CVR Partners LP produces urea ammonium nitrate (UAN), a fertilizer that helps to boost crop yields.
Since the V-MLP went public in 2011, CVR Partners’ unit price has tracked movements in corn prices; domestic corn producers are the company’s biggest end-market.
Source: Bloomberg, Energy & Income Advisor
These days, corn fetches about $4.25 per bushel, near the low end of its three-year range. Meanwhile, CVR Partners’ unit price has tumbled to about $18.00 per unit from more than $30.00 per unit in early 2012.
What sets CVR Partners apart from the competition? For one, the V-MLP’s strategic location in Kansas ensures ready access to several rail lines that supply agribusiness in the Midwest. Profits are proximity: CVR Partners enjoys lower transportation costs relative to UAN producers on the Gulf Coast or imported supplies.
The V-MLP also benefits from lower-priced feedstock relative to its peers.
Whereas most UAN producers run natural gas through their plants, CVR Partners’ facility processes petroleum coke–a by-product of the refining process. The partnership sources about 70 percent of its needs from sister V-MLP CVR Refining LP’s (NYSE: CVRR) neighboring refinery under an agreement that expires in 2027.
According to management, using petroleum coke instead of natural gas yields superior profit margins when gas prices exceed $4.00 per million British thermal units (mmBtu).
Although robust domestic production should prevent US natural-gas prices from rising sharply over the next few years, market dynamics suggest that the commodity will range between $4.00 and $5.00 per mmBtu. (See Commodity Price Outlook for 2014.)
But none of these advantages will offset the short-term headwinds facing the corn, UAN and fertilizer markets.
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Elliott and Roger on Jul. 27, 2017
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