CVR Partners: The Chances Of A Near-Term Sale Are Increasing

seekingalpha05-12

CVR Partners is an undervalued stock with significant opportunity due to its unique competitive advantages and lack of professional analyst coverage.CVRP's competitive advantages include its proximity...

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A sale of CVRP is highly likely, offering significant upside potential.   CactuSoup The Opportunity In a market that seems to be chasing the next big new shiny object, sometimes it makes sense to look in more overlooked corners that may be hiding significant opportunity. Yes, AI and Ozempic have huge potential, but these facts are well known. Where does the Alpha come from?When it comes to CVR Partners , the answer is clear. This stock is very thinly traded, has a less than $900m market cap, is a variable-distrib","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4161":"工业机械","BK4138":"石油与天然气的炼制和营销","CVR":"芝加哥机械","YARIY":"Yara International ASA","BK4585":"ETF&股票定投概念","UAN":"CVR Partners LP","OCINF":"OCI N.V.","CF":"CF工业","BK4588":"碎股","CVI":"CVR能源","YRAIF":"Yara International ASA","BK4590":"PTP","BK4093":"化肥与农用药剂"},"translate_title":"CVR合伙人：近期出售的机会正在增加","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CF":1,"CVI":1,"CVR":1,"OCINF":1,"UAN":1,"YARIY":1,"YRAIF":1},"content_text":"CVR Partners is an undervalued stock with significant opportunity due to its unique competitive advantages and lack of professional analyst coverage.CVRP's competitive advantages include its proximity to the US corn belt, production of low-carbon ammonia, use of pet coke as feedstock, and focus on nitrogen fertilizer for agricultural applications.The North American fertilizer market has high-demand and limited supply, creating a potential premium for existing plants like CVRP. A sale of CVRP is highly likely, offering significant upside potential.   CactuSoup The Opportunity In a market that seems to be chasing the next big new shiny object, sometimes it makes sense to look in more overlooked corners that may be hiding significant opportunity. Yes, AI and Ozempic have huge potential, but these facts are well known. Where does the Alpha come from? What edge do you have overtrained professionals and computer algorithms? When it comes to CVR Partners (NYSE:UAN), the answer is clear. This stock is very thinly traded, has a less than $900m market cap, is a variable-distribution MLP, is in the extremely un-sexy fertilizer business, and is 37% owned by CVR Energy (CVI), controlled by the oft-maligned Carl Icahn. With no professional analyst coverage, who is actually going to buy this stock? Huge swaths of larger investors or funds with mandates are excluded from this opportunity, leaving it still on the table for retail investors who can keep an eye on developments as they come. This helps to explain the mispricing that I will identify and why the market has not been efficient to this point. At this point, I will pause to shout out Publius, who has been tremendous in his coverage of CVRP, and I encourage anyone interested to go over his articles and invaluable commentary. CVRP Competitive Advantages Central to my thesis is that CVR Partners (which I will abbreviate CVRP and reserve \"UAN\" to refer to the fertilizer) will eventually be sold for a price much higher than its current unit price would suggest. However, I do not consider M&A to be a valid reason on its own to invest in a company. I also want to be willing to hold the assets for the long term if the sale does not materialize. When it comes to the production of a cyclical commodity, supply and demand are the main consideration. However, CVRP has a number of unique competitive advantages within that framework. First, CVRP owns and operates two Nitrogen Fertilizer plants, one in Coffeyville, Kansas and the other in East Dubuque, Illinois, right in the heart of the US corn belt. Proximity to the end market is its first competitive advantage, saving on transportation costs. According to the company, the East Dubuque plant sells most of its product within 200 miles of the facility, a testament to the value of their location. Second, Coffeyville produces low-carbon \"blue\" ammonia, where production is accompanied by carbon capture and sequestration, and they also have plans to convert East Dubuque in a similar way. This grants them access to carbon offset credits, benefits the environment, and makes them a much more attractive target for a potential buyer concerned about their environmental footprint. Third, Coffeyville uses pet coke, a byproduct created in the oil refining process, as their feedstock, while every other plant in North America uses natural gas. This usually provides a price advantage, especially