Is CVR Refining Overvalued?

CVR Refining has put in an impressive performance so far this year, but the company could be running into trouble.

Jun 15, 2014 at 12:40PM

CVR Refining (NYSE:CVRR) has been one of the refining sector's best performers this year. As the Brent-WTI spread widened during the first quarter, the partnership's income jumped to $270 million; this was up from the loss of $110 million reported during the fourth quarter of 2013. This growth allowed CVR to hike its quarterly distribution by nearly 120% to $0.98 per unit.

With this stellar performance, CVR's units have notched up an impressive year to date gain of 17.8%, beating the S&P 500 as well as refining sector peers HollyFrontier (NYSE:HFC), Philips 66, and Valero by 12.4%, 24%, 10%, and 11% respectively (excluding distributions.)

Has the partnership run too far too fast, though? Unfortunately, looking at the Brent-WTI spread, it would appear that it has.

The spread is key
During the first quarter of this year, the Brent-WTI differential averaged around $10 per barrel. The second quarter has seen a much tighter spread, closer to $6 per barrel and sometimes dropping under the $4 per barrel level.

CVR's two refineries, Wynnewood and Coffeyville, are located close to the Cushing transhipment point for benchmark WTI, so most of the company's crude throughput is priced at the WTI benchmark. Of the 185,000 barrel per day capacity CVR has, only around 30% of this throughput is priced at a discount to WTI according to the company's presentation.

Unsurprisingly, the crude the CVR uses, which is priced at a discount to WTI, is highly sensitive to Brent-WTI pricing.

Sensitive pricing
During the second half of last year when the WTI-Brent differential traded within a range of $4.50 to $10, the price difference between CVR's discounted crude and WTI fell to around $1. The discount and spread then widened to $2.50 during the first quarter of this year when the Brent-WTI spread widened again.

It is reasonable to assume that with the price of CVR's crude throughput rising, the company's profits are going to decline. Unfortunately, CVR is not able to significantly change the type of crude it refines, unlike HollyFrontier.

The best margins
HollyFrontier has five refineries spaced throughout the country. One is located within the Permian play, two are located near the Mississippi Lime formation,and the final two are located near the Uinta and Niobrara shale formations. This spacing gives HollyFrontier a variety of crudes to choose from and access to Canadian production as well.

Along with WTI, the advantage crudes the company uses are Western Canadian Select, which currently trades at a discount of $20 to Brent, and West Texas Sour, which trades at a discount of around $10.

The company is able to change quantities of crude used to achieve the best results, as seen in the slide taken from the company's results below:


Source: HollyFrontier investor presentation. 


This ability to switch feedstocks gives HollyFrontier a major advantage over its peers.

Foolish summary
In conclusion, CVR was able to profit from a wide Brent WTI spread during the first quarter of this year. As the spread closes, however, the partnership's income is likely to take a hit.

On the other hand, HollyFrontier has a highly flexible refining capacity. This allows the company to change feedstocks in order to drive the best margins.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Rupert Hargreaves owns shares of HollyFrontier.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers