CVR Energy, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results include petroleum refining and marketing, nitrogen fertilizer through CVR Partners, and other activities. CVR Energy reported the filing on August 1, 2023.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $2.236bn | $3.144bn | $4.523bn | $5.517bn |
| Operating income | $224m | $402m | $554m | $623m |
| Net income | $168m | $239m | $427m | $392m |
| Net income attributable to CVR Energy stockholders | $130m | $165m | $325m | $258m |
| Basic and diluted EPS | $1.29 | $1.64 | $3.23 | $2.57 |
| Operating cash flow | Not stated separately | Not stated separately | $614m | $712m |
| Company-defined free cash flow | Not stated separately | Not stated separately | $484m | $556m |
Q2 consolidated EBITDA, a non-GAAP measure, was $300m versus $401m; adjusted EBITDA was $347m versus $511m. For the first half, EBITDA was $701m versus $679m and adjusted EBITDA was $680m versus $666m. The company cautions that non-GAAP measures are not substitutes for GAAP results.
Segments: Petroleum operating income was $171m in Q2 and $408m for the first half, compared with $297m and $427m in 2022. Nitrogen Fertilizer operating income was $67m and $176m, compared with $126m and $230m. Petroleum refining margin fell to $333m ($18.21 per throughput barrel) in Q2 from $478m ($26.10 per barrel); first-half margin was $744m ($20.68 per barrel), versus $775m ($21.50).
Cash, debt and liquidity: Cash and cash equivalents were $751m at June 30, 2023, up from $510m at year-end; cash, cash equivalents and restricted cash totaled $758m. Total debt and finance lease obligations, including current lease obligations, were $1.591bn. The company reported total liquidity of approximately $1.041bn, comprising cash and available borrowing capacity of $255m under the Petroleum ABL and $35m under the Nitrogen Fertilizer ABL. It was in compliance with debt covenants. Senior notes include $600m due 2025 and $400m due 2028 at CVR Energy; CVR Partners has $550m of secured notes due 2028.
First-half investing cash outflow was $130m, including $100m capital expenditures and $50m turnaround expenditures, partly offset by a $20m return of an equity-method investment. Financing cash outflow was $243m, including $101m of CVR Energy dividends and $140m of distributions to CVR Partners’ noncontrolling holders.
Changes versus prior comparable periods
- Q2 sales decreased $908m year over year, while operating income declined $178m and attributable net income declined $35m. Management cited weaker refining crack spreads and unfavorable inventory valuation, as well as lower fertilizer prices.
- First-half sales fell $994m and operating income declined $69m, but net income rose $35m and attributable net income rose $67m. The net income comparison benefited partly from an $84m other expense in 2022 versus $6m other income in 2023; 2022 included a call-option litigation settlement accrual.
- Petroleum Q2 refining margin was pressured by lower product crack spreads and a $21m unfavorable inventory valuation impact, versus a $37m favorable impact in 2022. The first-half inventory valuation impact was also unfavorable by $33m, compared with a $170m favorable impact in 2022. Lower RFS-related expenses, utility costs and derivative results partly offset pressures.
- Fertilizer production and sales volumes improved as facilities operated more reliably after prior-year turnarounds and downtime, but lower product prices reduced segment earnings. Q2 ammonia utilization was 100%, versus 89% in 2022; UAN and ammonia gate prices were lower year over year.
- Operating cash flow fell $98m in the first half, which management attributed primarily to a $114m unfavorable working-capital change. Dividends and other distributions increased cash used in financing.
Outlook, management commentary and notable items
- Management believes existing cash, operating cash flow and borrowing availability should cover anticipated requirements for at least the next 12 months, while noting that capital, regulatory compliance and other cash needs could exceed expectations.
- Estimated 2023 capital expenditures are $200m–$225m, including $49m–$58m for renewables, principally the Wynnewood pretreater project. The pretreater is expected to be completed in Q4 2023 at an estimated cost of $91m. A Wynnewood refinery turnaround is expected in spring 2024 at an estimated cost of $40m.
- The company estimated an open RFS position of approximately 373m RINs, excluding 63m of net open fixed-price purchase commitments, and recorded a $599m RFS liability at June 30. Management estimated 2023 consolidated RFS compliance costs of $165m–$175m, net of estimated RIN generation from renewable diesel operations of $185m–$195m; actual costs remain sensitive to RIN prices, blending, exemptions and legal outcomes.
- In January 2023, CVR Partners entered a carbon capture and sequestration transaction intended to monetize Section 45Q tax credits. It received approximately $18m net initially and may receive up to an additional $60m through March 2030 if specified milestones are met. Failure to meet certain carbon oxide delivery minimums may trigger fees, subject to a $45m cap.
- CVR Energy concluded its exploration of a potential nitrogen fertilizer business spin-off and the board decided not to pursue it at this time. The company segregated its renewables business effective February 1, 2023.
- A new Gunvor crude supply agreement is to begin around January 1, 2024, replacing the Vitol agreement, which was terminated effective December 31, 2023. The Gunvor agreement has an initial 24-month term, subject to renewal provisions.
- After quarter-end, the board declared a $0.50-per-share quarterly dividend and a $1.00-per-share special dividend, both payable August 21, 2023. CVR Partners also declared a $4.14-per-unit distribution. These are discretionary and future distributions are not assured.
- Key risks include commodity prices and refining margins, volatile RIN costs and RFS requirements, fertilizer pricing and feedstock costs, operational interruptions, weather, regulation, and legal proceedings. RFS exemption disputes could materially affect results if resolved adversely. Clean Air Act proceedings involving the Coffeyville refinery were in settlement discussions; outcomes of these and insurance-coverage litigation related to the call-option lawsuits could not be determined.
Important facts for investors to verify
- Whether refining margins, product demand and inventory valuation support earnings as crack spreads normalize.
- Future RIN prices, EPA actions and court rulings on small-refinery exemptions, and how these affect the $599m recorded RFS liability and projected compliance costs.
- Progress, final cost and timing of the Wynnewood pretreater and 2024 turnaround, plus any capital or operating requirements tied to renewables and carbon capture projects.
- Developments and potential financial exposure in the RFS, Clean Air Act and call-option insurance proceedings; the filing does not provide a clear estimate of potential outcomes for these matters.
- Cash generation and liquidity after declared dividends and CVR Partners distributions, alongside debt maturities and any changes to discretionary shareholder returns.