Given the volatility in gas prices, Agrium’s concerns are justified. It consume 32 to 38 per million British thermal units, or MMBtu, of natural gas to produce one tonne of ammonia. Every rise in gas prices, even if small, could add significantly to the company’s costs. That’s why Agrium wants to sign a long-term gas supply contract before setting up a new plant. Methanol maker Methanex recently made a similar move by striking a 10-year gas supply deal with Chesapeake Energy for its plant in Louisiana. CF’s largest plant at Donaldsville is already well-connected to five gas pipelines, which can meet the requirements of its upcoming plants. Agrium Inc. (USA) (NYSE:AGU) seems to be taking a leaf out of these companies’ books, and rightly so.
All’s not lost for Agrium
Interestingly, while deferring plans on nitrogen, Agrium is upbeat about its ongoing potash expansion project at Saskatchewan. Once complete, Agrium’s annual potash production capacity of 2 million
tonnes will increase by 50%. Production is expected to go online by the latter half of next year, at about the same time when peer Potash Corp./Saskatchewan (USA) (NYSE:POT) will have completed its major expansion program that will double its annual potash capacity to 17 million tonnes.
Ironically, while Agrium is optimistic about potash, Mosaic Co (NYSE:MOS) recently pushed back potash expansion plans in favor of phosphate. But if the International Fertilizer Industry Association’s projections are anything to go by, Agrium could well be on the right track. According to the IFA, global demand for potash is expected to grow at an average rate of 3% through 2017, compared to 1.8% for phosphate, and 1.5% for nitrogen.
The Foolish bottom line
If Agrium can’t find suitable investment opportunities, it plans to return the extra cash to shareholders in the form of buybacks. The company might even increase dividends. Its current dividend yield at 2.3% is considerably lower than the 3.6% dividend yield that Potash Corp./Saskatchewan (USA) (NYSE:POT) offers.
Investors still have a lot to look forward to, even if Agrium Inc. (USA) (NYSE:AGU) defers some expansion plans. The company is well diversified, is growing its seeds and crop protection businesses, and is expanding into high-potential markets like Canada and Australia. As the world population grows, so will Agrium’s opportunities.
The article Natural Gas Is a Bigger Troublemaker for This Company Than You Think originally appeared on Fool.com and is written by Neha Chamaria.
Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings (NYSE:CF).
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