2023-07-19 13:20:23 ET
Summary
- CF Industries is a $15 billion market cap ammonia and nitrogen company offering a 2.1% dividend. With now-lower feedstock and energy costs, its results are expected to improve.
- High natural gas costs and lower demand dragged down its first quarter results; however, restocking and new demand for ammonia in energy applications suggests future upside.
- Appropriate for its large scale, CF Industries has clean ammonia projects underway with major industrial partners in the US, South Korea, and Japan.
CF Industries (CF) is the world's largest ammonia producer, a chemical key for fertilizer and industrial uses. CF's main products are anhydrous ammonia, granular urea, urea ammonium nitrate, and ammonium nitrate products. More generally, the company's markets are fertilizer, industrial ammonia, and now, clean ammonia for use in energy. According to the company, it "primarily serves cooperatives, independent fertilizer distributors, traders, wholesalers, and industrial users."
CF Industries' dividend yield is 2.1%.
Because it had outsized results, especially last year, its stock price has fallen as markets and fertilizer prices have re-normalized.
Higher-than-expected natural gas prices are anticipated to pull down results into early 2Q23 ; however, the company's primary plant locations on the US Gulf Coast give it access to lower-priced gas than in Europe, a competitive advantage.
Moreover, the company's partnership with Exxon Mobil (XOM) and its memoranda of understanding for ammonia offtakers Lotte Chemical (South Korea) and JERA (a joint venture of Tokyo Electric Power and Chubu Electric), both for clean ammonia as well as with NextEra Energy Resources (NEE) for green hydrogen, suggest growth in an important new area over the next several years.
I recommend CF Industries as a buy to investors in commodity chemicals, particularly ammonia, as well as investors in downstream energy markets for US natural gas.
The company's 2Q23 earnings date is August 2, 2023.
Clean Ammonia
"Clean ammonia" is considered to be ammonia made from either "blue" or "green" hydrogen. Blue hydrogen is made by putting natural gas through a steam methane reformer or an auto thermal reformer and capturing and sequestering most of the carbon dioxide thus generated. Green hydrogen is made by running water through a renewables-powered ( renewables is key ) electrolyzer to break the H2O into H2 and O2 (hydrogen and oxygen). The process is more expensive than reforming natural gas but does not produce carbon dioxide.
Natural Gas Costs
Natural gas is thus a critical feedstock for much ammonia production. Natural gas prices have dropped from a year ago, and the lower prices are now rolling into lower ammonia costs, particularly for US producers like CF Industries.
Natural gas spot prices and the 5-95 confidence interval for predicted future prices are shown below.
Because natural gas prices spike in the winter due to heating demand, CF Industries typically hedges its winter natural gas feedstock costs.
First Quarter 2023 Results and Guidance
For the first quarter of 2023 , CF Industries earned $560 million, or $2.85/share. EBITDA was $924 million. This was lower than the $883 million of net income, or $4.21/share it earned and EBITDA of $1.68 billion in 1Q22.
The company's average natural gas cost was $6.62/MMBTU in 1Q23 compared to $6.48/MMBTU in 1Q22.
Gross ammonia production in 1Q23 was 2.4 million tons; the company expects to produce 9.5 million tons for full-year 2023.
Good cash flow (trailing twelve months operating cash flow is $3.41 billion and free cash flow is $2.33 billion) allows the company both to buy an additional ammonia plant for $1.675 billion in Waggaman, Louisiana, and to undertake several strategic initiatives.
According to the company, these include:
- Memorandum of Understanding with JERA Co., Inc.: supply of up to 500,000 metric tons per year of clean ammonia beginning in 2027.
- Memorandum of Understanding with LOTTE: joint development of and investment in a greenfield clean ammonia production facility in the U.S. and quantify expected clean ammonia demand in South Korea.
- Proposed Joint Venture with Mitsui & Co., Ltd. at CF Industries' Blue Point Complex: front-end engineering and design (FEED) study, for proposed joint venture to construct an export-oriented blue ammonia facility in Louisiana.
- Donaldsonville Complex Blue Ammonia Project: the dehydration and compression unit will enable up to 2 million tons of process CO 2 to be transported and stored by Exxon Mobil.
- Donaldsonville Green Ammonia Project: installation of new electrolyzer unit and integration into Donaldsonville's existing operations to produce approximately 20,000 tons of green ammonia per year.
- Evaluation of Green Hydrogen/Ammonia Debottleneck Project at Verdigris Complex: CF Industries and NextEra Energy Resources, LLC, have signed an MOU under which the companies are evaluating a joint venture to develop a (green) hydrogen project at CF Industries' Verdigris Complex in Oklahoma.
Competitors
CF Industries is headquartered in Deerfield, IL.
Competitors for affordable natural gas are winter heating, electricity generation - including renewables backup - LNG export, petrochemicals (such as methanol, made by Celanese (CE)), and other industrial uses. The graphs below show the growth in natural gas used to generate electricity and the growth in US LNG exports.
Ammonia and nitrogen competitors are worldwide. In the US, CF Industries is the largest by a factor of 4x compared to next closest competitors. Among those US competitors are Nutrien, LSB Industries, Coffeyville Resources, Mosaic Company, Koch Industries, Green Valley Chemical, Dyno Nobel, Shoreline Chemical, and Yara/BASF.
