August 4, 2022
Nutrien Ltd.
Recent pull-back provides good entry point
Our view: We remain positive on Nutrien given continued favourable fundamentals, with potash markets still tight and potential nitrogen upside. We think shares currently trading at near pre-war levels makes little sense and see the recent mid-year pull-back as an attractive entry-point. We expect strong FCF (21%/18% in 2023/2024) supporting outsized capital return plans including significant buybacks and a likely dividend increase in the next 6 months.
Key points:
Ag and fertilizer fundamentals still favourable: We see crop prices still 30-40% above historical levels supporting strong crop economics, which should encourage demand to return while fertilizer supply remains constrained.
• Potash still set for multi-year tightness supporting elevated prices: While we expect Russian exports to eventually return over the next 6-12 months, Belarusian exports could take 3-4 years before making a meaningful return (see here for analysis on Russian/Belarusian vessel loadings, see here for views on Belarusian shipments via Russia). We forecast prices to moderate as Russian exports return and Canadian production increases, but staying elevated over several years. We slightly lower H2/22 Brazil potash price forecast to $850/tonne, from $900/ tonne, and maintain 2023 and L-T at $750/tonne and $400/tonne.
• Nitrogen optionality building into next 6-months as rebounding demand meets constrained supply: We see potential upside in nitrogen over the next six months as demand rebounds and supply remains constrained by high international natural gas costs. Global marginal costs set by high-cost European natural gas costs are at ~$1,500/tonne (using ~$60/mmbtu), compared to current global prices at ~$700/tonne across various benchmarks. The next lowest tier would be Asian producers using imported LNG, with marginal costs at ~$1,000/tonne (using ~$40/ mmbtu). As demand improves over the next few months, we think higher cost tonnes may need to be bid in, resulting in higher prices. If global costs remain elevated into early-2023, we see potential for prices to exceed current forecasts. We have raised our H2/22 US NOLA urea price forecast to $650/ton, from $575/ton, and maintain 2023 at $600/ton.
Strong FCF supports capital allocation with a bias to buybacks: We forecast strong FCF at $10B and $8B in 2023 and 2024 (21% and 18% yield) and $10B 12-month run-rate FCF (20% yield) at spot prices. Nutrien has stated intentions to complete the current share repurchase authorization, buying back ~40M shares (8% current float) through the rest of 2022. We also think the reduction in shares and continued growth in Retail could lead to an above-average +10-15% dividend increase in the next 6 months.
Reiterate Outperform rating at US$135 PT: We maintain 2022E EBITDA and trim 2023E EBITDA to $14.3B from $14.6B.