Assessing ValueAct Capital Management's fourth quarter positions

Part 3
Assessing ValueAct Capital Management's fourth quarter positions (Part 3 of 8)

Why did ValueAct Capital exit its position in CF Industries?

ValueAct Capital and CF Industries

ValueAct initiated a new position in Dresser-Rand Group, Inc. (DRC). It sold its stakes in CF Industries (CF), The Mosaic Company (MOS), and Valero Energy Corporation (VLO). The fund increased positions in Allison Transmission Holding (ALSN) and MSCI Inc. (MSCI). It reduced its stake in Adobe Systems Incorporated (ADBE).

ValueAct Capital exited a position in CF Industries (CF) that accounted for 2.69% of the fund’s third quarter portfolio. Last month, the hedge fund Third Point exited a 4.49% position in CF, while Soros Management and Renaissance Technologies cut their positions.

CF statsEnlarge Graph CF is one of the largest nitrogen fertilizer producers publicly traded. Because nitrogen fertilizers are commodities, the company’s earnings and share prices are largely dependent on market prices for fertilizers such as ammonia, urea, and UAN. So, CF Industries should perform similar to its pureplay peers such as Terra Nitrogen Company, L.P. (TNH) and CVR Partners, LP (UAN). But since mid-2013, CF Industries had outperformed its peers quite significantly (read Learning from hedge funds: CF Industries’ 70% outperformance to know more).

The company recently reported a decline in net earnings for 4Q 2013 to $325.8 million, or $5.71 per share, from $470.7 million, or $7.40 per share a year earlier. Nitrogen segment sales fell 4% due to a decline in overall average selling prices, partially offset by an increase in tons of product sold. Gross margin decreased due to lower revenues and an increase in natural gas costs. Despite the difficult challenging environment with the nitrogen and global urea prices down significantly, CF Industries said it was able to generate a significant level of EBITDA thanks to the structural advantage provided by low cost North American natural gas and the company’s extensive network of plant and logistical assets.

CFHEnlarge GraphThe company said it’s progressing on evaluating options for optimizing its capital structure and converting existing operating facilities “into a master limited partnership structure does not look terribly compelling to other alternatives such as additional low cost debt.”

The company has a positive outlook for 2014. CF said global nitrogen prices have improved significantly since November. Nitrogen floor prices are expected to continue to be the cash cost of Chinese urea producers. An upside to nitrogen prices has recently developed due to the close of the Chinese low-tariff export season, low retailer and distributor inventory levels in important agricultural regions including Europe and North America, and emergence of normal seasonal demand.

The company further added that North America is expected to have robust ammonia demand through the first half of 2014, assuming normal weather conditions; however, prices may be constrained due to high levels of producer inventory carried over from 2013.

CF increased dividend 150% to $1.00 per share per quarter in October and repurchased 1.5 million shares during 4Q 2013. The company said it intends to raise up to $1.5 billion of additional long-term debt in early 2014. These new borrowings, plus cash from operations and proceeds from the sale of the phosphate business, will fund the company’s capital expenditures, working capital, dividends and additional share repurchases. The company currently has $1.4 billion remaining on its existing $3.0 billion share buyback authorization.

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