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UAN contniues to perform amazingly...now if only Mr. Market would notice

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February 28, 2013 – Comments (3) | RELATED TICKERS: UAN

Since it is currently my largest personal equity holding at just under 7% of my portfolio, I figured that I'd provide an update to my friends here at CAPS on CVR Partner's (UAN) recently reported quarterly results. 

I have to keep this short though because my son has another indoor soccer game tonight that I'm coaching.  Like one learns from past experiences in investing, I have adjusted my coaching technique for the team as well after the last game.  Needless to say, 10 kids surrounding you clamoring for their favorite position when only six are on the field at one time is fairly chaotic.  As a result, I put together a spreadsheet that assures all of the kids fairly equal playing time and pairs the ones that I believe will play the best together with each other.  Plus, to avoid the end of game collapse that we experienced last game, I have made sure that we have a strong team on the follr at the end.  I want all of the kids to have fun and learn, this will assure that they do and hopefully enable us to win as well.  It will be interesting to see if a lack of continuity in positions has an impact upon their play.

Back to UAN.  The page for the company on Yahoo Finance! lists a dividend yield of 3.1%.  I find this particularly funny because the company's distribution for all of 2012 was in 6.8%, even using today's higher stock price.  Not only that, but the company's distribution guidance for 2013 is $2.15 per common unit to $2.45 per common unit, which using today's closing share price of $26.55 translates to a yield of 8.1% to 9.2%.  Where can you get yields like that in today's low-rate environment?

Why the discrepancy.  For one, every other year the company shuts down a huge chunk of its facility for maintenance.  This significantly impacted the Q4 distribution, making it look lower when annualized.  Furthermore, the company's new plant expansion is ramping up and is expected to be fully operational (doesn't that phrase make you think of Star Wars..."I'm afraid the Death Star will be fully operational by the time your friends arrive." by the end of Q1.  The added funds from the expansion juice the distribution even more.  As an added bonus, the company recently reached a favorable settlement in a property tax dispute (Coffeyville Resources Nitrogen Fertilizers Agrees to Partial Settlement of Property Tax Dispute with Montgomery County).

So UAN has been firing on all cylinders lately, yet the market hasn't rewarded it accordingly, even after taking today's 4% gain in the stock into account.  I love the secular tailwinds that this former spinoff has at its back and its management had done an admirable job.  he only think that keeps me from making this position larger is the fact that UAN only has one production facility.  Fertilizer production is a dangerous business, and while it is unlikely, it's always possible that an explosion could occur that would damage or destroy the plant.  Even with insurance, that would not be a good thing for the stock price.  I hope that UAN's management makes an acquisition in the future that will help diversify its operations with another production facility.

Here's a link to last quarter's results for anyone who's interested:

CVR Partners Reports Fourth Quarter and Full Year 2012 Results

Gotta run.  Have a great evening everyone!

Deej

3 Comments – Post Your Own

#1) On February 28, 2013 at 8:18 PM, Option1307 (29.73) wrote:

I've debated buying into UAN after seeing your original post about it however I just haven't been able to pull the trigger. It does seem like there are a lot of things going in the right direction for the company and there are significant catalysts present.

I've just been concerned about the signal property as the lone source revenue.

But after reading this post it makes me hungry to buy!

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#2) On March 01, 2013 at 12:56 PM, Mega (99.96) wrote:

Fertilizer margins and prices seem really high right now. I wonder if it is sustainable.

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#3) On March 03, 2013 at 8:47 PM, TMFBlacknGold (98.56) wrote:

I too own UAN (I think I still have the top pitch for it in CAPS). I too am worried that company only has one facility. If you read through the SEC filings though, from time to time when management discusses growth they never mention buying another plant directly. Instead, "expansion" is used which could mean expanding the current facility or perhaps buying another.

With the turnaround and nearly 50% expansion (soon to be) behind it, do you really think CVR Partners could ever buy another facility? The payout is already over 100% and, as the major shareholder, I doubt CVR Energy wants to see that cut anytime soon. That's especially true when you consider that crack margins will close in the next few years - putting pressure on CVI's share price.

I'd like more information on the company's revenues from DEF, although that is clearly not the main focus and will never contribute a sizable portion of revenue. It could be just the product that makes the company purchase another facility, however.  

I suppose a second fertilizer facility isn't necessarily out of the question. For instance, Terra Nitrogen (larger) has focused on expanding at all costs in recent years. The problem with that is, as I think we may see in this cyclical business, companies tend to expand when times are good and then contribute to oversupply in weaker markets.

The good news for nitrogen manufacturers is that close to half of all nitrogen used in the United States is imported, so facilities closest to the Corn Belt will always have a huge advantage over foreign suppliers. Check out this slide from Potash Corp on just how wide the margins can be:

http://www.potashcorp.com/overview/advantages/nitrogen/supply-cost-curves

(sorry for the brain dump) 

--Maxxwell 

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