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

We maintain our CF Industries CF $85 per share fair value estimate after updating our valuation model to incorporate first-quarter results as well as our lower near-term, nitrogen, and U.S. natural gas price forecasts. Our no-moat rating is unchanged.

CF shares were up 3% at the time of writing, while the broader market was down 1%, on the company’s outlook for strong nitrogen demand in 2023. At current prices, we view shares as slightly undervalued, with the stock trading a little over 10% below our fair value estimate but in 3-star territory. Accordingly, we recommend investors wait for larger margin of safety before considering an entry point.

We lowered our 2023 nitrogen urea forecast to account for prices falling faster than we had previously forecast. We now forecast average urea prices (on a free on board Middle East basis) will average $375 per metric ton in 2023, down from our previous forecast of $450 and well below the 2022 average price of $700. On its own, this would lead to sharply lower profits for CF on lower nitrogen prices. However, the lower prices should lead to more normal demand as nitrogen becomes more affordable for farmers. This should support nitrogen prices in 2023, even though spot prices fell to the low-$300 per metric ton range earlier in the year.

Separately, we also lowered our U.S. natural gas price forecast (Henry Hub basis) amid extra supply resulting from a more mild winter. We now see U.S. natural gas prices averaging nearly 15% below our long-term price forecast of $3.30 per million British thermal unit. As a primarily U.S. nitrogen producer, using U.S. natural gas, the lower natural gas costs should sharply lower CF’s unit production costs throughout the year as the company works through higher-cost inventory.