Executive Summary / Key Takeaways

• LSB Industries is strategically shifting its product mix towards higher-margin, more stable industrial chemical sales, targeting 35% of natural gas costs passed through in contracts by year-end 2025, with an optimal long-term goal of 50% industrial sales.
• Operational reliability improvements are driving increased production volumes across ammonia, UAN, and AN, with a target of 95% consistent ammonia plant reliability and an expected $15 million to $20 million in cost reductions from efficiencies by 2027.
• The El Dorado Carbon Capture and Sequestration (CCS) project is a key growth driver, expected to be operational by late 2026 and generate approximately $15 million in annual EBITDA starting in 2027, positioning LSB as a player in the low-carbon ammonia market.
• Strong market conditions in both industrial (mining, MDI production) and agricultural (UAN, ammonia pricing) segments are supporting revenue growth, despite higher natural gas costs, with Q3 2025 net sales up 42% year-over-year to $155.4 million.
• The company maintains a solid balance sheet with approximately $150 million in cash and a net leverage ratio of approximately 2x, enabling continued investment in strategic priorities and debt reduction.

Setting the Scene: A Chemical Powerhouse Adapting to New Demands

LSB Industries, Inc. (NYSE:LXU), founded in 1968, has a long-standing presence in the chemical manufacturing sector, producing essential products for both agricultural and industrial markets. Operating three multi-plant facilities in the U.S. and one on behalf of Covestro LLC, LSB's core business revolves around nitrogen-based chemicals, including ammonia, urea ammonium nitrate (UAN), nitric acid, and various industrial-grade ammonium nitrates. The company's strategic evolution is marked by a deliberate pivot towards enhancing earnings stability through a greater focus on industrial applications and pioneering low-carbon ammonia production, positioning it at the forefront of the energy transition within the chemical industry.

The broader chemical industry is currently experiencing dynamic shifts, driven by global economic trends, increasing demand for sustainable solutions, and geopolitical factors impacting commodity prices. Specifically, the nitrogen fertilizer market is influenced by world grain demand, weather conditions, and competitive pricing, while industrial chemical demand is tied to sectors like housing, automotive, and mining. LSB's strategy is to leverage its operational footprint and product versatility to capitalize on these trends, particularly the robust demand in industrial sectors and the emerging market for low-carbon chemicals. This strategic direction is crucial for LSB to differentiate itself and secure long-term value in a competitive landscape.

Technological Edge and Innovation in a Transforming Industry

LSB Industries' operational foundation is built on its advanced chemical manufacturing processes, particularly for ammonia, which serves as the basic building block for all its upgraded products. The company's facilities are designed to produce high-purity and commercial-grade ammonia, as well as a diverse range of downstream products like nitric acid and various forms of ammonium nitrate. This integrated production capability allows LSB to optimize its product mix based on market demand and pricing.

A significant technological differentiator for LSB is its commitment to low-carbon ammonia production. The company's El Dorado ammonia plant achieved pre-certification status under The Fertilizer Institute's Verified Ammonia Carbon Intensity program in January 2025. This voluntary certification, audited by a third party, validates the carbon footprint of ammonia production from well to production gate, providing a quantifiable measure of its environmental advantage. The El Dorado Carbon Capture and Sequestration (CCS) project, a collaboration with Lapis Carbon Solutions, is central to this initiative. This project is expected to capture and sequester approximately 400,000 to 500,000 metric tons of CO2 annually. This sequestration will enable the production of 305,000 to 380,000 metric tons of low-carbon ammonia annually, a product anticipated to command a premium price. The sequestered CO2 is also expected to qualify for federal tax credits under Internal Revenue Code Section 45Q, providing $85 per metric ton. This initiative is projected to reduce LSB's overall Scope 1 greenhouse gas emissions by approximately 25% from current levels.

For investors, this technological advancement is a critical component of LSB's competitive moat. The ability to produce certified low-carbon ammonia positions the company to meet growing demand from industries seeking to reduce their carbon footprint, including power generation, maritime, and agriculture. This technological edge is expected to translate into higher average selling prices (ASPs) for its low-carbon products and contribute approximately $15 million in annual EBITDA, with the majority beginning in 2027. While the Houston Ship Channel project for larger-scale low-carbon ammonia production has been paused due to capital cost uncertainties and slower demand ramp-up for prices above $600 per ton, the El Dorado project demonstrates LSB's practical approach to innovation and its commitment to the energy transition.

