Rentech Nitrogen Partners, L.P. (RNF), reported strong operating and financial results for the last quarter of 2011, as had other U.S. nitrogen producers.
But no cash distribution was declared by RNF. This was expected but let's go over the details and our expectation for the first distribution, probably to be paid in May.
RNF's year-end of September 30 has been pushed forward to December 31. We'll call the reported "transition period" and the December period in 2010 "Q4" for simplicity's sake.
Note the transition period comes with circa 200 pages of 10-K documentation on EDGAR filed yesterday, so this is a first pass at the results, which I believe are inline and don't warrant a big unit price move.
Although the IPO closed on November 9, the MLP is reporting a full 92 day quarterly result, with revenues of $$63 million versus $43 million in Q4 2010.
Gross profit was $25.5 million or a 46% margin, versus $16.1 million or 38% for the comparable period in 2010.
The East Dubuque, Illinois, plant was down for 15.5 days of the 92 day quarter (17%), so on-stream rates for ammonia synthesis and UAN upgrading were 83.7% and 84.7% were reasonable.
Prices received for its main products were buoyant and $684 on 55,000 short tons of ammonia versus $636 on 18,000 tons in Q3 (previously Q4 2011) and $307 on 65,000 tons of UAN solution versus $298 on 77,000 tons in Q3.
Ammonia sales were boosted by the purchase of 12,000 tons of third party product and Q3 sales were 6,000 tons less than production, carried over to Q4.
Production rates in the Q4, adjusted for the downtime, were in line with the rated capacities for the two plant's main products. Note that Rentech Nitrogen also produces lesser amounts of liquid urea, nitric acid and CO2.
The MLP reported Q4 EBITDA of $26 million. Given the 12-month IPO adjusted EBITDA forecast of $96.9 million, this seems like a decent result and in-line for the MLP to make its $2.34 IPO guided annualized payout rate.
The MLP had said in its IPO prospectus it would not pay a cash distribution on the 15 million units issued at $20 in early November, until a full quarter had passed as a public entity.
As we had previously indicated, we don't expect a distribution to be declared until after Q1 2012 for the period ending March 31 is released, likely to be paid out end of May.
It's a good thing, because Rentech actually consumed cash in Q4 leaving nothing for unitholders to receive as of yet.
The MLP used $6 million in cash as they paid back a term loan to parent Rentech (RTK) with the proceeds of the unit issue, causing a $10.3 million loss on extinguishment.
They also made some of the strong Q4 revenues out of the pre-sold bookings with cash deposits already received, to the tune of $13.8 million, so these revenues do not add to cash flow in the quarter.
Therefore, unitholders should not expect any cash distribution from the last two months of calendar year 2011 (the MLP indicated only results after the November 9 IPO date would accrue to limited partner owners).
Let's look at the outlook for Q1 of fiscal 2012.
The MLP had pre-booked 59% of ammonia and 46% of UAN as of the mid December earnings release, at attractive prices (I define as higher than required to make the IPO distribution target).
Those numbers have inched higher to 66.5% and 51.9% as the MLP declined to sell into what was a weak forward nitrogen fertilizer market in December through February. Prices in the forward book are attractive at $741 and $386 for ammonia and UAN respectively.
However, these high prices are probably no longer going to be realizable as ammonia brownfield expansions from people such as PotashCorp (POT) come on line in early summer.
On the cost side, RNF has hedged 84% of natural gas requirements for the 12 months ending September 30, 2012. The MLP likes to trade natural gas, and has entered into purchase commitments for 3.5 trillion BTUs in excess of its needs at an average price of $3.19. This trading of natural gas adds risk to the units in my view.
Looking forward, the MLP says it needs prices of $588 for ammonia, and $313 for UAN, to make its targeted cash distribution rate. The ammonia price is probably achievable given the difficulty in getting Gulf ammonia to the upper corn belt. However, UAN prices are currently running under the required price and may not be achievable this year.
We expect spring planting demand for nitrogen to start building for what has not already been applied in late 2011. Warmer than usual winter in the corn belt has changed some of the timing of application.
It appears much ammonia for 2012 pre-emergence has already been applied, as indicated by the stronger than normal ammonia sales being reported in Q4 by nitrogen fertilizer companies.
The warm weather also may create an early planting season for corn this year. That's good, because late corn planting often turns into soybean acres and continuing strong soybean prices due to the drought in Brazil could threaten to reduce U.S. planted corn acreage.
We are reducing our prior estimate for Rentech Nitrogen's first cash distribution from 80 cents payable in May, to 60 cents, given the lack of cash flow in Q4. We maintain our full year rate to September 30, 2012 of $2.00 versus the MLP target of $2.34.
Since we recommended RNF units at $17.50 January 4, they have appreciated to $26.00 this morning, a gain of 49%. They currently provide a prospective yield of 7.7%. We would be seller of these units at a 7% yield ($28.57) as we continue to monitor nitrogen demand and pricing.