Funding Thesis
CVR Companions (NYSE:UAN) noticed each of its crops shut down for a portion of the quarter for upkeep. Consequently, this meant that utilization charges have been down considerably. And in flip, this meant that the money distribution did not stay as much as expectations.
Wanting forward, I lay out a few of the constructive and damaging concerns that traders ought to have in mind.
Altogether, I imagine that UAN might provide a +20% yield over the subsequent twelve months.
What Occurred In CVR Companions’ Q3 2022?
Money distribution was $1.77 in contrast with $2.93 in Q3 of final yr, or an approximate 40% y/y discount. Moreover, that was a noticeable step down from the $10.05 acquired in Q2.
Now, for the main points. Revenues have been up roughly 8% y/y. After all of the information hitting the airways about UAN28, or fertilizer costs extra typically being up so considerably, one would have hoped that revenues would have been stronger.
Nevertheless, needless to say final yr’s Q3 outcomes did not have any upkeep shutdown. Consequently, even when pricing was certainly considerably larger in 2022, the truth that you find yourself with much less quantity going by way of UAN’s crops and out its doorways, meant that revenues bought impacted.
As you may see above, capability utilization was practically half of the capability utilization from the identical interval a yr in the past.
The upkeep shutdown interval occurs as soon as each two years, so after this quarter, traders which can be capable of have a barely longer-term time-frame than 90 days will get positively rewarded.
That being mentioned, within the present market, 90 days seems like an eternity.
CVR Companions’ Money Distribution, Wanting Forward to This autumn
Within the first occasion, I will describe the constructive parts of a robust money distribution for This autumn after which focus on the damaging headwind impacting the money distribution.
UAN sells urea ammonium nitrate (”UAN”) and ammonia. And each these fertilizers are up previously yr, with UAN costs up 42% y/y and ammonia up 65% y/y.
For This autumn, assuming utilization returns to not less than 92%, we should always count on to see a good improve in money distribution.
Nevertheless, needless to say UAN states that each crops at the moment are at ”document working charges”, so UAN might get an extra increase from elevated volumes, alongside elevated costs.
Can UAN’s utilization charges attain 96%? Remember that throughout 2020, utilization charges averaged 95% for the entire of the yr.
Therefore, each of those drivers can be constructive for revenues for This autumn 2022 to return in sturdy in contrast with This autumn of final yr.
Then again, throughout This autumn 2021, pure fuel prices have been $4.84 per mmbtu. I very a lot doubt that UAN will be capable of purchase pure fuel at something lower than a 25% improve y/y to round $6.2 per mmbtu.
As some extent of truth, provided that pure fuel is already $6.2 per mmbtu, whereas the Freeport LNG facility continues to be largely out of use, it is solely cheap to imagine that pure fuel costs will find yourself trending larger all through the rest of This autumn.
All that being mentioned, even when feedstock costs have been to finish up larger by 30% y/y, I would not be shocked to see fertilizer costs coming in not less than 25% y/y, provided that UAN’s friends exterior the US are more likely to see their very own enter prices working uncontrolled.
So if farmers want to purchase fertilizer, they’re going to be compelled to pay market costs.
UAN Inventory Valuation – At Least 20% Yield Going Ahead
Over the trailing twelve months, UAN’s complete money distribution reached $19.32. If we assume that over the subsequent twelve months, there isn’t a upkeep shutdown interval, that will have seen not less than $4 of money distribution in Q3, a rise of 37% from Q3 of final yr, from $2.93.
Altogether, as soon as we issue within the improve in feedstock costs, plus the rise in fertilizer costs, plus the document utilization charges, I imagine {that a} 16% improve in money distributions over the subsequent twelve months to roughly $25 per unit, appears cheap.
That implies that together with the after-hours sell-off, the inventory affords roughly 22% ahead yield.
The Backside Line
For traders that have been on this title solely for this quarter’s money distribution, this money distribution determine was a disappointment. Even when traders have been braced for the upkeep interval, I do not imagine that traders anticipated utilization charges to be down so considerably.
Wanting forward, the largest headwind goes to be pure fuel costs.
Altogether, I proceed to imagine {that a} +20% yield over the subsequent twelve months is feasible.