Earnings Sprout Higher At Fertilizer Firm Rentech Nitrogen

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The hot, dry weather that has battered much of the U.S. this summer hasn't only left many Americans sweaty and irritable.

It also has had a big impact on the prices of corn and other crops. Corn prices have increased about 15% this month amid worries that near-drought conditions and high temperatures will threaten crops in the Midwest.

In June, the U.S. Department of Agriculture said that 96.4 million acres of corn were planted in this year's crop, a 5% gain from the prior year. But because of the hot, dry weather, the expected yields might end up 10% to 15% lower than in 2011, according to some estimates.


Those lower yields will reduce supply and increase demand for corn, which in turn will drive prices higher. That's good news for companies that make their money off of the corn market, such asRentech Nitrogen Partners ( RNF ).

Rentech Nitrogen manufactures and sells nitrogen fertilizer products such as ammonia, urea ammonia nitrate solution ( UAN ) and liquid and granular urea in the Mid Corn Belt region of the U.S.

Nitrogen fertilizer demand is driven by corn acreage and production yields, which are in turn driven by corn prices and gross farm revenue per acre.

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The rising price of corn has been mirrored by an increase in Rentech Nitrogen's stock price. It has gained about 35% since early June.

The entire fertilizer sector has followed suit. The 17 stocks in IBD's Chemicals-Agriculture group are up 21% since hitting a four-and-a-half month low on May 18.

Why the uptick?

"The probability of hitting the current USDA estimate of 166 bushels per acre has been reduced, while the probability of lower yields has increased," Charles Neivert, managing director at Dahlman Rose, noted in a recent report. "This implies a higher corn price, more acreage for next year, and a stronger fertilizer market."

Rentech Nitrogen is a master limited partnership that went public in November at an opening price of 20. It was spun off byRentech Inc. ( RTK ), an alternative-energy company that develops and commercializes a patented and proprietary process, called Fischer-Tropsch, that converts feedstocks to liquids.

Rentech Inc. still owns a 61% share in Rentech Nitrogen. Financially, however, the companies live in alternate universes.

Even though Rentech Inc. dates to 1981, it has still never turned a profit. That's partly because the company spends so much money developing products that have yet to find a lucrative market.

In contrast, Rentech Nitrogen has already grown earnings in triple digits in each of its first two quarters as a publicly traded company.

One reason for Rentech Nitrogen's success is that it sells products that are in high demand, watchers say. Another reason is that it operates smack in the middle of the country's top corn-producing region.

The company's East Dubuque, Ill., facility is one of the main producers of nitrogen fertilizer products in the Mid Corn Belt region.

On its website, Rentech Nitrogen boasts that the location "allows us to sell more of our ammonia during application seasons, as opposed to the off-peak fill season, because our customers in the Mid Corn Belt typically experience two application seasons for ammonia every year: one in the spring and one in the fall."

The company says its customers are willing to pay premium prices for nitrogen products during application seasons, "so we seek to maximize sales during these peak periods."

Another benefit of the Illinois facility is that it is located a mile from an interstate natural-gas pipeline system. Easy access to the pipeline gives Rentech Nitrogen the flexibility to buy natural gas from different regions of the country, as well as from several major natural-gas suppliers.

Having such a wide range of options means the company can shop around for lower prices.

That's important because Rentech Nitrogen's facility uses natural gas to convert nitrogen gas to a form that can be used on crops.

Thanks to fracking technologies that make it easier to produce natural gas, prices of the fuel continue to trade near historic lows.

"As variable costs have declined, domestic nitrogen producers have developed a competitive advantage," analyst Matthew Farwell of Imperial Capital said. "We project that natural gas comprises roughly 50% of Rentech Nitrogen's cost of sales, or 40% of EBITDA."

Growing Financials

The combination of low production costs and high demand for its products have driven financial growth at Rentech Nitrogen.

The company posted first-quarter revenue of $38.5 million, up 61% from the prior year and well above the $22 million projected by Imperial Capital.

Rentech Nitrogen logged operating income of $20 million and adjusted EBITDA of $22 million, also above estimates.

"The Rentech Nitrogen fertilizer plant operated at 100% up-time and benefited from larger-than-expected shipments related to the extended spring application season," Farwell noted.

As a master limited partnership, or MLP, Rentech Nitrogen trades in units instead of shares. It posted first-quarter earnings of 51 cents per unit. Analysts polled by Thomson Reuters expect Rentech Nitrogen to post full-year profit of $2.76 per unit.

MLPs return cash to unitholders through distributions. These are usually paid on a quarterly basis. In May, Rentech paid a first-quarter distribution of $1.06 per unit.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: RNF , RTK , UAN

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