I think one can see that quite clearly in what has transpired with UAN over recent years.
Yes, over recent years the price of fertilizer dipped a good bit, and UAN didn't make any money for distributions (not dividends, distributions, it is an MLP which pays quarterly based on their internal calculation of distributable cash flows (not net income)).
From 2012 to 2015 the price of fertilizer was higher, and UAN make a good bit of money. My understanding is that the price of fertilizer was so nice in those years, and that lots of fertilizer makers expanded production capacity, increasing fertilizer supply, and pushing the price lower.
In theory, fertilizer demand should increase with population growth (you know, food), and I had thought that the fertilizer demand had finally absorbed the excess supply of 2016-2018, and we were on the road to higher fertilizer prices and more stable distributions in 2020. Five nice distributions were paid from Q4 2018 to Q3 2019.
But the fertilizer price dipped again, and it now remains unclear in which direction the price of fertilizer will go.
At current prices, UAN can make enough operating cash flow to pay for the input materials (COGS), pay the interest on its debt, and so it doesn't seem to have much of a going concern problem today. But again, depending on where the price of fertilizer goes in the future, that can change in both good and bad directions.
Price of fertilizer go down, UAN may have solvency trouble. Price of fertilizer go up, UAN make lots of money and pay big distribution.
It's that simple. |
