A Member of Pat McKeough’s Inner Circle recently asked for his advice on CF Industries Holding, a company with the world’s largest and most-integrated ammonia and nitrogen production and distribution network.
Pat likes the company’s record of rising revenues at low cost despite a setback in the most recent quarter. He also likes its position as the largest nitrogen fertilizer producer in North America and its diversity beyond agricultural customers thanks to a new acquisition.
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CF Industries Holding Inc. (Symbol CF on New York; www.cfindustries.com) produces the chemical compound ammonia as a fertilizer as well as other fertilizer products. It has the world’s largest and most-integrated ammonia and nitrogen production and distribution network.
The company produces 10 million tons of ammonia annually, with 3.2 million tons of storage capacity. It operates 23 distribution facilities in the U.S. and Western Canada.
On February 27, 2023, CF Industries announced that it had entered into an agreement with South Korea-based Lotte Chemical to jointly assess the development of a start-up clean ammonia production facility in the U.S. In addition, they aim to quantify future clean ammonia demand in South Korea.
To be considered clean, or green, ammonia, greenhouse gases emitted during the production process must be cut by 90%.
The Lotte partnership is another step by CF Industries to substantially increase its volume of clean ammonia within the next few years. As well, the company is constructing commercial-scale green ammonia capacity at its Donaldsonville Complex. That should let it generate up to 20,000 tons of green ammonia production starting next year.
The company has also signed a memorandum of understanding with Japan-based energy generator JERA Co., regarding the supply of up to 500,000 metric tons of clean ammonia starting in 2027.
Inner Circle: This latest acquisition will increase CF Industries Holding’s reach beyond agriculture
Meanwhile, on March 20, 2023, CF Industries announced it would acquire the Waggaman ammonia production facility from Incitec Pivot Limited. The Louisiana plant can produce 880,000 tons of ammonia annually.
CF Industries will pay $1.68 billion for the operation. About $1.25 billion of that will be in cash. The remainder will come in CF Industries’ commitment to supply 200,000 tons of ammonia per year to a subsidiary of Incitec Pivot.
The Waggaman facility opened in October 2016 and is about 100 kilometres from the company’s Donaldson complex in Louisiana. It currently supplies three customers with ammonia. Its gross profit margin per ton is about the same as CF Industries’ existing facilities. Still, CF Industries expects to increase the efficiency of the plant. Currently, its own plants have production efficiency rates that are 10% higher than its North American rivals.
From 2018 to 2019, CF Industries’ revenue rose 3.6%, from $4.43 billion to $4.59 billion. In 2020, revenue fell 10.2% to $4.12 billion as ammonia and nitrogen prices dropped because of increased global supply. At the same time, the pandemic disrupted customer demand. Revenue then jumped 58.5% in 2021 to $6.53 billion as the pandemic eased. In 2022, revenue climbed further, rising 71.1% to $11.19 billion.
From 2018 to 2019, earnings rose 70.0%, from $290.0 million, or $1.24 a share, to $493.0 million, or $2.23 a share. In 2020, earnings fell along with revenue, down 35.7% to $317.0 million, or $1.47 a share. Earnings jumped 264.9% in 2021, to $1.16 billion, or $5.35 a share. In 2022, they climbed 189.3% to $3.35 billion, or $16.38 a share.
In the three months ended March 31, 2023, CF Industries’ revenue decreased 29.8%, to $2.01 billion from $2.87 billion a year earlier. Global nitrogen prices fell during the first quarter of 2023 as higher global operating rates increased supply.
In the quarter, the company’s earnings dropped 36.6%, to $560.0 million from $883.0 million. On a per-share basis, its earnings fell 32.4%, to $2.86 from $4.23, on fewer shares outstanding.
The Waggaman acquisition should be a good fit for CF Industries. The purchase also provides the company with product diversification beyond agricultural markets. That’s because around 75% of ammonia produced at the Waggaman facility is used in industrial applications such as the production of refrigerants and pesticides.
Going forward, the company’s outlook is positive. It benefits from its position as the largest nitrogen fertilizer producer in North America and the world’s largest ammonia producer. It’s also one of the lowest-cost producers globally.
Recommendation in Pat’s Inner Circle: CF Industries Holding Inc. is a buy.
