Independent oil refiner CVR Refining (NYSE:CVRR) went through an extremely tough stretch over the past few years as refining margins were low. These past couple quarters, though, its results have improved drastically thanks to a more favorable refining environment. So it's a little surprising to hear that parent company CVR Energy (NYSE:CVI) decided to acquire all publicly traded shares in the master limited partnership just as business was starting to look good.
Let's take a look at CVR Refining's most recent results and why its parent decided now was the right time to buy it out.
By the numbers
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$1.82 billion||$1.46 billion||$1.34 billion|
|EBITDA||$162 million||$191.7 million||$25 million|
|Cash available for distribution||$97 million||$75.7 million||$0|
What a difference good refining margins can do for the bottom line. This past quarter's result was more of a reflection of the favorable market environment for refining than anything CVR did in particular. Sure, the company was able to keep its direct operating expenses relatively low at $4.76 per barrel, but the biggest driver was a refining margin that surged from $6.45 per barrel this time last year to $13.71 per barrel in the quarter. Refining across the U.S. is in a great position because companies are able to take advantage of the regional price discrepancies in crude oil.
From an operations standpoint, CVR was able to run its facilities relatively well, with the exception of a power outage at one of its facilities. Management said that the power outage at its Coffeyville, Kansas facility cost the company $16 million in lost opportunity.
Changing its stripes
Parent company CVR Energy has long held a majority stake in its refining subsidiary. The corporate structure of CVR Energy owning all of its refining and fertilizer manufacturing assets -- through its other subsidiary CVR Partners (NYSE:UAN) -- was to take advantage of the favorable tax treatment granted to master limited partnerships.
The benefits of being a master limited partnership were drastically diminished this year, though, with the changes to corporate tax rates. Lower tax rates for regular corporations make the limited partner/general partner structure much less lucrative than it was prior. As a result, CVR Energy has determined that it makes sense for CVR Refining to be a wholly owned segment of the parent instead of as an equity owner of a publicly traded partnership.
As part of the deal, investors in CVR Refining will receive 0.6335 shares of CVR Energy common stock for every common unit of CVR Refining. Surprisingly, though, this doesn't really change much for investors. They will now receive regular dividends instead of distributions, but CVR Energy's only assets are its stake in CVR Refining and CVR Partners. The only difference now is that investors won't have the added tax paperwork of a K-1.
What management had to say
The cost of complying with the Environmental Protection Agency's renewable fuel standards was a topic former CEO Dave Lipinski used to talk about every quarter. Last quarter, though, new CEO Dave Lamp changed the tone of the company by highlighting his plan to help to mitigate the cost of the renewable identification numbers (RINs).
Recently, the cost of RINs has come down significantly, which has helped boost the company's bottom line. According to Lamp on the company's conference call, he doesn't want to take the chance that RINs will stay this low and still plans on investing heavily in biofuel blending to bring RIN costs down.
[W]e still are the poster child for exposure to RINs. And I don't – with the current State of Washington and an election year, I don't see any real reform in RINs, at least, in the RFS program for any period of time, at least, in the near future even though they continue to work on it and job own about it. But I don't think we can sit here and just say, the problem has gone away, because the price is low now. If it comes back, it's a problem for us and we have to address it.
The right move for management, but doesn't necessarily make it a buy
If we're being honest with ourselves, CVR Energy buying back its stake in the refiner makes sense. Even though management structured the partnership as a variable rate MLP that only paid out what was left over at the end of a quarter instead of setting a fixed rate, the refining business is just too volatile of a business to lend itself to a corporate structure that works well with consistent cash flows.
While management has a plan in place to lower its compliance costs and find ways to source those discounted crude sources, CVR Refining is a small-scale refinery that doesn't have the logistics footprint of its larger peers to reap the same benefits. While it will be able to ride the same favorable market conditions as the rest, it's hard to see the company outperforming its larger competition.