CVR Partners Stock 3rd Quarter Preview (NYSE:UAN)

Introduction

I have been writing about CVR Partners (NYSE:UAN) for a long time now and have been unabashedly bullish on it since January of last year. While I still think that its biggest gains are yet to come, third quarter earnings due out about November 1 could be disappointing to the casual observer who does not follow what is happening.

What happened in the third quarter

Many kinds of fossil fuel processors, from oil refineries to natural gas fractionaters generally run 24/7 non-stop, but they do have to shut down from time to time to replace worn parts and clean out the gunk. This is also true of nitrogen fertilizer plants, like CVR’s. In the past, CVR has done its turnarounds about every 2 years for each of its two plants. But because of Covid, CVR (like many others) did not want to have large numbers of outside people in its plants for an extended period, and so delayed their turnarounds. The East Dubuque plant has gone three years without a turnaround and the larger Coffeyville plant has been going for 4 years without a full turnaround.

The resulting consequences were as should have been expected. In 2020, CVR operated at an average of about 99% of nameplate capacity. That went down significantly in 2021 to 93% and so far in 2022, they have been operating at about 88% of capacity. There have been numerous operational issues and downtime at the plants which has been a real drag on revenue and profitability. And particularly for a business with high fixed costs, losing that kind of revenue at the margin has a disproportionate effect on the bottom line. So this has been a huge drag on CVR’s distributions.

So, this summer, CVR shut down both of its plants for turnarounds. And because of long delay, apparently a lot more work than normal needed to be down. CVR’s plant turnarounds in the past have usually been for about 2 weeks and cost about 8-10 million dollars. But this time each plant was shut down for about 30 days at a total cost of about 32-34 million dollars. It is my understanding that both plants completed their turnarounds on time and on budget.

(As a side note, for its Coffeyville plant, CVR gets its nitrogen gas from a 3rd party air separation plant which has also had a lot of unplanned downtime over the last couple of years. That has caused CVR’s plant to have to shut down as well, even when they were not having their own problems. This 3rd party plant was shut down for its own turnaround and overhaul maintenance while CVR’s plant was down. So going forward, there should be additional reliability at Coffeyville).

Financial Consequences of the Turnarounds

So the result of this is multifold. First of all, CVR will lose a third of its normal production just from the plants being shut down for the turnarounds. And it will incur a cost of $32-$34MM for direct additional expense to complete the turnarounds. In addition, CVR spends an average of $5MM per quarter on capital expenses, but in this quarter, management guided to about $25MM, so there is that. And finally prices for nitrogen fertilizer almost always fall during the summer season, since demand from farmers goes to near zero at this time of year, and this year was no exception. Prices received by CVR for UAN in Q2 were $555 per ton and my estimate is that they received $470 per ton in Q3. For ammonia, Q2 was $1182 and I am expecting about $1000 for Q3.

So, to say the least, numbers are going to take quite a hit in Q3. My estimate for EBITDA of $35MM down from $147MM in Q2. For distributable cash flow, cash from operations will likely be about zero for the quarter, but about $30MM of cash has been reserved for the turnarounds over the last 8 quarters and in addition, $15MM was reserved in Q2 to cover any cash flow difficulties in Q3. So my estimate for the distribution in Q3 is $4.50 per unit.

Now, I would like to add that there is a fair bit of room for error here. During Q3, I was seeing very little sales of nitrogen fertilizer, with the big players concentrating on exports, and making very few domestic sales. CVR is only a domestic player, but there was very little demand out there during the summer. So volumes of sales could be modestly below my estimates. I would not be at all surprised to see a distribution of only $3. On the flip side, because the big players were concentrating on exports, CVR may have been able to fill a little bit of the vacuum and sold more product that normal in the summer. In which case, we could see a distribution as high at $5.50. So please do not take my estimate as a precise figure.

But no matter the actual number, it will be a huge step down from the distribution of $10.05 that was made in the second quarter. This will generate all sorts of headlines about CVR slashing/cutting/eviscerating their “dividend.” I think this will lead to all sorts of uninformed investors as well as computer generated algorithms to instantly sell CVR. But this will be a real opportunity for the rest of us.

The Opportunity

I expect that there will be a negative market reaction when third quarter results are released. But I expect that to be a (perhaps very, perhaps longer) short lived decline. The turnarounds should allow CVR to return to 99% operational results going forward. In the last few weeks, pricing of ammonia and UAN has snapped back smartly, and are now about 10% below their Springtime peak, but also 10% ABOVE the average prices realized by CVR in the second quarter. While I intend to write a full length article after earnings are released, let’s just say for now that I think distributions from the 4th quarter on will be higher than they were in Q2 for as far as the eye can see.