LXU - LSB Industries

[heth247]

VM,

 

Do you think they can still refi early next year if the ammonia price does not improve and they are likely to be FCF negative?

 

thanks,

 

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

[heth247]

So far the bonds haven't really sold off that much, trading around 97/99 down from 101/102 prior to the last production update. The credit market (for now) believes they have enough time to wait for a recovery in fertilizer prices.

 

The senior notes are pretty safe, especially after the recent injection of proceeds from the sale of climate control business. The equity will be very volatile in terms of ebitda change, given the leverage.

[heth247]

The most recent weekly update of ammonia prices indicate that it is at $210 for the week ending 14th, unchanged from last week:

http://www.mosaicco.com/resources/3185.htm

 

At end of Q2, they have $22M cash on hand (per 2Q report). The sale of climate control business give them $48MM net cash + $38 ABL facility available, per their presentation slide in Sept.  Note that this is net the payment of remaining EDC expansion ($30MM) and 2H 2016 Capex ($30MM) already. However, the recent unplanned maintenance and repair will cost them ~$25MM. Therefore, I estimate that their total liquidity is  $22+48+38 -25 = 83MM, give or take.

 

Even assuming ammonia prices hover at $210, and assuming that they are FCF negative of $30MM a year, that should give them at least two years to wait out for the recovery. Have I missed anything? Thanks.

 

[ValueMaven]

Dear heth247,

 

Thanks for the input.  Very interesting analysis actually.  I actually added to my position today in the equity.  Yes, I think management is planning on raising another $20mm to $30mm by selling ‘stuff’ (literally their words), such as warehouses, gas storage units and other items on the balance-sheet.  A lot of unknowns there, but its worth thinking about.  Also, management is trying to lower SG&A costs by $5mm a year annually as well. 

 

[heth247]

Dear heth247,

 

Thanks for the input.  Very interesting analysis actually.  I actually added to my position today in the equity.  Yes, I think management is planning on raising another $20mm to $30mm by selling ‘stuff’ (literally their words), such as warehouses, gas storage units and other items on the balance-sheet.  A lot of unknowns there, but its worth thinking about.  Also, management is trying to lower SG&A costs by $5mm a year annually as well.

 

Thanks, VM. I have bought a half position at $7 and is looking to add more too. It seems that there is a big seller trying to get out. Stock is down 6% every day. I don't know if the big seller is done yet.

[mateo999]

Dear heth247,

 

Thanks for the input.  Very interesting analysis actually.  I actually added to my position today in the equity.  Yes, I think management is planning on raising another $20mm to $30mm by selling ‘stuff’ (literally their words), such as warehouses, gas storage units and other items on the balance-sheet.  A lot of unknowns there, but its worth thinking about.  Also, management is trying to lower SG&A costs by $5mm a year annually as well.

 

Thanks, VM. I have bought a half position at $7 and is looking to add more too. It seems that there is a big seller trying to get out. Stock is down 6% every day. I don't know if the big seller is done yet.

 

This is obviously very levered to a recovering ammonia price.  And in that sense, there's a very good upside downside ratio.  But from a margin of safety standpoint, what if lightning strikes EDC again?  That pref is accruing at 14%.  7x levered through the pref (at least in this environment).

 

If pricing gets better, this will work very well.  But most analysts covering the other N names out there aren't super optimistic about 2017 from a pricing perspective.  I just think the equity-- as it should be-- is going to be extremely volatile until we get some better (or worse) pricing.

[heth247]

 

This is obviously very levered to a recovering ammonia price.  And in that sense, there's a very good upside downside ratio.  But from a margin of safety standpoint, what if lightning strikes EDC again?  That pref is accruing at 14%.  7x levered through the pref (at least in this environment).

 

If pricing gets better, this will work very well.  But most analysts covering the other N names out there aren't super optimistic about 2017 from a pricing perspective.  I just think the equity-- as it should be-- is going to be extremely volatile until we get some better (or worse) pricing.

 

I agree with your view, Mateo999. That's why I was trying to figure out their liquidity and see how much time they have to wait out for the recovery. Do you agree with my estimation that they have about two years of runoff time?

[mateo999]

Shares hitting low 5s... any updated thoughts on the board?  Disclosure: no pos.  GLTA.

[heth247]

Shares hitting low 5s... any updated thoughts on the board?  Disclosure: no pos.  GLTA.

 

I nibbled a bit today. The ammonia price is still in the $190~$210 range, correct?

[mateo999]

Shares hitting low 5s... any updated thoughts on the board?  Disclosure: no pos.  GLTA.

 

I nibbled a bit today. The ammonia price is still in the $190~$210 range, correct?

