My recommendation is for investors to consider CVR Partners, LP (NYSE: UAN) as a new income-producing equity holding. I have taken a long position in CVR Partners. UAN shares began trading April 8th and the company is currently underfollowed in the income producing space. CVR has company-specific and industry wide catalysts to provide outsized income streams and capital gains. CVR Partners is a pure play nitrogen fertilizer limited partnership. Management is focused upon paying 100% of net cash distribution payments which are significantly larger than cash distributions from fertilizer competitors CF Holdings (NYSE:CF), Agrium (NYSE:AGU), Potash (NYSE:POT), and Yara International (OTCPK:YARIY).
CVR Partners Strengths
CVR Partners is a manufacturer of ammonia and urea ammonium nitrate fertilizers. Positive aspects to highlight include:
1. Fertilizer pricing is strong. Urea is showing strong pricing power for seven consecutive weeks.
2. CVR Partners' parent reported first quarter results on May 9th. The year-over-year, March 31st 2011 vs. 2010, financial data confirms the fertilizer pricing's strength. Ammonia first quarter 2011 was $564 dollars per ton. This compares to the first quarter 2010 pricing of $282 dollars per ton. Urea ammonium nitrate first quarter 2011 pricing was $207 dollars per ton. This compares to the first quarter 2010 pricing of $167 dollars per ton. CVR Partners' parent reported first quarter 2011 nitrogen fertilizer operating income of $16.8 million. This compares to the first quarter 2010 nitrogen fertilizer operating income of $3 million.
3. CVR Partners has a distinct cost advantage versus peers. The nitrogen fertilizer production is completely based upon petroleum coke gasification. CVR Partners' production facility is near a CVI refinery and this proximity allows CVR Partners to utilize petroleum coke gasification. Petroleum coke is created during the crude oil refining process. This production cost is a pricing advantage versus peers who utilize natural gas production methods. Competitors use natural gas production techniques. Natural gas represents 85-90% of competitor production costs. This cost advantage results in positive cash flow, which will be returned to UAN shareholders.
4. CVR Partners' goals are to pay out significantly higher cash distributions than its competitors:CF Holdings, Agrium, Potash, and Yara International. CVR Partners is focused exclusively on higher profit margin, and higher industry growth nitrogen fertilizers.
5. CVR Partners will utilize part of the IPO's proceeds to expand the nitrogen fertilizer by 50%. This expansion is expected to require 1-2 years.
Strong Parent Relationship
CVR Energy (NYSE: CVI) serves as CVR Partners' general partner. CVR is an independent petroleum refiner based in Sugarland, Texas. Subsequent to the CVR Partners IPO, CVR owned (and still owns) a majority stake in CVR Partners. John J. Lipinski, CEO, has 38-years experience in the refining and chemicals industries. CVR management has an average of 22-years experience in the fertilizer industry.
CVR will not have an incentive distribution rights. The focus is upon CVR Partners paying all net cash flows out to CVR Partners shareholders. CVR management will have a services agreement with CVR Partners to ensure a hands-on management team is making beneficial company-specific and industry decisions.
CVR Partners Valuation Metrics
CVR Partners' management has stated the first year distribution will be $1.92. CVR Partners last traded on May 27th at $19.96. A $1.92 annual distribution offers a 9.6% annualized yield. This static calculation does not factor in the dynamic pricing movement in the fertilizer sector.
Agrium, Potash Corporation, CF Industries, Yara are the major fertilizer competitors. None of these companies are pure play nitrogen fertilizer plays.
Terra Nitrogen Company (NYSE:TNH) is a similar limited partnership. CF is a majority owner in Terra. Terra is not a nitrogen fertilizer limited partnership. CVR Partners is the lowest cost producer of ammonia and urea ammonium nitrate fertilizers.
Terra has provided outsized cash distribution and total returns to unit holders. In this aspect, a review of Terra's historical performance is worth noting.
|TERRA NITROGEN CO -LP(TNH)|
|10 YEAR PERFORMANCE RESULTS|
|Amount Invested: $ 100,000 Shares: 19,048||Closing Value: $2,375,285.60|
|Split-adjusted Price(12/31/2001): 5.25||Closing Price(05/27/2011): 124.70|
|Dividend Cash Flow|
|YEAR||Dividend/Share||DivGR%||Payout%||Cash Dividend||% Return|
|Total Cash Dividends:||$836,588.16|
|Closing Cash Value:||$2,375,285.60|
|Closing Annualized ROR:||40.0%|
|Total Annualized ROR:||44.6%|
|Performance History for TNH - Copyright © 2010, EDMP, Inc. - All Rights Reserved|
CVR Partners provides an excellent opportunity for outsized returns. The underlying business has positive pricing trends. CVR as a parent provides a proven management expertise to lean on. The current distribution yield provides an approximate 10% yield. A long CVR Partners position provides for both high quarterly cash-distributions and potential for significant capital gains.