LSB Industries' Q3 2025: Contradictions Emerge on UAN Production, Capital Allocation, Ammonia Market Outlook, and Turnaround Schedules

Guidance:

• Q4 2025 expected to be higher than Q4 2024 due to higher selling prices and higher production, somewhat offset by higher variable and other costs.
• Tampa ammonia at $650/mt (November) and NOLA UAN averaging >$300/ton so far in Q4; Tampa-linked pricing will flow through to results.
• Henry Hub natural gas averaging ~ $3.45/MMBtu and expected to trend higher seasonally; ~35% of gas costs are passed through to customers.
• Expect to finish the year generating solid free cash flow and to build on Q3 FCF (~$36M) and YTD FCF (~$20M) in Q4.
• El Dorado CCS: technical permit review expected Q1 2026; operations by end-2026; project expected to generate ~ $15M annual EBITDA (primarily 2027).

Business Commentary:

* Market Conditions and Sales Mix Optimization: - LSB Industries reported constructive market conditions in both its industrial and fertilizer businesses. - The company successfully transitioned out of high-density AN for fertilizers and into AN solution for explosives, optimizing its sales mix. - This strategic shift is expected to enhance performance across the business.

• Ammonia Market Tightness and Pricing Trends:
• The global ammonia market remains tight due to supply disruptions, including issues in the Middle East and Trinidad.
• Tampa ammonia prices have increased significantly, with November settlements at $650 per metric ton, up from $590 in October.

• The market is driven by ongoing unplanned supply disruptions and seasonal demand factors, particularly in the U.S.

• Urea Pricing Dynamics and Export Trends:

• Urea prices moderated during the quarter due to the resumption of Chinese exports but are expected to remain tight.
• The resumption of Chinese exports has limited participation in recent India urea tenders, supporting higher prices.

• Steady exports, lower imports, and strong demand have led to below-average inventory levels in the U.S.

• Financial Performance and Free Cash Flow:

• LSB Industries generated significant free cash flow, with approximately $20 million year-to-date and $36 million in Q3 2025.
• The company's balance sheet remains solid, with approximately $150 million in cash and net leverage at approximately 2x.
• The financial improvement is attributed to increased production volumes and a focus on strategic priorities.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly stated the company is "back to generating free cash flow," is "well positioned" and "expect[s] the fourth quarter ... to be higher than the prior year fourth quarter." CEO: "I remain extremely optimistic about the future of our company." Market commentary emphasized robust demand and tightening supply supporting higher prices.

Q&A:

• Question from Lucas Beaumont (UBS): What's your view on the tight ammonia market, and if December prices rise substantially, how should we think about that flowing through to your Q4 pricing?
  Response: Market is tight due to outages (Trinidad, Ma'aden) and healthy fall application demand; pricing is rising and will flow through via Tampa-linked pricing.

• Question from Lucas Beaumont (UBS): How do you see UAN heading into spring/2026 given recent softness in urea and seasonal demand?
  Response: Management is optimistic: UAN is well sold forward, expects recovery as Chinese exports remain limited and tight domestic inventories set up healthy prices into Q1/Q2.

• Question from Lucas Beaumont (UBS): How did turnaround timing and mix changes impact Q3 volumes and costs, and what is the Q4 setup on volumes/costs?
  Response: Transition from HDAN to AN solution raised maintenance and railcar-switching costs in Q3; expect AN and nitric acid volumes roughly in line in Q4, with ammonia and UAN likely higher.

• Question from Andrew Wong (RBC): With stronger industrial demand, how does that affect your negotiating position and contract margins?
  Response: Negotiating leverage depends on contract timing, but current healthy nitrogen prices and market dynamics improve ability to maintain or increase pricing on renewals.

• Question from Andrew Wong (RBC): Given stronger industrial backdrop, will LSB pursue capacity upgrades and would you seek long-term contract backstops?
  Response: Company is evaluating expansions (Pryor urea work, potential DEF entry, possible ~100k ton El Dorado ammonia expansion); engineering studies underway and larger projects would likely seek contractual backstops.

• Question from Laurence Alexander (Jefferies): Baseline seasonality with current contract mix and how you'd approach preselling if AN prices spike?
  Response: Most offtake is fairly ratable; AN for explosives is seasonal (weather-driven); team can manage seasonality and preselling decisions will be made case-by-case as market moves.

