CVR Partners Q1 Highlights

| About: CVR Partners, (UAN)

CVR Partners (NYSE:UAN) released its Q1 2012 financial results after the market closed.

The units are down from today's high of $29.10 in after hours trading to $28.49, because the headline earnings of 41 cents and $78.3 million in revenues numbers apparently missed average analyst estimates of 44 cents on $85.4 million.

I would caution, however, that very few analysts are incorporated in said estimate. CVR Partners also raised its cash distribution per unit for 2012 guidance, from $1.50-$1.75, to $1.65 to $1.85.

The most recent results showed the nitrogen fertilizer MLP worked through some unexpected production glitches during the quarter, which are now rectified. (All volumes are in short tons which equal 2,000 lbs).

I had heard that the Coffeyville, Kansas, plant had experienced some unexpected downtime, and was waiting for the release to detail these.

However, there is little information in the press release, so we'll have to wait for more color on the investor conference call tomorrow at 9:30 a.m.

Anhydrous ammonia production was down from 100,800 tons in Q4 2011 to 89,300, a shortfall of 11.4%.

UAN production was 154,600 tons versus 178,300 tons in Q4 2011, down 13.3%.

One thing I have noted about CVR Partners, detailed in my discussion of the history of the production plant in an article last year, is that its petroleum coke gasification method for producing hydrogen gas which is used to produce ammonia, is finicky. It requires high ongoing maintenance costs which are fairly fixed, from both CVR Partners and outside consultants (GE bought the technology and services it).

When the "on stream factors" are close to 100%, the plant makes very good operating margins. When something breaks, the operating margin plummets. On-stream factors for Q1 were 93.3% for gasification (not bad), 91.5% for ammonia, but only 83.6% for UAN. Therefore, they probably experienced some systems problems, as well as a problem in the UAN reaction vessel. Note said vessel blew up in September 2010.

In Q1 2012, operating income dropped to $31.4 million from $42.6 million in Q4 2012, or 26.3%. Although production was down, direct operating costs actually went up, to $22.5 million, from $21.0 million.

Conversely, the raw material the plant buys from CVR Energy (NYSE:CVI) as a carbon source, pet coke, went down in cost to $3.0 million from $3.7 million, as one would expect.

The partnership sold as much ammonia as in Q4 but more product than it produced, 29,900 tons of ammonia versus 29,300 in Q4. UAN sales were light at 158,300 tons of UAN versus 184,600 tons in Q4, as it probably went into the quarter with lighter inventories of the bulky liquid nitrogen fertilizer.

Here are some CVR Partners financial metrics for the last five quarters.

CVR Partners Q1-11 Q2-11 Q3-11 Q4-11 FY 2011 Q1-12 Yr/Yr
Total Revs $57.4 $80.7 $77.2 $87.6 $302.9 $78.3 $20.9
Product Revs $52.5 $69.1 $65.5 $79.3 $266.6 $67.9 $15.4
Freight $4.8 $5.4 $6.0 $5.9 $22.1 $4.7 -$0.1
CVR COPS $7.5 $9.7 $10.9 $14.4 $39.1 $12.6 $5.1
CVR COPS/Revs 14.3% 14.0% 16.6% 18.2% 14.7% 16.2% 1.9%
CVR GM $22.0 $37.1 $34.5 $43.9 $141.1 $32.4 $10.4
CVR%GM 41.9% 53.7% 52.7% 55.4% 52.9% 47.7% 5.8%
CVR DOE $23.0 $22.3 $20.1 $21.0 $86.4 $22.9 -$0.1
CVR DOE/Revs 43.9% 32.3% 30.7% 26.5% 32.4% 33.7% -10.1%
CVR EBITDA $25.9 $45.0 $43.3 $48.0 $162.2 $38.0 $12.1
CVR%EBITDA 45.1% 55.8% 56.1% 54.8% 53.5% 48.5% 3.4%
Coke (000 tons) 124.1 135.8 131.2 130.0 521.1 120.5 -3.6
Coke/Ammonia 1.18 1.33 1.28 1.25 1.26 1.35 0.17
Coke Cost per Ton $15 $30 $43 $45 $33 $42 $27.0
Total Coke Cost $1.9 $4.1 $5.6 $5.9 $17.5 $5.1 $3.2

Pricing was better in Q1 for ammonia at$613/st versus $606/st but UAN pricing was weaker as it did not participate in the big rally that urea enjoyed. Average UAN price realized was $313/st versus $334/st.

$ Short Ton FY 2010 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12
CVR Ammonia $361 $564 $574 $568 $606 $613
Deferred Revenues $18.7 $3.0 $26.7 $20.6 $9.0 $16.0
CVR UAN $179 $207 $300 $294 $334 $313

CVR Partners increased its operating cash flow in Q1 2012 by 69% to $53.8 million from $31.9 million, partly because of the higher pricing on ammonia, but also because it sold $5.7 million in excess hydrogen to its parent refinery company, versus $2.4 million in Q4 2011.

CVR Partners took in $11.6 million more cash deposits on prepaid orders than at 2011 year-end, and this will serve to stabilize revenues in the summer.

As the MLP deducts this input of cash deposits for future orders from cash available for distribution, it did not benefit the distribution for Q1, which has already been declared at 52.3 cents per unit, versus 58.8 cents for Q4 2011.

Another item that reduced cash available for distribution was a $7.5 million cash reserve for future expenses, which did not appear in prior cash distribution statements. The nature of this expense is most likely a reserve for the UAN addition and turnaround that will occur in late 2012.

The Q1 2012 distribution goes "ex" on Friday and is payable on May 15. The prospective 2012 yield at the current price of $28.49 based on a midpoint of the 2012 guidance (note the 58.8 cents was for last year) is 6.14%.

One final note: As you may know, Carl Icahn and his affiliates have struck a deal with CVR Energy to allow him to make a tender offer for the latter. I described some of the ramifications of a change in ownership of CVR Partners' parent in this article here.

The tender expires on Friday night at midnight. CVR Partners units were not sold by the board of CVR Energy to fund a special dividend, and the units have rallied with the good pre-plant nitrogen application market caused by extraordinarily warm spring weather. However, swap prices for ammonia and UAN are lower for the summer lull period.

I won't make a forecast of the CVR Partners price going forward. But you can see it is rallying near the $31 high again. UAN prices for April ended at $390-400/st at NOLA and $465-475/mt at Tampa. CVR Partners enjoys a premium to pricing at both those ports. However, pricing for June declines to $315-330 UAN and $350-405/mt for ammonia.

(Click to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.