CF Industries Earnings: Lower Nitrogen Prices Offset by Falling Natural Gas Prices

We maintain our $85 per share fair value estimate for CF Industries CF following the company’s second-quarter earnings. Our no-moat rating is also unchanged. At current prices, we view CF shares as fairly valued, with the stock trading just below our fair value estimate. As such, we recommend investors wait for the stock to pullback and offer a larger margin of safety before we would recommend shares.

CF’s results reflect continued lower fertilizer prices. Nitrogen prices have fallen significantly since hitting all-time highs last year as a result of the supply shock from the Russia-Ukraine conflict that sharply reduced natural gas exports from Russia to Europe. European natural gas-based nitrogen has historically set the marginal cost of production and this supply shock, along with lower fertilizer exports from Russia and China, sent prices soaring.

However, as European natural gas prices have come down and an economic slowdown has weighed on industrial nitrogen demand, nitrogen prices now sell well below our $350 per metric ton long-term urea price forecast. In response to falling prices, we reduced our nitrogen price forecast for CF in 2023. Longer term, as industrial demand returns, we expect prices will rise to reflect marginal cost economics based on our long-term European natural gas price forecast.

Separately, as a result of a mild winter, U.S. natural gas prices, CF’s largest input cost, have fallen and are now well below our $3.30 per million British thermal unit long-term forecast. As a result, we reduced our unit production cost assumptions for CF. As a result, the lower prices are offset by the lower costs, leading to a similar profit forecast.