what needs to be better considered and evaluated is to why there's been an over 330% rise of UAN's price in less than 12 months.
That, in turn, could certainly have something to do with the 1:10 Reverse Split which took place RIGHT AT THE START of the above mentioned rise in its price.
OK, a little UAN MLP history. All numbers post 1 for 10 reverse split. "UAN" is both the ticker of the MLP and also a type of fertilizer that UAN the MLP sells.
When fertilizer prices were last at elevated prices (2010-13) UAN traded around $200 per unit and distributed $16-$22 per year.
Fertilizer prices declined from 2012 to about 2015. UAN stopped paying distributions (because fertilizer prices were too low to generate free cash flow) in about 2015 (??) and the unit value went to about $35. The unit value sat at about $35 from 2015 to 2019, and other than one nice season when UAN paid $1.80 over four quarters, the distribution went to zero.
Then when the pandemic hit, UAN went to about $8 presumably in expectation that it might go bankrupt.
That was 80 cents pre-split, and the exchange UAN trades on requires that the company maintain a share price above $1.00 or face delisting. It did a reverse split to get the share price above $1.00. So 80 cent share price became an $8 share price post reverse split.
As far as I know the reverse split has nothing to do with UAN 34% stakeholder Carl Icahn. He's an occassionally discussed boogie man who allegedly might do bad things for UAN unit holders. But you'll notice that whenever the person telling the "Icann is a boogie man for UAN" story is pressed for details, like, "how might Icahn harm UAN shareholders??", the explanation is never forthcoming.
Why is UAN up so much in the past year?
This answer has two explanations in my opinion. First, the unit price drop for UAN from about $35 to $8 when the pandemic began was unjustified. UAN never came close to going bust. The CEO bought shares at $20 on the way down, he didn't see the bankruptcy risk feared by investors. So.......in the pandemic panic UAN dipped from about $35 to $8, like many debt laden stocks, but then it DIDN'T bounce back to fair value (about $35). It sat down there at $8, and forced the reverse split.
So in my view the recovery of UAN's unit price from about $8 to about $34 is just normal trading IF the fertilizer industry stayed in the dumps. UAN was about $35 from 2015-19 when the fertilizer industry was in the dumps, so during the 2020 pandemic it should have been $35, but it had dipped WAAAAY too low to $8.
Then you get the real world fact that the price of fertilizers has ROCKETED upward from Jan 2021 to present. That fertilizer price jump explains the unit price move from about $35 to it's current level of about
$75.
In plain English, the big jump in UAN's unit price is explained by 1. the units being TOO LOW due to pandemic induced fears which did not materialize, and 2. the improvement in the fertilizer industry.
I'm fairly confident the units are going over $100 before May 2022, and from then out it depends on what happens to the fertilizer industry (prices). There are LOADS of indicators that fertilizer prices will stay elevated for an extended period, and the longer fertilizer prices stay elevated the more UAN's distribution potential will become transparent, and as UAN begins paying VERY large distributions (starting in Q1 2022 at the latest) yield chasers won't be able to resist the units.
UAN is about $78. It's not that hard to see UAN paying $25 total over the next four quarters (while simultaneously paying down $1.40 per share in debt each quarter) so the forward yield (if you believe my numbers) is above 30%. The debt paydown should complete about Q3 2022, and then there's an extra $1.40 per Q for distributions after that. It's a cash machine with fertilizer prices up here. Who can resist that?
For reference, in the "bad years" 2015-19 when fertilizer prices were low and UAN paid no distributions UAN fertilizer averaged about $160/ton. Today UAN fertilizer is $590/ton.
In Q3 2021 UAN the MLP sold UAN the fertilizer for $305/ton, paid down $1.40 in debt, and paid $2.97 in quarterly distributions. They have indicated they are selling H1 2022 UAN fertilizer at market prices (means $590/ton or more), so, well, the distribution in Q1 2022 is going up..... a lot. The CEO again bought units at $76 a few weeks ago. |
