CVR Energy, Inc. — Q1 2020 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. CVR operates petroleum refining and nitrogen fertilizer businesses. Icahn Enterprises and affiliates owned approximately 71% of CVR Energy; CVR Energy owned approximately 34% of CVR Partners’ common units.
Financial performance
Unless otherwise stated, amounts are in millions of dollars.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1,130 | $1,486 |
| Operating income (loss) | $(135) | $160 |
| Net income (loss) | $(101) | $102 |
| CVR Energy stockholder net income (loss) | $(87) | $101 |
| Basic and diluted EPS | $(0.87) | $1.00 |
| Net cash from operating activities | $(58) | $228 |
| Free cash flow (non-GAAP) | $(115) | $186 |
Revenue fell approximately 24%; the company swung to an operating and net loss. Consolidated EBITDA, a non-GAAP measure, was $(38) million versus $230 million. No consolidated gross-margin percentage is stated; petroleum refining margin was $22 million ($1.52 per throughput barrel), down from $317 million ($16.55 per barrel). Excluding inventory valuation impacts, refining margin was $158 million ($11.06 per barrel) versus $285 million ($14.87 per barrel).
- Petroleum: Net sales were $1,057 million versus $1,397 million; operating loss was $127 million versus operating income of $156 million. Throughput declined to 156,518 barrels per day from 212,807, reflecting the Coffeyville turnaround and reduced Wynnewood utilization amid falling demand. Inventory valuation impacts were unfavorable by $136 million, including a $58 million lower-of-cost-or-net-realizable-value charge; derivative gains of $46 million partly offset these effects.
- Nitrogen fertilizer: Net sales were $75 million versus $92 million; operating loss was $5 million versus income of $9 million. Weaker realized prices for ammonia and UAN outweighed higher ammonia sales volumes. Gate prices fell to $264 per ton for ammonia from $367 and $166 per ton for UAN from $222.
- Liquidity and debt: Cash and equivalents were $805 million at March 31, up from $652 million at year-end. Current assets were $1,396 million and current liabilities $504 million. Long-term debt and finance lease obligations totaled $1,686 million, compared with $1,190 million; reported total debt excluding finance leases was $1,627 million. Available borrowing capacity was $442 million ($392 million under CVR Refining’s ABL and $50 million under CVR Partners’ facility). The company reported compliance with debt covenants.
Material changes, outlook and risks
- Q1 operating cash flow fell by $286 million year over year, primarily from lower earnings and unfavorable working-capital changes amid the crude-price decline. Investing used $196 million, including a $140 million investment in Delek US Holdings; financing provided $407 million, largely reflecting new notes. Cash increased by $153 million.
- On January 27, CVR Energy issued $600 million of 5.25% senior unsecured notes due 2025 and $400 million of 5.75% notes due 2028. Proceeds partly funded redemption of CVR Refining’s $500 million 6.50% notes due 2022; redemption included a $5 million call premium and the company recorded an $8 million extinguishment loss. Interest expense was $35 million versus $26 million.
- The Delek investment represented approximately 14.9% ownership; CVR recorded $31 million of investment income, including a $30 million unrealized gain. Marketable securities were reported at $170 million at quarter-end.
- Management described COVID-19, demand destruction—especially for gasoline and jet fuel—and oil-market supply and price volatility as significant threats to margins, operations, cash generation, and liquidity. It said the environment could remain volatile through at least the first half of 2020 and potentially longer; the filing provides no earnings guidance.
- Management said cash, operations, and available facilities were expected to cover anticipated needs for at least 12 months, subject to risks and future performance. Cost and capital actions included deferring most growth spending, limiting maintenance work to critical projects, operating refineries near minimum crude throughput, targeting $50 million of operating and administrative cost reductions, and postponing several turnarounds. Estimated 2020 capital expenditures were $95–$105 million, excluding turnaround expenditures; estimated petroleum turnaround capitalized expenditures were $140–$150 million. Estimated 2020 RFS compliance cost was $65–$75 million.
- The board declared a Q1 dividend of $0.40 per share, or $40 million, payable May 26, 2020; management characterized this as a 50% reduction. No Q1 distribution was declared by CVR Partners. CVR Partners’ unit price had fallen below the NYSE’s $1 minimum; it had until January 1, 2021 to regain compliance, with delisting risk. A subsequent authorization allows up to $10 million of CVR Partners unit repurchases, but does not require purchases.
- Contingencies include continuing discussions with the DOJ and Kansas environmental regulator regarding alleged Coffeyville refinery Clean Air Act and consent-decree violations; the company could not estimate potential costs. Litigation also includes lawsuits concerning CVR Refining’s call-option exercise, and uncertainty over a vacated refinery small-refinery exemption under the RFS. The company said it could not determine outcomes or potential material impacts for these matters.
Key facts for investors to verify
- Whether refining demand, margins, utilization, and inventory values recover, and how those trends affect operating cash flow and liquidity.
- Execution and cost of the announced spending reductions, turnaround deferrals, and 2020 capital plans.
- Debt service, available credit, covenant compliance, and the sustainability of shareholder dividends under continued market stress.
- CVR Partners’ NYSE unit-price compliance status and the possible effects of suspension or delisting.
- Developments in RFS obligations, environmental proceedings, and litigation, including any resulting costs or liabilities.
- Changes in the value and governance implications of the Delek investment and other related-party arrangements.