Terra Nitrogen Company LP's Sales Dwindle on Low Fertilizer Prices, Looks to Brighter Times Ahead

The nitrogen fertilizer market over the past several years has not been too kind to Terra Nitrogen Company (NYSE: TNH). Since 2011, the price of ammonia and urea ammonium nitrate (UAN) have slowly been sliding thanks to the aftershock of the Chinese commodity boom. Despite the troubles of the market, the company has been able to still generate strong margins and return cash to its investors. This quarter was particularly tough in that regard because fertilizer prices were so low, but according to the management team at Terra Nitrogen's parent company, CF Industries (NYSE: CF), the worst of the market may be behind us. Let's take a quick look at Terra Nitrogen's results as well as what CF Industries is seeing in the future of the fertilizer market that should leave investors encouraged.

Image source: Getty Images.

By the numbers

*in millions, except per share data. Source: Terra Nitrogen Company earnings release.

The largest driving factor in Terra Nitrogen's sales decline came from the falling prices of both ammonia and UAN. Prices for these two products are typically lower in the third quarter because of seasonal cycles in the agricultural market, but this year's lows have been particularly noticeable because of a global oversupply of nitrogen based fertilizer production. The company was able to offset some of these weaknesses by shifting more of its production toward ammonia versus UAN since ammonia prices are that much higher, but it can only do so much in this regard.

The thing that does stand out, though, is that earnings appear to have dropped rather significantly compared to the prior quarter. That's because the company reported anunrealized net mark-to-market gain on natural gas derivatives of$27.3million, which artificiallylowered costs of goods sold for the quarter.

From a cash flow perspective. This quarter was obviouslyhurt by lower realized prices, but it also helps that capital spending this year is significantly lower than in 2015. Last year, Terra Nitrogen's' facility went through a large turnaroundthat cost $82 million over the first 9 months of the year. In 2016, though, capital spending has been just $25 million, so a little more cash is flowing out to investors.

What management had to say

Terra Nitrogen doesn't hold its own conference call to discuss its results because it is a subsidiary of CF Industries. On the CF Industries call, Bert Frost, SVP of Sales, Market Development, and Supply Chain at CF Industries, gave a pretty extensive outlook for the nitrogen fertilizer market that is very pertinent to the future prospects of Terra Nitrogen.

What a Fool believes

This was one of the tougher quarters for Terra Nitrogen as fertilizer prices were very weak. Still, the company was able to produce net income margins greater than 30% and return a pretty hefty amount of cash to unitholders in what is traditionally the low point in the company's earnings cycle.

Based on the outlook from CF Industries execs, investors in Terra Nitrogen should expect this year and possibly 2017 to be so-so years as the glut of nitrogen fertilizer production will still be high, but eventually rising demand and the shut down of marginal cost players should bring prices back up again. This should set up Terra Nitrogen rather nicely to pay out hefty distributions to shareholders for many years to come.

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Tyler Crowe owns shares of Terra Nitrogen.You can follow him at Fool.comor on Twitter,@TylerCroweFool.

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