Successful income investors buy when stocks have a catalyst to raise their distributions. I believe fertilizer stocks provide this catalyst right now. Market factors are aligning with the potential master limited partnerships for significant quarterly distributions and capital gains. In this article, I will highlight three fundamental catalysts to buy specific fertilizer stocks before the announcement of 1st quarter earnings.
Three Catalysts to Buy Nitrogen Producers
The USDA projects the largest corn planting in 75 years.
Corn futures surged due to tighter than expected supplies,
Fertilizer prices are firm and advancing.
CF Industries Holdings, Inc. (CF)
CF Industries Holdings produces, sells, and distributes nitrogen and phosphate fertilizer products in North America. The Deerfield, Illinois-based company has two core segments: Nitrogen fertilizer and phosphate fertilizer.
The nitrogen fertilizer segment offers ammonia, urea, and urea ammonium nitrate solution. Natural gas is the feedstock for this segment. In 2011, natural gas represented 45% of operating costs.
The phosphate fertilizer segment offers diammonium phosphate and onoammonium phosphate.
Rentech Nitrogen Partners, L.P. (RNF)
Rentech Nitrogen Partners, L.P. produces nitrogen fertilizer. In addition, the company offers ammonia, urea ammonium nitrate, urea granule and urea solution, nitric acid, and liquid carbon dioxide to end use customers. The company's key feedstock is natural gas.
The low natural gas stock benefits the free cash flow for the company. Henry Hub Spot, natural gas per MMbtu, is priced at $1.98. This is as of March 30th.
The company has a clear direction to increase its fertilizer output in the near term 1-3 years. This will provide increased revenue and ideally higher distributions if fertilizer prices remain strong.
CVR Partners, LP (UAN)
CVR Partners, LP produces, distributes, and markets nitrogen fertilizers in North America. The partnership's key feedstock is pet coke. The company's parent, CVR Energy, (CVI) has a refinery directly across from CVR Partners' nitrogen fertilizer plant. The nitrogen fertilizer segment produces ammonia and urea ammonium nitrate.
The above table highlights the company's growth in production and increased expense in its feedstock pet coke.
Per a March 27th analysis, UAN revenues are increasing. The UAN costs have increased since last week, from $17.50 to $292.50 at the Gulf. The USDA reported the cost in Iowa at $412.50 per ton.
Urea prices jumped higher this week. Gulf prices rose $42.50 to $557.50 on heavy demand.
In addition, per a January 2012 presentation, the company will expand its UAN production by 59%. This will take effect by the first quarter of 2013.
Terra Nitrogen Company, L.P. (TNH)
CF Industries has a 75.3% interest in Terra Nitrogen Company, L.P. Terra Nitrogen Company is a publicly-traded limited partnership. Terra Nitrogen has the capacity to manufacture an annual 1.9 million tons of urea ammonium nitrate solutions and 1.1 million tons of ammonia. Ammonia is the key ingredient for most nitrogen fertilizer and many industrial products.
Potash Corp. of Saskatchewan, Inc. (POT)
Potash Corporation of Saskatchewan makes and sells fertilizers and associated products. Sales are primarily in North America. The company, per its name, mines and produces potash. Potash prices are increasing in Iowa. This information, according to the USDA, put the potash per ton revenues at $666. This is up $19 per ton in the last week.
The company pays a 1.2% dividend and is less likely a name for immediate dividend income. The growth in fertilizer demand will only enhance future revenues.
I recommend income investors buy Rentech Nitrogen Partners, L.P. as their number one income fertilizer stock. This is based upon Rentech's low cost feedstock, natural gas. Natural gas is trading at 12 year lows. This is the key cost in fertilizer production, and the free cash flow will drop down to unit holder distributions. I believe we will see $35 per unit in the coming months.
I recommend CVR Partners, LP as the second best income-based fertilizer stock to buy. The units are trading in a tight trading range due to Carl Icahn's bid for CVI Energy, the parent of CVR Partners. On March 28th, CVR Energy delivered a public letter to Carl Icahn. The company strongly disagrees with the price Mr. Icahn is willing to pay. I believe we will see $35 per unit in the coming months. The demand for fertilizer remains strong and prices are increasing.