CVR Energy, Inc. 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended March 31, 2009. CVR Energy, Inc. operates two primary business segments: a petroleum refining and marketing segment (115,000 bpd refinery in Coffeyville, Kansas) and a nitrogen fertilizer segment (producing ammonia and UAN). The company is a controlled company with approximately 73% of outstanding shares owned by Goldman Sachs Funds and Kelso Funds.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $609.4 million | $1,223.0 million |
| Operating Income | $91.0 million | $87.4 million |
| Net Income | $30.7 million | $22.2 million |
| Diluted EPS | $0.36 | $0.26 |
| Operating Cash Flow | $36.7 million | $24.2 million |
| Capital Expenditures | $15.9 million | $26.2 million |
| Total Debt (incl. current) | $490.9 million | $495.9 million |
| Cash and Equivalents | $28.4 million | $25.2 million |
| Working Capital | $174.9 million | $128.5 million |
Margins: The effective tax rate was 28.1% for Q1 2009 compared to 23.6% in Q1 2008. The company reported a refining margin of $13.36 per barrel in Q1 2009, down slightly from $13.77 in Q1 2008.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by $613.6 million (50%) primarily due to a $623.2 million drop in petroleum sales driven by significantly lower product prices (gasoline and distillate prices fell ~50%) and lower sales volumes. Nitrogen fertilizer sales increased by $5.2 million due to higher volumes and prices.
- Profitability Increase: Despite the revenue drop, Net Income increased by $8.5 million. This was driven by improved operating results in both segments, a reduction in derivative losses, and lower flood-related costs.
- Derivative Losses: Net loss on derivatives decreased to $36.9 million from $47.9 million in the prior year. This included a $20.1 million unrealized loss on the Cash Flow Swap (vs. $13.9 million in 2008) and a $15.7 million realized loss (vs. $21.5 million in 2008).
- Cost Reductions: Cost of product sold decreased by $614.6 million, reflecting lower crude oil costs. Direct operating expenses decreased by $4.4 million due to lower energy and maintenance costs in the petroleum segment.
- Flood Costs: Net costs associated with the 2007 flood dropped to $0.2 million from $5.8 million in the prior year as insurance claims were largely settled.
Guidance, Outlook, and Risks
Management Commentary: Management notes that while the economy remains weak, the company is focused on operational efficiency and minimizing capital spending. The nitrogen fertilizer business benefits from using pet coke rather than natural gas, providing a cost advantage during periods of low natural gas prices. However, the company faces risks from volatile petroleum margins and the "Cash Flow Swap" derivative, which creates significant mark-to-market volatility in earnings.
Liquidity and Debt: The company has $116.1 million available under its revolving credit facility. Total funded long-term debt is $483.1 million. The credit facility includes restrictive covenants, including a maximum leverage ratio of 2.25:1.00 and a minimum interest coverage ratio of 3.75:1.00. The company was in compliance as of March 31, 2009.
Risks and Contingencies:
- Derivative Exposure: The Cash Flow Swap with a related party (J. Aron) does not qualify for hedge accounting, causing significant fluctuations in net income based on crack spreads.
- Environmental: The company is finalizing remediation for a 2007 crude oil discharge. While property insurance claims are settled, litigation regarding environmental liability coverage with excess carriers remains unsettled.
- Market Volatility: Earnings are sensitive to crude oil prices, refining margins, and natural gas prices (which influence fertilizer pricing).
Investor Verification Checklist
- Cash Flow Swap Impact: Verify the sensitivity of net income to NYMEX crack spread movements due to the non-hedge accounting treatment of the Cash Flow Swap.
- Environmental Litigation: Monitor the status of the lawsuit against insurance carriers regarding coverage for the 2007 crude oil discharge and potential additional liabilities.
- Credit Covenant Compliance: Confirm continued compliance with the leverage and interest coverage ratios, especially given the restrictive amendments made in late 2008.
- Refining Margins: Assess the sustainability of the $13.36 per barrel refining margin amidst volatile crude differentials and regional basis risks.
- Capital Expenditure Limits: Review the $125 million capital expenditure cap for 2009 imposed by the credit facility and its impact on future maintenance or expansion.