 

That's what bloomberg quotes for Tampa (their source is updated weekly and is date stamped 10/28).  I have them doing about $25 gross margin dollars per unhedged ton of ammonia.  Given what they said about new supply taking a while to absorb, I'm nervous.  The play might be in the bonds with a gentle sprinkling of equity.  Anyone going down to EDC in November?

[PhatKing]

So Mateo,Heth, Value maven:

 

Thanks for a spirited discussion. So the question I have is: Should we not be concerned that the price of ammonia can remain irrational, longer than LXU can remain profitable/solvent ?

 

Also, EDC meeting is limited to Analysts and Institutional Investors, from what I understand. So people like myself cannot attend, even though I want to do so.

Thanks

 

 

[mateo999]

So Mateo,Heth, Value maven:

 

Thanks for a spirited discussion. So the question I have is: Should we not be concerned that the price of ammonia can remain irrational, longer than LXU can remain profitable/solvent ?

 

Also, EDC meeting is limited to Analysts and Institutional Investors, from what I understand. So people like myself cannot attend, even though I want to do so.

Thanks

 

Happy to share my notes upon my return.

[heth247]

Ammonia price seems to stabilize at $190~210 for now, which is very likely to be the bottom. By my estimation earlier, I think LXU has the liquidity to survive for two years at this price (assume that they suspend the Preferred dividend). The question is do you think the Ammonia price can keep this low for more than two years? I think no. But I could be wrong. So size your bet is the key.

 

So Mateo,Heth, Value maven:

 

Thanks for a spirited discussion. So the question I have is: Should we not be concerned that the price of ammonia can remain irrational, longer than LXU can remain profitable/solvent ?

 

Also, EDC meeting is limited to Analysts and Institutional Investors, from what I understand. So people like myself cannot attend, even though I want to do so.

Thanks

[valcont]

No horse in this race but CF posted some bleak results last night. They don't see a recovery in ammonia prices in 2017 either. Maybe its all priced in this stock already.

[mateo999]

No horse in this race but CF posted some bleak results last night. They don't see a recovery in ammonia prices in 2017 either. Maybe its all priced in this stock already.

 

I haven't a clue why LXU is up today.  I love CF's commentary around cost per ton of capacity.  "Because CHS overpaid, our average cost is effectively 1050/ton."  I'm sure that makes CHS feel warm and fuzzy.

[valcont]

Oh Oh that explains the price move.

 

http://www.businesswire.com/news/home/20161103006234/en/LSB-Industries-Exploring-Strategic-Alternatives

 

The question is who will buy them out?

[mateo999]

Oh Oh that explains the price move.

 

http://www.businesswire.com/news/home/20161103006234/en/LSB-Industries-Exploring-Strategic-Alternatives

 

The question is who will buy them out?

 

my guess is koch

[heth247]

Looks like that they will have to sell at the bottom of the cycle... What price do you guys think they can fetch?

 

Oh Oh that explains the price move.

 

http://www.businesswire.com/news/home/20161103006234/en/LSB-Industries-Exploring-Strategic-Alternatives

 

The question is who will buy them out?

 

my guess is koch

[valcont]

Oh Oh that explains the price move.

 

http://www.businesswire.com/news/home/20161103006234/en/LSB-Industries-Exploring-Strategic-Alternatives

 

The question is who will buy them out?

 

my guess is koch

 

Well now I started to like this one. They have couple years to find a buyer, lots of shareholders at higher prices and ammonia prices in the gutter.

[mateo999]

Anyone else notice they revised the Q4 UAN guidance down by 15k tons from their Oct 5th release.  This is after taking it down  40-45k from Aug 8 to Oct 5.  Obviously visibility is quite limited.

[heth247]

Anyone else notice they revised the Q4 UAN guidance down by 15k tons from their Oct 5th release.  This is after taking it down  40-45k from Aug 8 to Oct 5.  Obviously visibility is quite limited.

 

good eye! Yeah, I guess it is really hard times for now, but this may not matter any more due to the "for sale" news.

 

[mateo999]

Well this has been a boring day of trading.

[heth247]

Well this has been a boring day of trading.

 

Any thoughts on the conference call?  Here are my key take aways:

 

- They are going to hold preferred-divy for 2017.

- They are confident that they will sell all of their volume produced, given the demand, the only question is at what price.

- They think they can be free-cash break even for 2017 even if the current price level persist

- In addition to ABL for liquidity, they have an option to borrow extra $50mm from their senior facility, although they may not need to do it.

 

So, they should not have problem to survive 2017 while waiting out the bottom of the cycle.

 

 

[mateo999]

"They think they can be free-cash break even for 2017 even if the current price level persist"

 

yeah but as you mention, the pref is PIKing.  So can't actually support their cap structure.

[valcont]

"They think they can be free-cash break even for 2017 even if the current price level persist"

 

yeah but as you mention, the pref is PIKing.  So can't actually support their cap structure.

 

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.