CVR Partners

This blog has been inactive for quite some time. I'm going to restart it, but with more frequent and shorter posts.

I am long CVR Partners (UAN). It's a 3% position for me. UAN is an MLP that produces nitrogen fertilizer. The key fact is that its plant is allied with an oil refinery. It uses the bottom of the distillation column (called petroleum coke) as its input. This is practically free, since pet coke has minimal value. All its competitors use natural gas as an input. Thus, UAN has a cost advantage and should be able to make money in most markets. Another part of the story is that this is effectively a call on natgas prices. I'm not a big bull on natgas, but many people are. There's no question that natgas is dirt cheap vs. oil on a BTU equivalent basis.

UAN's management says they expect to pay out about 10% ($1.90) this year. With the sharp rise in nitrogen prices, they should be able to do this. So there's value here. The catalyst will likely be the actual payout announcement.

I am a big believer in the long term agricultural story, so an efficient fertilizer company is a nice play. MLPs are normally bought by conservative, income-focused investors. For that reason it will probably take some time until retail and long-only are comfortable enough with the name to bring it to full value. However if there are no unexpected problems, I expect a doubling in three years.

As far as risks go, I'm willing to take the macro risk of the overall agricultural market and nitrogen prices. There is execution risk of course. UAN is a one-plant company, so any fire, flood, labor problems or such would have serious effects.