CF Industries operates in the fertilizer industry and went public in 2005 at $15 a share. Five years later CF Industries has a higher level of net cash than their market capitalization in 2005 at $15 a share.
Clearly, CF Industries success is snowballing and they bought back $490 million of stock in 2008. CF is at the heart of the “fertilizer wars” and recently withdrew their bid for Terra Industries. Terra is now being acquired by Yara International leaving CF Industries vulnerable to the attempted hostile acquisition by Agrium.
The “fertilizer war” is intriguing because bids for each of these companies Terra and CF have steadily increased over the last year, which should make investors ask what managements of these companies see that the market is missing. Clearly, the missing link is lower natural gas prices in the future. Large and still unknown quantities of natural gas exist in North America in different regions perpetually depressing prices from past hurricane exuberance. CF Industries is the main beneficiary of a secular change in prices as it’s the largest cost component for producing fertilizer.
Here’s the key, “The average cost of natural gas at the company’s Donaldsonville, Louisiana operations in the fourth quarter of 2009 was $4.41/MMBtu, compared to $10.11/MMBtu in the year-earlier quarter. The average cost of gas at the company’s Medicine Hat, Alberta operations was $4.20/MMBtu, compared to $6.77/MMBtu in the fourth quarter of 2008. The low acquisition cost of natural gas in the fourth quarter of 2009 reflected the company’s decision not to fix the price of large quantities of natural gas, allowing it to capture the benefit of declining prices.”
While pricing declined year over year, so did their costs and the bet is that the increase in supply of natural gas in the last 20 months is far greater than CF Industries or any other manufacturers capacity for nitrogen and phosphate fertilizer. CF Industries has a likely tailwind for many years with a margin of safety of $882 million in net cash or $18 share in cash. Comparing year over year results from 2008 to 2009 is tricky because of hedges and the company sold forward a significant amount of their supply for the first half of 2009. However, the real benefit will occur when natural gas hedges end and when I believe fertilizer pricing increases at a faster rate than natural gas prices because of significantly more favorable fundamentals for nitrogen and phosphate fertilizers.
Demand is improving for products, but pricing is still far below 2008 levels. For example, Urea pricing is up from earlier in 2009, but still 43% below Q4 2008 levels. While the company is projecting a fairly rosy outlook for 2010, I think the compelling reasons to purchase the stock are the large net cash position and likely lower costs in the future. I hope investors will not agree to a takeover of CF Industries for less than $150 a share, or $130 net of CF’s cash position.
I own shares of CF Industries