Description

CVR Partners LP (UAN) has been written up 4 times on VIC (including once by me in Dec 2019). I’d encourage you to read those for background (note the 1 for 10 stock-split in Nov 2020). Rather than rehash details on the nitrogen fertilizer market structure and UAN’s operations, I’ll get right into the thesis.

In summary, I believe at the current $79 price, UAN trades at a 17% normalized FCF yield and could be sold at 2-2.5x the current share within the year.

UAN sells nitrogen fertilizer, which is a volatile commodity, but North American producers operate at the low-end of the global cost curve due to their access to lower-cost energy. Further, as UAN’s production facilities are in KS and IL, they have lower distribution costs to serve farmers in the Midwest compared to Gulf Coast or global producers. The chart below from CF’s Q4 23 presentation illustrates the global cost curve. I believe UAN is positioned on the left side of the chart. Also, one can shift up the whole cost curve up a bit to account for UAN’s production locations being closer to farmers vs the Gulf Coast.

Ammonia fertilizer is a commodity, so UAN’s EBITDA is volatile with a recent high of $407m in 2022 and a recent low of $91m in 2020. I believe it’s a fool’s errand to accurately predict EBITDA for this type of company so let’s first look backwards. UAN acquired its IL facility in 2016, so 2017 was the first full year of production from two facilities. From 2017-2023 the 7-year average EBITDA was $183m. Note 2022 was a “super cycle year,” but there are also 3 trough years in the last 7 (2017, 2018 and 2020). Looking forward, we are also entering a period where global supply additions are limited vs. history and consumption growth – see YAR NO’s slide from Q4 23:

Further, US ammonia producers are currently enjoying a wider than historical cost advantage vs. global producers due to the wider gap between US and global energy prices. See these two illustrations below from CF and YAR NO:

One can endlessly debate “normalized” EBITDA, but I believe $200m is a reasonable estimate based on the aforementioned factors. On the current enterprise value, UAN trades at a modest 6.7x multiple of normalized EBITDA. Over the last 7 years, annual capital expenditure has averaged $25m. In the past, UAN has struggled with expensive debt, but now has $550m 6.125% notes (due 6/28) so interest expense is $35m per year. Assume no taxes as UAN is a pass-through LP. Putting this all together results in normalized FCF of $200m - $25m - $35m = $140m (~$13 per share or ~17% yield on the current share price).

Now let’s explore a potential sale scenario. As background, UAN has a 63% public float and is 37% owned by CVR Energy (CVI). CVI is 66% owned by Icahn Enterprises (IEP) so UAN is controlled by IEP. On 3/18/24 IEP filed a 13D which stated: “…the Reporting Persons consider from time to time, and currently are considering, strategic options involving the Issuer, which may include the acquisition of some or all of the outstanding publicly held Common Units of the Issuer by the Reporting Persons or other affiliated entities, the sale of the Issuer or the Reporting Persons’ interest therein, or other transactions. Any such acquisition, sale or transaction could be effectuated through open market purchases, tender or exchange offers, exercise of the limited call right contained in the Issuer’s limited partnership agreement (as amended, the “Partnership Agreement”), value-enhancing partnerships, negotiated merger transactions, privately negotiated transactions, sale transactions or otherwise.” In other words, UAN is now on the block and IEP may buy more UAN or seek to sell UAN. Given the recent problems at IEP and recent industry transactions described below, I believe IEP is likely to seek a sale of UAN rather than buy a larger stake.

There have been two recent sales of U.S. ammonia plants that can help inform one’s estimate of UAN’s strategic value. These are two very different facilities, but I believe they provide bookends to value of UAN’s assets. In December 2023, CF completed the purchase of an ammonia plant in Waggaman, LA (WALA) for $1.675bn. WALA has nameplate ammonia capacity of 880m tons/year, so the purchase price was ~ $1,900/ton of ammonia capacity. Using $1,900/ton x UAN’s nameplate capacity of 867m tons results in a $107 share price for UAN. In December 2023, OCI announced the sale of Iowa Fertilizer Co (IFCO) to Koch for $3.6bn. IFCO has nameplate ammonia capacity of 850m tons/year, so the purchase price was ~ $4,200/ton of ammonia capacity. Using $4,200/ton value implies a $296 share price for UAN. I’ll explain why I think the WALA comp is too low and why the IFCO comp is too high, but both transactions imply a UAN stock price higher than today’s.

The WALA facility produces ammonia for industrial purposes, which typically carries a lower price per ton than ammonia used for agricultural purposes. UAN (the company) converts nearly 70% of the ammonia it produces into UAN (the agricultural fertilizer product) while WALA doesn’t convert any of its ammonia into downstream products. As a result, if one looks at the last 5-year average revenue divided by nameplate capacity, WALA has generated revenue/ton of $377 and UAN has revenue/ton of $647. In addition, when CF purchased WALA, it entered into a 25-year agreement with the seller of WALA to provide 200 tons/year of ammonia (~23% of total capacity) at production cost. Finally, WALA is in Louisiana where it sees more competition from US and global ammonia producers, and it is a long way from Midwestern farmers. Thus, I think the $1,900/ton valuation implied by the WALA acquisition is too low of a benchmark for UAN.

The IFCO facility is more comparable to UAN’s assets in that 1) IFCO upgrades most of its ammonia production into higher value products and 2) IFCO is strategically located closer to farmers. I don’t have IFCO’s historical financials, so I don’t know IFCO’s revenue or product mix. However, I do know that IFCO has enough downstream capacity to upgrade virtually all of its ammonia into higher-value products (compared to UAN’s conversion of ~70% of its ammonia production to UAN). In addition, IFCO also upgrades some of its ammonia into diesel exhaust fluid (DEF) and describes this as “often our highest-margin product out of Iowa” while UAN’s facilities are not capable of producing DEF. Thus, I am comfortable saying that IFCO’s capacity is more profitable than UAN’s capacity and thus the $4,200/ton that Koch is paying is too high of a benchmark for UAN.

Looking at these transactions doesn’t spit out a satisfying single answer but given the margin of safety, I’m happy to be roughly right on the upside. If forced to pick a value for UAN’s assets, I’d say $2,500-$3,000/ton of capacity “feels” about right. I triangulate to this range looking the datapoints above as well as the $3,000/ton construction cost for IFCO 7 years ago (noting costs of construction have risen since). Using $2,500-$3,000 value/nameplate capacity results in a $157-198 UAN share price or 2-2.5x where it is trading today.

I could be wrong on my not-so-scientific guess of UAN’s strategic value, but I believe there is plenty of room for error as even the “too low” WALA transaction price points to 35% upside for UAN shares. In addition, I believe there are interested strategic buyers as OCI stated that Koch was not the only bidder for IFCO. Of course, there is a chance that no sale of UAN occurs, but in this scenario, I think fundamental downside is limited based on the “normalized” free cash flow yield of ~17%.

Catalyst

Potential sale of UAN to a strategic buyer