UPDATED: 03/22/2018 — see Change Log

OWNER: El Dorado Chemical Company (LSB Industries Inc)
PROJECT: Nitrogen production complex, brownfield ammonia plant[memberful does_not_have_subscription=”1314-ammonia-industry-annual-subscription,1311-ammonia-industry-monthly-subscription,3338-ammonia-industry-30-day-subscription”]

COST (reported): $510 million
JOB CREATION (reported): 227 permanent (expansion: 40-60 permanent, 300-400 construction) — see Job Openings [LINK]
START-UP DATE (reported): 2016

CAPACITY	USGS[1]	COMPANY[2]	PERMIT[3]	ADJUSTED[4]
Ammonia		450,000 stpy	[Membership required]	[Membership required]
Units: stpd, stpy, mtpd, mtpy = short/metric tons per day/year. [1] United States Geological Survey (USGS) Mineral Yearbook, Nitrogen gives capacity in metric tons per year, calculated as “engineering design capacity adjusted for 340 days per year of effective production capability,” rounded to three significant digits. Source: most recent year, Table 4: Domestic Producers of Ammonia, http://minerals.usgs.gov/minerals/pubs/commodity/nitrogen/. [2] LSB Industries investor presentations. Sources: linked below. [3] [Membership required]. Sources: linked below. [4] [Membership required]. See Methodology.

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SUMMARY STATUS: Operational
El Dorado has been producing nitrogen since 1944, when the US army built the Ozark Ordnance Works. LSB Industries began construction on its new ammonia plant in November 2013 but costs spiraled out of control and start-up was delayed. LSB’s share price fell off a cliff, followed by sweeping changes in management; the company was stabilized by a financing deal and asset sales, and LSB’s plants may still be up for sale. The new ammonia plant started up in May 2016 and has been producing above nameplate capacity.

COST (AMMONIA PLANT): $510 million, originally $250 to $300 million
COST (TOTAL EXPANSION): $825 to $855 million, originally $430 to $500 million
JOB CREATION: 227 permanent (expansion: 40-60 permanent, 300-400 construction) — see Job Openings [LINK]
START-UP DATE: 1944, May 2016
LIKELIHOOD: Done — see Methodology

CAPACITY	USGS[1]	COMPANY[2]	PERMIT[3]	ADJUSTED[4]
Ammonia		450,000 stpy GROSS 1,330 stpd GROSS 230,000 stpy NET	1,550 stpd	513,240 mtpy GROSS 208,652 mtpy NET
Nitric Acid		530,000 stpy GROSS 1,200 stpd GROSS 50,000 stpy NET	PRE-2016: 444,775 stpy EXPANSION: +461,725 stpy POST-EXPANSION: 906,500 stpy	822,363 mtpy GROSS 45,359 mtpy NET
Ammonium Nitrate, HDAN		330,000 stpy NET	1,440 stpd	299,371 mtpy NET
Ammonium Nitrate, LDAN		160,000 stpy NET	1,080 stpd	145,150 mtpy NET
Sulfuric Acid		160,000 stpy
Units: stpd, stpy, mtpd, mtpy = short/metric tons per day/year. [1] United States Geological Survey (USGS) Mineral Yearbook, Nitrogen gives capacity in metric tons per year, calculated as “engineering design capacity adjusted for 340 days per year of effective production capability,” rounded to three significant digits. Source: most recent year, Table 4: Domestic Producers of Ammonia, http://minerals.usgs.gov/minerals/pubs/commodity/nitrogen/. [2] LSB Industries investor presentations. Sources: linked below. [3] Arkansas DEQ air permit documents, some data converted from hourly (x24). Sources: linked below. [4] Adjusted Capacity is in metric tons per year assuming operations for 365 days per year; gross capacities based on permit data, net capacities based on company data. See Methodology.

FEEDSTOCK: Natural gas
END PRODUCTS: Ammonia, Ammonium Nitrate, Nitric Acid, Sulfuric Acid

RESEARCH NOTE:
In November 2016, LSB Industries announced that it had begun “to explore and evaluate potential strategic alternatives for the Company, which may include a sale of the Company, a merger with another party, or another strategic transaction involving some or all of the assets of the Company.”

In May 2016, LSB announced that its new ammonia plant “is operational and ammonia production is now underway.”

The Company expects to be selling ammonia into the pipeline by the end of May. The plant will gradually ramp production volume over the next two months and is expected to reach full capacity by the beginning of the third quarter of 2016 …

The ammonia plant will significantly enhance the financial performance of the El Dorado Facility and have a materially positive impact on LSB’s overall performance.

