CF Industries Benefits from Low Natural Gas Prices in Third-Quarter 2012, Expects Strong Agricultural Demand

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Researched by Industrial Info Resources (Sugar Land, Texas)--CF Industries Holdings Incorporated (NYSE:CF) (Deerfield, Illinois), the holding company for CF Industries Incorporated, which is a worldwide leader in nitrogen and phosphate fertilizer manufacturing and distribution, reported record quarterly earnings in the third quarter of 2012, as sales costs retreated and customers focused on rebuilding inventories, despite lower nitrogen sales and phosphate prices. Net earnings for the quarter were reported to be $403.3 million, a 21.88% increase from third-quarter 2011.

Net sales stood at $1.36 billion, a 3.16% decrease from the same period last year. Nitrogen sales volumes were lower, mostly due to a decrease in urea sales, although prices improved. A 19% plunge in the Nitrogen segment's cost of sales was attributed to the sharp decline in natural gas costs. Average phosphate prices were lower as global demand tumbled, including exports to Central and South America. However, phosphate volumes increased as domestic sales improved on expectations for strong corn plantings next year, which led customers to rebuild inventories.

CF also benefited from a $39.8 million non-cash, pre-tax, mark-to-market gain on natural gas derivatives, as well as a $10.9 million gain from adjustments to post-retirement benefits for employees. The third quarter of 2011 also suffered in comparison because it saw a a $35.1 million impairment charge related to the shutdown of a methanol plant in Oklahoma and a $14.1 million non-cash, mark-to-market loss on natural gas derivatives.

Industrial Info is tracking more than $2.6 billion in projects involving CF. In August, CF entered into a definitive agreement with Glencore International plc to acquire the interests in Canadian Fertilizers Limited (CFL) that currently are owned by Viterra Incorporated. CFL owns a nitrogen fertilizer complex in Medicine Hat, Alberta, that is the largest in Canada. CFL and SNC-Lavalin are evaluating the construction of a new unit to double plant capacity of the approximately 2,250-ton-per-day urea unit. SNC-Lavalin is performing the design engineering.

"An extended spring fertilizer application season, along with an exceptionally large number of corn acres planted in the U.S., led to very strong demand for fertilizers in the first half of the year," said Stephen R. Wilson, the chairman and chief executive officer of CF, in a conference call. "Unfortunately for farmers, the weather that was so conducive to field preparation and planning work turned harshly hot and dry, withering crops and sending grain prices soaring. Thankfully, many farmers had crop insurance, which protected them financially, and should insure their liquidity going into next year's planting season.

"The dry weather, along with early crop maturity, has led to an early harvest, with 95% of the corn crop harvested as of November 4, about four weeks ahead of average. As a result, fields are clear and ready for nutrient applications much earlier than normal, positioning the North American fertilizer industry for a potential extended fall application season."

Net sales were down in both of CF's major segments for the quarter and the year, although the Nitrogen segment managed an improvement in gross margins:

• The Nitrogen segment saw net sales of $1.1 billion, a 2.04% decrease from third-quarter 2011, and a gross margin of $638.6 million, a 15.67% increase:
• Ammonia sales stood at 416,000 tons, a 3.23% increase from the same period last year, and the average selling price was $622 per ton, a 12.68% increase.
• Urea sales stood at 559,000 tons, a 20.26% decrease from third-quarter 2011, and the average selling price was $470 per ton, a 10.59% increase.
• Urea ammonia nitrate solution sales stood at 1.6 million tons, a 3.29% increase from the same period last year, and the average selling price was $296 per ton, a 7.21% decrease.
• Ammonium nitrate sales stood at 206,000 tons, a 15.23% decrease from third-quarter 2011, and the average selling price was $261 per ton, a 2.97% decrease.
• Total sales for other nitrogen products stood at 173,000 tons, a 20.14% increase from the same period last year.
• The Phosphate segment reported net sales of $264.2 million, a 7.56% decrease from third-quarter 2011, and the gross margin stood at $63.4 million, a 26.19% decrease:
• Diammonium phosphate sales stood at 395,000 tons, a 1.8% increase from the same period last year, and the average selling price was $507 per ton, a 10.42% decrease.
• Monoammonium phosphate sales stood at 122,000 tons, a 4.27% increase from third-quarter 2011, and the average selling price was $521 per ton, an 8.11% decrease.

CF executives expect the company to continue benefiting in coming quarters from rising North American shale gas production and a corresponding decline in natural gas prices, which have benefited CF's nitrogen production. Urea ammonia nitrate demand is expected to be strong, as corn acreage is expected to be high, and phosphate fertilizer demand is expected to be solid in the coming year, as overall planted acres are expected to be high as well. CF Industries announced on November 1 that it is planning $3.8 billion in capacity expansion projects at its nitrogen complexes in Donaldsonville, Louisiana, and at Port Neal, near Sergeant Bluff, Iowa.

Capital expenditures for full-year 2012 are expected to be between $350 million and $400 million. Wilson said that CF has a strong order book for final quarter of the year, based on solid nitrogen demand.

"With an anticipated 97 million acres of corn to be planted, crop nutrients, especially nitrogen, should be in very high demand," Wilson said in the conference call. "We currently have an attractive order book for nitrogen. Very strong ammonia movement began last week, and we anticipate great fall movement, if the weather continues to cooperate. The ammonia market generally is very tight going into next year, and we will be focused on effectively meeting the customer commitments we have in place.

"We are comfortable with our order book for UAN, and we anticipate that demand will continue to be strong into the spring. Conditions in the urea market are expected to remain stable as we progress through the fourth quarter."

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