Terra Nitrogen (NYSE:TNH) reported its earnings and its distribution this morning. More importantly they reported the “threshold “ level where a massive profit split change (negative for TNH) will kick in. It goes from 99:1 split to 50:50 (after the first $1.045)
First, TNH is ridiculously overpriced. It's the classic case of an unknown/unfollowed stock that stumbles out of the dark ages into a hot sector and has very little float or intelligence. It's a daytraders dream as folks go to chat boards searching for info.
TNH is an MLP . It was spun off by TRA back in 1994 . Its a single factory that churns out nitrogen based fertilizer product (UAN and ammonia byproduct). Terra Industries (NYSE:TRA) retains 75% ownership (needed to control an MLP vs 50.1% for a corp) and is the general partner running TNH. Because they lost money a few years back, profit sharing dropped to just 1% until losses in past were earned back . Those losses are very getting close to being earned back and then profit sharing soars in TRA favor with the big number being 50% of everything over $1.045 cents .
Refer to their last 10-Q where TRA management reposted this ancient profit split
It is all right here on page 9 of their last 10Q
The Limited Partners receive 99% of the Available Cash and 1% is distributed to the General Partner, except when cumulative distributions of Available Cash exceed specified target levels above the Minimum Quarterly Distribution (“MQD”) of $0.605 per unit. Under such circumstances, the General Partner is entitled, as an incentive, to larger percentage interests. As of September 30, 2007, the cumulative shortfall on quarterly distributions to holders of Common Units that must be paid before the General Partner receives an incentive payment was $152.9 million, or $8.18 per unit
Well, today it was announced that after the next $2.86 in distributions is paid out, (next Qtr)… the profit split will kick back in to the old profit split levels of 50:50 after the first $1.045 cent distrib.
By way of fundamentals, TNH runs at 100% production all the time so it can't produce more and if NatGas soars , its margins can crater (yes , this $130 stock traded at $3+ 5yrs ago)
I see folks on chat boards referring to TNH as a 'locked in dividend forever' and a way to cash in on the agriculture boon.
The problem of course is that TNH is no different today than it was at $3. That plant can be replicated by a competitor most anywhere NG is available.
It's a daytraders dream but I suspect 70% have no clue of underlying fundamentals. With a YoY change in avg daily volume going from 27k shares to 638k shares, short interest ratio is under 2.
I think TNH can trade below $100 as people figure this out. I will be listening to the conf call to gauge the level of investor awareness. Been painfully short awhile on this one and I have tried a paired trade (short TNH against TRA) but there really isn't any trading correlation between the two.
The author is short TNH