Shares of CVR Energy (NYSE:CVI) dropped 12% in May. While there was no news directly related to the company, the operating environments for CVR's two subsidiary partnerships -- oil refiner CVR Refining (NYSE:CVRR) and nitrogen fertilizer producer CVR Partners (NYSE:UAN) -- both remain weak, which is seriously reducing the amount of cash moving to the parent company.
Both CVR Refining and CVR Partners are master limited partnerships with variable-rate distributions. This means that their payouts each quarter depend on how much cash came in the door that quarter, minus any cash reserved for maintenance or future expenditures. Lately, market conditions for both have been so poor that CVR Refining hasn't paid a distribution in more than a year, and CVR Partners' payout has declined from $0.45 per share 18 months ago to just $0.02 per share today.
This puts CVR Energy in a tight spot, because it pays a consistent dividend of $0.50 per share -- the last time it changed was in the first quarter of 2015. Since the only cash that CVR Energy generates is through its ownership stakes in these two partnerships, though, the cash coming in the door hasn't nearly been enough to cover the dividend payments going out. The parent organization has tapped its own cash reserves to cover dividends for several quarters in a row, but this, obviously, isn't sustainable.
The one thing that could save CVR Energy right now is a material improvement in either CVR Refining's or CVR Partner's results. Unfortunately, neither looks likely to happen soon. On the oil refining side of things, we could see a modest improvement in margins this quarter as crude oil prices have slipped and refined product inventories are down slightly. However, it doesn't look as though those factors will provide enough of an improvement to turn CVR Refining into a cash cow.
For CVR Partners, things look even worse. The nitrogen fertilizer market is trying to work through a major disruption to the traditional order to the business. Cheap natural gas in the U.S. has completely upended the market and created a surplus, but higher cost sources have yet to shutter operations. CVR Partners is probably on the wrong side of this disruption, as one of its facilities generates fertilizer products using petroleum coke instead of natural gas.
All of these signs point to an eventual dividend cut at CVR Energy; it's just a matter of how long management wants to wait before making it. Wall Street has already priced a payout cut into the stock -- its current dividend yield is 9.8%. Depending on how long management puts off the inevitable, this stock could decline even further.