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LXU - LSB Industries

TonyG

By TonyG
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heth247 Newbie

heth247

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Thanks for your insight, CCap.

 

I spent some time to read CF Industry's most recent earning conference call transcript and got similar idea. Basically their CEO thinks the current ammonia price is below the cash cost of most of the foreign producers. It is a matter of time of when the Chinese producer come to rationalize. He think the price will recover by 2018.  Keep in mind that US still imports about 30%, so even with more domestic supply coming online, it probably will just offset the supply from the imports without further depression the price significantly.

 

I agree that the key is the spread between natgas and ammonia prices for LXU. I think in their presentation they mentioned that 50% of their products is sold at cost-plus prices, so that part should be immune?  Also, their 10Q mentioned that they have hedged 10 mmbtu natgas through June 2018 at $2.97.  Do you know how much is this in terms of percentage of their total natgas consumption?

 

They mentioned that their normalized capex will be $40mm~50mm in 2017. And if they don't do any refi, by my estimation that their interest expense (senior notes + prefered) should be about $45mm a year.  If they issue new debt to take out the prefered, they probably still have to pay $40mm a year in interest (cash) expense.  That does not really leaves a lot of free cash flow if they ends up with $100mm EBITDA (assuming ammonia  prices at 250 through 2017). what are your thoughts?

 

thanks.

 

 

Increasing ammonia prices should be a good thing now that LXU is making their own ammonia.  Now, LXU is a net seller of ammonia.

 

Natural gas prices are not the key thing to look at.  The key factor is the spread between natural gas and their products (fertilizer and ammonia).  If you look at refiners, oil goes in, and gasoline comes out.  The refiner makes money on the spread.  It is the same thing here.  Nat gas goes in and fertilizer/ammonia comes out.

 

What that spread looks like is a little harder to determine.  The US nat gas based facilities are low-cost producers.  Chinese fertilizer is higher cost and is made using coal.  Therefore, there is a tug of war between high-cost Chinese production based on coal and Chinese excess capacity that refuses to die.  Also, there is additional US capacity coming online. 

 

LXU has claimed that urea is not interchangeable with ammonium nitrate.  I think this is likely BS.  This plays into the spread evaluation as well.

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heth247 Newbie

heth247

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Avondale Partners I think has the best assessment of what is going on here...Also seems to be fairly close with management.  Is it typical to post research sell-side reports here for others to view?!

 

Sincerely,

VM

 

I don't mind reading the report.  ;) I'd appreciate it if you can post it. Thanks.

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mateo999 Newbie

mateo999

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I know it's not application season or anything, but note that Tampa ammonia is now at 210, levels not seen since 2009.    The gross margin per ton on the incremental non-hedged ton of ammonia is something like $25... down from $250 at the end of last year.  There's no way the company, at today's spreads, can generate anywhere close to $100mm in EBITDA.  At today's levels they're FCF negative.  So buying shares today is just a form of buying into mean reversion.  Not a universally bad idea (as the best cure for low prices is low prices), just not something I think is compelling.

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heth247 Newbie

heth247

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I know it's not application season or anything, but note that Tampa ammonia is now at 210, levels not seen since 2009.    The gross margin per ton on the incremental non-hedged ton of ammonia is something like $25... down from $250 at the end of last year.  There's no way the company, at today's spreads, can generate anywhere close to $100mm in EBITDA.  At today's levels they're FCF negative.  So buying shares today is just a form of buying into mean reversion.  Not a universally bad idea (as the best cure for low prices is low prices), just not something I think is compelling.

 

Mateo99,

 

Do you think the $210 price is sustainable?  Let's assume it will stay this low for another year. Do you think LXU will be able to survive it?  I think they probably will have to suspend preferred dividend and do minimal capex, which probably will let them be free cash flow break-even (or just slightly negative). What are your thoughts in terms of other options for them to survive?

 

Thanks.

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mateo999 Newbie

mateo999

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I know it's not application season or anything, but note that Tampa ammonia is now at 210, levels not seen since 2009.    The gross margin per ton on the incremental non-hedged ton of ammonia is something like $25... down from $250 at the end of last year.  There's no way the company, at today's spreads, can generate anywhere close to $100mm in EBITDA.  At today's levels they're FCF negative.  So buying shares today is just a form of buying into mean reversion.  Not a universally bad idea (as the best cure for low prices is low prices), just not something I think is compelling.

