Money and Investing Thoughts

I just went through the quarterly conference call for Atlas Pipeline Partners (APL: 37.07 -0.31 -0.83%) and the news is encouraging. First, I will state that the current market mentality does not reward companies that are able to continue to prosper or are working to improve their results in the current economic environment. I am really at a loss to understand why there is not more positive stock price results for those companies that are still doing OK despite the overall economic situation.

From the APL conference call I pulled two major ideas that I believe are positive for the company:

1. The 38¢ dividend declared for the 4th quarter had 1.5 times coverage in distributable cash flow. Prices and margins have improved in the first quarter and management declared that the new dividend was set at a (hopefully) sustainable rate. The stock currently yields 26%.
2. The company is in end-stage negotiations to sell part or all of 3 different assets. The proceeds from these sales will be used to pay down debt and deleverage the company. Completion of these deals could happen in just a few weeks.

APL has been one of the hardest hit of the midstream natural gas companies down over 90% from last summers 52 week high. Atlas Pipeline Partners seems to have survived the 4th quarter energy price collapse and is still able to generate free cash flow. It make take another quarter or two if increasingly better numbers for the market to like this stock again, but at the current share price I think long term investors will be well rewarded.

Note: APL is a component of this site’s Income Portfolio.

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Terra Industries – Terra Industries Inc. Investor Information.

Terra Industries Inc. (TRA: 0.00 N/A N/A) has reported 2008 4th quarter and full year results and the recent past was very good for the company. I will take a quick look at how they did and try to make a guess on what the future will bring.

First, for you income and Terra Nitrogen LP (TNH: 197.31 +1.349 +0.69%) fans, the company declared a distribution of $2.97 per unit. Shareholders for the entire 2008 earned $13.60 in distributions. Early in 2008 I recommended TRA vs. TNH when the net income distribution shifted in favor of the general partner (TRA). TNH shareholders are now getting $3.00 per share on the same income that a year ago would have earned them $4.50 (roughly). The current partnership agreement gives TRA about 40% of the net income off the top, then they pick up 75% of the distributions for the units they own.

For the 4th quarter TRA earned $1.65 per share, a 150% increase over the same quarter in 2007. The earnings were also in line with the $1.64 earned in the 3rd quarter of 2008. For the year TRA earned a record $6.20 per share, a 225% increase over 2007. According to Yahoo Finance the consensus estimate for the quarter and year were 92¢ and $5.52, pretty big misses. Revenue gains were made on higher selling prices as volumes for nitrogen, UAN and ammonia fell 12%, 16% and 30% respectively.

Going forward, this is what I see:

The biggest negative is that TRA’s product prices fell sharply at the end of the 4th quarter, forcing a $48 million write down in inventories. The combination of lower sales volumes and lower prices could have a significant effect on the bottom line.

The positives list is a little longer: TRA idled a couple of plants when the global slowdown started cratering prices, allowing the company to do some needed upkeep and keep inventories under control. Natural gas, which is the major expense for the company, is at a 5 year low. Farmers skipped a significant portion of fertilizer application in the fall as fear of falling commodity prices took effect. They will need to make up those applications in the spring. Corn prices have recovered to about $3.80 from near $3.00 in December, and historically $4.00 corn is a very good number.

The earnings estimate on TRA for 2009 is about $3.00 per share. I believe the current pessimistic environment has that number at least $1.00 low. But at this point I really see Terra Industries as a value play with long term positive fundamentals. TRA has a market cap of $2.4 billion while it sits on $1 billion in cash and their 75% stake in TNH has a current value of $1.8 billion. TNH generates about 30% of TRA’s earnings. Also, at the end of Q3, TRA had $680 million in cash.

Although TRA has doubled from its recent low, I think 2009 will be a year of positive surprises for the company.

Note: TRA is a component of this site’s hypothetical Opportunities Portfolio.

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The Associated Press: Cowskulls and dust: Drought grips Argentina.

