UAN (CVR Partners)- Special Situation with Yield

A High-Yield Gem with Potential Buyout Tailwind and Icahn’s Influence

When scanning the landscape for high-yield opportunities that come with a side of potential upside, UAN (CVR Partners LP) stands out as a compelling play. Let's break down why this fertilizer producer, with its juicy 10% yield, is a name that deserves your attention—especially now, with its parent company CVR Energy (CVI) potentially eyeing a buyout.

The 10% Yield: More Than Just Income

UAN's double-digit yield is hard to ignore, particularly in a market where reliable income sources are becoming increasingly scarce. For investors who appreciate cash flow, this is a rare find. The yield is backed by strong operational performance and a business model that benefits from consistent demand in the agricultural sector.

But the story doesn’t end with the yield. The potential for capital appreciation adds another layer to the thesis.

CVR Energy’s Distraction and Refocus

CVR Energy has been busy lately, with its sights set on Gold Reserve. This distraction along with fertilizer pricing may have left UAN somewhat overlooked by the broader market, which could be why its valuation still offers a favorable entry point. But now, with the Gold Reserve bid in the rearview mirror due to Elliott taking lead bidder, CVR Energy is likely to refocus its attention—and capital—on its existing assets.

This sets the stage for a potential buyout of UAN by CVR Energy. With a parent company that's well-capitalized and eager to streamline its operations, it’s not far-fetched to see them making a move to consolidate their position in the nitrogen fertilizer space.

Carl Icahn’s Influence

Adding fuel to the fire is the involvement of Carl Icahn, who holds a significant stake in CVR Energy. Known for his activist investment strategies, Icahn’s presence is often a catalyst for stock repricing. His influence could push CVR Energy toward a decision that benefits both UAN and its investors, potentially accelerating any buyout discussions.

Icahn’s track record of creating value in his investments suggests that his involvement in UAN’s parent company could lead to strategic moves that enhance UAN’s market position, whether through a buyout or other value-enhancing actions.

A Strategic Asset with Cost Advantages

UAN is not just any player in the nitrogen fertilizer industry; it’s a company with significant strategic advantages. Its facilities in Kansas and Illinois provide a strong competitive edge, offering lower energy costs compared to global producers. This positions UAN on the favorable end of the global cost curve, which, coupled with its proximity to Midwestern farmers, translates into lower distribution costs and enhanced market appeal.

Financial Strength and Potential Revaluation

Despite the volatile nature of the fertilizer market, UAN has managed to maintain a strong financial position. In Q2 2024, UAN reported net sales of $133 million, net income of $26 million, and EBITDA of $54 million. The company’s debt profile has improved significantly, with reduced interest expenses and a manageable capital expenditure program. UAN spent $5 million on maintenance capital projects during the quarter and estimates total capital spending for 2024 to be between $40 million and $43 million. This financial prudence has led to an estimated normalized free cash flow (FCF) of $140 million, translating to a 17% yield on the current share price—a highly attractive figure for value-oriented investors.

CVR Energy's Strategic Exploration

Adding another layer of complexity is CVR Energy's ongoing exploration of strategic transactions in its refining segment, as highlighted by recent reports. This could involve anything from asset sales to mergers, which would generate additional capital and strategic focus. If CVR successfully capitalizes on these opportunities, it may further enhance its ability to either support or fully acquire UAN. This could drive further value for UAN investors, especially if these moves align with Carl Icahn's broader strategic vision. On March 18, 2024, CVI announced that that its Board of Directors had appointed Mr. Smith and James M. Strock, each of whom was affirmatively determined by CVI’s Board of Directors to be independent of the Reporting Persons, to a special committee of CVI’s Board of Directors formed to consider, evaluate and negotiate on behalf of CVI certain of the potential strategic transactions discussed above.

https://investors.cvrpartners.com/static-files/d3c9274b-75d8-4771-bd88-852d891c6a8f

The most likely outcome is CVR Energy will purchase all of CVR Partners at a premium to the current stock price.

Insights from the Q2 2024 Earnings Call

During UAN's Q2 2024 earnings call, management highlighted the strong operational performance with a 102% ammonia plant utilization rate. UAN sold approximately 330,000 tons of UAN at an average price of $268 per ton and 43,000 tons of ammonia at $520 per ton. While prices for both products declined compared to Q2 2023, the company saw better-than-expected pricing for UAN and ammonia orders for the upcoming fall season, indicating strong demand. Additionally, UAN's strategy includes potential engineering projects at its Coffeyville facility to enhance feedstock flexibility, which could further solidify its competitive edge.

The Risk-Reward Setup

Of course, no investment is without risks. Fertilizer prices can be volatile, and any prolonged downturn in agricultural demand could impact UAN’s earnings and distribution capacity. However, the current setup—high yield, the potential for a buyout, strategic advantages, Icahn’s influence, and CVR’s strategic explorations—makes UAN a compelling proposition.

For those willing to take on some risk for the chance at significant returns, UAN is worth a close look. The 10% yield alone is enticing, but the potential for a buyout or a significant revaluation adds a cherry on top. If CVR Energy moves in, investors who got in at these levels could be handsomely rewarded.

In the world of high-yield plays, UAN is one of the more intriguing bets on the table right now. Don’t sleep on it.