Strategic Evolution and Operational Excellence

LSB's strategic narrative is one of continuous optimization and disciplined growth. The company has been actively transitioning its product mix, notably completing the shift from high-density ammonium nitrate (HDAN) for fertilizers to ammonium nitrate solution (ANS) for explosives in the third quarter of 2025. This move is a cornerstone of its strategy to increase contractual industrial sales, which now account for approximately 35% of natural gas costs passed through in selling prices, up from less than 20% in 2021. This provides improved visibility and stability to its earnings profile, mitigating the volatility inherent in spot market agricultural sales. Management aims for an optimal mix of 50% industrial sales over the long term, acknowledging that this provides significant downside protection.

Operational excellence is paramount, with a strong emphasis on safety, reliability, and efficiency. LSB has been investing significantly in its facilities, with capital expenditures for the full year 2025 expected to be approximately $80 million, including $60 million to $65 million for EH&S and reliability, and $20 million to $25 million for growth initiatives. These investments are yielding results, with solid improvements in sales volumes for AN and UAN in Q2 2025 driven by higher ammonia production and better performance from upgrading plants. The company targets total ammonia production of 820,000 to 850,000 tons for 2025. Furthermore, LSB is focused on driving efficiencies and profit optimization, expecting fixed costs to trend down starting in 2026 and anticipating $15 million to $20 million in cost reductions through efficiencies.

Financial Performance and Liquidity: A Story of Recovery and Stability

LSB Industries' recent financial performance reflects the positive impact of its strategic initiatives and improving market conditions. For the third quarter ended September 30, 2025, net sales increased significantly to $155.4 million, up 42% from $109.2 million in the same period of 2024. This growth was primarily driven by favorable pricing and higher volumes, attributed to improved plant reliability and the absence of planned turnarounds in the quarter. The company reported net income of $7.1 million for Q3 2025, a substantial improvement from a net loss of $25.4 million in Q3 2024. Diluted EPS for the quarter was $0.10, compared to $(0.35) in the prior year.

Profitability metrics also showed strength, with gross profit for Q3 2025 reaching $25.5 million, up from a gross loss of $7.9 million in Q3 2024. The adjusted gross profit percentage improved to 29.6% in Q3 2025 from 22.9% in Q3 2024. This was primarily due to increased sales and lower turnaround expenses, partially offset by higher natural gas costs. Year-to-date, net sales for the nine months ended September 30, 2025, were $450.2 million, an increase of 16% from $387.5 million in the prior year. Net income for the nine-month period was $8.5 million, compared to $10.2 million in the prior year.

The company's liquidity and capital structure remain robust. As of September 30, 2025, LSB held approximately $150 million in cash and short-term investments. Net cash provided by operating activities for the nine months ended September 30, 2025, was $77.6 million. The company's net leverage ratio stands at approximately 2x, which is in line with its target for a mid-cycle pricing environment. LSB has also been proactive in managing its debt, repurchasing $32.4 million in principal amount of Senior Secured Notes year-to-date 2025 and making a final balloon payment of approximately $5 million on a secured financing arrangement in Q3 2025. The Revolving Credit Facility was undrawn with $45 million of availability as of September 30, 2025. These financial maneuvers underscore a disciplined capital allocation strategy focused on deleveraging while funding growth and operational improvements.

Competitive Landscape and Strategic Positioning

LSB Industries operates in a competitive environment with larger players like CF Industries Holdings, Inc. (CF), The Mosaic Company (MOS), and Nutrien Ltd. (NTR). While these competitors boast greater scale and broader market reach, LSB carves out its niche through specialized product offerings and a direct sales model. LSB's high-purity ammonia and acids offer superior performance in specific industrial applications, such as semiconductor production, providing a qualitative edge in these segments. This specialization allows LSB to differentiate itself from the more commodity-focused strategies of its larger rivals.

