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Market Musings - December 8, 2017

We continue our blog series: Market Musings, Volume 1, Edition 13, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present How to Buy a Fertilizer Plant (or Two) at 34% Off of List Price.

Ever have a desire to buy a fully-functioning fertilizer plant or two for a dirt cheap (pun intended) price (namely, a one-third discount to actual value), it's your lucky day. Got dung? Oh yeah, we do--read on...

Meet CVR Partners (ticker UAN; investor relations site here). CVR Partners owns two fertilizer plants, one located in Coffeyville, KS and the other in East Dubuque, IL. Below is a quick summary of the two facilities from a 2016 CVR Partners investor presentation (source here):

Each facility produces Urea Ammonium Nitrate (or UAN), which is sold to farmers and used as crop fertilizer. Below we estimate the value of each of the above-referenced plants:

1. COFFEYVILLE: The Coffeyville facility was built in 1998 adjacent to an existing oil refinery (currently owned by sister company CVR Refining, ticker CVRR) and has a nameplate capacity of 3,000 tons of UAN per day. Its history (along with the CVR refinery) is further described below (courtesy of Wikipedia):

So how much is the Coffeyville UAN plant worth? Well, one industry source indicates that the original cost of the plant was at least $300 million :

If we adjust this amount for 3% annual inflation, we conclude that on an inflation-adjusted basis the plant cost around $500 million. But this assumes that the plant currently operates at its original capacity; however, we know that current capacity is higher than in 2000. For example, over the past decade CVR upgraded the facility to increase its UAN output by 50%, from 2,025 tons of UAN capacity per day to 3,000 tons of UAN capacity per day currently (cf. page 65 of the 2007 Form 10-K to page 4 of the 2016 Form 10-K). So we can fairly conservatively estimate that the value of the current facility is probably at least $750 million (and possibly higher, depending on whether capacity was increased pre-2007).

2. EAST DUBUQUE: The East Dubuque facility was acquired by CVR on April 1, 2016 from Rentech Nitrogen Partners (link). This facility is quite a bit older than Coffeyville, having been in operation since the mid-1960s. According to our trusty industry source, the plant was acquired by Rentech Nitrogen Partners in 2006 for $70 million and upgraded at a cost of $100 million in 2014 (source):

The consideration paid by CVR Partners for the plant was in 2016 consisted of cash and shares of CVR Partners which, at the time the acquisition was announced in 2015 (see PR here), were together valued at $13.69/Rentech share, or $533 million in aggregate, which is obviously far higher than the $170 million total cost of acquisition/upgrades described above. CVR expected to achieve $12 million in synergies from the acquisition, so capitalized at 10X these would be worth $120 million. To be conservative, we will assign a value of $411 million to the East Dubuque facility as of April 2016 (when the transfer to CVR Partners occurred), representing the midpoint between (A) original & expansion cost plus synergies and (B) the merger consideration. Adding 3% appreciation since the closing gives us a current valuation of approximately $425 million for the East Dubuque facility.

Together, then, the above two fertilizer plants have an aggregate value (based on our estimates) of approximately $1.175 billion. How does this compare to the current market capitalization of CVR Partners? With 113,283,000 units outstanding as of September 30, 2017 and a stock price of $3.60/share as of midday on December 8, 2017, CVR Partners has a market cap of $408 million. But wait, we still need to deduct CVR Partners' net debt from the $1.175 billion amount above in order to arrive at an equity-only value for the two plants. As of September 30, 2017, CVR Partners' net debt stood at $555 million ($625 million of debt less $70 million of cash). Thus, we conclude that in buying CVR Partners stock today, one is effectively purchasing an ownership interest in the above two fertilizer plants valued at $620 million ($1.3 billion minus $555 million) for just $408 million, or a 34% discount. Whether one wants to buy an interest in a fertilizer plant at 34% off of list price, of course, an entirely separate question--but, in our view, such an option is available if one wishes to pursue it (as we have recently, buying CVR Partners shares at slightly below $3).


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