Investors should take advantage today of low natural gas prices and the fertilizer sector. Low natural gas prices are a catalyst for Rentech Nitrogren Partners (RNF).
The dividend niche has plenty of stocks impacted by natural gas prices. Royalty trusts, based upon natural gas production, will continue to report lower distributions to unit holders. The winning sector is the fertilizer space. Fertilizer partnerships benefit from low natural gas prices. Natural gas is the key feedstock in their business model. Income investors want exposure to the sector which offers the best risk to reward benefit.
Rentech Nitrogen Partners, L.P.
Rentech Nitrogren Partners should report favorable distribution numbers on May 11th. The partnership is benefiting from low natural gas prices. In addition, the company is benefiting from higher ammonia prices, urea ammonium nitrate solutions UAN prices, and urea prices. The input costs are decreasing and the fertilizer prices are rising.
Rentech Nitrogren Partners is not followed by most income investors. The 2011 IPO has not paid a distribution at this point. The partnership will announce its first payout on May 11th. The 2012 total distributions, per the SEC S-1A, are expected to be $2.34. I recommend investors buy shares before recognition of this partnership's potential.
Terra Nitrogen Company, L.P. (TNH)
Terra Nitrogen Company, L.P. benefits from the low natural gas prices. Terra Nitrogen Company's core revenues are ammonia and UAN which are manufactured at their Verdigris, Oklahoma facility. Terra Nitrogen Company is majority owned by CF Industries (CF).
CVR Partners, LP (UAN)
CVR Partners uses pet coke as its feedstock. The partnership will not benefit due to the low natural gas prices as its fertilizer peers. The company reported 4th quarter guidance on February 12th. Management provided a normalized 2012 annual distribution of $1.75 to $2.00 per unit. The plant has a biannual turnaround which will decrease the annual payout by 25 cents.
The 1st quarter earnings will be reported on March 3rd. 2013 distribution growth prospects are positive due to an approximate 50% increase in UAN production as a result of the expected completion of a capital project in early 2013 that will allow the company to convert all of its ammonia production to more highly-valued UAN (currently, approximately 70% is converted)..
Enerplus Corporation (ERF)
President and Chief Executive Officer Gordon Kerr discussed the company's business model on April 19th. The stock continues to trade at 52 week lows. The April 19th Analyst Day highlighted the company's exposure to natural gas prices. Secondly the company focused upon funding solutions. Funding ideas included partnerships, equity offerings, and potential sale of assets.
2011 4th quarter cash flow was $89 million. This is substantially lower than the 2011 4th quarter cash flow of $145 million. The asset sales have decreased from prior periods. Enerplus needs funding for its high monthly dividend payout and its capital structure.
I have a personal opinion of the Analyst Day presentation. I don't want exposure to Enerplus Corporation. The company is attempting to retain its monthly dividends, and maintain its 2012 capital expenditures. I believe the company has to reevaluate its current monthly high dividend. The presentation defended the high yield dividend. I don't believe such a commitment to the dividend despite natural gas prices which are at multiple year lows. The dividends are unsustainable based upon the company's current business model.
The company referred to the natural gas situation in the exact phrase I was thinking and waiting for: the "elephant in the room" or otherwise known as negative cash flow natural gas prices. To cut to the chase, I recommend investors avoid Enerplus.
San Juan Basin Royalty Trust (SJT)
San Juan Basin Royalty Trust is predominantly a natural gas trust. The passive structure provides a monthly distribution based upon unhedged natural gas prices. San Juan Basin Royalty Trust has a lot of valuable assets assuming natural gas returns to higher prices. People who can predict the future of natural gas or oil are not people I have any faith in. I can only deal with the prices and future prices I see today. This trust should be sold short or sold. I have been saying this for a couple months now as the price is over valued based upon natural gas prices.
The capital structure at Enerplus is very questionable. The fact the equity is trading at 52 week lows speaks volumes. San Juan Basin Royalty Trust should end up in the single digits after the full effect of decade low natural gas prices is priced into the trust.
I recommend buying Rentech Nitrogen Partners, L.P. and CVR Partners LP. I believe fertilizer prices warrant a position in both names. Based upon 2012 distribution predictions, current natural gas prices, plant growth prospects, a 15% net return on both names is my goal. Due to the lack of trading shares in Terra Nitrogen Company, I would advise against owning shares. CF Industries , however, remains the best overall fertilizer company for future growth. CF Industries owns approximately 75% of Terra Nitrogen Company.