A High-Yield Fertilizer MLP with Growing Appeal

Agriculture is an industry with undeniable economic strength. People need to eat, which means there will always be demand for food and farming.
One agriculture company that might fly under your radar is Terra Nitrogen Company LP (NYSE: TNH), a master limited partnership (MLP) engaged in nitrogen fertilizer production. It’s only a $2.2 billion company by market capitalization, and its assets are primarily comprised of a single nitrogen manufacturing facility in Oklahoma.
But despite its relatively small size, Terra Nitrogen is a fertilizer MLP that has the potential to offer big rewards. It pays a more than 7% distribution yield and is in the process of a turnaround that could pay off handsomely for investors.
The current environment in the nitrogen industry is fairly weak, but the strong long-term economics of agriculture should result in increased demand for Terra Nitrogen’s products. That’s why, despite its current troubles, Terra Nitrogen is a cheap play on agriculture and could be a long-term winner.
Terra’s principal product is ammonia, a primary ingredient of nitrogen fertilizer. Nitrogen fertilizer works to boost both farm productivity and crop yields. There are many factors that influence the company’s sales, including soil and weather conditions, as well as changes in regional farming practices. Fluctuations on a harvest-to-harvest basis result in volatility in the company’s financial performance.
Last quarter, Terra Nitrogen’s year-over-year sales and earnings per share declined 28% and 37%, respectively. A poor application season last fall resulted in larger inventories than normal, which is weighing on sales volumes. This caused ammonia volumes to decline 3% last quarter.
This looks very bad, and Terra’s poor performance unfortunately has had a negative effect on its distribution as well.
Since Terra Nitrogen is classified as an MLP, it’s required to distribute the bulk of its earnings to investors. The bad news is that when profits fall, there isn’t a lot of room for error. Its most recent declared distribution of $2.08 per unit is 30% lower than the same quarterly distribution last year.
But Terra still offers a big distribution, even at its reduced level. In the past four quarters, the company distributed $9.47 per unit, which is a hefty 7.8% yield.
Plus, Terra’s turnaround process is priced into the valuation. The stock trades at just 11 times earnings, which is a significant discount to the S&P 500. This could be an attractive entry point if the company’s turnaround materializes.
I have reason to believe it will. The biggest factor behind the company’s falling revenue last quarter was lower sales volume as a result of a planned shutdown and corresponding turnaround of an ammonia and UAN (urea ammonium nitrate solution) plant. Fortunately, the more than two-month process was finally completed during the first quarter.
The turnaround work included upgrade projects to improve the production capacity and efficiency of the facility. Now that the project is completed, it should help Terra boost production going forward.
Ratcheting up production makes sense for the company, since ammonia prices are favorable. Terra’s realized ammonia prices rose 21% last quarter.
If the company’s fundamentals recover, its distribution will grow once again. And, since the stock is relatively cheap, investors could earn significant capital gains as well as the income from the high yield.
The agriculture industry still has very solid long-term economics. Fertilizer demand should remain strong for many years, because there will always be a need for food and farming. Terra Nitrogen is a well-run business, and its current valuation and attractive future distribution potential could be appealing for both value and income investors.

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