Fertilizer Partnerships Offer Enticing High-Yield Income

| About: Terra Nitrogen (TNH)
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Terra Nitrogen Company, L.P. (NYSE:TNH) offers investors an 8.1% annual distribution. The limited partnership has provided investors an impressive 17.7% total annualized rate of return over the past 15 years. This article will focus upon risks and rewards of investing in Terra Nitrogen at today's price of $197.31.


Terra Nitrogen produces nitrogen based fertilizer ingredients, specifically urea ammonium nitrate (NYSE:UAN) and ammonia, at its manufacturing plant in Verdigris, Oklahoma. Approximately 75% of Terra Nitrogen's shares

are held by Terra Industries, which is a wholly owned subsidiary of Illinois based CF Industries (NYSE:CF). CFIndustries acquired Terra Industries in a 2010 acquisition. As a result, Terra Industries is now a part of CF Industries' vertically integrated fertilizer supply chain. CF Industries is the world's second largest producer of nitrogen based fertilizers.

Fertilizer Sector:

Per a January 31st update, fertilizer prices are firming up. Ammonia and urea ammonium nitrate solution are showing strong pricing power based upon supply and demand. The long term sector should excel. The population is growing globally and the farm acreage is shrinking each year. Acreage needs to produce more output per acre. Fertilizer allows for the promotion of increased output per acre.


For the twelve months ended September 2011, Terra Nitrogen paid out $13.91 in distributions. With units trading at $197.31, near all-time highs, Terra's distribution yield is 8.1%. While management is committed to regularly paying distributions, actual payouts have varied based on profitability and cash flow. Terra Nitrogen has steadily increased distributions from $1.75 per year in 2004 to its current payout of $13.91, but payouts have been up and down depending upon the fertilizer market.


For the 12 months ended September 30, 2011, Terra Nitrogen reported revenue of $740.8 million and net income of $444 million, with a whopping net margin of a 59.9%. Moreover, its 3Q 2011 revenue of $203.1 million was a 49.3% increase over 2010, and earnings were $128.4 million compared to $35.2 million in the third quarter of 2010 - partly due to higher sales volumes but more significantly due to sharp increases in UAN and ammonia prices. For example, the average price of UAN jumped 63% year over year from $181 per ton in the third quarter of 2010 to $295 per ton in third quarter of 2011. Terra Nitrogen held cash reserves of $144 million, assets of $297.1 million and partners' capital of $236.5 million.


Over the past five years, Terra Nitrogen has handily outperformed the S&P 500 Index by over 350%. For the twelve months ended February 2012, Terra Nitrogen units gained over 75%, and near all time highs, with a market capitalization of $2.7 billion and a price to earnings ratio of 13.9x.

Peer Group:

Terra Nitrogen's peers, companies in the fertilizer partnership space, include CVR Partners, LP and Rentech Nitrogen Partners, LP (NYSE:RNF).

CVR Partners, LP

CVR Partners is a Delaware limited partnership formed by CVR Energy (NYSE:CVI) to own, operate and expand the nitrogen fertilizer business. The one unit facility is located adjacent to CVR Energy's refinery in Coffeyville, Kansas. This unit is anticipated to expand UAN capacity by 50%, or 400,000 tons per year, in the first quarter of 2013.

CVR Partners has the only operation in N. America that uses a petroleum coke, or pet coke, gasification process to produce nitrogen fertilizer.

CVR Partners' management has executed in their initial public offering, up to this point, mission to pay close to a 10% distribution per unit. The partnership had its ex-dividend date on February 3rd. The amount of 58.8 cents per unit will be paid on February 14th.

Rentech Nitrogen Partners, LP

Rentech Nitrogen is a Delaware limited partnership formed in July 2011 by Rentech (NYSEMKT:RTK). Rentech is a publicly traded provider of clean energy solutions and nitrogen fertilizer. Rentech Nitrogen will own, operate and grow a nitrogen fertilizer business. The one unit nitrogen fertilizer facility is located in East Dubuque, Illinois. The partnership produces anhydrous ammonia (ammonia) and urea ammonium nitrate solution. Natural gas is the primary feedstock. The lower natural gas prices will benefit both Rentech Nitrogen and Terra Nitrogen. Terra Nitrogen also uses natural gas as its primary feedstock.

Rentech Nitrogen, per the SEC S-1/A, anticipates a $2.34 annual distribution. Based upon a February 3rd closing price of $25.01 per unit, the annual distribution yield is 9.3%.


Terra Nitrogen serves up a dividend that is fairly rich in dollar terms. Its shares have performed very well over time. However, shares are currently near all time highs so investors may want to ride the peak out and accumulate positions as units may drop in the months ahead.

As an investor, the fertilizer sector has witnessed strong upward share performance. I can not recommend Terra Nitrogen at these current levels. Due to the lack of hedging options, investors should know precisely what downside risk there is.

Disclosure: I am long RNF, UAN.