CVR Partners: Q3 Distribution Disappoints, Likely To See 20% Yield

Investment Thesis

CVR Partners (NYSE:UAN) saw both of its plants shut down for a portion of the quarter for maintenance. Consequently, this meant that utilization rates were down significantly. And in turn, this meant that the cash distribution didn’t live up to expectations.

Looking ahead, I lay out some of the positive and negative considerations that investors should keep in mind.

Altogether, I believe that UAN could offer a +20% yield over the next twelve months.

What Happened In CVR Partners’ Q3 2022?

Cash distribution was $1.77 compared with $2.93 in Q3 of last year, or an approximate 40% y/y reduction. Furthermore, that was a noticeable step down from the $10.05 received in Q2.

Now, for the details. Revenues were up approximately 8% y/y. After all the news hitting the airways about UAN28, or fertilizer prices more generally being up so significantly, one would have hoped that revenues would have been stronger.

However, keep in mind that last year’s Q3 results didn’t have any maintenance shutdown. Consequently, even if pricing was indeed substantially higher in 2022, the fact that you end up with less volume going through UAN’s plants and out its doors, meant that revenues got impacted.

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

The maintenance shutdown period happens once every two years, so after this quarter, investors that are able to have a slightly longer-term time frame than 90 days will get positively rewarded.

That being said, in the current market, 90 days feels like an eternity.

CVR Partners’ Cash Distribution, Looking Ahead to Q4

In the first instance, I’ll describe the positive elements of a strong cash distribution for Q4 and then discuss the negative headwind impacting the cash distribution.

UAN sells urea ammonium nitrate (”UAN”) and ammonia. And both these fertilizers are up in the past year, with UAN prices up 42% y/y and ammonia up 65% y/y.

For Q4, assuming utilization returns to at least 92%, we should expect to see a fair increase in cash distribution.

However, keep in mind that UAN states that both plants are now at ”record operating rates”, so UAN may get a further boost from increased volumes, alongside increased prices.

Can UAN’s utilization rates reach 96%? Keep in mind that during 2020, utilization rates averaged 95% for the whole of the year.

Hence, both of these drivers will be positive for revenues for Q4 2022 to come in strong compared with Q4 of last year.

On the other hand, during Q4 2021, natural gas costs were $4.84 per mmbtu. I very much doubt that UAN will be able to buy natural gas at anything less than a 25% increase y/y to around $6.2 per mmbtu.

As a point of fact, given that natural gas is already $6.2 per mmbtu, while the Freeport LNG facility is still largely out of use, it’s only reasonable to assume that natural gas prices will end up trending higher throughout the remainder of Q4.

All that being said, even if feedstock prices were to end up higher by 30% y/y, I wouldn’t be surprised to see fertilizer prices coming in at least 25% y/y, given that UAN’s peers outside the US are likely to see their own input costs running out of control.

So if farmers wish to buy fertilizer, they’ll be forced to pay market prices.

UAN Stock Valuation – At Least 20% Yield Going Forward

Over the trailing twelve months, UAN’s total cash distribution reached $19.32. If we assume that over the next twelve months, there is no maintenance shutdown period, that would have seen at least $4 of cash distribution in Q3, an increase of 37% from Q3 of last year, from $2.93.

Altogether, once we factor in the increase in feedstock prices, plus the increase in fertilizer prices, plus the record utilization rates, I believe that a 16% increase in cash distributions over the next twelve months to approximately $25 per unit, seems reasonable.

That means that including the after-hours sell-off, the stock offers approximately 22% forward yield.

The Bottom Line

For investors that were in this name solely for this quarter’s cash distribution, this cash distribution figure was a disappointment. Even if investors were braced for the maintenance period, I don’t believe that investors expected utilization rates to be down so significantly.

Looking ahead, the biggest headwind is going to be natural gas prices.

Altogether, I continue to believe that a +20% yield over the next twelve months is possible.