Stifel Equity Trading Desk analysts Paul A. Massoud and Anthony Shen maintain a Hold rating for CF Industries Holdings, Inc. (NYSE:CF) as the company announce Q4 earnings.

CF Industries

CF Industries Holdings, Inc. (NYSE:CF) posted a 4Q beat driven by stronger-than-expected ammonia prices. Looking ahead, we caution against the impact of higher natural gas prices, particularly in 2Q14 (where half of CF’s expected demand is still open to market pricing) and beyond. With natural gas prices having averaged $4.64/mmBTU since December 31, we expect realized prices to be somewhat higher than its hedge in 1Q (75% hedged at $3.66/mmBTU) and significantly higher in 2Q (50% hedged at $3.55/mmBTU), though lower than our previous estimates for $4.25/mmBTU for both quarters. As a result, we are adjusting our 2014 EPS estimate slightly higher to $18.50 from $18.05 previously. We maintain our Hold rating.

CF Industries earnings

CF Industries Holdings, Inc. (NYSE:CF) reported 4Q13 EPS of $5.71, vs. our estimate of $3.80 and Street consensus of $4.53. The beat was a result of stronger-than-expected ammonia price realizations and gains from natural gas and foreign currency derivatives amounting to $0.67 per share.

Nitrogen net sales in 4Q13 totaled $1.2 billion (vs. our estimate of $983.0 million) and cost of goods sold were $586.6 million (vs. our estimate of $618.5 million), resulting in gross margin of $592.1 million (vs. our estimate of $364.5 million). CF intends to issue $1.5 billion in long-term debt in 1H14, using the proceeds to fund capex, working capital dividends and share repurchases. 2014 capex guidance is $2.5 billion, with $2 billion allocated for capacity expansions and the remaining $500 million allocated towards sustaining and other capex.

CF Industries Holdings, Inc. (NYSE:CF) was able to hedge some of its natural gas consumption in 1H14. For 1Q14, 75% of natural gas demand is hedged at $3.66/mmBTU. For 2Q14, 50% of natural gas demand is hedged at $3.55/mmBTU. This compares to our previous estimate for $4.25/mmBTU. To account for the hedges, we are lowering our 1Q14 natural gas assumption to $3.91/mmBTU and our 2Q14 assumption to $4.10/mmBTU. We maintain our 2H14 estimate of $4.25/mmBTU.

CF Industries valuation

We are raising our 2014 EPS estimate from $18.05 to $18.50 to reflect lower natural gas price assumptions in 1H14. For 1Q14, we are raising our EPS estimate from $4.46 to $4.50. We maintain our Hold rating.

Segment Review

Nitrogen

Net sales in 4Q13 totaled $1.2 billion (vs. our estimate of $983.0 million) and cost of goods sold were $586.6 million (vs. our estimate of $618.5 million), resulting in gross margin of $592.1 million (vs. our estimate of $364.5 million).

  • Ammonia sales totaled 859,000 tons (vs. our estimate of 932,000 tons) with reported realized pricing of $512/ton (vs. our estimate of $425/ton).
  • Urea sales totaled 611,000 tons (vs. our estimate of 649,000 tons) with realized pricing of $335/ton (vs. our estimate of $310/ton).
  • UAN sales totaled 1.7 million tons (vs. our estimate of 1.5 million tons) with realized pricing of $266/ton (vs. our estimate of $251/ton).
  • AN sales totaled 217,000 tons (vs. our estimate of 229,000 tons) with realized pricing of $225/ton (vs. our estimate of $231/ton).
  • Average costs for all nitrogen shipments were $165/ton (vs. our estimate of $185/ton).
  • Gas costs were $3.74/MMBtu during the quarter (vs. our estimate of $3.70/MMBtu).
  • CF has 75% of 1Q14 NYMEX exposure hedged at $3.66/MMBtu and 50% of its 2Q14 exposure hedged at $3.55/MMBtu

Phosphates

Net sales in 4Q13 totaled $147.6  million (vs. our estimate of $158.2 million) and cost of goods sold were $145.9 million (vs. our estimate of $167.3 million), resulting in gross margin of $1.7 million (vs. our estimate of negative $9.1 million).

  • Phosphate sales totaled 415,000 tons (vs. our estimate of 475,000 tons), with DAP sales of 323,000 tons (vs. our estimate of 390,000 tons) and MAP sales of 92,000 tons (vs. our estimate of 85,000 tons).
  • DAP and MAP realized pricing were $348/ton (vs. our estimate of $330/ton) and $382/ton (vs. our estimate of $350/ton), respectively.
  • Average costs for all phosphate shipments were $352/ton (in-line vs. our estimate).

Capital allocation

CF Industries Holdings, Inc. (NYSE:CF) intends to issue $1.5 billion in long-term debt in 1H14, using the proceeds to fund capex, working capital dividends and share repurchases. 2014 capex guidance is $2.5 billion, with $2 billion allocated for capacity expansions and the remaining $500 million allocated towards sustaining and other capex.

CF Industries Holdings, Inc. (NYSE:CF) repurchased 1.5 million shares at an average price of $223.21 in 4Q13 ($337.8 million). Currently, CF has $1.4 billion remaining under its $3.0 billion share repurchase program.