Business Overview

LSB Industries, Inc. (NYSE: LXU) is a leading manufacturer and seller of nitrogen-based products for the agricultural, industrial, and mining markets. The company has undergone a remarkable turnaround in recent years, transforming itself into a more efficiently managed and operationally sound business. With a focus on improving environmental, health, and safety standards, as well as enhancing the reliability of its production facilities, LSB Industries is well-positioned to capitalize on the growing demand for its products and the emerging opportunities in the energy transition.

LSB Industries is headquartered in Oklahoma City, Oklahoma, and operates three multi-plant facilities in Cherokee, Alabama, El Dorado, Arkansas, and Pryor, Oklahoma, as well as a facility in Baytown, Texas, which it operates on behalf of Covestro. The company's primary products include ammonia, fertilizer-grade ammonium nitrate (HDAN), urea ammonium nitrate (UAN), high-purity and commercial-grade ammonia, high-purity ammonium nitrate, sulfuric acids, concentrated and blended nitric acid, mixed nitrating acids, carbon dioxide, and diesel exhaust fluid. These products are sold to customers in the agricultural, industrial, and mining sectors, primarily in the United States and other parts of North America.

Financials

In the fiscal year 2023, LSB Industries reported annual net income of $27.9 million, annual revenue of $593.7 million, annual operating cash flow of $137.4 million, and annual free cash flow of $69.8 million. The company's financial performance has been impacted by fluctuations in commodity prices, particularly natural gas, which is a key input for its production processes.

For the first quarter of 2024, LSB Industries generated adjusted EBITDA of $33 million and earnings per share of $0.08. The company's results were affected by weaker selling prices for its products compared to the prior-year period, which was partially offset by stronger sales volumes and lower natural gas costs.

Looking ahead, the company expects some weakening in pricing for both ammonia and UAN in the second quarter of 2024 as the market transitions from the spring planting season. However, the company anticipates a meaningful sequential increase in adjusted EBITDA over the first quarter of 2024 due to higher sales volumes and lower natural gas costs.

Operational Initiatives

LSB Industries has several key operational initiatives underway to improve its performance and position the company for long-term success. These include:

Investing in Environmental, Health, and Safety (EHS) and Reliability:

The company has been investing additional capital at all three of its facilities to build upon the progress it has made in implementing enhanced safety programs and improving the reliability of its plants. The goal is to achieve an ammonia on-stream operating rate of 95%, which would enable the company to produce greater volumes of product for sale while lowering its unit cost of production.

Broadening Distribution and Optimizing Product Mix:

LSB Industries has taken over the direct distribution of its Pryor and Cherokee facilities' UAN production, which it believes will make the company more effective in identifying and capitalizing on the most profitable distribution opportunities for its products. Additionally, the company is advancing several capital improvement projects to increase its sales volumes of higher-value downstream products, resulting in improvements in its overall profit margins.

Developing Low-Carbon Ammonia and Clean Energy Projects:

LSB Industries is actively pursuing opportunities to become a producer and marketer of low-carbon ammonia and other derivative products. The company has two significant projects underway: a low-carbon ammonia project at its El Dorado facility in collaboration with Lapis Energy, and a low-carbon ammonia project on the Houston Ship Channel in conjunction with INPEX, Air Liquide, and Vopak Exolum. These projects are expected to generate additional cash flow and position LSB Industries as a leader in the energy transition within the chemical industry.

Evaluating Organic Capacity Expansion:

The company has been evaluating opportunities across all its facilities to increase production capacity through the implementation of several potential debottlenecking projects, particularly at its El Dorado facility. While the company has decided to put these expansion projects on hold for the current year due to the high-cost environment and limited resources, it will reevaluate the prospects of moving forward with one or more of them in 2025.

Liquidity

As of March 31, 2024, LSB Industries had $265.2 million in cash and short-term investments, providing the company with ample liquidity to fund its operations and future growth initiatives. The company has also been actively managing its capital structure, using its strong cash position to repurchase $75 million of debt and $10 million to $12 million of its stock year-to-date.

Looking ahead, the company expects to allocate approximately $60 million to $80 million in capital expenditures for 2024, primarily for reliability and maintenance projects. LSB Industries is also evaluating opportunities to acquire strategic assets or companies that could enhance the value of the business and provide attractive returns.

Market Dynamics and Outlook

The nitrogen fertilizer market, which is a significant driver of LSB Industries' agricultural business, has been impacted by a variety of factors in recent quarters. These include declining European natural gas prices, which have resulted in increased global supply and lower selling prices for ammonia and ammonia-derivative fertilizers. However, the company believes that after six consecutive quarters of year-over-year declines in product selling prices, pricing will be more in line with prior-year quarters during the second half of 2024.

In the industrial and mining markets, demand for LSB Industries' products has remained relatively stable, reflecting the resilience of the U.S. economy. The company's diverse customer base, the nature of its contracts, and its ability to shift its production mix to products where demand and pricing are strongest provide a meaningful degree of downside protection against potential economic challenges.

Risks and Challenges

While LSB Industries has made significant progress in improving its operational and financial performance, the company faces several risks and challenges that investors should be aware of. These include:

Commodity Price Volatility:

The company's results are heavily influenced by fluctuations in the prices of natural gas, a key input for its production processes, as well as the prices of its finished products.

Environmental Regulations:

LSB Industries is subject to various federal, state, and local environmental laws and regulations, which could result in significant compliance expenses, cleanup costs, and potential liabilities.

Plant Reliability:

Unplanned downtime at the company's production facilities can result in lost contribution margin, lost fixed-cost absorption, and increased repair and maintenance costs.

Competitive Landscape:

LSB Industries operates in a competitive industry, and its ability to maintain its market share and profitability depends on its ability to provide high-quality products and services at competitive prices.

Conclusion

LSB Industries is a compelling investment opportunity for investors seeking exposure to the growing demand for nitrogen-based products and the emerging opportunities in the energy transition. The company's focus on improving its operational efficiency, diversifying its product mix, and developing low-carbon ammonia projects positions it well to capitalize on the evolving market dynamics and generate long-term value for shareholders. While the company faces some risks and challenges, its strong financial position, experienced management team, and strategic initiatives make it a stock worth considering for investors with a long-term horizon.