Thread by @hareng_rouge

Ammonium sulphate

How quaint

reuters.com/article/us-usa…

Bit niche but here’s one rough idea to play this: $UAN is a bust up MLP that hasn’t paid a distribution in a couple of years.

I’ve put the UAN FOB NOLA swap below over 5 years for context. UAN needs about $160 to pay out.

It’s pretty clear if you look at the Reuters article or a chart of John Deere $DE that ags are expected to have their first truly good year in a while: when they do, everyone buys a new tractor - hence the chart.

But crop inputs are mooning too.

Bit of hand waving gets you to a distribution of around 25% at $21 if these numbers hold. More if the MLP refis high cost debt in June / July and drops 200-300bps into further distributable funds. What do you capitalise this at? Answer is not much: ag is still cyclical.

But a 25% yield here - and dare I say it, even a 30% - if / when declared may be able to draw in enough punters to compress this down enough to be a double or triple by summer.

$CF reported yesterday: "Nitrogen industry dynamics entering 2021 are the most favorable we’ve seen in nearly a decade, as rising grain values and higher global energy prices are driving significant price appreciation for nitrogen products"

👀

On the last call, $UAN declined to quantify a value on their moves to monetise their tax credits in response to questions. Nevertheless, the Storage Tax Credit Amendments Act, if passed, has the potential to increase their value, duration and utility quite substantially.

$UAN idea worked well enough, from $20 to around $50 but forward months in FOB NOLA have begun to show weakness whilst a generalised measure of the nitrogen index has started to roll over. Doubtful how much heavy lifting or credit that refi / tax will carry in the face of this.

Tweet above bottom ticked the dip and fertiliser limit up every day since. $UAN does have some ability to sell forward. Refi / tax both very nice but at this rate may end up being little more than a rounding error.

This strip - up nearly 10% today and 50% in under a month - and the current $1.3B EV of $UAN imply a EV/EBITDA in the order of 5-6x, just off the core operations. Refi and tax worth another turn, or two.

A couple of months ago the Nutrien CEO spoke at the BMO Capital Markets Virtual 16th Annual Farm to Market Conference and amongst general bullishness, he mentioned this about the nitrogen complex

In the time since that the conference, a UAN antidumping request has been filed by CF against Russia and Trinidad

worldfertilizer.com/nitrogen/01072…

And China is experiencing coal shortages. Coal's the feedstock for their marginal production of UAN,

scmp.com/economy/articl…

This is more or less the seasonal impact that the Nutrien CEO would've had in mind - there's a well established pattern in NH3 prices through the year

Chart's the same data in a couple of different ways showing the last five years' intra-year trend (barchart.com/futures/quotes…)

But from article (despite the title, it covers more than potash) and a few other scraps around the place, it seems that seasonality isn't kicking in with summer-fill prices weakening as it should. Instead pricing is remaining elevated.

dtnpf.com/agriculture/we…

Willingness to pay elevated pricing at this stage may suggest that a supply response to the market is not seen to be around the corner. Prices obviously benefit $UAN in revenue terms but their permanence could also be a narrative prompt to capitalise earnings at higher multiples

A $1.3B EV at a 5-6 multiple implies quite a modest four-Q EBITDA between $210M-$260M with the strip below, absent operational disaster it's hard to imagine they don't at least land somewhere there. Midpoint, 7 multiple - was around 8 in the days of the ag supercycle: $100 stock

Recall it's a MLP and that audience: distributions. Midpoint earnings may translate to a cash yield - just off one quarter - in the mid to high single digit % range. They can extrapolate that out, knock it down to $20 for conservatism, bid it to a mid-teens yield: +$100/sh

Had hoped to be waving this off by about now but Q2 for $UAN decidedly mixed: EBITDA scrapes in at $51M but given the prior tweet, somewhat hesitant to work this purely off such a multiple. It's the distribution that's the issue, anaemic at $1.72 and worth looking to see why

Surprisingly enough, the main culprit seems to be pricing. Despite the guidance on the Q1 call for lower-priced and past forward sales to have washed out, this didn't come to pass

Ebitda to distributable cash of $18.4m. Can make a couple of reasonable adjustments and one questionable one

Financing fees for refi incurred and lower debt service benefit not yet reflected: $7-8M additional, +$0.7 per unit additional distribution, or $2.50 if applied to this q

The questionable adjustment is similar production but sold at the prevailing gate price reported exiting Q2: +$16m on NH3; +$38m on UAN = +$5.00 p/unit additional, or $7.50 per $UAN unit w/full benefit of financing for Q3 but if I'd really want to bet on that after this Q..

Ida knocked out $CF's Donaldsonville plants, article below states they're "begun restarting" them. At least 17 days of 7k to 8k tonnes daily capacity lost, equivalent to around ~ ⅓ of $UAN's last Q's production and the strip looking like someone's short.

worldfertilizer.com/nitrogen/13092…

$CF idling UK plants ufn due to the high price of gas. H/T to locked account for digging up Yara's Q1/20 call where they mention their policy to run unhedged..

businesswire.com/news/home/2021…

And right on cue..

"The company said it would partly source the ammonia it needs from outside of Europe or third parties"

ft.com/content/22497c…

FYI

The strip for Q1/21 in UAN Nola has moved this week into the low $500s, very much nosebleed territory. Have been harping on about this one since Feb and I promise I'll stop soon but it's worth trying to see what these numbers might mean for CVR Partners $UAN

Story of last Q was that it was a disappointment: the largest part being that the company had (again) sold forward and ended up realising UAN and ammonia prices of $237 / $403 per ton - around 70% of the prevailing spot for the period.

More disclaimers than usual here: how much ammonia they'll sell vs upgrade into UAN idk so I use Q2's amounts. I'm eyeballing gas and petcoke inputs and most importantly, assuming their gate prices are in line with market - if not, there's plenty of scope for timing to mismatch.

Anyway as something along order of magnitude change terms, looking across this bit of the cycle, idealised etc roughly we get payouts shooting up, by Q1/21 the payment is ~10x higher than this latest Q at $10 and change:🚀and lashings of #content and substack pumping all round

In terms of valuation, it goes somewhere towards a 40%-50% cash yield on the units and with the past typical good times' multiple of 8x EV/EBTIDA, a price for $UAN perhaps in the order of $300 - would be a 15 bagger or nearly another 4x from here. It's all very nice but nonsense

If I recycle this chart posted earlier in the thread in March and assume fertiliser prices are stay higher in the near future than in the recent past but not at these clearly unsustainable levels, maybe this red line is a reasonable and fairly generous place to start from?

Helpfully, those are pretty much the actual levels the co achieved in this last Q and in a world of $3 natural gas feedstock. EBITDA was $51.8M, so $207M annually. They've refi'd since, worth another $17.2M so call it $225M and today's EV of $1.5B implies a 6.6x multiple

Am sceptical that even that holds on the way back down but if we assume it's fair, or at least not lunatic and then discount back something like $30 of cash in the next 12M to unitholders down to $20 we're at $100 per $UAN unit. Much more at this point seems hard to justify to me