CF Industries (NYSE: CF) is down 4% after-hours after the company reported Q3 EPS of $2.62, which was well below the analyst estimate of $3.47. Revenue for the quarter came in at $921.4 million, versus $1.1 billion reported last year.

Outlook

CF Industries has a positive business outlook for the fourth quarter and into 2015. U.S. corn growers have among the lowest variable costs of farmers in any corn production region of the world. Given healthy grain demand and attractive farm economics, which still favor corn over soybeans for U.S. growers, the company forecasts robust nitrogen demand associated with 90 million acres of corn expected to be planted in 2015. Additionally, North American natural gas prices have declined significantly from their 2014 highs as incremental production has resulted in record storage injections. The company has locked in attractive natural gas costs through the first quarter of 2015.

CF Industries’ current low ammonia inventory, along with planned turnaround activity and unplanned outages, may impact the company’s total availability for the fall. This is expected to limit fourth quarter ammonia sales volumes, excluding sales to Mosaic which are sourced from the company’s Point Lisas Nitrogen Limited (PLNL) joint venture, to levels similar to the fourth quarter of 2013. The unplanned outage at the company’s Woodward, Oklahoma complex will also affect UAN volumes and is expected to have approximately a $20 million impact on cash operating earnings from lost production volume.

The company has a large book of ammonia orders that were placed during June and July, and a significant amount of available product will be dedicated first toward those existing orders. Domestic ammonia prices are expected to remain steady through the fourth quarter, primarily due to continued tight supply and strong demand as evidenced in current pricing of approximately $650 per short ton in the Corn Belt. Higher ammonia prices and tight availability could drive demand towards higher margin urea and UAN. The company expects robust demand for pre-plant application in the first half of 2015.

Urea prices are expected to remain stable to rising through the fourth quarter, supported by global outages and an increase in the Chinese export tax rate related to the end of its export season on October 31. The cash costs of production and distribution from marginal cost producers support the current $310 per short ton delivered price to the U.S. Gulf during this traditionally low volume period of the year. Robust North American demand for urea is anticipated for 2015 due to the significant corn and wheat acres anticipated to be planted next year, which is expected to result in price increases during the spring application season in 2015.

UAN prices have been relatively stable even as retailers delayed buying as they have been gauging farm-level interest in fertilizers ahead of 2015 planting. Further delays in buying could lead to higher spot market demand in the first half of 2015, which CF Industries would be well positioned to serve from its broad network of production, storage and distribution assets. Additionally, the company is selling from a large order book for UAN and expects to finish 2014 with very low inventory levels.

“Given the attractive demand outlook for North American consumption and a continued balanced global nitrogen supply situation, we expect to generate robust revenue performance into 2015,” stated Mr. Will. “Farm balance sheets and cash levels are strong, nitrogen costs as a percent of crop revenues are in line with their historic averages, and farmers are economically incented to apply the appropriate amount of nitrogen fertilizers to ensure optimal crop production. These factors, along with North America’s reliance on nitrogen imports to satisfy a significant portion of demand, bode well for our business outlook.”

Attractive North American natural gas costs, in comparison to feedstock costs in other regions of the world, continue to support CF Industries’ long-term cash generation prospects. Year-over-year natural gas production growth of approximately 3 billion cubic feet per day led to record storage additions during the 2014 injection season. As a result, gas prices have moderated and traded in a narrow range of approximately $3.80 to $4.10 per MMBtu during most of the third quarter. To mitigate potential weather-related spikes in natural gas costs, the company has put in place collars for 90 percent of its gas needs through the first quarter of 2015 with an average floor price of $3.41 per MMBtu and an average ceiling of $4.25 per MMBtu. Based on these natural gas prices, the company’s cash cost to produce ammonia would be approximately in a range of $140 to $170 per short ton. To mitigate potential basis volatility as seen in the first half of 2014, the company also has fixed the basis differential to Henry Hub through the first quarter of 2015 for the portion of its gas needs that is most subject to basis volatility at Port Neal, Iowa, and Courtright, Ontario.

For earnings history and earnings-related data on CF Industries (CF) click here.