CVR Partners, LP (UAN)

Executive Summary / Key Takeaways

• Dual-feedstock capability at Coffeyville represents a unique structural advantage: CVR Partners is developing the only U.S. nitrogen fertilizer facility capable of switching between pet coke and natural gas feedstocks, creating a durable cost advantage that becomes more valuable as energy prices fluctuate and competitors face margin pressure.

• Tight supply-demand dynamics drive exceptional pricing power: Geopolitical conflicts, domestic production outages, and robust corn acreage have created critically tight nitrogen inventories, supporting 52% UAN price increases in Q3 2025 and positioning the company for sustained profitability through the first half of 2026.

• Cash generation supports compelling income profile: With $113.5 million in trailing free cash flow and a 12.55% dividend yield, UAN offers income-oriented investors exposure to the agriculture cycle while maintaining a 75.5% payout ratio that remains well-covered by earnings.

• Execution risks on growth initiatives and operational safety: The October 2025 ammonia release at Coffeyville and the complexity of the feedstock conversion project represent tangible threats to the investment thesis, requiring careful monitoring of management's execution and potential liability exposure.

Setting the Scene: A Regional Nitrogen Player with Unique Cost Positioning

CVR Partners, LP, formed in 2011 as a Delaware limited partnership by parent CVR Energy (CVI), operates two nitrogen fertilizer manufacturing facilities in Coffeyville, Kansas and East Dubuque, Illinois. The company produces ammonia, urea ammonium nitrate (UAN), and urea products sold on a wholesale basis to agricultural distributors serving corn and wheat farmers across the Midwest. This regional focus concentrates the company's exposure to U.S. planting cycles while insulating it from international trade complexities that burden global competitors.

The nitrogen fertilizer industry operates as a pure commodity cycle where cost position determines survival and pricing power emerges only during supply disruptions. Unlike its larger competitors CF Industries (CF) and Nutrien (NTR), which operate extensive global networks and diversified nutrient portfolios, CVR Partners has deliberately maintained a narrow strategic focus: achieve the lowest possible production cost per ton while maximizing utilization rates. This strategy aligns perfectly with the company's core mission to be a top-tier North American nitrogen-based fertilizer company measured by safe operations, superior performance, and profitable growth.

The industry structure rewards scale and feedstock flexibility. Natural gas represents 70-80% of cash production costs for most North American producers, creating synchronized margin compression when gas prices spike. CVR Partners breaks this paradigm through its unique ability to utilize petroleum coke (pet coke), a refinery byproduct, as primary feedstock at Coffeyville. This integration with CVR Energy's adjacent refinery provides a structural cost advantage that competitors cannot replicate, particularly during periods of natural gas volatility. The company's strategic objective to achieve industry-leading utilization rates above 95% of nameplate capacity—excluding turnaround impacts—demonstrates management's focus on sweating every dollar of invested capital.

Technology, Products, and Strategic Differentiation: The Feedstock Flexibility Moat

The centerpiece of CVR Partners' competitive positioning is the ongoing engineering project at Coffeyville to enable natural gas as an alternative feedstock to pet coke. This initiative, which could begin construction in 2025, would make Coffeyville the only nitrogen fertilizer facility in the United States with dual feedstock flexibility. The strategic implications extend far beyond simple cost savings.

When natural gas prices trade at a discount to pet coke on an energy-equivalent basis, the company can optimize feedstock selection to minimize costs. More importantly, during periods of extreme gas price spikes—such as the European energy crisis of 2022 or potential future disruptions—CVR Partners can shift entirely to pet coke while competitors face margin compression or forced curtailments. This operational resilience transforms a potential vulnerability into a durable competitive moat. Management estimates the project could expand ammonia production capacity by up to 8%, or approximately 100 tons per day, adding low-cost brownfield capacity at a fraction of greenfield construction costs.

The engineering studies are complete, long lead-time equipment has been ordered, and board approval for construction is anticipated. The project's timeline aligns with the company's broader debottlenecking initiatives funded by reserves accumulated over the past two years. These investments target water and electrical reliability upgrades, diesel exhaust fluid (DEF) production expansion, and production rate improvements that could add over 5% capacity at East Dubuque. Management frames these as "great investments" because brownfield expansions cost a fraction of new construction while delivering similar output gains.

Environmental stewardship reinforces the strategic positioning. The planned installation of a nitrous oxide abatement unit during the fall 2025 turnaround will equip all four nitric acid plants with emission controls, supporting the company's ambition to certify Coffeyville as a low-carbon nitrogen fertilizer production site. This proactive approach to carbon intensity addresses emerging regulatory requirements and potential carbon border adjustments that could disadvantage higher-emission imports, further strengthening the domestic competitive position.

