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For much of the latter half of 2012, nitrogen-based fertilizer companies were great investments. These firms often utilize natural gas as a key input for their processes, so when prices of this potent fuel are slumping, it is great news for their bottom lines.
However, the reverse is also true, and this has been the case so far in 2013 thanks to surging natural gas prices. In fact, prices for natural gas have stormed higher by roughly 50% since August, collapsing the outlooks for many companies that rely on natural gas as key inputs.
This situation is especially prevalent in one of the key names in the space, Rentech Nitrogen Partners LP (RNF). Prices of RNF shares moved higher by about 50% from August to February, but have nose dived since then as the higher price of natural gas has begun to finally take its toll.
Prices of Rentech have slumped by over 12% in the past one month alone, largely driven by a weak earnings report and a tepid outlook for the coming quarters. Analysts are beginning to take note as well, slashing their profit forecasts for this now troubled stock.
Analysts have universally lowered their estimates in the past sixty days, pushing the current quarter estimate down slightly and the current year estimate down significantly. In fact, analysts now expect negative growth for the next quarter and for the current year period as well, suggesting a rough stretch for the company going forward as well.
This poor outlook by analysts has pushed RNF to a Zacks Rank of 5 or ‘Strong Sell’, further confirming the new-found bearishness about this firm. If that wasn’t enough the ‘fertilizer’ industry is currently ranked in the bottom 20% of industries, so there looks to be little hope from a rising tide lifting all boats in this troubled segment either.
Other factors to consider
The most important thing to consider for RNF is the price of natural gas. According to the most recent 10-K for the firm, 64% of production costs for ammonia (at their East Dubuque facility) in the most recent year were due to natural gas.
Also according to the annual report, the company has traditionally purchased natural gas, through the use of forward purchase contracts, in the spot market. This equaled about $3.59 for the 2012 calendar year, and as high as $4.79 in the 2010 fiscal year.
Average prices could certainly return to these lofty levels, especially if current trends in the natural gas market hold. There has been an extremely long winter in much of the northeast and the Midwest, while a reduction in drilling operations has also reduced supply. If this continues for a bit longer, it could increase natural gas withdrawals, and if we see a hot summer, it could add to the woes for Rentech going forward.
Clearly, RNF isn’t a very good choice for investors at this time. The company is heavily dependent on natural gas prices as an input, and these costs could be surging if current trends hold.
Instead, investors should consider other, top ranked options in the space if they are looking for potentially better investments. One company that sticks out in this regard is definitely CVR Partners LP (UAN - Analyst Report).
The company is also in the fertilizer space, but this firm has a top Zacks Rank of 1 or ‘Strong Buy’. It has been seeing positive estimate revisions, and its growth picture for the full year period is looking quite positive, especially when compared to RNF.
And best of all, UAH doesn’t use natural gas as an input for its products, instead using pet coke. This could make UAH a vastly better choice going forward, especially if the natural gas market continues to surge higher as we get into the next earnings season.
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