Could a $1 natural gas price change affect Terra Nitrogen shares?

Market Realist

Why did Terra Nitrogen Company stock drop 10% more? (Part 7 of 9)

(Continued from Part 6)

Accounting changes

In order to estimate the cost of sales for Terra Nitrogen Company LP (TNH), we considered whether there were certain accounting changes over the past few years. This is important because it can have a material impact on our estimated earnings and share prices.


Using data from 2011 only

One particular point that stood out related to how the company had reported its transportation cost in the past. Before 2011, TNH recorded transportation fees as part of its revenue. Because of this, it also had to record transportation cost as part of its materials, supplies, and services expenses. From 2011, TNH started to record its revenue based on FOB (free on board) price, which excludes the price charged to customers for transportation—so no need to record transportation costs anymore.

The materials-to-natural gas factor (multiple)

Because the majority of the materials, supplies, and service expenses are natural gas, we can apply a multiple to natural gas price for that specific year. The chart above shows that over the past two years, the materials-to-natural gas factor has been relatively tight. Because there are only two data points here, we took the average of those two.

This gave us 56.70x. Note that this multiple is in millions. So, if natural gas price rises by $1, TNH’s annual earnings could be negatively affected by 56.7 million. Now, not all of this could be distributed to common unit holders (those who invest in TNH), which we’ll explore in the next part of this series.

Continue to Part 8

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