The Intriguing Story Of CVR Partners

| About: CVR Partners, (UAN)

I was challenged by one of my followers the other day to look for a high-yield petrochemical investment, and as a lover of interesting stories, I am intrigued by this one.

CVR Partners (NYSE:UAN) is a producer of Urea Ammonium Nitrate fertilizer. This material is normally produced using natural gas feedstock, but this company is North America's lone producer of UAN from petroleum coke feedstock. Petroleum coke is the nasty material left over as part of the oil refining process, and the refiners usually pay someone to haul it off where it can be burned as residual fuel for power plants and that kind of thing.

The plant is located adjacent to the CVR Energy refinery in Coffeyville KS. This refinery has been in the news in the last couple of years for two reasons: In 2007, the plant was shut down due to flooding for several weeks, causing an already tight fuel market in North America to get even tighter, and most recently, it was taken over by Carl Icahn, who now owns 80% of the stock and has replaced the board of directors.

We who are in tune with the oil business in the middle of the country know that this refinery is not going anyplace. It uses cheap Midwest crude oil feedstock, and sells mainly diesel fuel, and one can pretty easily theorize that Icahn will hang onto it long enough to extract value for the value of the refinery and pipelines, and then do with it what he will.

The petroleum coke agreement with CVR Energy is in force until 2027, according to the UAN quarterly report.

Coffeyville KS also has an advantage in that it is on the main railroad line, and has a shipping advantage to the corn belt compared to the competitive processes along the gulf coast (urea ammonium nitrate is a main fertilizer for corn).

CVR Partners is a Master Limited Partnership, and distributes all of its "free cash", as determined by the board of directors, in the form of "distributions", which we investors really like. At today's market price of 21.59, the annualized yield of the last distribution of 52 cents is 9.68%. The company has issued guidance that the 2012 distributions will total $2.09 per share, even though they are going to have a shutdown for maintenance in the fourth quarter.

So, to summarize: You have a $1.5B business, with a small share of a growing market (ammonium fertilizer). It pays more than a 9% dividend, which is pretty secure between now and the end of the year. They are in the middle of a 50% expansion project, and they already have significant advantages over their bigger commoditized competitors in the area of feedstock costs and transportation into the primary market. The most recent investor presentation is linked here.

Even more interesting is the stock chart, with the dividends annotated:

Click to enlarge

We have written in the past about the possibility of playing the dividend in some of the high yielding mREITs. I would just throw out for consideration that with 100% reliability for the life of the company, the price always falls precipitously right after the dividend, and recovers before the next declaration date. So, a simple game might be to go long on the stock right now, with the price beaten down, and wait until just before the next dividend payment in August, and we might do much better than the 2% quarterly dividend.

Or, the more patient of us might just go long, wait out the turnaround in the fall, and in 2013 when the production is 50% higher, collect an even bigger dividend and in all probability a higher price.

The risks: Where to start? There is the Icahn/Drama risk, and that kind of thing is never 100% predictable. There is the overall energy price risk, which influences both the natural gas feedstocks of the competition as well as the refining situation of the next door neighbor who is providing UAN the coke. There is some commodity exposure, UAN being as it is a feedstock for the corn industry. There is the risk of an overall 2008-like downdraft in the marketplace.

But, you have to think on either the very short term, between now and August, or on the 18-month to 2-year time frame, there are a lot of positives.

As we always say, the world is chaotic, and there are no guarantees on anything, and there are plenty of instances of a 100% reliable history not translating into a 100% reliable future. Still, it's intriguing.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UAN over the next 72 hours.