LSB Industries will soon be a pure-play nitrogen producer. It announced this morning that it “has entered into a definitive agreement to sell the Company’s Climate Control Business.” Subject to the usual approvals and conditions, they expect to close the sale in Q3 2016.
Although separating its two businesses has been an explicit possibility for some time, and this sale makes a lot of sense, the timing is noteworthy. LSB has been forced into making deals to stay afloat since the costs of its El Dorado expansion spun out of control in 2015.
While staving off bankruptcy, a November 2015 financing deal came at a high cost, both in terms of interest payable and in terms of giving away ownership of the company.
Now, the sale of the climate control business to a Swedish company, NIBE Industrier AB, for “total cash consideration of $364 million,” at least allows LSB to retire some of its overpriced debt.
The tale-of-woe that has been the El Dorado ammonia plant will very soon come to a close: I expect LSB to announce start-up any day now.
According to LSB’s Q1 2016 earnings presentation, in May 2016, the total cost of the El Dorado expansion has not risen since the last disclosures (in fact, the range for total costs has decreased).
Nonetheless, the careful reader will notice that the cost of the ammonia plant has risen by $20 million in the last three months. This cost increase is no great surprise and matches LSB’s guidance: the $20 million increase is offset by a $16 million decrease in remaining “contingency” and (somehow) a decrease in “Other Support Infrastructure.” For full details, see my Research Note for El Dorado, AR.
In last week’s Q1 2016 results, LSB endeavored to present a financially stable and responsible company, explaining that “planned capital additions, not related to the El Dorado expansion projects, may be deferred should we need to do so.” This would mean delaying turnarounds at both Pryor and Cherokee, planned for Fall 2016, and the maintenance and expansion work they hope to achieve, especially at Pryor.
However, the sale of the climate control business may help fund those projects:
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.”