If you've seen the dividend yield for CVR Refining (CVRR +0.00%) lately, your reaction probably looked something like that guy on the right. With the company sporting a 15.5% yield these days, almost anyone looking for an income investment will be tempted by CVR Refining's siren song. To the prudent investor, though, a yield that big probably sets off alarm bells. So let's take a deeper look at CVR's business and see if it can keep this pace going.
The yields they are a changin'
The first thing you should note about CVR's massive dividend is that the company is structured as what is known as a variable-rate master limited partnership, or MLP. Like all other MLPs, it is exempt from corporate taxes because it pays out its distributable cash flow to shareholders (known as "unitholders" with MLPs) each quarter. What separates CVR from most other MLPs is that as a variable-rate entity it pays out 100% of its distributable cash flow instead of a fixed amount established by management.
The one advantage of this structure is that the company isn't forced to pay more in distributions than it brought in on a quarterly basis, so there are far fewer worries that the CVR will get in trouble with these payments. The drawback is that the company can't retain any excess cash after distributions to grow the business, and and as a result distributions will change from quarter to quarter based on the amount of cash the MLP generates.
Being a variable-rate MLP makes a lot of sense for a company like CVR Refining. The company only has two refineries, both located in the Midwest, so if one were to go down for any reason it would significantly impact the ability to meet a distribution payment. Also, in a cyclical business such as refining that is wholly dependent upon the pricing of commodities at both ends of its business -- buying crude oil and selling refined products -- having the ability to adjust the distribution based on market conditions gives a little more wiggle room.
Don't throw the baby out with the bathwater
So, the likelihood of CVR Refining actually maintaining that kind of distribution yield is unlikely; next quarter it could drop significantly if the price of gasoline were to fall and/or the price of crude were to rise. However, just because the company's distribution is completely dependent upon crude and petroleum product prices doesn't mean you should write off CVR. If you do, you might miss out on one of the better refining companies out there.
Source: CVR Refining Investor Presentation.
CVR's refineries are strategically located close to what is possibly the nation's largest oil hub: Cushing, Okla. This gives CVR cheaper access to both domestic and Canadian crudes, most of which sell at a decent discount to the prices found in areas such as the Gulf Coast. Access to these crude types -- and its low-cost operations -- allow the company to generate better margins and returns than most of its peers.
| Company | EBITDA Margin (LTM) | Return on Equity (LTM) |
| CVR Refining | 6.3% | 23.8% |
| HollyFrontier | 5.7% | 7.5% |
| Western Refining | 6% | 19.8% |
| Tesoro | 3.1% | 7.8% |
Source: S&P Cap IQ.
Considering that U.S. and Canadian oil production is expected to increase dramatically over the next several years, there isn't any worry from a lack of supply anytime soon. Also, while U.S. gasoline consumption has declined slightly as vehicles become more fuel efficient, we are still a long way from seeing a major decline that could drastically impact long-term prices. As long as CVR Refining can maintain its low-cost structure, it should produce decent returns over the long term.
What a Fool believes
The chance of CVR Refining maintaining a distribution yield as large as seen today is pretty slim. The price of oil is a crazy, crazy thing, and having so much of your success tied to its price can cause both pain and pleasure. Ultimately, though, CVR Refining's structure is built to handle this uncertainty, and its ability to generate superior returns means distributions should remain strong even in rougher times. With shares trading at a total enterprise value to EBITDA ratio -- a better valuation metric than P/E for MLPs -- of 6.3x, the company is well below the MLP average of 15.7x. So it might be worth taking a better look at CVR Refining even if you might not ever see that 15.5% yield.
