CVI - CVR Partners: 2023 Results Will Likely Be Below 2022 But Still Solid

Summary

• Nitrogen fertilizer prices have been falling in 2023.
• However, supply/demand dynamics still look solid.
• CVR Partners looks like a "Hold" at the moment.

CVR Partners' ( UAN ) 2023 results look poised to fall somewhere between 2021-22 results, as fertilizer prices ease from last year's elevated levels. UAN stock looks appropriately valued based on that market view.

Company Profile

CVR Partners is a maker of nitrogen fertilizer. The company owns two fertilizer plants: Coffeyville and East Dubuque.

Its Coffeyville plant is unique in that instead of using natural gas as a feedstock like most nitrogen fertilizer plants, it uses petroleum coke (pet coke) through a clean coke technology that captures the CO2 emissions. The plant is next to one of CVR Refining's facilities, which it uses to procure a substantial amount of its pet coke. Over the past five years, 44% of the facility's pet coke needs were supplied by CVR Refining.

The Coffeyville facility upgrades the bulk of its ammonia production to UAN. The plant, which is located in Kansas, primarily ships its product via rail to the Southern Plains market.

CVR Partner’s East Dubuque facility uses natural gas as its feedstock. The Illinois-based plant is located in the heart of the Corn Belt and serves the Mid Corn Belt area located within 200 miles of the facility. Customers typically will pick up fertilizer at the East Dubuque plant with their own trucks.

The facility has a 1,075 ton per day capacity ammonia unit and a 950 ton per day capacity UAN unit. The facility is flexible and will produce a mix of ammonia, UAN, liquid and granulated urea, and nitric acid.

CVR’s main customers are retailers and distributors. It top-two customers represented 30% of sales in 2022.

The company is structured as a master limited partnership and pays a variable distribution.

Nitrogen Fertilizer Dynamics

Both the biggest opportunity and risk for CVR Partners is nitrogen fertilizer prices. Prices, meanwhile, are dictated by global fertilizer supply/demand dynamics.

In North America, the corn crop is very important, as corn uses a lot of nitrogen fertilizer while soybeans use relatively little. Farmers often use the soybean-to-corn ratio to determine which is the more profitable plant to plant. Ratios above ~2.5 favor soybeans, while below favors corn. Going into 2023, the ratio favored corn, which is good for nitrogen fertilizer makers.

Internationally, leading fertilizer company CF Industries ( CF ) sees demand from key markets India and Brazil to both be strong in 2023. India has a large and growing population that makes it one of the largest importers of urea, while strong crop prices and increasing number of acres planted should drive fertilizer demand in Brazil.

On the supply side, China has historically been one of the largest swing producers. CF expects the country’s imports to remain low due to government measures to keep fertilizer prices affordable and readily available. It expects 2-3 million metric tons of urea to be exported from China in 2023, with the ability to export up to 5 million metric tons if China loosens its policies.

On CF’s Q4 earnings call , SVP of sales Bert Frost said:

“But today, the Chinese price is higher than the global market. So there is not an incentive to export those tons. And they're going into their spring season, just like we are in the Northern Hemisphere, and I expect demand to be robust. China has been a very active purchaser supporting the global agricultural structure of corn and soybeans and refined products for the -- for now decades. And we expect that to continue as they rebuild their stocks as well as their protein stocks as well as their feed grain stocks. So we don't see a big change coming out of China on the export front for urea in 2023.”

That said, reduced natural gas prices in Europe have led to more supply coming onto the market, as some economical plants have been able to come back online , according to fertilizer research firm Profercy. Meanwhile, buyers in the key markets of North America, Brazil, and India have been cautious in their buying patterns.

For his part, CVR Partners CEO Mark Pytosh does not see this dynamic lasting, saying on the company's Q4 call last week :

“There's currently about a $500 a ton advantage to produce ammonia in the U.S. compared to Europe. While the extreme pressure on natural gas has subsided for now, we do not believe that the structural issues that initially drove the European natural gas prices higher have been solved and will likely remain in effect through 2023.

“We also expect, as we get closer to the spring planting season in the coming weeks, demand for nitrogen fertilizer will improve due to strong grain prices and farmer economics. While we may not see the high prices of spring 2022, we still expect a solid market and good demand for product in the spring of 2023.”

Opportunities

One area of opportunity for CVR Partners is with carbon capture. The Inflation Reduction Act raised the values for 45Q tax credits, which will allow the company to pursue sequestration projects. The company has already been able to claim credits at its Coffeyville facility, and will now look into projects at its East Dubuque plant. Just from Coffeyville, the company expects to receive up to $60 million in proceeds over the next 7 years.

The collapse in U.S. natural gas prices, meanwhile, should help reduce its feedstock costs for East Dubuque. However, according to its 10-K, the company did make some very high price commitments for 0.7 million and 0.6 million MMBtus of natural gas for January and February of 2023, respectively, at a weighted average rate per MMBtu of approximately $9.50 and $9.72.

Risks

Outside of nitrogen fertilizer prices, the biggest risk to CVR Partners is how efficiently its plants run. Given that it only operates two plants, any unforeseen down time or turnarounds can have a major impact on its results. It’s not unheard of for plants to run into issues in the industry, and a competitor’s plant was once damaged in a l ightning strike .

In addition, CVR Energy ( CVI ), which owns 37% of CVR Partners, is looking to spin off its interest in the fertilizer maker. Maybe this results in a sale of the whole company, or it could lead to pressure if it can’t find a deal and decides to sell some units in the open market. CVR and Carl Icahn also control CVR Partners' debt. If that equity ownership relationship is no longer there, CVR Partners could face debt related issues if fertilizer prices went into a bear market.

Conclusion

On the surface CVR Partners looks cheap. It trades at 4x trailing EBITDA after the company generated nearly $411 million in EBITDA in 2022. Its leverage, meanwhile, is a modest 1.4x.

However, between 2014 to 2020, the company generated between $64-111 million in EBITDA a year. The difference between now and then: nitrogen fertilizer prices. To be fair, nitrogen fertilizer prices were in a long bear market, and 2021 EBITDA of over $200 million may be what prices look like in a more normalized environment, if there is such a thing.

The fertilizer dynamics likely will fall somewhere between 2021 and 2022 levels. If investors are comfortable knowing that 2023 is not going to be as good as 2022, and that CVR Partners' variable distribution will be lower than last year, I think the stock looks like “Hold.” However, I would not be a new buyer here at this time.

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