Diversified energy holding company CVR Energy (NYSE:CVI) would appear to be an ultra-safe stock on the surface given that the company carries no debt and it stands to benefit from weaker oil and gas prices. However, that only tells part of the story because the company's entire income stream is derived from its ownership stake in affiliates CVR Refining (NYSE:CVRR) and CVR Partners (NYSE:UAN). Their concentrated asset base and exposure to price and volume volatility makes CVR Energy a lot less safe.
Cash flow safety
We saw that last quarter after CVR Energy reported a net loss of $45 million, or $0.52 per share. That loss was mainly attributable to troubles at the company's CVR Refining unit, which experienced downtime due to a major turnaround at one of its two refineries. In addition to that, CVR Refining's earnings were further constrained by narrowing crack spreads, which is the difference between what it pays for oil and what it receives for its refined products. Because of that weak quarter CVR Refining didn't declare a distribution to investors, which is bad news for CVR Energy because the only actual cash flow it receives is from the distributions it receives from its two publicly traded partnerships.
Therein lies a key difference between CVR Energy and a traditional general partner/MLP relationship. It doesn't collect the generous incentive distribution rights from its two partnerships, but instead is reliant on the distributions from its partnerships. That's a potential issue because those entities don't own classic MLP assets like pipelines and processing plants which generate steady fee-based income. As such, it's exposed to the cash flow volatility when either commodity prices or volumes produced at their operating plants fluctuate leading to lower distributions.
We saw this volatility at CVR Partners last quarter as well. This was after the average realized prices of UAN fell from $247 per ton in 2014 to $221 per ton last year, while ammonia slumped from $547 per ton to $479 per ton over the same period of time. This resulted in its fourth-quarter operating income falling from $26.5 million to $20.4 million leading the company to declare a distribution of $0.27 per unit, which is down 34% from the year-ago period.
This earnings and cash flow volatility is nothing new, with CVR Energy and its two partnerships having a history of volatility:
Because of this volatility, the stock can't really be considered all that safe.
Balance sheet safety
Having said that, while CVR Energy's cash flow is variable, its balance sheet is rock-solid. As the slide below notes, the consolidated company is actually sitting on a net cash position of just over $90 million:
Further, its overall minimal debt level puts its consolidated debt-to-adjusted EBITDA ratio at a very comfortable 1.4 times. That's a very safe balance sheet and provides a nice safety net so that the group can manage through volatile commodity prices as well as facility downtimes.
Ranking CVR Energy's safety is tough. On the one hand, with a net cash position, its balance sheet is very rock-solid. However, its cash flow can be very volatile because its partnerships are exposed to commodity price fluctuations as well as potential volume issues given that it only operates a small handful of plants. That's a big safety concern for investors because that concentrated asset base could cause problems down the road should the company get hit with a major unplanned downtime. It's that direct exposure to volatility on price and volume, as well as weak diversification, that brings CVR Energy safety level down a couple of notches given the big impact these issues could have on the company's earnings and therefore its ability to maintain or even pay dividends in the future.