Cf industries holdings buy the structural advantage – cf industries holdings, inc. (nyse cf) seeking alpha electricity load shedding

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CF Industries Holdings ( CF) is breaking out higher following upbeat earnings. Although a decline in agricultural commodity prices have weighed on the company’s operations in recent years, there looks to be a turnaround taking shape. The supply/demand balance of the nitrogen industry looks to be normalizing, leading to increased demand for CF’s products. Moreover, the company’s competitive advantages are giving it a leg up on its competitors. Its share price is beginning to trend higher, and I am buying stock in the name as fundamental drivers are leading the way. Fundamental Narrative

The company manufactures and distributes nitrogen fertilizers and other nitrogen products worldwide. It operates through Ammonia, Granular Urea, UAN, AN, and Other segments. Its principal nitrogen fertilizer products include ammonia, granular urea, urea ammonium nitrate, and ammonium nitrate.

Over the last quarter, CF generated adjusted EBITDA of $296 million, while also adding $100 million of cash to the balance sheet, which is on top of a temporary increase in working capital from higher inventory as a result of delayed spring shipments, according to management. The strong performance came amid a quarter where cold and wet weather delayed fertilizer purchases and applications across the Northern Hemisphere, according to its earnings call. This reflects management’s ability to execute efficiently, capitalizing on lower North American natural gas costs and higher global nitrogen prices despite the delayed spring and delayed shipments.

CF enjoys the benefits of location as it has a structural advantage from access to low cost North American natural gas. Energy costs in many other parts of the world are rising, while CF’s is falling. During the quarter, the majority of its inland plants had natural gas costs lower than Henry Hub due to favorable basis differentials, driving a competitive advantage that is benefiting operating margins. Management expects this favorable situation to persist, according to its earnings call.

Its in-region assets have access to some of the most productive gas basins in North America. As technology is rapidly improving, increasing the ability to extract natural gas at lower costs, CF should remain at the low end of the global cost curve. Moreover, the nitrogen market is becoming more balanced, driven by reduced production in high cost regions, notably Eastern Europe and China, according to management. This is supporting global urea prices well above the lows of 2017.

Producers in China face high energy prices year-over-year along with increased environmental regulation and enforcement, again giving CF a structural market advantage. The impact of these factors is highlighted by the dramatic decline of Chinese urea exports. Through the first quarter, Chinese urea exports were 77% lower than the same period in 2017, according to the CF earnings call.

The impact however, is not limited to China and Eastern Europe. Two unprofitable urea plants in Brazil are expected to close later this year and production in Trinidad has been interrupted due to gas availability. These factors helped drive CF’s first quarter performance, supporting its cash generation.

Moreover, management continues to expect strong nitrogen consumption in North America, coming in roughly equal to last year given anticipated crop plantings. Despite delayed spring, farmers are better situated today to catch up on plantings given the technology they employ, according to its earnings call. The industry’s ability to supply increasing volume to all areas will be challenged by the significant logistical constraints of poor rail service, stretched trucking resources, and tighter application windows, according to management. These factors should enable CF to capture higher prices across most segments compared to the second quarter of last year.

Although declining agricultural commodity prices have weighed on demand for its products recently, there looks to be a turnaround taking place. Its revenue began to turn higher in 2017, while earnings per share also spiked higher. Its fundamental operations should further strengthen due to the number of structural tailwinds discussed above.

CF looks to have bottomed and is reversing higher following a steep fall in 2015. As the supply/demand dynamics stabilize in the nitrogen industry, investors are becoming more comfortable investing in CF. Moreover, the stock looks to have put in a double-bottom pattern in recent years, signaling a potential end to its selling pressure.

CF is breaking out higher following upbeat earnings. Although a decline in agricultural commodity prices have weighed on the company’s operations in recent years, there looks to be a turnaround taking shape. The supply/demand balance of the nitrogen industry looks to be normalizing, leading to increased demand for CF’s products. Moreover, the company’s competitive advantages are giving it a leg up on its competitors. Its share price is beginning to trend higher, and I am buying stock in the name as fundamental drivers are leading the way.

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