Again, CF Industries and other US producers have a competitive cost advantage because natural gas is cheaper in the US than in Europe or Asia. This is evident from the majority of CF Industries' revenue from North America.
Clean ammonia competition with CF Industries' plant in Ascension Parish , Louisiana, on the US Gulf Coast is also increasing. Proposed projects include OCI in Beaumont, Texas; Exxon Mobil in Baytown, Texas; Yara/Enbridge in Ingleside, Texas; RWE/Lotte Chemical in Corpus Christi; Nutrien in Geismar, Louisiana; and Air Products ( APD ) in Ascension Parish, Louisiana.
Governance
Institutional Shareholder Services ((ISS)) ranks CF Industries' overall governance on July 1, 2023, as a good 2, with sub-scores of audit (4), board (1), shareholder rights (5), and compensation (3). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.
CF Industries' ESG ratings from Sustainalytics at January 2023 were "high" with a total risk score of 30 (65th percentile). Component parts are environmental risk 16.8, social 7.7, and governance 5.5. Controversy level is 1, or low, on a scale of 0-5, with 5 as the worst.
Shorts were 2.0% of floated shares at June 30, 2023.
A very small percentage of shares (0.42%) is held by insiders.
The company's beta is 1.03: the stock moves directionally with the overall market and with virtually the same volatility.
At December 30, 2022, the largest institutional holder was Vanguard 13.0%. At March 30, 2023, the next largest institutional holders were: BlackRock at 11.2%, T. Rowe Price at 6.7%, Fidelity/FMR at 5.2%, and State Street at 4.65%. Some of these institutions represent index fund investments that match the overall market.
Financial and Stock Highlights
Market capitalization is $14.9 billion at the July 18, 2023, stock closing price of $76.35/share.
The 52-week price range is $60.08-$119.60 per share, so the closing price is 64% of its 52-week high. However, it is 90% of the average one-year target of $85.68/share.
Trailing twelve months ((TTM)) EPS is $15.02 for a trailing price/earnings ratio of 5.1. The average of analysts' estimates for 2023 EPS is $8.85 and 2024 EPS of $6.97. This gives a forward price/earnings ratio range of 8.6-11.0.
TTM return on assets and equity are both excellent at 21.9% and 47.6%, respectively.
TTM operating cash flow is $3.41 billion and leveraged free cash flow is $2.62 billion.
At March 31, 2023, the company had $5.3 billion in liabilities and $13.4 billion in assets, giving CF Industries a modest liability-to-asset ratio of 40%.
Of the liabilities, $0.9 billion was current liabilities and $3.0 billion was long-term debt.
The ratio of debt to EBITDA is only (and a healthy) 0.6.
Book value per share of $27.98 is less than half the market price, implying positive investor sentiment.
The graphs below compare three years of CF Industries' stock prices to the Dow Jones Industrial Average (DJI).
The company's ratio of enterprise value ($14.8 billion) to trailing twelve months EBITDA of $5.6 billion is a small 2.7, far below the preferred ratio of less than 10 and thus indicating a considerable bargain.
The dividend of $1.60/share provides a 2.1% yield. The company is about to complete a $2 billion share buyback program and will then start a $3 billion share buyback program effective through the end of 2025.
CF Industries' mean analyst ranking is a 2.6, closer to "hold" but leaning toward "buy," from seventeen analysts.
Positive and Negative Risks
CF Industries' major risk is lower demand for fertilizer and nitrogen as countries have slowed their pace of restocking inventory. Positive risk comes from natural gas feedstock costs that are lower than last year's. But of course, natural gas prices could always spike suddenly again.
While LNG exports may likely compete even more for natural gas supply in the future, both LNG and industrial users like CF Industries' plants are advantaged by large nearby sources of natural gas from fields such as the Haynesville in Louisiana, the Eagle Ford in south Texas, and even from gas fields in west Texas, New Mexico, Oklahoma, and Appalachia.
An ancillary benefit is that the US economy may have a soft, rather than hard, recessionary landing. For example, according to the EIA, " Our forecast assumes U.S. GDP growth of 1.5% in 2023 and 1.3% in 2024, which is revised up from last month's forecast of 1.3% in 2023 and 1.0% in 2024."
Finally, competitive risk from other ammonia producers in the US and abroad is strong and unrelenting.
Recommendations for CF Industries
While CF Industries' dividend is below-par, given a current two-year less-risky Treasury rate of 4.76% and so may not interest dividend-seekers, I recommend the company as buy to both ESG investors and traditional commodity (fertilizer and ammonia/downstream energy consumer) investors. I am considering buying shares.
CF Industries does have share-repurchase programs underway.
Fertilizer prices rose and demand fell in 2022; however, this is normalizing. Demand is recovering and natural gas feedstock prices are lower, important for the world's largest ammonia producer.
CF Industries has low debt relative to its market capitalization, a forward price-earnings ratio of 8.6-11.0, good governance scores, and strong cash flow.
Also of interest for future earnings growth are CF Industries' real (as opposed to vaporware) blue and green ammonia projects, given the MOUs and project ventures signed with Lotte from South Korea, Mitsui and JERA from Japan, and Exxon Mobil and NextEra from the US.
For further details see:
CF Industries Adds Clean Ammonia Growth Prospects