LXU - LSB Industries

[KJP]

Am I missing something here? Just trying to get the cash picture at the end of 2017.

 

The big assumption to management's projections was 95% on-stream rates at all facilities.  It's very hard for any outsider to evaluate the likelihood of them achieving those production levels, particularly given all of their recent problems. 

[heth247]

So they have $147m outstanding preferreds including accruals at the end of 3rd qtr which compounds semi annually. They'll end up with ~$170m of preferreds at the end of 2017. They said that EBITDA can support capex and interest for next year at current prices. That will leave them with $42m cash + $20-25m upcoming sale of non core assets + $7-8m of warranties payback or about $70m at the end of 2017. Am I missing something here? Just trying to get the cash picture at the end of 2017.

 

I thought the preferred and accrued dividend does not compound. Those accrued dividend is basically like a interest-free loan, no?

 

$70MM is more than enough. They still have ABL + $50MM extra to borrow against senior facility. I think they should not have liquidity issue for two years, long enough to wait out the bottom of the cycle and find a buyer.

[valcont]

I thought the preferred and accrued dividend does not compound. Those accrued dividend is basically like a interest-free loan, no?

 

$70MM is more than enough. They still have ABL + $50MM extra to borrow against senior facility. I think they should not have liquidity issue for two years, long enough to wait out the bottom of the cycle and find a buyer.

 

Dividends are compounded according to this section:

The Series E Redeemable Preferred has a 14% annual dividend rate and a participating right in dividends and liquidating distributions

equal to 456,225 shares of common stock, which is equal to 2% of LSB’s outstanding common stock before the transaction was

completed. Generally, the holders of the Series E Redeemable Preferred Shares (the “Series E Holders”) will not have any voting

rights or powers, and consent of the Series E Holders will not be required for taking of any action by LSB.

 

Dividends accrue semi-annually in arrears and are compounded. Dividends are payable only when and if declared by the Board of

Directors (the “Board”).

 

I get they have the cash to survive. But what I'm concerned is that they are break even at full capacity at current prices. So there are two concerns here:

 

1. They reported a long list of operational issues this qtr. Mgmt seemed confident that they have a handle on that. Hate to bring ZINC in every discussion but we know how accurate that assessment was.

 

2. This is a pure pricing play on the commodity and we haven't seen the bottom yet. There will be bankruptcies,consolidation and possibly another round of pricing war. But they claim they are low cost producer since they produce their own ammonia. You guys probably know more about their pricing power. Industrial seems stable but ag is concerning.

 

Another interesting thing I have noticed with these commodity producers is their horrible timing. The typical script goes like this: the commodity prices skyrockets , the producers leverage and start building new supplies,the prices fall , the new plant faces issues . The debt comes due and then they or on the chopping block. Eerily similar to stock investing.

 

 

[heth247]

Dividends are compounded according to this section:

The Series E Redeemable Preferred has a 14% annual dividend rate and a participating right in dividends and liquidating distributions

equal to 456,225 shares of common stock, which is equal to 2% of LSB’s outstanding common stock before the transaction was

completed. Generally, the holders of the Series E Redeemable Preferred Shares (the “Series E Holders”) will not have any voting

rights or powers, and consent of the Series E Holders will not be required for taking of any action by LSB.

 

Dividends accrue semi-annually in arrears and are compounded. Dividends are payable only when and if declared by the Board of

Directors (the “Board”).

 

I get they have the cash to survive. But what I'm concerned is that they are break even at full capacity at current prices. So there are two concerns here:

 

1. They reported a long list of operational issues this qtr. Mgmt seemed confident that they have a handle on that. Hate to bring ZINC in every discussion but we know how accurate that assessment was.

 

2. This is a pure pricing play on the commodity and we haven't seen the bottom yet. There will be bankruptcies,consolidation and possibly another round of pricing war. But they claim they are low cost producer since they produce their own ammonia. You guys probably know more about their pricing power. Industrial seems stable but ag is concerning.

 

Another interesting thing I have noticed with these commodity producers is their horrible timing. The typical script goes like this: the commodity prices skyrockets , the producers leverage and start building new supplies,the prices fall , the new plant faces issues . The debt comes due and then they or on the chopping block. Eerily similar to stock investing.

 

Thanks for point that out.  Yes, this one definitely has some hairs and is not worth of a big bet like FELP.  ;)

[heth247]

Stock price has rallied from $5 to $8+ now since the 3Q CC. If I remember correctly, the tour of the EDC facility is today Nov 15th.  Was anybody there? Hopefully you must have been impressed.  ;)  Would appreciate it if you could share your experience.  Thanks.

[mateo999]

Stock price has rallied from $5 to $8+ now since the 3Q CC. If I remember correctly, the tour of the EDC facility is today Nov 15th.  Was anybody there? Hopefully you must have been impressed.  ;)  Would appreciate it if you could share your experience.  Thanks.

 

I'm swamped today but will do my best to update the board tomorrow or friday.  Long story short, I stick with my call to avoid the equity.

[heth247]

Thanks, look forward to your update.

 

 

[mateo999]

Sorry for bad formatting (open bullets are sub-bullets).  Here are some of my notes/thoughts:

 

• Bottom Line: after the recent run up, I continue to stay on the sidelines of the equity.

• Well attended.  I’d guess representatives from about 12 buyside firms were in attendance, as were analysts from Feltl and Avondale, and a few from the HY sell side.  CEO, CFO, John Diesch, EDC and Cherokee mgmt from LXU side

o       Certainly some equity holders in the room, but also a good turnout of bond holders

o       Much better attended than on my visit earlier in the year.