Harvest season will start in a month or so for the major South American agricultural areas in Brazil, Argentina and Uruguay. Unfortunately, for many of the farmers there will not be much to harvest. There has been no rain in much of the region for all of the spring and summer. The AP article linked above gives some graphic examples of how Argentinian farmers are being affected.

Brazil and Argentina are the number 2 and 3 producers of soybeans. Brazil is the world’s number 1 exporter of beef and Argentina is in the top 5. The drought is especially hard on the corn crop which is used mainly to feed the beef, although a lot of the beef raised in the region is grass fed. The grass has not been watered either.

During the spring planting season the financial meltdown was at its peak and many South American farmers were not able to get loans to purchase fertilizer for their crops, putting a dent in the possible harvest for the year. Now the drought is further reducing the amount of grain that will be harvested and killing of a significant portion of the region’s cattle herd.

What does this mean for investors? First, I think you will start to see significant price increases in agricultural commodities: corn, soybeans and beef especially. Normally increasing prices for commodities would be good for the fertilizer prices, but this drought may have a strong negative impact on fertilizer sales in South America. Farmers there will not have the money or motivation to buy fertilizer for the next seasons crop until they know the drought has broken. The problems in South America should be a benefit for U.S. based producers of meat and soybeans. The foreign markets that need these products will be forced to buy from U.S. suppliers.

I have not seen a lot of U.S. based news on the severity of the drought in South America but it is going to have a tremendous impact on exports from the region.

Oil falls below $34 ahead of Feb contract expiry: Financial News – Yahoo! Finance.

I found the article linked above very interesting and thought provoking. The main point of the story is that oil traders are dumping their near term contracts because they have no where to store the oil. Since reading this article this morning oil has recovered over 10% as other traders (I assume) rush in to cover their positions. Reading the article above and the oil news through the day has me wondering whether oil traders are setting themselves up for a big squeeze. Let me lay out the facts as I see them.

• Worldwide oil consumption has fallen about 500,000 barrels per day from the levels of last year.
• The contango in the oil futures has producers of oil selling it in forward contracts. The 6 month futures were $17 to $18 /barrel higher than the current spot last  time I looked and end of 2009 contracts were $20 better than current prices.
• Oil in storage for future delivery is starting to take up all available storage space.
• If there is not enough storage or demand where will current and near term  production go? Prices will have to drop to the point where producers reduce production to something less than current demand.
• If production does not contract significantly, in a few months their will be future’s contract holders buying $55 oil that is worth less than $40.
• Somebodies will be going broke!

I know OPEC has committed to significant cuts in production and that is the reason for the oil price contango (so I read).  But there seems to be a problem is the oil industry runs out of storage for oil sold into future contracts. I do not know what the effects of this can be, and it appears that somewhere there is going to be a big squeeze!

I would appreciate your feedback and thoughts on this topic.

Note: I wrote this article last Friday and somehow forgot to hit the publish button, my apologies.

Terra Industries weighs $2.1B takeover bid: Financial News – Yahoo! Finance.

This bid by CF Industries (CF: 186.75 +4.45 +2.44%) sucks for Terra Industries (TRA: 0.00 N/A N/A) shareholders. I think the stock is grossly undervalued. I wrote here that TRA had a valuation problem when you look just at the company’s cash holdings and the value of their stake in Terra Nitrogen (TNH: 197.31 +1.349 +0.69%). The market values the non-TNH part of Terra’s business, which generates 70% of their revenues at less than zero.

I do see a couple of positive’s in this bid:

• First, it puts TRA in play and may end up pushing the stock back up to a reasonable level.

• Second, if the purchase does go through, shareholders will end up owning shares of CF, which is in the same industry.

This was a smart move by CF to try to pick up Terra’s assets on the cheap. Let us hope this bid starts a bidding war and the shares continue to appreciate.

Note: TRA is a component of this site’s hypothetical Opportunities Portfolio.

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