CVR Partners: Q3 Distribution Disappoints, 20% Yield Likely

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investment thesis

CVR Partners (New York Stock Exchange:UAN) saw its two plants shut down for part of the quarter for maintenance. Consequently, this meant that utilization rates dropped significantly. And in turn, this meant that the distribution of cash did not live up to expectations.

Looking ahead, I lay out some of the positive and negative considerations that investors should be aware of.

Overall, I think UAN could deliver a +20% return over the next twelve months.

What Happened in CVR Partners Q3 2022?

Cash distribution was $1.77 compared to $2.93 in the third quarter of last year, or an approximate decrease of 40% year over year. Also, that was a notable step down from the $10.05 received in the second quarter.

Now for the details. Revenues increased approximately 8% YoY. After all the news hitting the airways about UAN28, or fertilizer prices in general rising so significantly, one would have expected earnings to have been stronger.

However, keep in mind that last year Third quarter results did not have any maintenance stops. Consequently, even if the price was substantially higher in 2022, the fact that it ended up with less volume going through UAN’s plants and out its doors meant that revenues took a hit.

Third Quarter 2022 Results from CVR Partners

UAN Q3 2022

As you can see above, capacity utilization was almost half the capacity utilization of the same period a year ago.

The maintenance shutdown period occurs once every two years, so after this quarter, investors who can take a longer-term time frame of 90 days will reap a positive reward.

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That said, in today’s market, 90 days seems like an eternity.

Cash Distribution from CVR Partners, Looking Ahead to the Fourth Quarter

I will first describe the positive elements of a strong fourth quarter cash distribution and then discuss the negative headwinds affecting cash distribution.

UAN sells urea ammonium nitrate (”UAN”) and ammonia. And these two fertilizers increased last year, with UAN prices up 42% y/y and ammonia up 65% y/y.

For the fourth quarter, assuming utilization returns to at least 92%, we should expect to see a fair increase in cash distribution.

Note, however, that UAN claims that both plants are now at “record operating rates,” so UAN may gain further momentum from increased volumes, along with rising prices.

Can UAN utilization rates reach 96%? Note that during 2020, utilization rates averaged 95% for the entire year.

So both drivers will be positive for Q4 2022 revenue to be strong compared to Q4 last year.

On the other hand, during the fourth quarter of 2021, natural gas costs were $4.84 per mmbtu. I highly doubt UAN will be able to buy natural gas rising less than 25% a year at around $6.2 per mmbtu.

In fact, given that natural gas already costs $6.2 per mmbtu, while the Freeport LNG facility is still largely out of use, it is reasonable to assume that natural gas prices will end up trending higher for the rest of the year. fourth trimester.

All that said, even if commodity prices end up rising 30% a year, I wouldn’t be surprised to see fertilizer prices go up at least 25% a year, given that UAN pairs outside of the US are likely US to see their own input costs out of control.

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So if farmers want to buy fertilizer, they will be forced to pay market prices.

UAN Stock Valuation: At Least 20% Yield Going Forward

During the last twelve months, the total cash distribution of the UAN reached $19.32. If we assume that for the next twelve months, there is no maintenance shutdown period, that would have seen at least $4 of cash distribution in the third quarter, a 37% increase from the third quarter of last year, of $2, 93.

In total, once we factor in the increase in commodity prices, plus the increase in fertilizer prices, plus record utilization rates, I think a 16% increase in cash distributions over the next twelve months at about $25 per unit seems reasonable.

That means, including the after-hours sell-off, the stock offers a forward return of about 22%.

The bottom line

For investors who had this name solely for this quarter’s cash distribution, this cash distribution figure was a disappointment. Even if investors were prepared for the maintenance period, I don’t think investors expected utilization rates to drop that significantly.

Looking ahead, the biggest hurdle will be natural gas prices.

Overall, I still believe a +20% return over the next twelve months is possible.

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