Soon after, in June 2016, LSB announced that the plant was producing ammonia at its “nameplate capacity” of 1,150 short tons per day, which was good news; note, also, that this was more than LSB’s announced annual capacity of 375,000 tons: in its November 2016 Investor Presentation, LSB gave the plant capacity as 400,000 stpy. As the plant continued to ramp up, LSB’s confidence in its production capacity evidently grew: by June 2016, its Investor Presentation listed the ammonia capacity as 450,000 stpy.

At the end of February 2017, in its Q4 2016 earnings, LSB provided more detail on the ramp-up of the ammonia plant:

El Dorado’s ammonia on-stream rate continues to improve with the fourth quarter of 2016 increasing over third quarter of 2016. We continued this trend into the first quarter of 2017 with on-stream rates for the first two months of 2017 increasing to 84%. We are very encouraged by the performance of our new plant as it is consistently producing at rates in excess of 1,300 tons per day which is a meaningful increase over the plant’s nameplate capacity of 1,150 tons per day.
LSB Industries, Q4 2016 earnings, 02/27/2017

With no turnaround planned in 2017, LSB hoped to run the plant at a 95% on-stream rate, and “consistently produce at 1,275-1,325 tons/day.” However, by July 2017, when LSB reported its 2Q 2017 earnings, the plant was regularly producing 1,350 stpd but could not yet maintain that rate on a sustained basis:

El Dorado had an on-stream rate of approximately 87% at its ammonia plant in the second quarter. Although the plant continues to run at approximately 1,350 tons per day, which is above its nameplate capacity of 1,150 tons per day, we were down for 12 days during the quarter primarily to perform proactive adjustments and heat exchanger cleaning and repairs to enable the plant to operate closer to the higher end of its operating envelope on a sustained basis.
LSB Industries 2Q 2017 Earnings Announcement, 07/25/2017

Unfortunately, problems persist: in mid-October 2017, LSB issued another press release to say that the plant had been shut down for “mechanical repairs to the burner refractory system on the boiler,” which led to additional “repairs on a process heat exchanger,” all taking about three weeks. For those hoping for 95% on-stream rates, 3 weeks out of a 13 week quarter is a major blow.

LSB Industries’ brownfield project had gone way over budget and far behind schedule, and, to an extent, the company’s future success now depends upon the new plant’s operational reliability.

The US Army Corps of Engineers built the Ozark Ordnance Works at El Dorado in 1944, during World War II, and it was operated on behalf of the US government by Lion Oil Company, which still runs the nearby refinery. After the war, the government disposed of its munitions manufacturing plants, transferring them to private companies for fertilizer production.

The sulfuric acid plant started-up in 1949, one ammonium nitrate plant has been in operation “since the 1950s,” and a second was added in 1989 (relocated from American Cyanamid Corporation’s site in Hannibal, Missouri); two nitric acid plants were built in 1962, and a third was added in 1990 (also relocated from Missouri). The plants take up 150 acres of a 1,400 acre tract of land.

In 1955, Monsanto acquired Lion Oil and operated the El Dorado plant for thirty years until, in 1984, LSB Industries entered the nitrogen industry when it purchased the El Dorado complex from Monsanto.

Until 2016, the site purchased 220,000 to 250,000 stpy of ammonia, supplied “from the Gulf of Mexico by pipeline,” which it uses to produce nitric acid and ammonium nitrate. The site still has the ability to purchase additional ammonia, beyond what the new plant produces, for upgrade.

In May 2012, the complex “suffered significant damage when a reactor in its DSN plant exploded … the DSN plant was damaged beyond repair and several other plants and infrastructure within the El Dorado Facility sustained various degrees of damage.”

At the end of 2012, LSB announced that it was investing in “a new 65% nitric acid plant and concentrator that will replace lost capacity.” Soon after, in August 2013, LSB announced that it would also build an ammonia plant, which “will significantly decrease our cost and exposure to fluctuations in the price of ammonia in the spot market.” The plan was to allow LSB to benefit from the cheap price of natural gas feedstock, and avoid the relatively expensive cost of purchasing ammonia.

The company says that the new ammonia plant – or, more correctly, the used ammonia plant – will produce 375,000 stpy, significantly more than the site has historically consumed (but significantly less than is given in the project’s air permit, which cites ammonia capacity as 1,550 stpd, or more than 500,000 stpy). Most of this ammonia will be upgraded to other products, but 120,000 stpy will be available for sale.

LSB purchased this ammonia plant from CF Industries and reassembled it at El Dorado. It was previously in operation as Triad Nitrogen’s Ammonia #1 plant at Donaldsonville, LA, where it was built in 1969 with an original capacity of 350,000 stpy. It had been idled in April 2004 and remained mothballed until it was shipped to Arkansas.

