Here is the third (out of four) installment of our special report comparing two very popular fertilizer investments: Terra Nitrogen, formerly a subsidiary of Terra Industries but now controlled by CF Industries, and the recent upstart, CVR Partners, which is controlled by CVR Energy. Please check out part 1 and part 2.
Ammonia Production Comparison
The starting point for valuation of a nitrogen fertilizer plant is its annual ammonia productive capability. Ammonia is the most expensive step to produce other nitrogen fertilizers such as urea and UAN (Urea Ammonium Nitrate solution).
The Haber-Bosch process whereby atmospheric nitrogen is combined with hydrogen gas to form ammonia (chemical symbol NH3), is common to all these plants, but the technology and engineering design provider differs, with a handful of global leaders. Verdegris was designed by Kellogg Brown Root (NYSE:KBR) based in Houston and Coffeyville was designed by Casale Group based in Switzerland.
Both KBR and Casale trace their roots back several decades. KBR was started by M.W. Kellogg in 1901 as a pipe fitting company and grew to become the largest contractor in Iraq while it was owned by Halliburton (NYSE:HAL). Luigi Casale bought an industrial facility in Terni, Italy, in 1921 and began developing ammonia plants when the industry was still in its infancy in Germany. Both contractors claim they have designed over 200 ammonia plants worldwide, and both claim they are technology leaders, especially in the field of optimizing and revamping existing plants.
TNH says the older Verdegris plant has a 1,080,000 short ton (st) annual ammonia capability, 50% more than the two Kellogg unit original design, due to extensions, revamps and optimizations. The average production for the 2005-2010 period for Verdegris was 1,088,250 (Source: TNH 10K filings and company communication).
CVR says its newer Coffeyville Nitrogen plant ammonia capacity is 1,225 st/day (or 442,125 st per year). Because the CVR Partners number does not include an allowance for maintenance downtime, we should look at actual production to determine practical capability. The average NH3 production for the past six years was 382,717 (Source CVR and CVR Energy 10K filings and company communication. That average includes a low 326,700 production year in 2007 stemming from the previously described flooding incident (see Part 2 of this article series). Removing this year, the average from 2005-2010 was 393,920.
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Hence, a rough estimate of the ratio of CVR to TNH annual ammonia productive capability would be 394/1088 or 36%.
Ammonia Upgrading Capability
Both Verdegris and Coffeyville upgrade much of their ammonia to a higher value added nitrogen fertilizer called UAN solution. The benchmark UAN has 32% nitrogen content and unlike ammonia, does not require special equipment and handling procedures to be transported or applied by farmers to their fields.
Sometimes, as is currently the case, ammonia prices are relatively high, and both plants can dial down the upgrade rate to UAN and sell more ammonia (called "merchant ammonia"). But the more UAN upgrade capability the plant has, the more flexibility it has to produce better margins and cash flow.
TNH says Verdegris can produce 1,965,000 st of UAN 32 at its maximum rate. It produced on average 1,937,333 of UAN per year from 2005-2010. TNH sold an average of 316,500 st of merchant ammonia, meaning 71% is typically upgraded.
CVR quotes capability based on tons per day at 2,025 st UAN which would equate to a 739,125 annual rate. Actual UAN production for the past six years was 621,417. Again, production was dragged down below 600,000 by events in 2007 and 2010. In its presentations, CVR uses 675,000 st as its UAN capability and in 2009 actually produced 677,700. Removing those two years results in an average UAN production of 643,325.
CVR sold an average of 129,200 st of merchant ammonia during the period and therefore upgrades, on average, 67% of its production and 4% less than TNH.
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CVR plans a major expansion of UAN capacity of 400,000 tons for a budgeted cost of $100 million, to be completed in 2013. As each extra UAN ton produced would require approximately 0.41 tons of ammonia, this upgrade would require 164,000 tons of ammonia per year, in excess of its merchant ammonia availability. Looking at it alternatively, CVR’s billed 1,075,000 UAN capacity would require 440,750 tons of ammonia, more than it has produced in any of the last six years. Therefore, a question mark remains as to how it is going to produce that much UAN.
Please stay tuned for the fourth and final installment of our special report comparing TNH and CVR.
Trading Note: Yara International (OTCPK:YARIY) reported Q3 results this morning. Yara is the largest global nitrogen fertilizer company.
Yara reported third quarter net income after non-controlling interests of NOK 3,566 million (NOK 12.42 per share), compared with NOK 1,927 million (NOK 6.68 per share) last year. Excluding net foreign exchange gain/loss and special items, the result was NOK 9.13 per share compared with NOK 5.00 per share in third quarter 2010. Third-quarter EBITDA excluding special items was NOK 4,211 million compared with NOK 2,536 million last year.
I am still analyzing the Yara results but wanted to give fertilizer stock traders a heads up. It looks like we’ll have a positive opening on the U.S. stock market with DJIA futures up 99 points as of 8 a.m.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.