First, for all those who are seriously underwater on their income investments in the fertilizer production space (aka Master Limited Partnerships), please take a big breath.
I'm a technical scuba diver, master scuba diver trainer, and mixed gas diver. Learned when I was 18. I love being down below 150 feet in opaque cold lake water, alone, on a shipwreck, breathing on my "Big Yella" steel tank, with a double valve, and extra O2 tank for deco stops.
The first rule in diving, as should be for commodity investing, is "stop, breathe, think" before acting. So take a breath, and let's look at these MLP investments, often billed as high yield income plays, but volatile equities in disguise.
Investors should keep in mind two things about income equities such as these MLPs: As soon as they go "ex" distribution, they are bound to be weak in price, because they won't pay anything out until another three months (August). So you can expect weakness in the first half of that period.
Secondly, the macro news from Greece has been terrible. There is only one thing worse than waking up to a bad event which impacts investor psychology. That is to tell investors the bad event is coming, but is not here yet. We know the Greek reelection will be bad news for Europe and the markets, and is expected to occur around June 17, or one month from now. So stocks have been selling off every day in expectation of that bad day.
The only good news is, the discounting mechanism has been working overtime for 11 days since May 6, and the nadir of commodity prices and investments will precede the actual event.
The Good
Rentech Nitrogen Partners (RNF) is in the sweet spot for selling nitrogen fertilizers to corn belt farmers. Centered in East Dubuque, Illinois, they are far removed from price competition from Gulf of Mexico imported ammonia, urea or UAN.
Rentech sells dry urea as well as ammonia and UAN fertilizer. So they capitalized on the spike in urea prices during Spring. Another MLP for some reason, wants to make their company produce only one product, with no flexibility.
CVR Partners recently upped their 2012 CAD guidance to $1.65-1.85. Since 52.3 cents have already been paid for Q1, you should only expect to get $1.13 to $1.33 for the rest of the year.
Our estimate for CVR Partners' sustainable CAD has been $2.20 all along. At the closing price of $21.93, that's about a 10% yield. But you won't see that yield until 2013, and who knows what corn prices and nitrogen will be trading at then.
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The Ugly
Terra Nitrogen Partners (TNH) has got to be the least researched (is this the perfect investment?), over-hyped nitrogen fertilizer MLP of the decade.
The units had a lousy Q1 because volumes of its ammonia and UAN product were artificially boosted due to a new arrangement with its 75.3% owner and controlling partner, CF Industries (CF).
We had predicted a low $12.58 distribution for 2012 back in November 2011. Although better than expected nitrogen fertilizer prices cause us to bump this by a $1, at $13.58, the units were yielding a paltry 4.55% when they hit their $298.50 high on April 16.
Now that $4 of Q1 distribution has already been paid out, you can expect at best, another $10 of CAD for the rest of the year, front-ended in Q2 and Q3, because Q4 will require $50-80 million of turnaround expense (shared equally with the GP).
Terra Nitrogen has high margins in the mid-60% range, that is true. But the valuation of the MLP got out of whack ($10 billion for the whole thing if you back-in the GP's share).
At the closing price of $182, the prospective yield for the units, based on our CAD estimate, is 7.46%, which we feel is reasonable. However, downside momentum and lack of liquidity continue to plague this investment.
The problem with TNH is, there are no conference calls, and no guidance, so frightened investors have no assurance when the units tumble.
It has been pretty ugly. Closer to the August release of Q2, I expect TNH to rally strongly for those who can hold their breath that long.
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Positive comments by Rentech executives at the BMO Farm to Market Conference which ended yesterday support my view Q2 and Q3 2012 will be buoyant.
According to Mark Wallace, head of sales and marketing, RNF is booking summer and fall ammonia sales at $600-650/st. Those prices are certainly not as good as Q1 ($673) but very profitable, and much better than the July Gulf swap of $350-450/mt at Tampa.
This MLPs cost of gas has come down from $4.46 in Q1 to $3.78 for product locked in going forward for the rest of 2012.
A slight of the hand in the presentation showed 38% of RNF's ammonia and 34% of UAN locked in at $693 and $361 respectively. But that included already delivered volumes of 25,000 tons ammonia, and 34,000 tons UAN.
Therefore, Rentech is still relatively unhedged on product sales, but hedged 68% on natural gas.
The CEO said the yield on the units is 13%. That's a bit disingenuous, given the "yield" on MLP's is highly variable.
Its $2.86 guidance for 2012 CAD (Cash Available for Distribution) has already been paid out to some degree.
My thinking is the 53 cents of the recent $1.06 payment must be attributed to 2012.
So we only have $2.33 left to be paid this year assuming I am right (I have tried to get more details from the MLP).
That would be a yield of 9.96% at the closing price today of $23.39.
Rentech is clearly the least vulnerable nitrogen plant to ammonia and urea import competition and brownfield expansion (other than their own).
My target would be up a few points from here as value players get back in to the MLP, barring more bad headlines from Europe interfering.
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RNF's EV/EBITDA is $913 million/$120 million or 7.6X which is on the high side of where much bigger corporations trade at (CF and Agrium), but much better when it was at $29/unit.
An 8% yield or a price of $29.15, or 25% upside from here is doable, because the float is so low (only 15 million units).
The Bad
CVR Partners (UAN), produces UAN and ammonia in the Southern Corn Belt. The MLP is now under the control of Carl Icahn, and he just appointed two Icahn Directors to the General Partner.
CEO Byron Kelley, quickly went into an unscripted tirade at the BMO conference, railing against the May 10 USDA WASDE report that implied a bumper crop for corn was in the cards for 2012.
He doesn't see sub $5/bushel corn this year and "it could be a lot better than that."
Kelley conveniently forgot about the production problems the plant experienced during Q1 2012, when he stated the plant always runs at high operating rates (other than the UAN reactor accident in 2010).
The truth is, CVR Partners has been between the cross-hairs of Carl Icahn, who controls the parent company, and the lower quarterly distributions the MLP will pay out, due to the plant turnaround and expansion planned for October 2012
Disclosure: I am long RNF.
