What's on Tap for CF Industries

I'm eagerly waiting for CF Industries' (NYS: CF) numbers to come out next week. Analysts are expecting earnings to be around 27% higher this time around. Let's take a look at what's going to work, and not work, for CF?

Gassing up
Natural gas prices have been on a wild downswing lately, hitting decade-low levels. This is a big boon for chemical makers, as natural gas is a key input for them. Chemical giant DuPont (NYS: DD) is expecting a dip in its costs this year because of lower natural gas and ethane prices. CF should also see its costs coming down as a price change of $1 per MMBtu would mean a change of roughly $156.3 million in the company's "unrealized mark-to-market gain/loss" (pre-tax).

Softer natural gas prices were the primary reason behind the astounding 79% jump in CF's gross profit in the fourth quarter. But the advantage might not play out as significantly this time. That's because although gas prices are currently almost half of what CF encountered in its fourth quarter, the company had unfortunately hedged a major portion of its natural gas requirements for this year by December. Which means that it has lost out on a good opportunity to lower costs.

Set to head north
But that doesn't mean CF is in a tough spot. Its revenue looks set to rise as prices of nutrients are still strong. Take urea for instance. By hedging, CF has limited its urea production cost to below $150 per ton. Now picture this. From a bottom of around $350 in December 2011, urea prices were up 15% by March. So margins should continue to be good.

Similarly, urea ammonium nitrate (UAN) prices have been heading north in recent months, which should be an added benefit for CF. So profitable is the nutrient that, like peer CVR Partners (NYS: UAN) , CF is aggressively adding capacity to upgrade higher amounts of ammonia to UAN. Since last quarter, it started upgrading an extra 200,000 tons per year. Given how UAN sales volumes and prices jumped 37% and 50%, respectively, during the first nine months of 2011, CF's moves appear smart. I am expecting more updates from the company on some of its plans in the forthcoming earnings call.

Phosphate could be a dampener, though. The price of DAP fertilizer, for instance, has fallen more than 5% year-to-date. Peer Mosaic (NYS: MOS) faced the brunt of this in its last quarter, although higher volumes made up for lower prices. But CF curtailed phosphate production in the first quarter, which could mean lower volumes. So first-quarter phosphate revenue might slip from last year's levels.

Overall, analysts are expecting CF's top line to climb by a mild 7.5% in the first quarter. But if CF has managed to take advantage of the early planting season that kicked off in the U.S. by selling more, it could surprise us with heavier top-line growth.

The Foolish bottom line
CF could make a killing if the U.S. Department of Agriculture's predictions of record corn plantations come true. A good start to the planting season, rock-bottom stockpiles of critical crops like corn, and global buyers stepping up fertilizer purchases -- things are on fire.

It's a win-win situation for CF, as everything seems to be working in its favor. Its shares have gained 30% year-to-date, but if CF fails to impress the Street next week, worry not. You'll know it's an opportunity to bet on a fundamentally strong company.

I can't wait to cover CF's earnings in detail. In the meantime, to get more earnings-season insight, check out our brand-new free report "5 Stocks Investors Need to Watch This Earnings Season." It details what to look for from Apple and four other must-watch companies as they report their latest results. Get access right now.

At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of CF Industries Holdings. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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