Shares of CVR Energy (NYSE:CVI) dropped over 12% today after the holding company announced an interesting stock exchange offer for unitholders of its subsidiary, CVR Refining (NYSE:CVRR). The transaction will allow for up to 37.1 million units of the refiner to be exchanged for up to 23.5 million shares of the parent company, or at a 0.6335-to-1 ratio.
The move amounts to a bailout of sorts for CVR Refining unitholders but considerable dilution for existing CVR Energy shareholders. That's because unitholders have more burdensome tax considerations for owning a master limited partnership beginning in 2018 following the enactment of sweeping tax reform legislation. The exchange allows them to trade in their units in the partnership for common stock in CVR Energy, ownership of which is not accompanied by the same amount of paperwork come tax time.
As of 3:39 p.m. EDT, the stock had settled to a 11.3% loss.
The exchange doesn't change anything concerning the operations of CVR Refining. And since CVR Energy is a holding company that only generates income from its ownership stake in the refiner and fertilizer producer CVR Partners, there's not much changing at the parent, either. However, it will own over 80% of the refiner once the exchange offer is complete.
That leads to an important point: Unitholders who participate in the exchange will still be able to benefit from the operations at CVR Refining, just a little more indirectly than before.
While this might help to ease the tax burden of individual investors to an extent, the move is really designed to help the largest unitholders, such as billionaire Carl Icahn, who owns large stakes of the CVR family of companies through Icahn Enterprises LP. Aside from that, shareholders in CVR Energy are bearing the burden by being forced to take on the added dilution to allow the transaction to proceed. If there's any silver lining, it's that the strength of the American refining industry could provide enough near- and long-term growth to make up for today's drop.