CVR Refining's (NYSE:CVRR) distributions have yielded a whopping 12% over the past year. However, yields that high typically suggest trouble. So let's look to see if there is any danger lurking for CVR Refining's distribution. 

CVR Refining 101
Before we go too far, there are two important things investors need to know about CVR Refining. First, the company is structured as a master limited partnership, or MLP. Because an MLP is a pass-through entity for tax purposes, CVR Refining will deliver virtually all of its income to investors. We therefore expect the payout ratio to be high.

Second, unlike most other MLPs, CVR doesn't own stable midstream assets such as pipelines and processing plants, nor does it own and operate mature oil and gas wells. These assets typically provide stable income, which yields a fairly steady distribution to investors. Instead, CVR Refining's core assets are two oil refineries, which are less stable assets due to the volatility of oil and gas prices, as well as the volumes processed each quarter. This is evident in the following slide, which shows that the company's margins and EBITDA can vary from year to year.

Source: CVR Refining Investor Presentation.  

Volatility = variability
Because of its structure and assets, CVR Refining's distribution policy is a bit different from most other MLPs. It pays a variable distribution, meaning it provides all of the available cash generated each quarter, as opposed to distributing a set amount to investors. This system creates a particularly lumpy distribution, as seen in the following chart.

Source: CVR Refining. Chart prepared by author.  

CVR Refining's most recently declared distribution was $0.54 per unit, a steep 44% reduction from the prior quarter. The reduction was due to some challenges in the quarter, including a fire at one of its refineries. Any downtime at one of its refineries, such as for scheduled maintenance, will impact cash flow and the distribution. CVR Refining's history shows its distribution can vary quite widely depending on its operations and cash flow in any given quarter.

Because CVR Refining operates under a variable distribution policy we can't say that there is any danger lurking when it comes to its payout ratio. We know that 100% of its available cash flow will be paid out each quarter. As the cash amount available changes so will the distribution to investors.

Investors simply need to know that CVR Refining is a different type of investment. It pays out basically all of its income to investors in any given quarter, and that income can, and likely will, fluctuate.