as they have an agreement with nearby CVR Energy to take their pet coke at a market discount. However, natural gas is so cheap right now that this is not a short-term factor. That said, in response to low natural gas prices, CVRP has plans to convert Coffeyville to be able to use either pet coke or natural gas as their feedstock, depending on which one is more cost-effective at the time. This would be a significant advantage and certainly something to catch the eye of a potential buyer. Lastly, CVRP only produces nitrogen fertilizer for agricultural applications. Competitors produce other lower margin fertilizers like potash or sell ammonia for industrial use, again at lower margins. I do not know of any other pure nitrogen fertilizer plants for sale in North America. Fertilizer Market in North America Given that CVRP has a few unique competitive advantages, their main advantage is not necessarily unique, but far more impactful - their location in North America. And this will bring us to a discussion of the overall supply/demand picture worldwide. As a commodity producer, will the value of CVRP's product, nitrogen fertilizer, go up in the future, or down? This is of course the million-dollar question, and though it can be difficult to predict, we can make some general statements. Nitrogen fertilizer is a global market, and the US is the third-largest importer of it, as well as the largest exporter of coarse grains (see CVRP's 2023 annual report). This necessitates a pause. Nitrogen fertilizer is produced from natural gas. This means that we import a natural gas product, turn it into grain, and export it. But the US is also the world's largest exporter of natural gas. We have an abundance of cheap natural gas available to us to make our own fertilizer. So why do we import so much? We lack the capacity to turn that gas into fertilizer. So why don't we simply build more nitrogen fertilizer plants? Doing so is very expensive, complex, and takes a very long time. OCI's Wever plant (which we will come back to), has a very similar production and location profile to CVRP, and was completed in 2017 for $3 billion. The costs would be far greater today. It can take well over a year of planning and permitting before construction begins, and then construction takes about four years (CF Industries (CF) talks about this in their latest conference call). So you commit billions of dollars to earn no return for at least four years. For this reason, there have not been many nitrogen fertilizer plants built recently in the US, and none set to come online in the next few years.   East Dubuque (Company Website) So there is huge demand for fertilizer in the US, and not nearly enough supply to meet it. Given the low cost of natural gas as well, producers in the US have a massive advantage in the global market. To hammer this point home, the US even imports significant amounts of fertilizer from the country we supposedly wish to sanction, Russia. CF provides important commentary about the global nitrogen fertilizer market in their conference calls, and their most recent one had some choice words: But what's kind of shocking is that there's been all of this focus on not funding the Russian war machine and not buying Russian gas and yet the U.S. is arms wide open to take urea and UAN coming out of Russia, which is effectively just natural gas that's been converted. The fact that we are still willing to buy fertilizer from Russia speaks to the imbalance in the current market, an imbalance that is set to persist for years to come. According to CF, \"North American producers remain firmly positioned on the low end of the global cost curve.\" Yara International (OTCPK:YARIY) (OTCPK:YRAIF) has significant fertilizer operations around the globe, and their worst returns are from Europe (where natural gas is extremely expensive) at a -9.8% ROIC clip over the last 12 months, while North America, their best performing region, realized a 9.6% ROIC. Where would you be thinking to invest new capacity? In the US, then, we have huge demand for nitrogen fertilizer, not enough domestic supply to meet it, a cost advantage in the form of cheap and abundant natural gas, and extremely long lead times for new plants, so there should be a significant premium being placed on existing plants. Fertilizer producers made huge amounts of money during the post-covid supply disruptions (CVRP was dishing out $10 quarterly distributions), so there is money waiting to be deployed. You can bet that several companies are looking at CVRP and asking, why don't we buy them? Looking For A Sale I would be comfortable holding CVRP and collecting distributions. However, it would be a much smaller position in my portfolio, as I am not positive