the fertilizer side of the business. After the offering was complete, CVR Energy held a 70% interest while the other 30% was sold to the public. Currently, UAN is the only fertilizer producer in North America that uses a special petroleum coke process to make its product.
A positive catalyst for the partnership is its location near a refinery in Coffeyville, Kansas operated by CVR Energy, which was its parent company. In the unique fertilizer production process, the partnership utilized the petroleum coke which happens to be created during the crude oil refining process at the refinery. Over the past five years, 70% of all the coke used at the partnership was provided by this refinery.
When compared to natural gas prices, petroleum coke prices tend to be much less expensive and much more stable in price. As a result, competitors like Agrium (AGU), Potash Corp (POT), and CF Industries (CF) have much higher operating costs as their production is dependent on natural gas. This being the case, it will make CVR Partners one of the lowest cost producers in the nitrogen fertilizer business. A further positive for UAN is that the partnership as of March 31, 2011 had cash on hand of $71 million and no debt.
The real heart of the matter for the income investor will be the distributions, and CVR Partners do not plan to disappoint in this arena. Current estimates by the company suggest an initial payout of $1.92 per share for the upcoming year. Currently, the shares trade at $18 a share, making it a 10.6% yield. This distribution will be the representation of all the cash the partnership generates and will be distributed on a quarterly basis. One note that income investors should be aware of is that management has stated that the business performance will be more seasonal and volatile.
This being the case, the distribution from quarter to quarter could vary. The first of the distributions to the shareholders will be made by August 15, 2011, which will represent the second quarter of operations for the business. CVR Partners has elected to retain the first quarter of the year’s cash. The yield is very attractive when compared to other publicly traded partnerships and should remain so due to the volatility in the share price that this new IPO brings to the table.
1st Quarter Earnings
In early May 2011, the partnership released its results of the first quarter which were prior to the public offering. The first quarter 2011 net sales figures were $57 million which generated a net income of $16.7 million. When compared to the same quarter of the last fiscal year, the partnership has shown some real growth. In the first quarter of 2010, the net sales were $38 million while the net income was $6 million. A quick analysis shows that the net sales were up 50%. With such a high growth rate, income investors can feel more at ease knowing that the partnership has proven their ability to grow the business.
Like all equities, there are risks to consider for the income investor. CVR Partners is no different and just by having a yield of 10.6% should alert investors that the risks do exist. Being a new IPO means that there is no historical data to analyze. Also, the partnership is not required to make distributions at all. Those looking for a steady stream of income should take heed in this fact.
The partnership has also expressed its desire to expand in the future. Being a limited partnership, all cash should be distributed to the shareholders so funding future expansions will probably come from the issuance of new shares. Lastly, the partnership derives a large portion (70%) of its petroleum coke from one refinery. Any disruption in that centralized location could easily have a negative impact on production and cause delays in processing until another source can be located.