As is the case every time with CVR Energy's (CVI 3.53%) earnings results, all's not what it seems. The reported results can be misleading if you don't know how its relationship works with its subsidiaries. This quarter is a great example of that. The on-paper results may have been a pleasant surprise, but it doesn't tell the whole story.
Let's drill down into the company's most recent results to see why the nuances of CVR Energy's corporate structure matter and why that structure may be masking an underlying issue with its dividend payments.
By the numbers
|Results*||Q1 2017||Q4 2016||Q1 2017|
|Earnings per share||$0.26||$0.08||($0.19)|
It's always worth mentioning each time CVR Energy reports earnings: The company has no revenue-generating assets. Its sole source of cash comes from its ownership stake in its two subsidiary master limited partnerships: CVR Refining (CVRR) and CVR Partners (UAN 5.24%). The better-than-expected earnings came due to the strength of its refining segment, which posted results well ahead of estimates thanks to some lower operational costs and a boost in refining margins.
UAN Partners and its nitrogen fertilizer operations, however, didn't fare quite as well. Prices for ammonia continue to fall, while feedstock costs and operating expenses keep rising. It also doesn't help that the partnership's interest expenses have increased dramatically since it acquired Rentech Nitrogen Partners. Those expenses more or less wiped out any chance of turning a profit this quarter. Keep in mind that the first quarter is typically the low season for ammonia-based fertilizers.
Perhaps the one good thing was that CVR Partners was able to generate enough cash flow that it could make some of it available for distribution, albeit a modest one of $0.02 per share -- totaling $1.5 million to CVR Energy. The same couldn't be said for CVR Refining, though. Despite its net income numbers, the company said it needed to retain all existing cash for future operations. This is important because CVR Energy's dividend is paid for by the distributions it receives from its subsidiaries. Today, the company is drawing down its own cash pile to pay its current dividend. The hope is that both of its subsidiaries will be in a position to distribute cash relatively soon so CVR Energy can replenish its cash coffers.
From the mouth of management
CEO Jack Lipinski's comments for the quarter were more or less the same thing he said about CVR Refining. Basically, he is still on the warpath to see the U.S. EPA's renewable fuel standard changed.
As I mentioned in the CVR Refining first quarter news release, the Renewable Fuel Standard continues to be a disaster searching for a solution. The wild volatility in the market for Renewable Identification Numbers (RINs) during the first quarter once again proves that RINs are not fundamentally priced but are in fact manipulated. The cost to produce a D-6 ethanol RIN is currently between 6 cents and 10 cents, yet it trades 40 cents higher. This is the price manipulation in the market that must stop and CVR Refining supports the efforts of the many refiners and independent gas station dealers to reform this misguided regulation.
As a company that only has assets in the refining and crude oil gathering part of the value chain, RIN costs hit it harder than others with retail and ethanol blending assets. It also doesn't help that CVR Refining has been on the losing end of some bets that RIN prices would fall.
What a Fool believes
The consolidated results at CVR Energy present a decent-looking picture of a company with ample cash reserves to pay dividends throughout difficult times. What is not reflected in those numbers, though, is that a large portion of that cash is held by its subsidiaries. Until both CVR Refining and CVR Partners are both in a position to throw off significant amounts of cash in the form of distributions, CVR Energy will have to rely on its smaller cash position. There is certainly enough cash there to keep this up for a few more quarters, but after that, things could get tight for the company.
Investors intrigued by CVR Energy's 9% dividend yield will need to keep a close eye on the performance of its subsidiaries over the coming quarters. Without material improvements that lead to distributions, CVR Energy may be one worth avoiding.