Value Investing Don't Confuse Archegos Collapse With Contagion - By Aaron Brown |
- Don't Confuse Archegos Collapse With Contagion - By Aaron Brown
- Shopify and the hard thing about easy things
- CVR Partners (NYSE:UAN - $38.70)
- The State of Big Food™
| Don't Confuse Archegos Collapse With Contagion - By Aaron Brown Posted: 30 Mar 2021 05:50 PM PDT | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shopify and the hard thing about easy things Posted: 30 Mar 2021 12:29 PM PDT | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CVR Partners (NYSE:UAN - $38.70) Posted: 30 Mar 2021 06:41 PM PDT CVR Partners (NYSE:UAN - $38.70) This is an update to my previous article. For reference, you can find the previous article here. Updated Value Drivers (See below for further details)
Business Description CVR Partners is a variable distribution master limited partnership that makes and sells nitrogen fertilizers in the United States. They are the only pure play publicly listed North American nitrogen fertilizer manufacturer. They operate two facilities located in Coffeyville, Kansas, and East Dubuque, Illinois. CVR Partners' primary product is UAN, a value-added nitrogen-based fertilizer. UAN is a seasonal product with the primary application taking place in the spring planting season. The proximity of the manufacturing facilities to end markets gives them a freight advantage vs. imports (UAN NOLA). The Midwest UAN price traded at a $48/t premium to UAN NOLA in Q1/21. Opportunity Production of UAN is a high fixed cost business. The operating leverage allows for outsized profits in a favorable commodity market. The price of nitrogen fertilizers tends to slightly lag crop prices - primarily corn and beans. When the price of corn is high, the incremental yield from fertilizing generates more revenue than the cost of the fertilizer. This incentivizes farmers to use more fertilizer. In December 2020, the price of corn rose to a 7-year high and has remained at an elevated price. Corn futures are forecast to stay above $5.00 per bushel through the summer. UAN NOLA prices followed in January 2021 rising from $150/t to ~$278/t for March delivery. CVR Partners' breakeven UAN gate price (the point at which there are zero annual distributions to unitholders) is $169/t UAN. Note that this implies a UAN NOLA (Futures Price) of $144-154/t when you factor in their freight advantage. This analysis does not include an in-depth forecast of commodity markets. For simplicity, it's assumed current commodity future prices remain constant. Use the sensitivity table at the end for returns at your own assumed UAN price. Fertilizer Business Forecast The 2021 forecast assumes Q1 actual pricing and the remainder of the year uses pricing that is consistent with current CME Globex futures. The average gate price for the year is $232/t. If CVR Partners meets their operating targets, current commodity prices support 2021 EBITDA of $220 MM. Using a historical multiple of 8.0x EV / EBITDA implies an EV of $1,758 MM.
I've provided a sensitivity table at the end so that you can change the assumptions and come up with your own view on value. A Gift From The Government In January 2021, the US government approved Section 45Q. Section 45Q provides tax credits for carbon capture. CVR Partners sequesters about 1 million metric tons of carbon per year. They indicated on their Q4/20 call and in the 2020 10-K that they are exploring options to monetize these tax credits. The form of this structure is still unknown, but it seems they will try to time this with the refinancing of their debt in June 2021. If they can monetize these credits, the estimated value of the credits from 2021-25 (the period the current regs cover) is $103MM @ 10% discount rate. If they can claim credits for previous sequestration from 2018-2020, this is an additional $16MM.
Another Gift From The Government? On March 25, 2021, a new bipartisan bill was introduced to the Senate. The bill is sponsored by 6 senators from each side. The proposed bill would change the 45Q CO2 tax credits in 3 important ways: 1) Extends the eligibility period from 2025 to 2030; 2) Sets the new linearly interpolated 2030 tax credit at $75/t in 2030 (from $35/t in 2026 currently); 3) allows for direct tax credit claims from the asset holder which eliminates the need for them to enter into structures with counterparties to receive the credits. It is assumed that this bill will be an amendment to the next Covid bill. It remains to be seen if/when this will pass but the bipartisan sponsorship makes it likely. If the bill becomes law, the value of the CO2 tax credits jumps from $119MM to $316MM. The breakdown of value is as follows:
9.25% Callable Notes CVR Partners has $645M principle 9.25% coupon senior secured notes due in 2023. The notes were issued to fund the acquisition of the East Dubuque plant. These notes are callable in June 2021 without a penalty. The current market yield for single B issuers is ~5%. If CVR Partners can refinance the 9.25% senior secured notes with a high yield issue at 5%, this will save them $27M per year in interest. On previous conference calls, management have indicated their intention to refinance these notes in June 2021. With a simple dividend discount model and a 10% cost of equity capital, the incremental value from refinancing the debt is worth the current share price. This forms a compelling value floor for the shares.
Risks CVR Partners operate in a commodity driven business. Results will be heavily impacted by the prices realized for end products (UAN, Urea, Ammonia) and, to a lesser extent, input costs (natural gas, pet coke). Demand for fertilizer in the spring will be impacted by corn and bean prices, acres planted, and weather conditions. Volumes of imports will also impact UAN prices in CVR Partners' local markets. CVR Partners' may also suffer from operational issues at its plants. Model Sensitivities 2021 EBITDA (US$M)
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| Posted: 30 Mar 2021 01:57 PM PDT |
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