De schrijver van dit stuk heeft zeker een punt,het waren slechte jaren voor de sector ,maar 2021 gaat
top worden door hogere afzet prijzen,consollodatie ligt op de loer.
CVR Partners Operating In Tough Fertilizer Market
Dec. 4, 2020 10:07 AM ET|3 comments | About: CVR Partners, LP (UAN), Includes: CF, CVI, LXU, RTK, TNH
Bashar Issa
Bashar Issa
(281 followers)
Summary
Low-profit margins and high capital expenses are characteristics of nitrogen fertilizers manufacturers such as UAN.
Raising sales volumes to compensate for the low margins has become necessary. This has incentivized mergers and acquisitions in the industry.
Investing in UAN has significant tax implications that investors should know about.
Investment thesis
The nitrogen fertilizers industry is consolidating. Increasing market share and sales volumes has become a necessity for survival, to compensate for the low margins. The rising M&A activity increases the exit opportunities and potential gain to investors.
Still and all, CVR Partners' (NYSE:UAN) conflict of interest with Carl Icahn might discourage third-parties from acquiring a majority interest in the company. This negatively affects UAN's common unit price and makes the company less attractive to investors trying to benefit from the current M&A activity in the nitrogen fertilizer industry.
As a small fertilizer manufacturer with unprofitable operations, high maintenance costs, and low prospects of being acquired, the recent rally is hard to justify even in the light of industry macro-trends such as high corn price and increase global fertilizer demand.
Unitholders vs shareholders
UAN is registered as a limited partnership, so instead of having shareholders holding ordinary shares, we have unitholders owning common units. At first, this might seem a trivial technical difference, except that holding units in a partnership as opposed to shares in a corporation has significant tax consequences that you should know about before investing. Below is an excerpt from the company's 10-K form that clearly explains the issue.
Our unitholders are required to pay income taxes on their share of our taxable income even if they do not receive any cash distributions from us.
From time to time, members of Congress debate on whether publicly traded partnerships should be taxed the same way as corporations, and laws might change in the future. For now, however, I think it is important to consult a tax advisor before investing.
Performance during the pandemic and going forward
In the second quarter, UAN sales decreased 23% compared to the same quarter last year. This is the result of lower sale prices of Urea Ammonium Nitrate and Ammonia, UAN's main product lines. Volumes, nonetheless, remained strong as farmers continued cultivating their lands during the lockdown. The same pattern was seen in the third quarter, where revenue was down 10% on lower product prices, partially offset by higher volumes.
I expect these patterns to continue in the fourth quarter. The industry's low-margin, high-volume model is in full swing, fueled by low natural gas prices. Also, nitrogen fertilizer producers who now can't enter the European market in the aftermath of the recent anti-dumping tariffs are channeling their products to the U.S market, putting downward pressure on prices.
The U.S Department of Agriculture predicts a strong corn season going into 2021. Corn prices are at a multi-year high, which bodes well for UAN's product sales volumes in the coming quarters. Strong corn cultivation and subsequent demand for nitrogen fertilizers are not enough to counter the downward pressure resulting from the products' oversupply.
Butting head with Carl Icahn
Carl Icahn controls 34% of UAN's common units through his majority ownership of CVR Energy (CVI). He has significant influence over UAN's business strategy, distributions, and capital structure. UAN board of directors admits the existence of a conflict of interest between Carl Icahn and other public unitholders. Below is an excerpt from UAN 10-K form,
Mr. Carl C. Icahn exerts significant influence over the Partnership through his controlling ownership of CVR Energy, and his interests may conflict with the interests of the Partnership and our unitholders.
Carl Icahn's interest in UAN might deter third parties from seeking to acquire a majority share in the company. He has a notorious reputation for corporate raids, hostile takeovers and, asset-stripping.
Cut-throat industry
UAN operates two facilities; the Coffeyville facility in Kansas and the East Dubuque facility in Illinois. The Coffeyville facility uses Petroleum Coke as the main raw feedstock to produce Ammonia, which is then processed into Urea Ammonium Nitrate. The East Dubuque facility uses Natural Gas to produce Ammonia, which is also then used to produce Urea Ammonium Nitrate.
Ammonia and Urea Ammonium Nitrate are globally traded commodities that are priced competitively. Nitrogen fertilizer producers have little if any pricing power. This has pushed margins lower in the past few years. UAN's margins are also being squeezed because of the rising price of Petroleum Coke, the raw feedstock used in its Coffeyville facility.
In my view, the high fertilizer prices between 2010 and 2015, combined with low natural gas cost attracted new nitrogen-based fertilizer producers and incentivized existing producers to expand production. Supply flooded the market and suppressed prices as shown in the graph below.
Chart
In a world of suppressed nitrogen fertilizer prices, smaller manufacturers are struggling. LSB Industries (LXU) and UAN haven't made a profit in years, and it seems that the industry is in a consolidation phase. For example, CF Industries (CF) acquired Terra Nitrogen Company (TNH) in 2018, and Rentech Nitrogen Partners (RTK) merged with UAN in 2016.
Summary
Investing in UAN can have significant tax implications for the investor. Common unitholders are required to pay a share of the company's taxable income each year, regardless of whether they received dividends or not.
Global supplies of nitrogen are finding their way to the U.S after the European Union imposed anti-dumping rules on low-cost producers in Russia and Trinidad.
Larger nitrogen manufacturers are likely to be able to adapt to lower product prices through higher volumes better than smaller fertilizer companies.