Morningstar | Raising CF FVE to $50 on Higher Near-Term Outlook Due to Lower U.S. Natural Gas Prices
No-moat CF Industries reported solid fourth-quarter results, as adjusted EBITDA grew 31% year on year to $349 million, driven by higher prices and lower natural gas input costs. We forecast lower U.S. natural gas prices in 2019 than in 2018, which should boost CF’s profits, since natural gas is the feedstock for its nitrogen production. Having updated our model to incorporate lower U.S. natural gas prices, we increase our fair value estimate to $50 per share from $48.We maintain our 2019 urea nitrogen price forecast of $260 per metric ton, as higher European natural gas prices will increase costs for European producers that have recently set the marginal cost of production. Although we anticipate more Chinese production in 2019 than in 2018 as temporarily shuttered production comes back on line, this should be offset by higher demand from our outlook that more U.S. farmers will choose to plant corn over soybeans. Planting more corn boosts nitrogen demand because corn requires far more nitrogen fertilizer than soybeans, which generate most of their needed nitrogen naturally through their symbiotic relationship with rhizobia bacteria.
CF uses low-cost U.S. natural gas, a feedstock with different price movements from the feedstock costs of marginal cost producers that use European natural gas or Chinese coal. As a result, CF's profits are sensitive to the spread between U.S. natural gas prices and either European natural gas or Chinese anthracite coal in any given year. Over the long term, we forecast that nitrogen marginal cost producers will come from European natural gas. Our long-term urea price forecast of $290 per metric ton (in nominal terms) stems from our long-term forecast for European natural gas prices above $7 per million British thermal units. This feedstock cost is well above our U.S. long-term natural gas price forecast of $3 per mmBtu. This spread should allow CF to generate operating profit margins above 30% in a midcycle environment.
CF Industries Holdings is a global fertilizer and chemical company. The company's principal nitrogen fertilizer products are anhydrous ammonia, granular urea, urea ammonium nitrate solution and ammonium nitrate. The company's other nitrogen products include diesel exhaust fluid, urea liquor, nitric acid and aqua ammonia, which are sold primarily to its industrial customers, and compound fertilizer products, which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus, and potassium. The company serves its customers in North America through its production, storage, transportation and distribution network.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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