Terra Industries: An Interesting Fertilizer Play

A few months ago I wrote several articles about the relationship between Terra Nitrogen L.P. (TNH) and Terra Industries (TRA) concerning the earnings and dividends of Terra Nitrogen. You can see the articles here, here and here. For background, until the last quarterly dividend, TNH had a deficit of accumulated minimum dividends to work off. As of the last dividend, the deficit had been repaid and TRA was then entitled to about 44% of TNH’s earnings before dividends were paid to shareholders.

I warned that unsuspecting TNH unit holders may not get the payout they were expecting. This quarter's results vividly show that outcome. Here are the comparative results for the two quarters:

First quarter 2008:

Revenue: $174.5 million
Net income: $81.6 million
Dividend: $4.20 per unit
Second quarter 2008:

Revenues: $256.7 million
Net income: $130.2 million
Net allocated to common units: $74.2 million
Dividend: $3.63

As you can see, net income increased by $48.6 million and the amount paid out as dividends decreased by $7.4 million. The recent $3.63 dividend still gives a robust 12.9% yield on the current ($112) share price, but it is probably a disappointment to those who bought at $164 in April without checking into the partnership details or reading this blog. Going forward, any hit on profitability will hit double hard on the payout to common unit holders. One other item from the figures above: I am truly impressed at the 51% profit margin! These people are minting money at their current pricing levels.

I added TNH to this site’s portfolios in Nov 2007 at about $102 and dropped it at the end of April 2008 at $144 in favor of Terra Industries. Terra also owns about 75% of TNH, so TRA shareholders reap the majority of the benefit of TNH’s profitability. Another issue I found with TNH units was the volatility of share prices around earnings and dividend release. It is not uncommon for the share price to fall 4 to 5 times the dividend as the ex-div date approaches. Finally, TNH earns from the production of a single fertilizer plant and has been running at 100% capacity. The only upside TNH has is through pricing, there will be no additional production.

At this point, I definitely prefer TRA over TNH. The company is generating huge amounts of cash with which it is looking for ways to enhance shareholder value. It is buying in shares, starting up a moth-balled ammonia plant and have started paying a small dividend. Terra Industries has earned $2.91 a share for the first 6 months of 2008 and even matching Q2 earnings for Q3 and Q4 put 2008 earnings at $6.80, giving a PE of 7.5 at the current share price. TRA is a component of this site’s Special Opportunities Portfolio. For someone looking for something different (not (POT) in the fertilizer space, TRA deserves a look.