LSB awarded the EPC contract to SAIC Constructors, LLC. Construction started in November 2013, and LSB expected the nitric acid plant and concentrator to be “fully installed and operational by mid-2015,” with the ammonia plant operational by late 2015.

At that time, LSB estimated the total project cost at $430-$500 million, which included the ammonia plant, nitric acid plant and concentrator, and associated infrastructure; the ammonia plant alone was expected to cost between $250 and $300 million. The project started out with an IRR of 15% to 17%, assuming a natural gas price of $5 per million BTU and an ammonia price of $500 per ton. The initial phase of the expansion was financed through a 2013 debt offering of “7.75% Senior Secured Notes due 2019,” which raised $425 million.

In 2015, however, the costs spun out of control, to almost double this initial estimate, and the start-up date was pushed back.

In its Q3 2015 earnings presentation, in November 2015, LSB estimated the revised total cost at $831-$855 million, with the ammonia plant costing $475-$489 million and not expected onstream until the second quarter of 2016.

These capex numbers had not significantly changed by March 2016, when LSB announced its Q4 2015 earnings but by its Q1 2016 earnings presentation, in May 2016, the cost of the ammonia plant had increased again, to $510 million. However, this $20 million capex increase to the ammonia plant did not change the total project cost because prior guidance had included a $46 million contingency, of which the company said it would be “surprised if we have to use more than 50%.”

In December 2015, LSB announced that the nitric acid plant was “fully operational,” and estimated that the ammonia plant was “approximately 85% mechanically complete.” In February 2016, LSB announced that the ammonia plant “is now mechanically complete.” In March 2016, according to LSB’s Q4 2015 earnings call:

The remaining work … includes finalizing the commissioning activities, completing the instrumentation, preparing installations for the heat affected areas, activating the catalyst and the initial start up activities … We believe we’ll start initial production in April. It will likely take us a couple of months to ramp up the full nameplate production capacity of 1150 tons per day.

In May 2016, LSB disclosed during its Q1 2016 earning call that the work was – finally – almost complete:

We have finalized construction of the El Dorado ammonia plant and we are well into the startup activities. We have full operational status of the reformers and the CO2 removal system and we are in operation of the ammonia synthesis loop and activating the catalyst.

Due to a power outage by the utility earlier in the week, we lost a couple of days in the startup process. The last major ammonia plant startup process is converting the ammonia gas into liquid form. We anticipate starting the ammonia refrigeration compressor this weekend, which cools and condenses the ammonia gas to liquid form. We expect to be producing full strength ammonia within two weeks

Two weeks later, LSB announced the plant had started up.

In the second half of 2015, as the project costs and schedule were slipping out of control, a series of corporate changes began sweeping through the company. First, in August 2015, the independent board directors implemented a series of “Strategic, Operational and Corporate Governance Enhancements.” Then, in early September 2015, Barry Golsen, son of Jack Golsen (LSB’s founder and current executive chairman of the board), was abruptly replaced as President and CEO by independent director Daniel Greenwell. Then, in late September 2015, senior executives were replaced by another independent director, the new Executive VP Chemical Operations. More executive departures continue to be announced.

Between July 1 and December 1, 2015, LSB’s share price plummeted ~84%, from $41.33 to $6.51. In September 2015, a shareholder class action suit began brewing – presumably, not the only legal action in the offing. (By May 17, 2016, when LSB announced start-up, share price had recovered enough to open at $13.77.)

The new team appeared quick to address the problems: LSB secured sufficient additional financing to complete the expansion project, although at onerous cost in terms of both annual interest and corporate control, and executed a 3-year off-take agreement with Koch Fertilizer for the excess ammonia produced.

During the Q3 2015 earnings call, in November 2015, the new CEO explained the problems that had led to the costs spinning so far out of control:

“In order to accelerate the construction of the El Dorado facility, the company originally decided to bring experienced large bore pipe, defined as pipe greater than four inches in diameter, from the Donaldsonville, Louisiana location to El Dorado. The dismantling and relocation was completed in a manner that was not held for reassembly in El Dorado. Additionally, as a result of an initial poor quality piping subcontractor, significant costs were incurred for limited productivity and time was lost … in early July 2015, we replaced the poor performing piping subcontractor with two well-qualified high quality piping subcontractors. Further, the company’s approach for the El Dorado expansion was to perform significant engineering work just in advance of construction activities in order to fast-track construction efforts. This meant the initial and subsequent cost estimates were not engineered estimates with a high degree of precision. We have painfully learned that fact.”

