Tuesday, April 15, 2014

Stay Away From CVR Refining

This article was originally published by TheStreet  on April 08, 2014
By Sarfaraz A. Khan
NEW YORK (TheStreet) -- An attractive yield isn't everything. Here's why you should stay away from CVR Refining (CVRR_).
CVR Refining is a limited partnership and the refining arm of CVR Energy (CVII_), which, in turn, is mainly a holding company that is also engaged in fertilizer manufacturing operations through CVR Partners (UAN_). CVRR offers attractive yield of 7.80% and it is trading just 6.6 times its trailing earnings. But this $3.4 billion market-cap company is not without risks.

CVR Refining shares, trading at $23, are down 28% for the past 52 weeks. This price is even lower than its IPO price of $25 in January 2013. Its shares are trading just 0.4 times its trailing sales as opposed to the industry's average of more than 1.2 times, as per data compiled byThomson Reuters.
It doesn't help the volatile price of ethanol credits has created a challenging business environment. CVR Refining's earnings before interest, taxes, depreciation and amortization dropped from $779 million in 2012 to $748 million in 2013 while adjusted earnings slumped 40% to $712 million. CVR Refining's net income fell 0.8% from 2012 to $590 million. 

Oil production isn't the problem. The company owns a crude oil refinery at Coffeyville, Kansas, that can handle 115,000 barrels of oil per day and a smaller facility at Wynnewood, Okla., with daily capacity of 70,000 barrels. Besides these, CVR Refining also owns 350 miles of pipelines and more than six million barrels of oil storage capacity.
In 2013, the company's daily throughout and refining production rose 9.7% and 10.2%, respectively, from 2012. However, due to weakness in fuel prices, higher volumes did not result in a commensurate increase in net sales, which were up just 5% to $8.7 billion. A 3.7% increase in average cost of crude oil consumed and a nine-fold increase in prices of ethanol credits to $181 million further exacerbated the situation.
Refiners are required to either blend renewable fuels into gasoline and diesel, or purchase the ethanol credits, also called Renewable Identification Numbers (RINs).
The extremely volatile RIN prices pose a big challenge for the company's future. CVR Refining's management has acknowledged that the RIN prices are still going up. In the current year, the refiner has forecast that it could spend anything between $75 million and $150 million as RIN expense. Although this would be a decline from the current year, the company only paid $21 million in 2012 and $19 million in 2011.
Furthermore, RIN prices depend upon a variety of factors that are difficult to predict. Therefore, the company's RIN expense could get revised in the coming quarters. CVR Refining's RIN expense would primarily rely on the availability of the credits, the prices of gasoline and diesel and the company's product mix.
Since CVR Refining owns just two refineries, any accident which hampers the operations at any of these facilities can have a significant adverse impact on the company's profits. This happened in the third quarter of 2013 at its Coffeyville refinery whose fluid catalytic cracking unit went offline for about 2 months. As a result, in the third quarter, the company's net income witnessed a 73% year-over-year drop.
This also holds true for other small master limited partnerships with few assets. For instance, CVR Partner, like CVR Refining, also gets its revenue from just two assets: a fertilizer plant and a distribution center. Other partnerships, like Northern Tier Energy (NTI_) and Alon USA Partners (ALDW_) operate with even fewer assets. The former has a single refinery at Minnesota while the latter operates one at Texas.
Unlike most of the master limited partnerships, CVR Refining is a variable rate partnership. This means that although the company maintains a policy of distributing all available cash to its unit-holders, it is not bound to do so. In fact, CVR Refining can cut its distribution any time to zero. Although this sounds a bit extreme, it has happened before; variable rate limited partnerships, like Alon USA Partners, have declined to give any cash distributions to unit holders.
On the flip side, the refiner does not pay incentive distribution rights to its general partner CVR Energy. As a result, the company has more cash available for distribution.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.