Financial Performance & Segment Dynamics: Pricing Power Meets Cost Discipline

The nine months ended September 30, 2025, demonstrate the earnings power of CVR Partners' strategy in a tight market. Net sales surged 23% to $475 million, while net income more than doubled to $108.9 million from $42.6 million in the prior year. Operating income expanded from $64.6 million to $131.5 million, driving operating margins to 32.7% and validating management's focus on cost control during a period of revenue growth.

The revenue composition reveals the company's leverage to UAN pricing. UAN sales jumped 28% to $309.6 million, driven by a 52% year-over-year price increase in Q3 and higher volumes from improved production reliability. Ammonia sales grew 10% to $92.6 million despite lower volumes, as prices rose 33% in Q3. The volume decline in ammonia reflects management's decision to upgrade more ammonia into higher-margin UAN and urea products, a mix shift that enhances overall profitability. This flexibility to optimize product slate based on relative margins demonstrates operational sophistication beyond typical commodity producers.

Cost management remains disciplined despite inflationary pressures. Direct operating expenses increased 9% to $172.7 million, primarily from higher natural gas and electricity prices, increased personnel costs, and preliminary turnaround spending. However, the company's access to lower-cost pet coke—prices declined further in 2025 following lower oil prices—partially offset these headwinds. Gross margins held firm at 45%, while the EBITDA margin expanded meaningfully, generating $171.2 million in operating cash flow through nine months.

Capital allocation reflects a partnership structure focused on cash returns. The board's policy distributes all available cash quarterly, calculated as EBITDA less reserves for maintenance capital, debt service, and future needs. This approach produced a trailing dividend yield of 12.55% at the current $94.99 unit price, with a 75.5% payout ratio that remains sustainable given the $113.5 million in trailing free cash flow. The partnership increased cash distributions by $25.4 million year-over-year while simultaneously building liquidity to $206.2 million to fund growth projects, demonstrating balanced capital discipline.

Outlook, Management Guidance, and Execution Risk

Management's commentary signals confidence that favorable market conditions will persist through the first half of 2026. Mark Pytosh, who will assume the CEO role at parent CVR Energy on January 1, 2026, while retaining leadership of the partnership, describes the setup as "favorable" with domestic and global nitrogen inventories remaining tight. The company expects a "big fall ammonia run" as customers place additional cash orders beyond already-committed volumes, suggesting strong underlying demand from corn planting intentions.

The USDA's revised estimate of 98.7 million corn acres planted in spring 2025—up 8.6 million from 2024—provides fundamental support for nitrogen demand. This 8.7% increase in corn acreage, combined with a 7% decline in soybean acres, directly translates to higher nitrogen application rates since corn is a heavy nitrogen consumer. Management believes corn acreage might surprise further to the upside in 2026 as farmers anticipate restricted soybean export markets, potentially extending the demand tailwind.

Operational guidance reflects planned downtime. The Coffeyville turnaround, which commenced in early October 2025, is expected to last 33 days at a cost of approximately $17 million, reducing Q4 ammonia utilization to 80-85%. While this creates a temporary earnings headwind, the installation of new boilers and the nitrous oxide abatement unit during the outage should enhance reliability and environmental performance for the next operating cycle. Direct operating expenses are forecast at $58-63 million for Q4, excluding turnaround impacts, with full-year capital spending of $58-65 million funding both maintenance and growth initiatives.

The wildcard remains geopolitical disruption. Management explicitly flags potential tariffs on Russian fertilizer imports as a near-term pricing catalyst. With Russia representing a marginal UAN producer and ongoing conflicts disrupting production in Eastern Europe and the Middle East, the global supply balance remains fragile. Any additional curtailments could send prices sharply higher, disproportionately benefiting low-cost producers like CVR Partners that can maintain full production.

Risks and Asymmetries: Where the Thesis Can Break

The October 2025 ammonia release at Coffeyville represents the most immediate threat to the investment case. A lawsuit filed against CVR Energy following the incident, which resulted in multiple individuals being transported to hospitals, creates uncertainty around potential liability and operational impacts. Management acknowledges the release could delay turnaround completion by a few days, but the full financial and reputational consequences remain unknown. If regulatory scrutiny intensifies or operational permits are affected, the company's utilization targets could be compromised.

Execution risk on the feedstock flexibility project poses a longer-term concern. While detailed engineering is complete and equipment ordered, construction projects in the fertilizer industry frequently encounter cost overruns and delays. The project's success is critical to maintaining the competitive moat, as competitors are unlikely to replicate this capability given the required integration with a refinery and the capital intensity. Any failure to complete the project on time and budget would diminish the strategic advantage just as market conditions favor low-cost production.

