CVR Energy, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. CVR Energy operates petroleum refining and nitrogen fertilizer businesses. In January 2019, it acquired the remaining CVR Refining common units, making CVR Refining wholly owned; Icahn Enterprises and affiliates owned approximately 71% of CVR Energy at quarter-end. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,622 | $1,935 | $4,794 | $5,386 |
| Operating income | $159 | $166 | $511 | $409 |
| Net income | $104 | $110 | $334 | $271 |
| Net income attributable to CVR Energy stockholders | $119 | $81 | $336 | $185 |
| Diluted EPS | $1.18 | $0.85 | $3.34 | $2.05 |
| EBITDA | $235 | $235 | $738 | $619 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $653 | $526 |
Margins and segments: Petroleum refining margin was $334 million, or $16.34 per throughput barrel, in Q3, versus $319 million, or $15.70, a year earlier. For the first nine months, refining margin was $959 million, or $16.18 per barrel, versus $899 million, or $15.71. Petroleum operating income was $173 million in Q3 and $492 million for nine months. Nitrogen Fertilizer operating income was a loss of $8 million in Q3 versus income of $3 million; nine-month income was $36 million versus a loss of $2 million. The filing does not provide consolidated net margin as a reported metric.
Cash flow and liquidity: Nine-month operating cash flow was $653 million, investing cash outflow $73 million, and financing cash outflow $556 million; cash increased $24 million to $692 million. Cash from operations rose $127 million year over year, attributed mainly to improved operating results and favorable working-capital changes. At September 30, cash was $692 million, current assets $1,327 million, and current liabilities $590 million. Available revolving capacity was $393 million under CVR Refining’s ABL facility and $48 million under CVR Partners’ facility; neither had borrowings outstanding. Management said existing cash, operating cash flow and available facilities should meet anticipated operating needs for at least 12 months.
Debt: Long-term debt and finance lease obligations totaled $1,190 million, including $1,128 million of reported long-term debt net of unamortized costs and discount. Principal debt included $645 million of CVR Partners’ 9.25% notes due 2023 and $500 million of CVR Refining’s 6.50% notes due 2022. The company reported covenant compliance.
Dividends: CVR Energy paid $2.25 per share during the first nine months. After quarter-end, it declared a $0.80-per-share dividend. CVR Partners declared a $0.07-per-unit distribution after quarter-end.
Changes versus comparable periods
- Q3 sales fell about 16%, while operating income declined about 4%. Consolidated net income decreased, but CVR Energy-attributable income and EPS rose; the ownership acquisition changed the noncontrolling-interest allocation, so these measures are not directly explained by consolidated net income alone.
- Nine-month sales fell about 11%, while operating income increased about 25%, net income about 23%, and CVR Energy-attributable income about 82%.
- Petroleum results benefited from higher refining margins, lower RIN costs associated with reduced 2018 renewable volume obligations, higher throughput, and the $9 million gain on the Cushing terminal sale. Q3 refining performance also benefited from derivative gains, partly offset by weaker crack spreads and higher direct operating expense per barrel.
- Nitrogen fertilizer sales increased in both periods, primarily from improved pricing and weather-related shifts in customer demand. Q3 segment operating income weakened, including East Dubuque turnaround expense and costs associated with increased sales and inventory draw.
- Year-over-year comparisons reflect the January 2019 purchase of remaining CVR Refining units. Prior periods were retrospectively recast for the petroleum turnaround accounting change.
Outlook, risks and notable items
- No formal earnings or revenue guidance is stated. Estimated 2019 capital expenditures were $145–$165 million, including $115–$125 million for Petroleum and $20–$25 million for Nitrogen Fertilizer. The next planned major Coffeyville refinery turnaround is in 2020, with estimated costs of $130–$140 million; the East Dubuque turnaround completed in October 2019, with estimated total cost of about $9 million.
- Management estimated 2019 Renewable Fuel Standard compliance costs of $40–$50 million. Recorded expense for the first nine months was $31 million, including a $2 million benefit in Q3. RIN prices, availability, blending volumes and regulatory requirements create uncertainty.
- On October 23, 2019, the board authorized a four-year program to repurchase up to $300 million of shares. The authorization does not require repurchases and timing and amounts are discretionary.
- Risks include volatile refining and fertilizer margins and commodity prices, RIN compliance, operational interruptions and turnaround execution, weather and seasonality, transportation constraints, regulation, and liquidity and financing conditions. Management cited long-term favorable U.S. nitrogen fertilizer fundamentals but noted short-term commodity-cycle volatility.
- Legal matters include alleged Clean Air Act and consent-decree violations at the Coffeyville refinery; the company said it could not reasonably estimate potential penalties or costs. Nine consolidated Delaware lawsuits challenge the CVR Refining unit call-option purchase; the company considers them without merit and intends to defend them. A prior federal inquiry concerning RFS-related activities had made no claims or allegations against the company or Carl Icahn, according to the filing.
- Accounting items: the company adopted the new lease standard, recognizing additional lease assets and liabilities, and changed petroleum turnaround cost accounting from expensing costs as incurred to deferring and amortizing them, generally over four years. Comparatives were recast; the change increased December 2018 assets by $93 million and equity by $75 million.
Important facts for investors to verify
- Whether stronger refining margins and throughput persist, and how crack spreads, derivative results, RIN prices and compliance obligations affect future earnings and cash flow.
- Execution, cost and funding of the 2020 Coffeyville turnaround and the remaining 2019 capital program.
- Fertilizer demand and pricing after weather-related shifts, as well as pet coke and natural gas cost trends.
- Liquidity and debt-service capacity alongside dividends, the newly authorized buyback, and the substantial planned turnaround spending.
- Developments and potential exposure from the Coffeyville environmental matter and CVR Refining call-option lawsuits; the filing gives no clear estimate of potential costs for the environmental matter.