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Non-Tech : UAN - The variable distribution MLP that could go a long way
UAN 77.00-1.7%Jun 14 4:00 PM EDT

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To: Elroy who wrote (787)6/28/2023 2:32:00 PM
From: Area51  Read Replies (2) of 811
Interesting post by Publius today (I'll copy it just in case I want to refer to it later) and UAN at least briefly back above that 80 support line. Maybe UAN investors will still do well longer term. The 3rd quarter looks tough ($1 distribution in Q3 maybe), but hopefully that may be the bottom as far as UAN distributions.

I've been buying some ALTO as a bit of a hedge to my UAN position (corn is an input into their ethanol so it tends to do well on days like today where corn sells off, looks like rain coming to many of the corn producing areas this weekend).

GRVY, SIMO, NGL all doing well (ok SIMO a little rough today) so you should be happy. I bought a little GRVY at around 60.

Hi guys. Just got back from vacation in a blissfully internet/cellphone free location. So I have a lot of stuff to catch up here, but let me address a few things now.

Pricing for nitrogen fertilizer has clearly bottomed, even though we won't see the results of these prices in earnings and distributions until November. As usual, urea led prices down, but spot pricing bottomed in early April and Q3 pricing (futures) bottomed about three weeks ago and has rebounded strongly since. And the fact that urea has bottomed and rebounded is the best leading indicator for ammonia and UAN.

Ammonia has been in free fall since December, but retail prices are still really high. The summer fill re-set prices were set so retailers can average down their high cost inventory and drain their tanks at prices farmers will pay. These prices are WAY below what ammonia should be selling for given a whole host of factors. For starters, it looks like urea will sell at a higher price per ton than ammonia this summer. Urea has a little over half the nitrogen content than NH3, so you can see how absurd this is. Secondly, Tampa ammonia at $285 for July would indicate a corn belt price in the $450-$490 range, not $300-$375. Finally European and Asian natural gas prices now show a natural gas cost of ammonia of $400 for this summer and $600 for the winter. This excludes carbon taxes and any other expenses. I think that ammonia prices rebound strongly in Q4. My best guess right now is to $450 (corn belt), but obviously there is a lot of room for error here.

UAN is the most difficult, as pricing information has very limited availability. But based on a few things, it looks like summer fill prices will be in the $225-$250 range. Much as I hate to use CME futures indications (with no actual contracts outstanding or trading), they indicate summer cornbelt pricing in the $230 range. Based on urea summer pricing (which actually has quite a bit of trading activity) on a nitrogen equivalent basis, UAN would sell for about $250 for the summer. Finally, last week there was a significant UAN summer fill pricing in Europe (Belgium ports) for July, August and September delivery of $244 per ton. I wouldn't rely completely on any one of these indications, but the fact that all three give similar numbers, gives me a fair bit of confidence.

Going forward for UAN, those CME futures are indicating cornbelt pricing of $260 for Q4 and $300 for the first half of next year. Again, I would not rely on CME UAN futures alone, but in combination with production costs in Europe and Asia (including India), these numbers look pretty reasonable. In addition recent corn prices can certainly support pricing of UAN at $300, so these numbers will not chase off farmers the way $650 UAN did last year.

What does this mean in terms of UAN distributions? Well, I did some quick and dirty numbers, making a few assumptions. For Q3, if pricing is $225/$325, CVR sells only 80% of its production and they pay the expected capital expenses out of Q3 cash flow, but add no reserves, the distribution would be a little over $1 per unit. Now, they could sell a lot more, and they can draw down from the huge reserves from Q1 (and I expect, from Q2 as well), but this is kind of a worst case here.

In Q4, I assumed prices of $250/$450 and sales of all of production plus inventory from Q3, paying all capital expenses and adding reserves of $5, I get a distribution of about $7.

For the first half of 2024 (total) with prices at $300/$520 and reserving $4MM per quarter, I get distributions of about $12 (for the two quarters combined).

So, after Q2's distribution of $9-$12 (depending on reserves taken), I expect distributions of $20 for the following 12 months. Am I promising that? No. It is just what I expect at this time.

Oh, and yes, I still have my full position in CVR and just added another 1,000 units. I see a lot of gloom and doom here while I was gone, but I think that that is just another indication of a bottom.

UAN (the stock) still may sell off in the second half
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