I'm the one who guessed $7.00 in distributions for 2021 was possible if fertilizer prices remain where they are now for the entire year.
As I said, the calculation was simplistic. They paid $4.00 in a year when UAN fertilizer was about $200/ton and ammonia was about $390/ton
The latest news indicates UAN fertilizer is about $260/ton and ammonia $525/ton.
With fertilizer prices that much higher, and leverage in the model as once expenses are covered ALL EBITDA just flows to the distribution, $7.00 per year sounded reasonable.....but I didn't do any modeling.
So now, lets do some modeling!
Using the presentation format UAN uses each quarter......
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So if I had to work it out via the financials............
UAN is going to produce roughly the same volume of UAN fertilizer and ammonia each year. The try to improve production efficiencies like any manufacturing capacity, and they have planned and unplanned downtime for maintenance, weather issues, you name it. But its fair to say the amount of fertilizer produced is going to be roughly similar each year.
The distribution per year is going to be roughly
Adjusted EBITDA
minus
Interest Expense (~$60m per year)
minus
Maintenance Capital Spending (??)
$12 million in 2018
$15 million in 2019
~$12m in 2020
minus
Cost of Turnaround (Turnaround = shut down the plant for 3-6 weeks to fix stuff and improve production bottlenecks, it happens to one of the two plants every other year, but they skipped it in 2020 due to Covid)
2018 Turnaround expense = $6.5m
2019 Turnaround expense = $10m
2020 Turnaround expense = zero
minus / plus
reserves taken / reserves released
= CASH FOR DISTRIBUTION
So......for the full year, if we want to get that number up to $7.00, with ~11 million shares we want CASH FOR DISTRIBUTION to be $77m
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Reconciliation of EBITDA to Available Cash for Distribution
The next question is what level of annual EBITDA produces $77m CASH FOR DISTRIBUTION?
EBITDA IS OUR Fudge number
EBITDA - ($60m debt service + $15m Capital Spending + $10m Turnaround expense) = $77m
EBITDA = Fudge number - $85m = $77m
EBITDA = $162m
EBITDA = ~$40m per quarter (close enough).
SOOOOOOOOOOOO the question becomes what level of quarterly revenues produces $40m of quarterly EBITDA?
Reconciliation of Net (Loss) Income to EBITDA
In their EBITDA calculation, you take net loss, and ADD BACK interest expense ($15m) and depreciation ($18m). So.....to get to $40m in EBITDA per quarter we only need to get net income to positive $7 million per quarter.
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What level of quarterly revenues produces $7m net income?
This is a bit more difficult, but lets assume DIRECT COSTS are fixed and don't float with the fertilizer price. Maybe wrong, but I don't know how DIRECT COSTS are fluctuating so I'm just going to plug in the most recently reported DIRECT COSTS (Q3 2020, $38m) and same with depreciation, to get the quarterly estimate for DIRECT COSTS and Depreciation
Revenues (our fudge factor)
minus
Cost of Materials (natural gas or pet coke) (25% of sales)
Direct Costs ($38.5m - Q3 2020 number)
Depreciation ($18m - Q3 2020 number)
SG&A = $4.5m (Q3 2020 number)
= Operating Profit
minus
Interest Expense = $15m
= Net Income of $7 million
To simplify, Revenues * 75% - ($38.5 + $18 + $4.5 + $15) = $7
Revenues * 75% - ($76) = $7
Revenues * 75% = $83m
Revenues per Q = $110m per quarter, $7m net income per quarter, $40m EBITDA per quarter, and UAN is spitting out $1.75 per quarter, or $7.00 per year.
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Dude!
With ammonia prices around $525, UAN is going to have revenues WAY above $110m per quarter. In Q2 2020 ammonia was $360m and UAN fertilizer was $165m, and UAN delivered revenues of $105m.
I must be doing something wrong, but this is what MY math says. It says UAN is going to gush cash in 2021 if fertilizer prices stay where they are.
Where could I be wrong?
I don't know. I'm all ears if anyone can explain to me why UAN is sitting BELOW the share price it was at when it paid zero distributions, I would like to read the reason.
UAN could easily pay a lot more than $7.00 in 2021 if my understanding of it's fixed costs are correct. Cost of Materials probably goes up with revenues, and hopefully stays at the 25% level, but I think DIRECT COSTS do not increase with revenues since the plants are always operating as close to 100% capacity as possible. DIRECT COSTS don't know what the revenue number is, they are fixed and stink when fertilizer prices are low, and when fertilizer prices are high, they don't rise ..... I think. |
