This is a big position of mine, and I thought I'd just talk about why I own this company since it is basically a short US natural gas play. CF Industries is a large nitrogen fertilizer producer and distributor with operations in the USA. They take convert atmospheric nitrogen to nitrate fertilizers like ammonia, urea, and ammonium nitrate, with the major inputs being natural gas and energy.
1) USA is a nitrogen fertilizer importer, but we now have among the lowest cost production in the world due to low gas prices. The only lower cost suppliers are in areas like the Middle East, which has a cost disadvantage from a transport standpoint.
2) I believe that the USA will have sustainable low natural gas prices and will eventually be a nitrate fertilizer exporter.
3) US producers have a major transport advantage vs. importers due to proximity to the US and Canadian customers. We used to be a marginal producer at the top end of the cost curve due to high and volatile gas pricing. The shale gas revolution changed this.
4) Even though I believe that natural gas prices will stay low, I think that US gas producers can indeed make money at very low gas prices, which is why I am long certain gas producers like Chesapeake Energy and Apache, and am considering investment even in dry gas only companies like Cabot or Southwest Energy. CF acts as a hedge for these positions in case the gas price falls dramatically.
5) The valuation of CF is attractive. They have bought back 20mm shares (vs 52mm outsanding) in the past four years with modest debt issuance, while paying a 1% dividend and investing in a 25% capacity expansion coming online in 2015 and 2016. I think we are in close to trough earnings over the next few years due to current strong gas prices and near floor level ammonia pricing in the quarter. Even in these conditions they still earned $4.50 per share, implying a 13.9x PE ratio at $250 per share.
I remain a believer in low gas prices for the long term, but my faith is not limitless. I must admit that the skyrocketing gas prices this winter gave me pause with this position! I did sell a bit at $225 or so this winter, vs $248 current price, which I regret. Fortunately I bought between $180 and $200 last year.
1) USA is a nitrogen fertilizer importer, but we now have among the lowest cost production in the world due to low gas prices. The only lower cost suppliers are in areas like the Middle East, which has a cost disadvantage from a transport standpoint.
2) I believe that the USA will have sustainable low natural gas prices and will eventually be a nitrate fertilizer exporter.
3) US producers have a major transport advantage vs. importers due to proximity to the US and Canadian customers. We used to be a marginal producer at the top end of the cost curve due to high and volatile gas pricing. The shale gas revolution changed this.
4) Even though I believe that natural gas prices will stay low, I think that US gas producers can indeed make money at very low gas prices, which is why I am long certain gas producers like Chesapeake Energy and Apache, and am considering investment even in dry gas only companies like Cabot or Southwest Energy. CF acts as a hedge for these positions in case the gas price falls dramatically.
5) The valuation of CF is attractive. They have bought back 20mm shares (vs 52mm outsanding) in the past four years with modest debt issuance, while paying a 1% dividend and investing in a 25% capacity expansion coming online in 2015 and 2016. I think we are in close to trough earnings over the next few years due to current strong gas prices and near floor level ammonia pricing in the quarter. Even in these conditions they still earned $4.50 per share, implying a 13.9x PE ratio at $250 per share.
I remain a believer in low gas prices for the long term, but my faith is not limitless. I must admit that the skyrocketing gas prices this winter gave me pause with this position! I did sell a bit at $225 or so this winter, vs $248 current price, which I regret. Fortunately I bought between $180 and $200 last year.
No comments:
Post a Comment