As New Year's Eve quickly approaches and we prepare to make our 2013 investing resolutions, it's a good time to reflect on the energy sector in the year that was 2012.
In this December series, our writers will be recapping some of the most popular, highest-performing stocks in this sector. We will examine whether the gains these companies provided their shareholders in 2012 are sustainable, or whether they merely can be attributed to one-time events or fizzling trends. Consider these pieces as gifts to benefit our Foolish, long-term investors seeking exposure to the energy sector. Enjoy, and Fool on!
Today we'll take a look at independent refiner and nitrogen fertilizer producer CVR Energy (NYSE: CVI ) . Its stock has been up a whopping 147% year to date. With legendary investor Carl Ichan snapping up 82 % of all outstanding shares (through Ichan Enterprises), CVR seems to have become the perfect energy investment for 2012.
Fool Energy editor and analyst Joel South explains in this video why this company did so well this year. However, the question investors need to ask is: Will this company continue to grow, or has it reached the limits?
The year that was 2012
Thanks to the strategic locations of its two refineries, CVR Energy has access to the cheaper variants of crude oil as feedstock. Both the 115,000 barrels-per-day Coffeyville refinery in Kansas, and the 70,000 bpd Wynnewood refinery in Oklahoma, are within a 100-mile radius from Cushing -- the West Texas Intermediate storage hub.
For readers not very well acquainted with the price dynamics of crude oil in the United States, the WTI trades at an average $17/barrel discount when compared to the internationally-traded Brent benchmark because of a supply glut and bottleneck at the WTI storage hub at Cushing, OK. Many refineries situated in the Mid-Continental region could source cheap feedstock and cut down on costs. Apart from CVR Energy, HollyFrontier (NYSE: HFC ) is another refiner taking advantage of the cheaply available crude oil.
To cut short and put things in perspective, CVR's operating income in the third quarter shot up an amazing 151%, to $533 million, year over year.
But cheap crude isn't the only advantage
In an effort to further cut down on costs and become more efficient, the refiner maintains its own crude oil gathering systems. While crude oil from Cushing is supplied to the Coffeyville refinery by a pipeline owned by Plains All American (NYSE: PAA ) , CVR isn't totally dependent on third-party resources. The refiner owns a 145,000 bpd pipeline system that includes 350 miles of owned and leased pipelines to transport crude oil to the Coffeyville refinery, plus associated crude oil storage tanks with a capacity of 1.2 million barrels. On top of that, the refiner maintains an additional 3.3 million barrels of leased storage capacity in Cushing and other locations .
Foolish investors must take note that building efficiency holds key to achieving long-term growth in the refining industry, and here, CVR seems to be dead on target. The refiner also maintains capacity on the Keystone and Spearhead pipelines, which bring in the cheap, heavy crude oil from Canada.
A useful side business
CVR Energy, through its MLP CVR Partners (NYSE: UAN ) , also has a nitrogen fertilizer business, whose feedstock is pet coke. Now, pet coke is produced during the crude oil refining process. Over the past few years, the Coffeyville refinery supplies 70% of the pet coke required for the production of the fertilizer.
However, will all these advantages spur CVR's stock price to shoot up even further?
That's a tricky question to answer. It's both yes, and no.
To be fair, there isn't any scope for further growth. Both refineries are running at over 100% capacity utilization. What management could possibly exploit is to change the crude slate of the refineries.
This means that the refineries could run more Canadian crude, which is way cheaper than WTI. Or, the Midland WTI -- which is trading at $6/barrel discount to prices at Cushing -- could also do with increased runs. Other than these, I don't see a possibility for organic growth. And my suspicion is that the market has already factored in these possibilities.
However, what might turn out to be a surprising move is some sort of acquisition in the near future. After all, the company is currently sitting on a cash pile of nearly $1 billion. So, the company has enough resources to fall back upon in case a consolidation is required. Fools must keep a close watch on management's moves. Add CVR Energy to your watchlist, so that you don't miss out on any developments in the future.
As I have mentioned above, the surge in oil and natural gas production from hydraulic fracturing and horizontal drilling is creating massive bottlenecks in takeaway capacity. However, this problem for producers creates a massive and immense-profitable opportunity for midstream companies. Energy Transfer Partners helps alleviate the gluts in supply with 23,500 miles of transformational pipelines. To see if ETP and its industry-leading yield will be a fit for you, click on this detailed premium report, which will supply you with a thorough analysis of this attractive midstream.