Shares of CVR Energy (CVI +0.85%) have been on an absolute tear since the company last reported earnings in October, climbing more than 50%. That huge gain, however, came not from a stellar quarterly performance, but from what investors expect the Trump administration to do for oil refiners. Based on CVR Energy's most recent results, that Trump-based optimism may wear off before long.
Here's a quick look at the company's most recent results and why its 8%-plus dividend yield looks to be in question.
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By the numbers
| Results* | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Revenue | $1,353 | $1,240 | $1,010 |
| Operating income | $12.9 | $27.2 | ($110.7) |
| Net income | $7.1 | $5.4 | ($45.0) |
| Earnings per share | $0.08 | $0.06 | ($0.52) |
FIGURES IN MILLIONS, EXCEPT PER-SHARE DATA. DATA SOURCE: CVR ENERGY EARNINGS RELEASE.
CVR Energy by itself doesn't have a whole lot of actual operations. Rather, all of its revenue and earnings comes from the operations of its subsidiaries -- refining company CVR Refining (CVRR +0.00%) and nitrogen fertilizer manufacturer CVR Partners (UAN 0.90%). Neither of these businesses is exactly knocking it out of the park lately.
The refining side of the business had yet another tough quarter. Operational results remained rather strong, as it kept refinery throughput high and per-barrel operational costs low. High inventories of refined products coupled with rising crude costs and high costs to comply with the EPA's renewable-fuel standards led to refining margins so low that it's almost impossible to eke out a profit.
The nitrogen fertilizer side of the business was hit with a double whammy of declining product prices and rising feedstock costs. Ammonia and urea ammonium nitrate (UAN) prices for the quarter were $352 and $147 per ton, respectively, compared with $479 and $221 per ton, respectively, in the fourth quarter of 2015. Moreover, the cost of natural gas was $3.30 per thousand cubic feet in the quarter.
Natural gas costs didn't affect CVR Partners' business that much in the past because its Coffeyville nitrogen plant uses petroleum coke -- an oil refinery byproduct -- as its feedstock. However, the recent acquisition of Rentech Nitrogen Partners and its natural gas fertilizer facility now means that natural gas costs are a major factor in the company's overall results.
Neither CVR Refining nor CVR Partners declared a distribution in the fourth quarter, so CVR Energy was forced yet again to dip into its cash reserves to pay its $0.50-per-share dividend. While the cash position at all three entities didn't change much from the third quarter of 2016 to this past one -- $762 million in Q3 and $735 million in Q4 -- more and more of that cash is being held at the subsidiary levels as the two prepare for maintenance and turnaround costs in the coming year. CVR Energy's cash position declined from $411 million in the third quarter to $366 million in the fourth quarter.
What management had to say
As has been the case over the past few quarters, analysts have been asking a lot about the sustainability of CVR Energy's dividend, especially when both CVR Energy and CVR Partners aren't paying distributions. Here's what CEO Jack Lipinski had to say about the company's current dividend policy:
Obviously, we've got a very pristine balance sheet, and we also believe that both our businesses will see better days in 2017 than they did in 2016. Now what is the absolute sustainability of the dividend? That gets discussed with our board every quarter. And realistically, with the large ownership of the underlying subsidiaries, it doesn't take a whole lot for CVR Refining or UAN to contribute significantly to cash back up to the parent. So the short answer is we look at it every quarter, and a lot of it last year was obviously a very difficult year. We think the sun will rise and it will shine once again. We came out of the difficult period, and we felt it best at this time not to reduce the dividend. But again, this gets reviewed every quarter.
That's a notable statement, considering that on CVR Refining's most recent conference call, Lipinski mentioned that refined product inventories continue to build even though there was a decent amount of turnaround and maintenance work that shut in about 1 million barrels per day of refining capacity in the fourth quarter. If inventories continue to build with that much refining capacity out of commission, one has to wonder what will happen when those assets come back online.
What a Fool believes
There have been quite a few deals made recently in the refining business. There was a time that with CVR Energy's strong balance sheet, the company was in a position to make an acquisition. After so many deals and considerable industry consolidation, though, one has to wonder what kind of deals are left out there to be made. Also with so little cash coming in the door, it could be a risky time for the company to make a big, splashy acquisition.
CVR Energy's stock did get a big jump over the past several months following the election of Donald Trump and the nomination of Carl Icahn -- CVR's chairman of the board and largest shareholder -- to a special position related to business regulation reform. However, if refining margins remain weak, that Trump bump could wear off pretty fast. Until we see results improve for CVR's subsidiaries and they start to throw off cash to the parent company again, it may be best to wait this one out.