 

Mateo99,

 

Do you think the $210 price is sustainable?  Let's assume it will stay this low for another year. Do you think LXU will be able to survive it?  I think they probably will have to suspend preferred dividend and do minimal capex, which probably will let them be free cash flow break-even (or just slightly negative). What are your thoughts in terms of other options for them to survive?

 

Thanks.

 

Not sure I'm an expert, but gun to my head, not sustainable.  But the weak renminbi is keeping coal fired Chinese supply online longer than most had expected (read last few CF conference call transcripts).  There's also new NA ammonia supply that hasn't yet come online (read Mark's comments on last LXU call about requiring some time for the market to absorb).

 

I think they'll be ok on cash.  Pro forma I have them at around $50mm so that's a decent amount of runway. 

 

If the spread is still hanging out around these levels by the time the company reports in November, I'd have to imagine there'll be a better entry point (i.e. the day of earnings).

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heth247 Newbie

heth247

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I think they'll be ok on cash.  Pro forma I have them at around $50mm so that's a decent amount of runway. 

 

What do you mean by this? Do you mean that they will be free cash flow negative of -$50MM a year assuming $210 ammonia price?

 

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mateo999 Newbie

mateo999

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What do you mean by this? Do you mean that they will be free cash flow negative of -$50MM a year assuming $210 ammonia price?

 

No, not necessarily FCF negative to the tune of $50mm over the next 12 months.  Put it this way, they've got $75mm in fixed cash needs between capex and interest.  Just extrapolate the EBITDA generating ability from the matrix they last put out in the May slide deck.  It's fairly linear in the way it's set up.  So at $3 gas and $210 ammonia, maybe they're at $80mm in pre-overhead EBITDA.  Net out $20 or so for O/H gets you to $60mm.  So say a $15mm negative FCF if things stay exactly the same, which I'm 99% certain they won't.

 

 

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heth247 Newbie

heth247

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No, not necessarily FCF negative to the tune of $50mm over the next 12 months.  Put it this way, they've got $75mm in fixed cash needs between capex and interest.  Just extrapolate the EBITDA generating ability from the matrix they last put out in the May slide deck.  It's fairly linear in the way it's set up.  So at $3 gas and $210 ammonia, maybe they're at $80mm in pre-overhead EBITDA.  Net out $20 or so for O/H gets you to $60mm.  So say a $15mm negative FCF if things stay exactly the same, which I'm 99% certain they won't.

 

That is inline with what my estimation is. Basically I am trying to figure out how much downside this investment has at a price of $8, is there a chance of permanent capital loss or not. Other than the commodity price, what else do you think may go wrong and against the company?  It seems to me that, after the sale of the climate control business, and the completion of the EDC, it will be really hard to kill this company over the next couple of years. It is just a matter of waiting for the cycle to turn.

 

 

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heth247 Newbie

heth247

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Thanks for sharing.  Why do you think their $115 EBITDA estimation for 2017 is "quite" aggressive?  I think last time your estimation is $85MM based on $210 ammonia price. An increase of $20MM in EBITDA basically translate to $50 price increase of ammonia price to $260. Is that too optimistic? 

 

Of course, there is the wild card which is the unexpected downtime.

 

Would you mind sharing that? 

 

Sincerely,

VM

 

https://www.dropbox.com/s/beugi9gf5d4qggb/NEWS_456350986_OEMPFU3PWT1C.E3ld1R.pdf?dl=0

 

Just to be clear, I don't think anyone in the world is actually making institutional investment decisions based on Feltl.  Even the company description is wholly inaccurate.

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ValueMaven Newbie

ValueMaven

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I dont think so...but I've been dead wrong on this name ever since they sold the HVAC business.  Commodities are very very tricky, just look at the price of coal YTD - who would have thought that?  Anyway, I still feel like management is doing as good of a job as they can given the current situation.  The recent downtime, particularly during such a weak pricing environment hurt the story in the short-term...they were able to meet all client demands - mostly selling from direct inventory... 

 

Again, who knows with LXU.  I've been a bull on the name, and I am down about 30% (after being up 50% when it hit over $15).  I still believe the operational turnaround, and almost $1bb in CAPEX at EDC, coupled with the refi of the cap structure, and improved ammonia prices drives this name higher.  It's a 2017 story...we just have to make it there first.  Other opinions are most welcome

 

Sincerely,

ValueMaven 

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