CF Industries -- Good News and Bad News

February 20, 2013 06:13 AM


CF Industries reported strong fourth quarter earnings for 2012, but EBITA was $35.4 million less than the same period last year. Net sales for the quarter were also down, shedding 14% compared to Q4 2011. Adjusted sales were down from year-ago levels at 1.6 billion -- a 4% decline.

Despite lagging revenue, net earnings attributable to common stockholders was up $6.61 over Q4 last year on $6.1 billion in net sales at a record pace of 15.0 million tons by volume.

“With a strong ammonia market, favorable natural gas costs and excellent execution, we again achieved record earnings for a quarter,” said Stephen R. Wilson, chairman and chief executive officer, CF Industries Holdings, Inc. “Economics for North American corn farmers are exceptionally attractive, and this led to robust demand for nitrogen products, especially ammonia. As the leading domestic producer of nitrogen plant nutrients, CF Industries has responded to this demand, meeting our customers’ needs and delivering strong results for our shareholders.”

CF's realized cost for natural gas during the quarter tell the story of widening margins on increasing supplies allowing production to clip along near the high end of capacity. Natural gas cost averaged $3.61 per MMBtu in the fourth quarter of 2012, compared to $4.06 per MMBtu during the fourth quarter of 2011.

While earnings attributable to shareholders is up and production margins are widening on soft natural gas -- 2013 nattie hedges are in place 'well below $4.00' --, CF stock took a pounding this morning and has dropped $10.10 since the open today. The fall is in response to lackluster revenue during Q4 2012 and a foggy nutrient outlook from CF for the second half of 2013.

“Agricultural market conditions are as attractive today as at any time in recent history, and give us confidence in the demand outlook for our products,” said Wilson. “With the exceptional advantages provided by our North American assets, we are well positioned to serve that demand. Our investments to expand our production capacity will strengthen that position, and enable us to generate long-term shareholder value.”

Robust expected new-crop revenue will keep CF producing N&P near capacity in the short-term and more planted acres to corn means higher Nitrogen demand. With natural gas locked in below $4.00 until April , expect production to continue at its current pace. The added supply should help keep a lid on N&P pricing, but uncertainty in the summer markets has also put a lid on CF's upside potential for the time being.


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