In the agricultural sector, LSB competes by focusing on regional demands and tailored solutions, which can offer quicker responsiveness compared to global giants. However, LSB's smaller scale can lead to higher operating costs and potentially weaker market share in highly competitive bidding scenarios compared to the cost advantages enjoyed by larger producers. The company's strategic shift towards industrial contracts with cost pass-through mechanisms is a direct response to mitigate commodity price volatility, a vulnerability shared with, but potentially more impactful for, smaller players.

Industry trends, such as the increasing demand for low-carbon solutions and the potential for AI-driven data center growth to boost demand for ammonia in energy applications, present both opportunities and challenges. LSB's El Dorado CCS project positions it favorably to capture emerging demand for green chemicals, potentially outpacing some rivals in this specific innovation area. However, the broader market for low-carbon ammonia is still developing, and the timing of significant demand remains a wildcard. The company's customer base, primarily located in the United States, provides a degree of downside protection against global trade disruptions, though potential tariffs on Canadian and Mexican nitrogen imports could impact pricing dynamics.

Outlook and Guidance: Building a More Resilient Future

LSB Industries' outlook is characterized by continued operational improvements, strategic product mix shifts, and the realization of benefits from its low-carbon initiatives. For the fourth quarter of 2025, management expects results to be higher than the prior year's fourth quarter, driven by higher selling prices and increased production, partially offset by higher variable and other costs. The company projects total ammonia production for 2025 to be between 820,000 and 850,000 tons.

Key operational guidance includes the planned turnaround at the El Dorado Facility in the first half of 2026, with subsequent turnarounds at Pryor in 2027 and Cherokee in 2028, establishing a more predictable maintenance schedule. The full-year incremental EBITDA benefit from the Pryor urea capacity expansion (75,000 tons annually) and the El Dorado nitric acid storage (5,000 tons) is expected in 2025. LSB anticipates meaningful increases in UAN and AN sales volumes in 2025, with a corresponding decline in ammonia sales as more is upgraded to higher-margin products. Fixed costs are expected to trend down starting in 2026, following investments in 2025.

The El Dorado CCS project is a significant forward-looking catalyst, with operations expected to commence by the end of 2026, contributing approximately $15 million in annual EBITDA starting in 2027. This will provide approximately 250,000 tons of low-carbon ammonia for sale by the end of next year. While natural gas costs are expected to be higher in 2025 compared to 2024, the increasing proportion of cost-plus contracts will help mitigate this impact.

Risks and Challenges

Despite a positive outlook, LSB Industries faces several risks. The inherent seasonality of agricultural product sales and the timing of major plant maintenance activities can cause interim results to fluctuate. Commodity price volatility, particularly for natural gas and ammonia, remains a significant factor impacting profitability, though the shift to cost-plus contracts aims to reduce this exposure. Operational risks, such as unplanned downtime, can lead to lost sales and increased costs. A tragic incident involving a contractor fatality at the Pryor facility in early October serves as a somber reminder of the critical importance of safety protocols.

Environmental regulations pose ongoing compliance costs and potential liabilities, as evidenced by accrued liabilities for environmental matters totaling $0.6 million as of September 30, 2025, and ongoing discussions regarding wastewater treatment at the Pryor Facility and remediation at the Hallowell Facility. Economic uncertainties, including the potential impact of tariffs on global trade flows and input costs, could also affect demand and pricing. The slower-than-anticipated ramp-up of demand for low-carbon ammonia at transactable prices, as seen with the Houston Ship Channel project, highlights the timing risk associated with new market development.

Conclusion

LSB Industries is executing a compelling transformation, strategically repositioning itself for more stable and profitable growth. By prioritizing operational reliability, shifting its sales mix towards resilient industrial contracts, and investing in pioneering low-carbon ammonia technology, the company is building a more predictable earnings profile. The significant improvements in recent financial performance, coupled with a strong balance sheet, underscore the effectiveness of these initiatives. While challenges such as commodity price volatility and the evolving low-carbon market persist, LSB's disciplined approach to capital allocation and its technological leadership in green ammonia position it favorably for long-term value creation. The El Dorado CCS project, in particular, represents a tangible step towards a sustainable future, promising incremental EBITDA and a strengthened competitive standing in a world increasingly demanding environmentally responsible chemical solutions. Investors should watch for continued progress in operational efficiencies, the successful ramp-up of low-carbon ammonia production, and the sustained strength of its industrial segments as key indicators of LSB's ongoing success.