• Question from Laurence Alexander (Jefferies): For the El Dorado CCS project, will you change offtake structure or sign more offtake agreements as completion nears?
  Response: A per-ton sequestration rate with partner Lapis is already negotiated; the gating item is EPA Class VI permit; company is exploring selling low-carbon product premiums and environmental attributes and discussing customer contracts.

• Question from Robert McGuire (Granite Research): Can you comment on UAN volumes, which appear down year-over-year?
  Response: Q3 UAN production missed expectations; management expects UAN production to be in line with expectations in Q4.

• Question from Robert McGuire (Granite Research): What's your current mix of industrial vs. ag (post HDAN transition)?
  Response: On a volume/tons basis, industrial is roughly 40%–45% with the balance in agriculture.

• Question from Robert McGuire (Granite Research): Update on proposed antidumping duties on imported MDI and implications?
  Response: Preliminary determination is in process; a final duty would push domestic MDI producers to ramp, increasing nitric acid demand.

• Question from Robert McGuire (Granite Research): Status of value-creation initiatives you outlined previously?
  Response: Reliability/maintenance improvements ~25%–50% complete; expected profit-optimization (~$20M) ~40%–50% complete; more detail planned for the year-end call.

Contradiction Point 1

UAN Production and Sales Expectations

It involves changes in the company's expectations for UAN production and sales, which are directly linked to revenue forecasts and market positioning.

With operating rates stabilizing, how will costs trend over time? - Andrew D. Wong (RBC Capital Markets, Research Division)

2025Q3: In 2025, we are continuing to expect UAN production in the range of 67 million to 70 million gallons, with the focus on managing high operating rates and ensuring the stability of our UAN plant. - Mark T. Behrman(CEO)

How do you see the second-half outlook in terms of growth volume for UAN, and what strategies are you implementing to maximize growth amid current strong pricing? - Lucas Charles Beaumont (UBS Investment Bank, Research Division)

2025Q2: The UAN plant's maximum rates are expected to improve, and kinks are being resolved for consistent performance. UAN production and sales are expected to increase in the second half of the year, although seasonality may impact the first half. - Mark T. Behrman(CEO)

Contradiction Point 2

Capital Allocation Priorities

It involves changes in capital allocation priorities, which can impact the company's strategic direction and financial investments.

How will shifting turnaround timing affect Q3 and Q4 volumes and costs? - Lucas Beaumont (UBS)

2025Q3: No new committed projects. Focus remains on reliability and EH&S improvements. Post that, consider investments, stock buybacks, and debt reduction. - Mark Behrman(CEO)

What are the CapEx and margin benefits of potential upgrade capacity projects? - Andrew Wong (RBC Capital Markets)

2025Q1: Too early to discuss specifics. Exploring urea and ammonia production expansions to enhance margins. Full analysis post-engineering studies. - Mark Behrman(CEO)

Contradiction Point 3

Ammonia Market Outlook

It involves differing perspectives on the ammonia market outlook, which can impact pricing strategies and demand expectations.

What is your outlook for the ammonia market? How should we assess Q4 pricing if ammonia contracts see a significant rise? - Lucas Beaumont (UBS)

2025Q3: It's a tight supply and demand market globally, with issues in Trinidad affecting the market. We expect a healthy fall ammonia application season. - Mark Behrman(CEO)

Given strong UAN derivative pricing and weaker ammonia prices, how will LXU's realized pricing be affected in Q2? - Lucas Beaumont (UBS)

2025Q1: We are well positioned to capitalize on UAN pricing with deliberate unsold volumes. Realized pricing in Q2 will reflect this, but ammonia pricing adjustment may affect overall results. - Mark Behrman(CEO)

Contradiction Point 4

Turnaround Schedule and Capacity Expansion

It involves differing statements about the turnaround schedule and capacity expansion plans, which can impact operational efficiency and strategic growth.

Will industrial demand growth drive capacity expansion, and would that require backstop contracts? - Andrew Wong (RBC Capital Markets, Research Division)

2025Q3: We aim for a 3-4-year turnaround schedule. El Dorado will have a turnaround this year but none planned for the next 3 years. Cherokee and Pryor will similarly have a 4-year cycle. - Mark Behrman(CEO)

How should we think about future turnarounds following the El Dorado turnaround in the second half of the year? - Daniel Rizzo (Jefferies)

2024Q4: We've achieved 90%-92% operating rates excluding turnarounds. The focus is to move closer to 95% by the end of 2026, which would mark significant progress. - Mark Behrman(CEO)