LSB’s expansion project had been designed to “increase capacity, improve efficiency, enhance product mix flexibility and balance capabilities,” and, since opening the new plant, the company has been refining its product mix. In its June 2017 Investor Presentation, LSB presented revised capacity figures for many of the products: gross ammonia capacity increasing from 400,000 stpy to 450,000 stpy; net ammonia increasing from 120,000 stpy to 230,000 stpy; LDAN decreasing from 220,000 stpy to 185,000 stpy; and net Nitric Acid decreasing from 105,000 stpy to 50,000 stpy.

In anticipation of the ammonia plant start-up, LSB’s former executives had said that they “expect 2016 to be a transformative year.” Although much of the news that came out of the company during 2016 and 2017 appeared to demonstrate that the company was moving in the right direction, capex and outages notwithstanding, I imagine nobody at LSB had expected this period to be quite so transformative as it has become.

As a result of its newly precarious financial position, the cash-strapped company had warned in its Q1 2016 results that it might need to postpone turnaround work at all its plants: “Some of the 2016 planned capital additions, not related to the El Dorado expansion projects, may be deferred should we need to do so.”

The turnarounds went ahead but, unfortunately, the planned downtime drifted into more unplanned downtime – at all three of its plants – and further eroded the company’s income expectations, and investors’ confidence:

Turnaround activities and various operational issues resulted in unplanned downtime at its three primary chemical facilities during the third quarter of 2016 … our main focus has been on proactively identifying and completing the repairs and upgrades necessary to position LSB to deliver significantly improved financial performance in 2017. We are confident that the recent work that we have done at Cherokee, Pryor and El Dorado, and over the past year, will yield improving on-stream rates.”
LSB Industries press release, 10/05/2016

In May 2016, LSB announced the sale of its climate control business, to a Swedish company, NIBE Industrier AB, “for a total cash consideration of $364 million.” The sale passed the major US regulatory hurdle in June 2016 and closed in July 2016.

Proceeds from the transaction will primarily be used to pay down debt. As a result, LSB will have greater financial flexibility and an improved capital structure to execute its growth strategies for its core Chemical Business, including improving the Company’s chemical plant on-stream rates.

Dan Greenwell, LSB’s President and CEO, stated, “This transaction represents an important milestone for LSB and our shareholders … As a focused chemicals company, our management team can now concentrate entirely on growing our Chemical Business by leveraging the substantial investments we have made over the last several years to enhance the reliability and profitability of our facilities. We are confident that the investments we made at El Dorado will significantly enhance our performance and look forward to the generation of strong cash flow from those facilities. Importantly, this transaction will enhance our financial flexibility and allow us to continue to invest in improving our plants.”

LSB closed the sale of its climate control business in July 2016, and is now a pure-play nitrogen producer. In November 2016, LSB announced that it was looking at “strategic alternatives for the Company, which may include a sale of the Company, a merger with another party, or another strategic transaction involving some or all of the assets of the Company.” This is ongoing, although, in July 2017, the company announced it had decided to “terminate the formal sale process portion of its strategic review.” Asset sales, we can assume, are still on the table.

For context looking forward, “general maintenance CapEx in the chemical business will run between $40 million and $60 million,” per year, across all three of LSB’s ammonia producing plants and its upgrade facility at Baytown, TX.[/memberful]

View larger map with all ammonia plants.

ADDRESS: 4500 North West Avenue, El Dorado, Arkansas, 71730, United States

WEBSITE: http://www.lsbindustries.com/EDC

REGULATORY SOURCES:

• USGS: Minerals Yearbook, Nitrogen [RECENT / ARCHIVE]
• EPA Emissions data: Greenhouse Gas Emissions from Large Facilities: El Dorado Chemical Company [LINK]
• Air Permit documents: Arkansas DEQ Air Permit Application Process Data Files: El Dorado Chemical Company [LINK] / PSD permit, 2015 PDF]
• US Securities and Exchange Commission regulatory filings: EDGAR Search Results, LSB Industries Inc CIK#: 0000060714 [LINK]

NEWS SOURCES:

