Money and Investing Thoughts

A few months ago I wrote several articles about the relationship between Terra Nitrogen L.P. (TNH: 197.31 +1.349 +0.69%) and Terra Industries (TRA: 0.00 N/A N/A) concerning the earnings and dividends of Terra Nitrogen. You can see the articles here, here and here. For background, TNH had until the last quarterly dividend a deficit of accumulated minimum dividends to work off. As of the last dividend, the deficit had been repaid and TRA was then entitled to about 44% of TNH’s earnings before dividends were paid to share holders. I warned that unsuspecting TNH unit holders may not get the payout they were expecting. This quarters results vividly show that outcome.

Here are the comparative results for the two quarters:

First quarter 2008:

• Revenue: $174.5 million
• Net income: $81.6 million
• Dividend: $4.20 per unit

Second quarter 2008:

• Revenues: $256.7 million
• Net income: $130.2 million
• Net allocated to common units: $74.2 million
• Dividend: $3.63

As you can see net income increased by $48.6 million and the amount paid out as dividends decreased by $7.4 million. The recent $3.63 dividend still give a robust 12.9% yield on the current ($112) share price, but it is probably a disappointment to those who bought at $164 in April without checking into the partnership details or reading this blog. Going forward any hit on profitability will hid double hard on the payout to common unit holders. One other item from the figures above: I am truly impressed at the 51% profit margin! These people are minting money at their current pricing levels.

I added TNH to this site’s portfolios in Nov 2007 at about $102 and dropped it at the end of April 2008 at $144 in favor of Terra Industries (TRA: 0.00 N/A N/A). Terra also owns about 75% of TNH, so TRA shareholders reap the majority of the benefit of TNH’s profitability. Another issue I found with TNH units was the volatility of share prices around earnings and dividend release. It is not uncommon for the share price to fall 4 to 5 times the dividend as the ex-div date approaches. Finally, TNH earns from the production of a single fertilizer plant and has been running at 100% capacity. The only upside TNH has is through pricing, there will be no additional production.

At this point, I definitely prefer TRA over TNH. The company is generating huge amounts of cash with which they are looking for ways to enhance shareholder value. The are buying in shares, starting up a moth-balled ammonia plant and have started paying a small dividend. Terra Industries has earned $2.91 a share for the first 6 months of 2008 and even matching Q2 earnings for Q3 and Q4 put 2008 earnings at $6.80, giving a PE of 7.5 at the current share price. TRA is a component of this site’s Special Opportunities Portfolio. For someone looking for something different (not POT) in the fertilizer space, TRA deserves a look.

Note: I currently do not have a position in either TRA or TNH.

Many foreclosures aren’t included in the data at all because they are not sold through the Realtors’ multiple-listing service.

Existing-home sales fall 2.6% to 10-year low – MarketWatch.

If up to 60% of home sales in places like Sacramento and Las Vegas are foreclosures what good is the data from this report? Sacramento and Las Vegas are showing significant year-over-year sales gains.

I write about Las Vegas and Sacramento markets because I am following the real estate trends in those two areas. The quote I pulled above makes me wonder if the sales data has any correlation in reality. How many othe areas are having a significant proportion of sales not show up in the national data?

Over the last few months I have been writing articles on the improving housing market in the Sacramento region, with a little Las Vegas thrown in. I write on these areas because I am familiar with the markets and these were some of the leaders of the recent boom and bust. Over the last 3 months these markets have shown growth in numbers of home sales in both year-over-year and month-to-month, though at significantly lower median prices than a year ago. Today’s data show the other side of the equation, foreclosures, have not turned the corner yet.

In the 2nd quarter of 2008 foreclosures for the 8 county Sacramento region totaled 6,075 compared to 5,278 in the first quarter. The total foreclosures of 11,353 is in comparison to 17,117 homes sold year-to-date in the region. Over half of the resales have been foreclosure properties.

Defaults throughout California continue to rise, although at a slower pace. One item caught my eye:

Most of the loans that went into default last quarter were originated between September 2005 and November 2006. The median age was 26 months, up from 16 months a year earlier.

To me this says it is essentially the same “pool” of mortgages that are going into default, the bunch that originated right at the peak of the market. This same pool appears to be reaching a peak of rate resets against falling values. No wonder so many are choosing to turn in the keys. Mortgages taken out both before and after this period will not have the same extreme negative equity position as this group.

