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The fertilizer stocks investment story pulls together some factors which make these investments very appealing: Fertilizers are a globally necessary product with - at times - very high profit margins. The main raw material to produce nitrogen based fertilizer products - natural gas - is at record low prices. The available limited partnership companies allow investors to earn very high dividends/distributions from those attractive profit margins. Of the three fertilizer plant L.P. investments currently available, CVR Partners L.P. (NYSE:UAN) may provide the best long term potential for investors.

The first point I want to make is that, while the long term trend for fertilizer prices is up, this is a very cyclical business and investors who buy shares of one of these companies near the peak of the price cycle will be seriously disappointed in the share values and future distributions as the prices work through the cycle. Buy any of the fertilizer L.P. companies - CVR Partners, Terra Nitrogen Co. L.P. (NYSE:TNH) or Rentech Nitrogen Partners L.P. (NYSE:RNF) - when the dividends are well below the historic highs. For example, the Terra Nitrogen quarterly distributions have ranged from a low of $1.25 per unit to a high of $4.84 over the last five years.

(click to enlarge)TNH Dividend Chart

TNH Dividend data by YCharts

There are several reasons why CVR Partners is positioned to outperform the long term crowd favorite - Terra Nitrogen:

  • The top reason to go with CVR Partners are the company plans to increase the plant's production capacity. The UAN fertilizer production capacity is projected to increase by 50%, to 3,000 tons per day by the first quarter of 2013. UAN is produced from ammonia produced at the plant. The company decides in what proportion to sell ammonia or convert ammonia to the more profitable UAN. Once completed the upgrade will increase the CVR distributable cash flow by 10% to 12%. Terra Nitrogen has not increased plant capacity since at least 2005 - the limit on how far back the company website posts annual reports.
  • CVR Partners does not pay incentive distribution rights - IDRs - to a general partner. CVR Energy (NYSE:CVI) owns the general partner and majority of the limited partner units, but does not earn IDRs. All of the distributable profits earned by CVR Partners are distributed equally to the limited partner unit holders. The Terra Nitrogen partnership agreement requires that 48.5% of distributable cash per unit above $1.05 per quarter be paid as IDRs to the general partner owned by CF Industries (NYSE:CF).
  • The share price of CVR Partners has lagged both Terra Nitrogen and Rentech Nitrogen Partners over the last year and 2012 to-date. The Terra Nitrogen share price had a big run-up on large distribution increases and will make a similar drop when future distribution amounts do not meet investor expectations. CVR Partners offers a better value on potential distribution yield.

CVR Partners has paid relatively steady dividends over the four quarters since the early 2011 IPO. I think profits will drop some in the second quarter and further in the third on UAN price weakness. CVR Partners received an average of $313 per ton of UAN in the 2012 first quarter. Currently, the market price for UAN is in the $260 per ton range. At the low end of the distribution range guidance from management, UAN currently yields about 8%. Investors should wait until after the second quarter earnings report to pick up shares of CVR Partners as a long term hold. A target share price of $16 would provide attractive long-term potential.

(click to enlarge)UAN Dividend Chart

UAN Dividend data by YCharts

Additional Reading: Terra Nitrogen Is At The Wrong Point In Its Business Cycle

Source: Outlook For CVR Partners: Short-Term Negative - Long-Term Positive