• 10/16/2017: LSB Industries press release: LSB Industries, Inc. Provides Operational Update on Its El Dorado, Arkansas Facility [LINK]
• 07/25/2017: LSB Industries press release: LSB Industries, Inc. Provides Update on Its Strategic Alternatives Review Process [LINK]
• 07/25/2017: LSB Industries press release: LSB Industries, Inc. Reports Improved Operating Results for the 2017 Second Quarter [LINK]
• 06/19/2017: LSB Industries investor presentation: June 2017 [PDF]
• 11/22/2016: LSB Industries press release: LSB Industries, Inc. Announces That Its El Dorado, Arkansas Facility Resumes Nitric Acid Production [LINK]
• 11/2016: LSB Industries investor presentation: November 2016 [PDF]
• 11/03/2016: LSB Industries press release: LSB Industries, Inc. Exploring Strategic Alternatives [LINK]
• 08/05/2016: LSB Industries press release: LSB Industries, Inc. Announces That Its El Dorado, Arkansas Facility Ammonia Plant Resumes Production [LINK]
• 07/26/2016: LSB Industries press release: LSB Industries, Inc. Provides Update on Its El Dorado, Arkansas Facility [LINK]
• 07/01/2016: LSB Industries press release: LSB Industries, Inc. Announces Closing of Sale of Climate Control Business to NIBE Industrier AB [LINK]
• 06/29/2016: LSB Industries press release: LSB Industries, Inc. Announces That Its El Dorado, Arkansas Facility’s Ammonia Plant is Operating at Nameplate Capacity [LINK]
• 06/27/2016: LSB Industries press release: LSB Industries, Inc. Announces That Its Agreement to Sell Its Climate Control Business to Nibe Industrier AB Has Obtained HSR Act Clearance from the U.S. Federal Trade Commission [LINK]
• 05/17/2016: LSB Industries press release: LSB Industries, Inc. Announces the Start of Production at Its El Dorado, Arkansas Facility’s Ammonia Plant; Full Production Level to Be Attained by Third Quarter 2016 [LINK]
• 05/12/2016: LSB Industries press release: LSB Industries, Inc. to Sell Climate Control Business to NIBE Industrier AB [LINK]
• 05/05/2016: Seeking Alpha earnings call transcript: LSB Industries Q1 2016 Results [LINK]
• 05/04/2016: LSB Industries press release: LSB Industries, Inc. Reports Operating Results for the 2016 First Quarter [LINK]
• 02/16/2016: LSB Industries press release: LSB Industries, Inc. Announces the Mechanical Completion of Its El Dorado, Arkansas Facility’s Ammonia Plant; Production Expected to Begin Early Second Quarter 2016 [LINK]
• 01/20/2016: LSB Industries press release: LSB Industries, Inc. Announces That Its Pryor, Oklahoma Facility Resumes Production [LINK]
• 12/07/2015: LSB Industries press release: LSB Industries, Inc. Provides Business Update [LINK]
• 11/10/2015: LSB Industries press release: LSB Completes Issuance of $50 Million of New Senior Secured Notes [LINK]
• 11/06/2015: Seeking Alpha earnings call transcript: LSB Industries’ (LXU) Q3 2015 Results [LINK]
• 09/29/2015: LSB Industries press release: LSB Industries, Inc. Appoints Richard Sanders Interim Executive Vice President, Chemical Manufacturing [LINK]
• 09/29/2015: The Rosen Law Firm press release: EQUITY ALERT: Rosen Law Firm Announces Filing of Securities Class Action Lawsuit Against LSB Industries, Inc. [LINK]
• 09/03/2015: LSB Industries press release: LSB Industries Inc. Announces Leadership Transition [LINK]
• 08/07/2015: LSB Industries press release: LSB to Implement Strategic, Operational and Corporate Governance Enhancements [LINK]
• 07/14/2015: LSB Industries press release: LSB Industries, Inc. Updates Status of El Dorado Facility Expansion [LINK]
• 05/16/2014: Magnolia Reporter: El Dorado Chemical sues Air Liquide for $100 million as result of 2012 blast [LINK]
• 02/28/2014: Seeking Alpha earnings call transcript: LSB Industries’ CEO Discusses Q4 2013 Results [LINK]
• 11/06/2013: Seeking Alpha earnings call transcript: LSB Industries’ CEO Discusses Q3 2013 Results [LINK]
• 08/15/2013: Arkansas Online: Chemical firm in El Dorado set for $425 million project [LINK]
• 08/14/2013: LSB Industries press release: LSB Industries, Inc. Announces Engineering, Procurement and Construction Agreement to Construct an Ammonia Plant at Its El Dorado, Arkansas Site [LINK]
• 08/07/2013: LSB Industries press release: LSB Completes Issuance of $425 Million of New Senior Secured Notes [LINK]
• 12/04/2012: LSB Industries press release: LSB Industries, Inc.’s El Dorado Facility Signs Contract for a New Nitric Acid Plant, and Completes Reconstruction and Resumes Production at Its Sulfuric Acid Plant [LINK]
• 05/15/2012: Magnolia Reporter: Significant damage from explosion will close El Dorado Chemical indefinitely [LINK]