Don't Fret Too Much About CVR Refining's Earnings, it's Part of the Business

Image Source: CVRR Refining investor presentation

So far this year, we have seen several energy companies either cut or completely eliminate their dividends to preserve some form of financial health. This past quarter, CVR Refining (CVRR) also declared a no dividend quarter. Unlike others, though, this is a much more temporary situation that is part of the deal when owning shares of CVR Refining. Let's take a quick look at the company's most recent results, why the company didn't pay shareholders this quarter, and what we can expect in the coming quarters.

By the numbers

Source: CVR Refining earnings release

Two things to keep in mind when looking at CVR Refining's results. The first is that revenue isn't necessarily indicative of the company's health on a quarterly basis. For the most part, the cost of goods sold -- crude oil -- fluctuates at the same rate as revenue from the sales of refined products such as gasoline and diesel. So in this case its better to focus on items such as refining margins and in the case of CVR, adjusted EBITDA.

The second thing to consider when looking at these results is that the company is in the middle of a major turnaround project at its Coffeyville refinery. This quarter alone, the average daily output for this particular facility dropped from 126,900 barrels per day this time last year to 77,200 barrels per day. This is also part of the reason why the company generated a negative amount of cash available for distribution. In the quarter, the company poured $85 million into the effort at the Coffeyville facility that led to the company bleeding cash this quarter.

The (not so) highlights

• Crack spreads for both the Gulf Coast and the Midwest -- indicators of a refiner's profit margins -- fell compared to this time last quarter. So even if the Coffeyville facility was up and running, chances are results for the quarter would have been muted compared to last year.
• Direct operating expenses -- excluding the money spent on the Coffeyville turnaround -- climbed to $7.04 per barrel. This isn't too surprising, either, since there are many fixed costs associated with refineries and losing some production capacity in the quarter will translate to higher per barrel expenses. The better indication going forward will be if per barrel costs increase after the company has completed its turnaround work.
• Since the company did not generate any cash available for distribution, the company did not pay a distribution this quarter. As a variable rate master limited partnership, this will happen from time to time, but it does not mean that the distribution has been suspended.

A look into 2016
For the coming year, CVR Refining's management is expecting to spend about $200 million in capital expenditures. Because of the lower crack spreads the company has experienced so far in the first quarter of 2016, management has elected to commence the second phase of Coffeyville's turnaround plan and expects to have part of the plant down again this quarter for 30-35 days. While this may sound like things will not look good for this coming quarters results, CEO John "Jack" Lipinski did note that inventories of refined product are very high right now and margins are at seasonal lows. So electing to start the turnaround now and having the refinery up and running at full speed before refiners ramp up for the summer driving season may be a pretty good idea.

What a Fool Believes
This quarter shows one of the drawbacks to owning shares of CVR Refining. As a smaller refining company with only two refineries, the company's earnings and payout can be drastically affected when one of those facilities needs to be down for either planned or unplanned maintenance. You have to keep this quarter in perspective, though. Even without making a distribution to shareholders this quarter, total distributions for the year totaled $2.75 per unit, a 25% yield at today's stock price. While there is no telling where that distribution will be for the coming year, the company has been very good at cranking out strong results when the market for refining is good. As long as CVR continues to do this, it's OK to overlook the occasional quarter like this.