LSB Industries Inc

LSB Industries, the nitrogen products producer, declined approximately 28% and was the portfolio's largest detractor. We originally owned LSB for its leverage to the disrupted global nitrogen supply, a thesis that worked well while the Middle East conflict kept capacity offline. However, with peace negotiations progressing in mid-June, curtailed supply began returning to the market, leading to a sell-off in shares. We believe this move to the downside is an overreaction, but we decided to exit the position at a modest gain, honoring our commitment to sell if the chief executive left, which she did unexpectedly.

We added LSB Industries (LXU) in the first quarter, viewing it as a compelling small-cap opportunity. LXU operates in a highly consolidated nitrogen industry, benefiting from significant barriers to entry due to the capital-intensive nature of ammonia manufacturing. The company enjoys a cost-of-production advantage with its U.S.-based plants using domestically sourced natural gas, which is priced below international benchmarks. Recent geopolitical disruptions have tightened global nitrogen supply, favoring domestic producers like LXU. The stock trades at an attractive multiple on forward EBITDA, with management outlining a path to higher earnings power supported by improving nitrogen pricing. Additionally, LXU's partnership in producing blue ammonia positions it well for future clean energy opportunities.

During the quarter, performance was aided by strong contributions from fertilizer producer LSB Industries, which benefited from global gas disruption, rising prices, and potentially serious impacts to the global fertilizer supply. The disruption to Middle East oil and gas flows creates significant disruption to energy and product flows, leading to wider pricing differentials and wider crack spreads for those positioned to take advantage. This environment is very desirable for LSB Industries, enhancing its potential for strong performance.