• I think the tone from management is that Q3 was a real disappointment, and that things are on the upswing operationally.

o       But that said, we’ve heard this all before.

o       Going over some of the bad welds, broken flux capacitors, cracking metals, etc etc etc… you realize just how shitty a job LSB’s contractors (Weatherly) and subcontractors did.  The fact that the only recourse is warranty reimbursement is frustrating.

• I asked Dan: “you guys are saying that you have liquidity for the next few years, even if pricing doesn’t improve from here…. Why sell at the bottom?  Why now?”

o     Dan’s response was basically that he’s laser focused on the time erosion dynamic inherent in the 14% PIK on the preferred.  So my sense is he’s a motivated seller.

o     There’s no chance Security Benefit converts its preferred into equity.  They love being in line ahead of equity and that their claim is growing.

• There was a broad-based pessimistic buzz among investors around the willingness/ability (or lack thereof) around potential buyers.  Questions around whether CVR would want to issue units to acquire LXU if its own unit price is beaten up, and it has leverage.  Can’t use much debt to acquire LXU because the business isn’t generating real cash flow.  CF’s recent comments seem to indicate that they’re not looking to stretch their balance sheet.  Koch is likely interested at a price.  But if they’re the only ones serious about bidding, that doesn’t bode well for the equity.  Speaking to one HY analyst: “Value is what someone’s willing to pay.  Replacement value doesn’t hold water when no one would re-build the plant at today’s economics and with the real cost (not the original estimate)”

o     For those long the equity… and this is a real (not rhetorical question)… what do you think the equity is worth in a scenario where LSB concludes its strategic review without a deal?

• John Diesch is impressive.  He came in in August, and he’s a fixer of troubled assets.  30 years of fixing troubled N assets.

• Company insures its assets for an undisclosed amount, but Mark said it has a “B” in front of it.

• Mgmt seemed confident on closing on the $20-25mm in asset sales in short order.

 

[heth247]

Thanks for the summary, Mateo999.  My biggest concern is their facility. If they have another one or two unexpected downtime and repair, then they are going to run out of money pretty quickly. If a shitty job is what they paid for almost $1bn, then it will be discounted by the buyer, in addition to the difficult environment. The upside of the equity from here will be hard to gauge.

 

 

 

 

[ValueMaven]

I still like this idea…Everyone is trying to nail-down a specific valuation, however given the levered nature of the capital structure – good luck with that.  There is a broader ‘re-flation’ trade going on in the market right now.  Even a marginal improvement in ammonia prices would be very beneficial to the cause.  Operationally we are finally, FINALLY on the upswing here…and I remain very impressed with Greenwell’s handling of the situation.  I continue to believe the name works higher overtime – no insight regarding a possible buyout however…Koch/CF makes the most sense.  It remains one of the more unique special situations that I own...

 

Sincerely,

VM

 

[ValueMaven]

All,

 

I trimmed half of this position yesterday...letting the other half run for now.  Was adding all the way down from $7 to below $5, so the huge run-up was most welcome.  Unclear how this still plays out...I still think its very interesting, however with an EV of over $1bn, I do question who would want to buy this? 

 

Sincerely,

ValueMaven

[igor]

Accumulated preferreds that are not redeemed after August 2, 2019 may be called by their holders. Prior to August 2, 2019 LSB has an option to redeem preferreds by issuing equity.

 

Preferreds and dividends are going to be ~200m by the end of 2018. They may or may not have enough cash to redeem preferreds by then. It's unfortunate if the equity gets diluted that way.

 

Do you folks know whether covenants exist that require them to pay down Senior Secured Notes while redeeming preferreds? Perhaps it's due to these covenants that the recent consent solicitation was required. I fear that they are not going to be able to pay down 200m of preferreds and, say, 200m of Senior Secured Notes (if 1:1 was required).

 

If such covenants do exist, are the current shareholders counting on amending the indenture that governs the Notes?

[ValueMaven]

Those are very fair and valid points, of which I have no good answer.

 

Sincerely,

VM

[wjsco]

I still like this idea…Everyone is trying to nail-down a specific valuation, however given the levered nature of the capital structure – good luck with that.  There is a broader ‘re-flation’ trade going on in the market right now.  Even a marginal improvement in ammonia prices would be very beneficial to the cause.  Operationally we are finally, FINALLY on the upswing here…and I remain very impressed with Greenwell’s handling of the situation.  I continue to believe the name works higher overtime – no insight regarding a possible buyout however…Koch/CF makes the most sense.  It remains one of the more unique special situations that I own...

 

Sincerely,

VM

 

fertilizer prices are on the upswing. anthracite and thermal coal prices in china have skyrocketed. only issue is that CF built so many plants domestically. but, the cost structure of the marginal producers is growing, which means shutdowns and/or price increases, b/c its a global market. at least for urea/uan...should apply to ammonia, as well. and nat gas is up in the high 3s. cvr partners could be an intersting play...alot of their production is pet coke. which means they have alot of operating leverage if US nat-gas based producers COGS and chinese coal-based producers COGS (and shipping costs) swing up, which theyre doin'.

[mateo999]

Quoting myself here:

 

For those long the equity… and this is a real (not rhetorical question)… what do you think the equity is worth in a scenario where LSB concludes its strategic review without a deal?

 

Looks like the strategic review concluded without a deal.  And the quarter/outlook wasn't so pretty.  Anyone a potential buyer tomorrow?