that it would outperform the S&P 500 and other top stocks on its own. It certainly could, but I cannot speak with confidence. What makes this a high conviction pick is the possibility of a sale. This was always the endgame for me, but several recent events have made it much more likely on an accelerated timeline. Step one: The calculation changed on December 18th, 2023 when Koch Industries agreed to pay $3.6 billion for OCI Global's (OTCPK:OCINF) Iowa Fertilizer Company, which operates a nitrogen fertilizer plant in Wever, Iowa. Both have virtually identical ammonia production capacity in the 850k-900k tons of ammonia per year range, and similar locations (Iowa vs. Illinois and Kansas). Wever is obviously one plant compared with CVRP's two, and it is also newer. CVRP has some of its own advantages, but still some discount is warranted. However, to my surprise, CVRP ended trading on December 18th with an enterprise value of $1.22 billion. The plant in Wever sold for almost 3 times as much as CVRP's \"market\" price! Step two: This seemed like a market failure, and I immediately doubled my position to extremely overweight. Absolutely nothing happened to the unit price, highlighting how out of sight this name is. The next domino fell on March 18th, 2024 when CVI, who controls CVRP, released an 8-K that mentioned things like \"ways of maximizing stockholder value, which may include extraordinary transactions\" and that they \"are considering strategic options involving CVR Partners, LP,\" including the possibility of \"the sale of CVR Partners.\" The market did react to that announcement, sending the units from $64 to $80 in short order. But that was nowhere near enough! Step three: You can bet that the possibility of a sale would be brought up during their next conference call. Alas, CVRP conference calls are extremely dull affairs, and the main comment was that \"there's nothing for us to report.\" However, CVI's conference call was slightly more enlightening. Here is the first relevant comment: Finally, in March, we issued a Form 8-K announcing that we were routinely considered and currently considering potential strategic transactions both in refining and potentially related to CVR Partners. While we have nothing to disclose and certainly provide no assurances that we could successfully close any such transactions, there are some very interesting and transformative opportunities out there for both our refining business and CVR Partners. And the next: As far as other M&A, there's some very intriguing deals out there that are transformative for our company as well as others. And I think as we've always said, we look at everything, and we continue to look at everything...I think you probably heard about the recent transaction that's occurred with - or it hasn't closed yet, but it's been proposed for the Wever plant with OCI that kind of mark-to-market a pretty big value, pretty much twice the value of what UAN is today. So that's what kind of sparked the interest in it and we're just exploring opportunities that, that might incur going forward. It seems obvious that when Koch committed $3.6 billion to the Wever plant, management at CVI's eyes lit up. They say that they are interested in expanding their refining business, and selling CVRP for anything close to $3.6 billion would go a long way towards achieving that goal. It would also allow them to be a pure refining business, instead of the awkward refining plus nitrogen fertilizer conglomerate. This would make CVI itself easier to sell as well. Value of CVRP So what is the market price for CVRP? Some might say it is roughly $80/unit, or what you could buy it for today at your broker. Others would say it is roughly $3.6 billion, which would translate to a unit price around $295. I'm not hoping for $295, but that leaves a whole lot of wiggle room. Even a sale at half the price of Wever would translate to a unit price around $125, over 50% upside from here. The price of an asset is what someone is willing to pay for it. Koch was willing to pay $3.6 billion for a similar asset. Other large fertilizer companies would love to add CVRP's competitive advantages in North America to their portfolio. We might be able to handicap the various probabilities and discount back to an intrinsic value, but most of it would be opinionated guesswork, and you also have to establish a baseline downside value for CVRP without a sale. When buying CVRP for $80/unit, though, you know that you are buying assets worth more than twice their current value to a strategic buyer. This makes it a no-brainer for me, whether you value the chance of a sale at 10%, 50%, or 90%. As far as distributions are concerned, one can always have a reasonable guess of the next quarter or two, with too many variables after that. Over the medium term, industry leader CF stated that \"new capacity that is currently under construction doesn't meet traditional growth of, call it, 1.5% to 2% within the nitrogen markets.