New quarter, same story. That is the short version of CVR Energy's (NYSE:CVI) most recent quarterly report. The company's subsidiaries still struggle to turn profits in their respective markets of oil refining and nitrogen fertilizer manufacturing, even though the operations at both look to be in good shape.
That doesn't help CVR Energy that much, though, because it needs to maintain its obligations to shareholders in the form of its dividend. Here's a look at the company's most recent earnings report, why its dividend days look numbered, and what possible moves management can make to alleviate the situation.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$1.42 billion||$1.51 billion||$1.28 billion|
|Operating income||$1.3 million||$67.6 million||$90.7 million|
|Net income||($10.5 million)||$22.2 million||$28.4 million|
|Earnings per share||($0.12)||$0.26||$0.33|
Here's the obligatory statement that comes with all of CVR Energy's earnings releases: These are the consolidated results of CVR's subsidiary master limited partnerships. CVR Energy has no operations outside its ownership stake in these subsidiaries. In fact, revenue for the quarter at just CVR Energy was negative $1.7 million.
In the first quarter, refining subsidiary CVR Refining (NYSE:CVRR) surprised everyone with a profitable quarter, which helped to offset the losses at nitrogen fertilizer manufacturer CVR Partners (NYSE:UAN). This quarter, that script was flipped. While CVR Partners posted better results thanks to producing higher volumes, CVR Refining results fell back into the loss column from weak refining margins.
The thing that both subsidiaries had in common was that they both elected to retain cash rather than make some available for distribution. CVR Partners didn't have any cash to distribute because of a working capital build, and CVR Refining said that it wants to keep cash around to work through this hard-to-handle refining market and have the cash available when it needs to do maintenance and turnaround work.
What this means is that no cash came in the door at the parent level again. This isn't anything new: CVR Refining hasn't paid a distribution since November 2015, and CVR Partners' distributions have been small and inconsistent for the same time. CVR Energy has used the cash held at the parent level since then to cover any cash shortfalls and maintain its $0.50-per-share dividend. Even though CVR's consolidated balance sheet says it has $829 million in cash on the books, only $262 million of it is held at the parent level. So far in 2017, it has used $100 million in cash at the parent level.
What management had to say
As he is wont to do, CVR Energy CEO Jack Lipinski went on a tirade about the cost to comply with the U.S. EPA's renewable fuel standards and how the market, as it is currently constructed, is deeply flawed. Aside from that, though, he seemed satisfied with the operational performance of its two subsidiaries:
CVR Refining reported strong operational results for the 2017 second quarter. The Coffeyville refinery achieved a quarterly crude throughput record and the Wynnewood refinery also continued to run well. CVR Partners' fertilizer facilities had solid operational performance during the quarter. The East Dubuque facility posted an on-stream rate of 100 percent for its ammonia plant, which is a quarterly record. In addition, the Coffeyville facility's gasification and ammonia plants operated at on-stream rates nearing 100 percent.
What a Fool believes
Something has to give here. CVR Energy's cash pile has been a savior for its dividend for close to two years now, but it's drying up. Unless we see a sharp rebound in either CVR Refining's or CVR Partners' results soon -- and that doesn't look too likely -- the parent organization is going to have to make some hard decisions regarding its dividend. The one interesting caveat in this story is that CVR Refining has an abnormally large amount of cash on the books right now. Management has said it is keeping it there for future spending needs, but it is more than its total capital expenditures over the past 14 consecutive quarters. If CVR Energy gets in a pinch with its cash position, it's not a stretch to see CVR Refining issuing a dividend to replenish the parent's cash levels.
Overall, though, long-term investors don't want to pin their investment thesis on cash transfers. The larger concern is how the company is going to be able to fix these businesses such that they can better handle the ups and downs of these cyclical markets.