The agricultural cycle remains a fundamental vulnerability. While 2025 corn acreage surprised to the upside, a return to normal weather patterns or a shift in planting economics toward soybeans could reduce nitrogen demand by 10-15% in a single season. With 38% of the U.S. corn crop dedicated to ethanol production, any reduction in renewable fuel mandates or gasoline consumption could cascade through the demand chain. The company's high customer concentration in agricultural markets amplifies this cyclicality compared to diversified competitors like Nutrien.

Competitive dynamics present a mixed picture. While current geopolitical tensions support pricing, a resolution of conflicts or resumption of Russian exports could flood the market and compress margins across the industry. Larger competitors CF Industries and Nutrien have greater financial resources to weather downturns and invest in clean ammonia technologies that may become required under future carbon regulations. CVR Partners' smaller scale limits its ability to influence market pricing and increases its vulnerability to a supply glut.

Regulatory risks are evolving. The September 2025 antitrust investigation by USDA and DOJ into agricultural input suppliers creates uncertainty around pricing practices and market structure. While the company maintains it operates competitively, any restrictions on pricing flexibility could limit margin capture during tight markets. Conversely, potential tariffs on Russian imports would provide a significant tailwind, illustrating the asymmetric risk-reward profile of the current environment.

Valuation Context: Income-Compelling but Cyclically Discounted

At $94.99 per unit, CVR Partners trades at a price-to-earnings ratio of 7.89 and enterprise value-to-EBITDA of 5.90, representing a significant discount to larger peers despite superior margins. CF Industries trades at 9.70 times earnings and 4.80 times EBITDA, while Nutrien commands 16.19 times earnings and 8.21 times EBITDA. The valuation gap reflects CVR Partners' smaller scale, higher cyclicality, and concentrated asset base—factors that justify a discount but may overcompensate for the company's structural cost advantages.

The 12.55% dividend yield stands as the most compelling valuation metric for income-oriented investors. With a payout ratio of 75.5% and trailing free cash flow of $113.5 million, the distribution appears sustainable through the current cycle. This yield compares favorably to CF's 2.49% and Nutrien's 3.63%, reflecting the partnership structure's mandate to distribute available cash. However, the yield also embeds market skepticism about durability, as commodity cycles inevitably turn and distributions have been volatile historically.

Cash flow multiples tell a similar story. The price-to-free-cash-flow ratio of 7.25 and price-to-operating-cash-flow of 5.46 suggest the market is pricing in significant cash flow degradation from current levels. Given that operating cash flow increased 24% year-over-year to $171.2 million through nine months, these multiples may be overly punitive if management successfully executes its growth projects and maintains utilization above 95% of nameplate capacity.

Balance sheet strength provides downside protection. With $156.2 million in cash and a conservative debt-to-equity ratio of 1.80, the company has financial flexibility to fund its $58-65 million capital program without external financing. The current ratio of 2.68 and quick ratio of 1.89 indicate strong liquidity, while return on equity of 42.0% demonstrates efficient capital deployment. These metrics compare favorably to leveraged competitors and support the argument that the valuation discount is excessive.

Conclusion: A Cost-Advantaged Income Play in a Favorable Cycle

CVR Partners represents a compelling combination of structural cost advantage and cyclical tailwind. The company's unique dual-feedstock capability at Coffeyville creates a durable moat in a commodity industry where cost position determines survival. This advantage becomes more valuable as geopolitical conflicts and production outages tighten global nitrogen supplies, supporting the 52% price increases that drove net income up 156% through nine months.

The investment thesis hinges on two critical variables: successful execution of the feedstock flexibility project and resolution of the ammonia release incident without material operational or financial impact. If management delivers the 8% capacity expansion on time and budget while maintaining its industry-leading safety and reliability metrics, the company will emerge with a sustainably lower cost structure and expanded production capability. Conversely, any significant delays or cost overruns would erode the competitive advantage just as competitors invest in their own efficiency programs.

For income-focused investors, the 12.55% dividend yield offers attractive compensation for commodity cycle risk, particularly given the 75.5% payout ratio and strong free cash flow generation. The valuation discount to larger peers appears excessive when considering superior operating margins of 32.7% and return on equity of 42.0%, suggesting potential for multiple expansion if the company successfully navigates its growth initiatives and the current nitrogen cycle extends into 2026.

The story remains attractive but fragile. While tight inventories and robust corn demand support pricing through the first half of 2026, the agricultural cycle can turn quickly. Investors should monitor natural gas versus pet coke spreads, corn planting intentions for 2026, and any escalation in the ammonia release liability. These factors will determine whether CVR Partners compounds its structural advantages or succumbs to the cyclical pressures that have historically defined the nitrogen fertilizer industry.