\" Natural gas disruptions (particularly in Europe), war in Ukraine and the Middle East, and underinvestment in the space make me comfortable with the medium-term picture. In the short term, CVI mentions the following: Prompt fertilizer prices are approximately $600 per ton for ammonia and $300 per ton for UAN...For the Fertilizer segment, we estimate our second quarter 2024 ammonia utilization rate to be between 95% and 100%, direct operating expenses to be approximately $50 million to $55 million, excluding inventory impacts and total capital spending to be between $15 million and $20 million. Back of the envelope math looks like the following:  330k UAN tons at $300/ton = $99 million 75k Ammonia tons at $600/ton = $45 million Freight/Other income= $15 million Operating expenses = ($50 million) Cost of Materials = ($30 million) Capex = ($15 million) SG&A = ($8 million) Interest = ($8 million)  There are obviously a lot of moving parts, but using these numbers and dividing by 10.57 million units gets a distribution in the $4 range. Annualized, that would be a yield of 20% at an $80 unit price. Of course, there are seasonality variations by quarter, but this still shows that CVRP is making a lot of money at current relatively stable prices. In a defensive industry like agriculture, I am happy with the distributions here while I wait for a sale. Risks All investments come with risks, particularly those as concentrated as only two small midwestern fertilizer plants. Any unplanned downtime or unforeseen accidents at either plant could be potentially significant. While all available information seems to point to continued tightness in the nitrogen fertilizer market, it is always possible that there could be a shift to the downside, particularly when Russia and China are such large players in the fertilizer space and our data into their operations is limited. Making fertilizer is a fairly \"dirty\" process. Even though CVRP is on the more environmentally friendly end of the curve, it still relies on natural gas and pet coke. That said, laws and regulations can shift quickly, affecting the profitability of CVRP and its potential appeal to an acquirer. Even CVRP's status as a tax-advantaged MLP could cause issues down the road if current tax laws shift against them. Lastly, and perhaps most importantly, CVRP is almost exclusively controlled by Carl Icahn, through his ownership of CVI. The concentrated power in one man is always a risk, as his interests may or may not be aligned with those of common unitholders. Especially in the context of an MLP available for sale, there is a lot of fear that Icahn may be able to pull off a scheme to enrich himself at the cost of unitholders. It does not seem likely that such a scheme is likely or even possible, but this no doubt weighs on the unit price and causes potential buyers to steer clear. For more information on risks to the partnership, CVRP lists them in great detail in their annual report. Conclusion In sum, CVRP is extremely undervalued in a defensive and well-positioned industry. The reason for the valuation disconnect is reasonably clear, given the constraints many potential investors would have in pursuing such a thinly traded MLP. The catalyst to unlock that value is also clear in a potential sale in the next year. Without a sale, the distributions are significant compensation for waiting, and it is difficult to imagine CVRP not being sold, even if it takes longer than I might like. It is not often that you can buy world-class assets for such a discount, and the risk/reward is highly skewed in favor of investors at current levels. Addendum for Options Traders I never buy call options. Until now. As a disclaimer, CVRP is extremely illiquid, and their options are even more illiquid, with just a handful trading on any given day. Any option bought or sold will likely have to be held to expiration. A sale is a binary option that is being way undersold by the market, making this a perfect setup for far out of the money calls. I recently purchased 1/17/25 call options at a 120 strike price for $3.50. The downside is $3.50. If a sale occurs at $160, an inordinately conservative price (around $2.2 billion), then the upside is $40.  That's over 10 to 1 odds, indicating based on pricing that the chance of a sale at $160 is less than 10%. That is far too low in my opinion, and it is also likely that a sale would be even higher than $160/unit. 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