The thing to remember here is this tends to be very delayed data. The average foreclosure takes place after the mortgage is 5 payments in arrears, so the current foreclosure numbers are up to 9 months old (5+3+1). Also, the current sales of foreclosed properties are most likely from the 10,000 homes repossessed in 2007. A turn in the foreclosure activity will not show in the data until 6 to 8 months after the fact.

The next thing I would like to see is a stabilization in the median price on a month to month basis. At that point many more buyers will show up to try to snatch good deals on foreclosed properties and the overhang in inventory will soon (my guess: 6 months?) be absorbed.

Sources: Sacramento Bee Data Quick

Time again to report on last week’s results for the WilderHill New Energy Global Innovation Index, the NEX. The NEX is the target index for the PowerShares Global Clean Energy Fund (PBD: 9.73 +0.259 +2.73%). I found some interesting reversals in last week’s top and bottom stocks in the biofuels area.

The NEX ended the week with a gain of 4.2%, nicely out gaining the NASDAQ and S&P500, up 3% and 2.6%. AMEX oil lost 3% on falling crude.

The top sector for the week was biofuels and biomass with a gain of 8%. Three American ethanol were the top gainers while there were a pair of Brazilian ethanol companies in the bottom 5. Regular readers here know I am a strong proponent of U.S. ethanol production so these are gratifying returns. The energy efficiency sector was close on the heels of biofuels with a 7.7% gain.

Only one of the 7 sectors finished in negative territory. “Other renewables” consist of small hydropower and geothermal power and the sector managed to fall 0.9% on the pullback of Canadian Hydro Developers.

Here are the top gainers and losers for the week from the NEX:

NEX top gainers since 15 Jul 2008
VeraSun Energy VSE + 57.5%
Verenium VRNM + 55.1%
Aventine Renewable Energy Holdings AVR + 38.9%
Kingspan Group KSP + 29.3%
Maxwell Technologies MXWL + 20.3%

NEX top losers since 15 Jul 2008
Canadian Hydro Developers KHD – 12.7%
Sao Martinho SMTO3 - 11.3%
Conergy CGY - 8.7%
Cosan S/A Industria e Comercio CSAN3 - 8.0%
Sharp 6753 - 7.0%

Note: I have a long position in VSE.

USDA_DOE_biofuels_letter_61208.pdf (application/pdf Object).

The link above is the Dept. of Energy’s response to several questions concerning biofuels impact on food and energy prices. The questions are from Senator Jeff Bingaman, Chairman of the Senate Committee on Energy and Natural Resources. The 16 page report is in question-and-answer form and here are some selected quotes:

First, the effect of biofuels on U.S. food prices:

During the first 4 months of 2008, the all food CPI increased by 4.8 percent, with increased ethanol and biodiesel consumption accounting for only about 4-5 percent of the total increase while other factors accounted for 95-96 percent of the Increase.

That’s right: Biofuels account for 4-5% of the recent food price increases. Data for 2007 show a lesser effect.

Next, how much has U.S. biofuel production affected global food prices:

From April 2007 to April 2008, in the absence of any growth in biofuel production in the United States, we estimate that the International Monetary Fund (IMF) global food commodity price index would have risen by 40.6 to 42 percent as opposed to 45 percent.

In other words, biofuels account for 3-4% of the 45% increase of food commodities globally.

How has increased ethanol and biodiesel consumption affected gasoline and diesel prices?

Biodiesel use has had a negligible effect on diesel fuel prices since biodiesel fuel production is so small compared to total diesel fuel use.

We estimate that, if we had not been blending ethanol into gasoline, gasoline prices would be between 20 cents per gallon to 35 cents per gallon higher.

Remember, when diesel fuel cost less than gasoline? Remember when the U.S. did not produce 9 billion gallons of ethanol to blend into gasoline?

I know there are many readers who do not believe any reports that do not agree with their point of view, but they will believe the fear mongering of an anonymous website. Those types should not read the report. For those who like to read and make their own decisions, scan through the entire report.

Another piece of good news came from VeraSun Energy (VSE: 0.00 N/A N/A) today. They are now starting up their new North Dakota refinery, which they put on hold less than a month ago, due to improving market conditions. Maybe because corn has fallen from $8/bushel to $6 and nobody noticed. Press release here.

These news pieces reinforce my ongoing belief that corn ethanol is a integral, necessary and growing part of the U.S. fuel structure. Neither the politics, economics or technology (i.e: cellulosic ethanol) will change the equation anytime in the foreseeable future.

Note: I have a long position in VSE.