Analysts are buzzing about LSB Industries' foray into low-carbon ammonia, and rightfully so. The burgeoning clean energy sector presents a massive opportunity, with LSB poised to become a key player. However, buried within the Q1 2024 earnings call lies a less flashy but potentially more impactful shift: a quiet pivot towards the industrial ammonia market. This subtle strategic move, largely unnoticed by other analysts, could be the key to unlocking substantial profit growth for LSB in the coming years.

Let's rewind to March 2024, when LSB announced the delay of their El Dorado facility expansion. On the surface, this seemed like a response to softening commodity prices and the need to allocate resources towards existing operations and the Houston Ship Channel project. However, a closer look at the language used in both the Q4 2023 and Q1 2024 earnings calls reveals a deliberate emphasis on maximizing downstream production and optimizing product mix, particularly for industrial applications.

In the Q4 call, Mark Behrman highlighted LSB's commitment to achieving a consistent 95% operating capacity for ammonia, emphasizing the importance of upgrading this ammonia into higher-value downstream products. He stated, "Our profitability is further enhanced as we will look to upgrade ammonia into higher valued downstream products, and in 2024, we will be intensifying our efforts to maximize the production of our downstream plants, while optimizing the mix of those products to capture the highest margins possible."

This emphasis on downstream production is echoed in the Q1 call, with both Behrman and CFO Cheryl Maguire explicitly mentioning the strong demand from industrial applications. Behrman noted the robust demand for ammonium nitrate driven by infrastructure and electric vehicle production. Maguire, in her guidance for Q2, foreshadowed a decrease in ammonia sales and a corresponding increase in downstream production volumes for industrial products like UAN, AN, and nitric acid.

This shift makes strategic sense for several reasons. First, as Behrman alluded to, the US agricultural market is notoriously slow to adopt premium-priced low-carbon products. Industrial applications, on the other hand, are facing increasing pressure to decarbonize, creating a more immediate and lucrative market for LSB's low-carbon ammonia from the El Dorado project.

Second, the industrial market offers a more stable baseload of demand compared to the often volatile agricultural sector. This allows for more predictable production schedules and potentially longer-term contracts with stable margins, creating a "more of an annuity" as Behrman described it.

The numbers further support this hypothesis. In Q1 2024, despite a year-over-year decline in overall adjusted EBITDA, LSB experienced a healthy increase compared to the previous quarter. This was attributed to a combination of strong ammonia demand, improved downstream production, and lower natural gas costs. Importantly, the improved downstream production is likely heavily weighted towards industrial applications, as Q1 typically sees strong agricultural ammonia demand, a trend that is expected to reverse in Q2 as the focus shifts to post-planting fertilizers.

Furthermore, LSB's margin enhancement projects point towards this industrial focus. The expansion of urea capacity at Pryor will provide an additional 75,000 tons of UAN annually, but UAN can be used for both agricultural and industrial applications. The additional nitric acid storage at El Dorado, on the other hand, is specifically intended to allow for greater optimization of industrial product mix.

Projected EBITDA Growth

The following table and chart illustrate LSB Industries' projected EBITDA growth based on various factors.

While the spotlight remains on LSB's low-carbon ammonia projects, this quiet pivot towards the industrial market might be the unsung hero of their earnings story. By leveraging the increasing demand for low-carbon industrial products and the stability of this market, LSB could be setting themselves up for a significant and sustained profit boost in the coming years. This strategic move, largely overlooked amidst the excitement surrounding clean energy, could be the ace up their sleeve, propelling them towards their mid-cycle EBITDA target and beyond.

It's also worth noting that LSB Industries has a rich history dating back to 1968, originally starting as a manufacturer of climate control systems before transitioning to chemicals. This company, known for its resilience and adaptability, has weathered numerous economic cycles and emerged as a leader in the chemical industry. Their current strategic pivot, much like their past transformations, demonstrates their ability to anticipate market shifts and capitalize on emerging opportunities, positioning themselves for continued success in the ever-evolving energy landscape.

"Fun Fact: LSB Industries' El Dorado facility, a focal point of their low-carbon ammonia strategy, is located near the oil-rich Smackover Formation, a geological landmark that played a key role in the early development of the US oil industry. The region's history of energy production is now being rewritten with LSB's focus on low-carbon solutions."