2016 was a difficult year for CVR Refining (CVRR), beginning with it announcing a suspension of its distribution. Based on the start of 2017 and CVR's most recent earnings report, it appears that this coming year could be a repeat performance. Here's a quick rundown of CVR's fourth-quarter results, what management expects for the coming year, and how investors should approach 2017 when it comes to CVR Refining's stock.
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By the numbers
| Results | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Revenue | $1,269 million | $1,163 million | $948.3 million |
| Earnings before interest, taxes, depreciation, and amortization | $34.3 million | $59.2 million | ($79.7 million) |
| Net income | ($10.7 million) | $15.9 million | ($122.2 million) |
| Earnings per share | ($0.07) | $0.11 | ($0.83) |
| Cash available for distribution | $0 | $0.3 million | $0 |
Data source: CVR Refining.
There wasn't really much to say this past quarter, as the environment for refining companies remains very weak. Refining margin for CVR in the quarter declined to just $7.32 per barrel, which was down from the already low margin of $8.96 per barrel this time last year. It doesn't really matter what kind of operational performance the company puts in. With refining margins this low, it is close to impossible to turn a profit.
On the operational side, things did go reasonably well. Per-barrel operating expenses excluding major turnaround expenses were $4.96 per barrel in the fourth quarter compared to $7.04 in the same quarter last year. Also, the company was able to boost its refinery throughput to 223,266 barrels per day, up from 172,364 in 2015. Much of that gain came from less turnaround activity at its Coffeyville refinery.
Despite the less-than-ideal operating environment, the company has been able to maintain discipline with its balance sheet. CVR ended the quarter with $341 million in cash on hand and its total debt, including the current portion, is $541 million. Much of that cash is currently being preserved for some expected turnaround and maintenance work.
The two prevailing themes for this past quarter were the increases in refined product inventory and, of course, the Renewable Fuels Standard. Management did touch on the fact that Renewable Identification Number (RIN) prices were down to about $0.48 per RIN from $1.09 in December, but the build in refined product inventories across the board was enough to offset the lower cost of RINs in its refining margin.
What management had to say
As he is wont to do, CEO Jack Lipinski talked quite a bit about the Renewable Fuels Standard and how the rules as currently enforced are unnecessarily hard on independent refiners and fraught with issues of fraud and manipulation. This time, though, he did spend some time talking about the high levels of refined product inventories in the U.S. system today, which could lead to another tough year for U.S. refiners:
[T]he recent build of U.S. product inventories looks to be a repeat of what we saw last year in 2016 in the same period. Since the beginning of the year, gasoline inventories have increased approximately 24 million barrels and distillate inventories have built by about 8 million barrels. We know that there is a significant amount of turnarounds going on in light [product refining like gasoline], but when you consider this building during the turnaround period, it kind of gives you a pause of where the products the going. The group continues to see high inventories, but year-over-year improvements in gasoline have been supporting our local bases. Current gasoline inventories in the Magellan [Midstream Partners] system are about 400,000 barrels below last year's level.
Unfortunately, distillate has about 900,000 [more] barrels than last year. Since the beginning of December of last year, Group 3 crack spreads have been on a roller coaster, ranging from approximately $8 to $14 a barrel. Yesterday, the group crack spread closed at approximately $12 a barrel.
One thing that Lipinski also mentioned later in his remarks is that European refiners have benefited from higher refining margins lately and have been exporting greater levels of gasoline to the U.S. If this were to continue, it could make the glut of refined products even worse.
What a Fool believes
There isn't much else CVR Refining can do during this tough operating environment than continue what it's currently doing: keep costs low, preserve liquidity, and hold on for better days ahead. Based on Lipinski's most recent statements, those better times could be a ways off. For investors, that isn't exactly a great thing to hear, but until the market for refined products improves, no one should expect the company to throw off cash in the form of a distribution.
