CVR Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. CVR Energy operates petroleum refining and marketing and nitrogen fertilizer businesses through CVR Refining and CVR Partners. On April 1, CVR Partners completed its acquisition of CVR Nitrogen, including the East Dubuque fertilizer facility; results include that facility from the acquisition date. CVR owned approximately 66% of CVR Refining and 34% of CVR Partners at quarter-end. Icahn affiliates owned approximately 82% of CVR Energy.
Financial and operating performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,283.2 million | $1,624.2 million | $2,188.7 million | $3,013.1 million |
| Operating income | $90.7 million | $274.2 million | $50.8 million | $410.8 million |
| Net income | $43.8 million | $192.1 million | $12.9 million | $276.8 million |
| Net income attributable to CVR Energy stockholders | $28.4 million | $101.9 million | $12.2 million | $156.7 million |
| Basic and diluted EPS | $0.33 | $1.17 | $0.14 | $1.80 |
| Adjusted EBITDA, non-GAAP | $64.4 million | $145.7 million | $100.6 million | $309.4 million |
- Petroleum: Q2 operating income was $90.1 million versus $250.8 million; six-month operating income was $34.1 million versus $360.0 million. Refining margin was $12.07 per crude throughput barrel in Q2 and $9.50 for the first half, compared with $19.12 and $16.47, respectively, a year earlier.
- Nitrogen fertilizer: Q2 operating income was $3.7 million versus $28.7 million; six-month operating income was $23.4 million versus $60.2 million. Adjusted Nitrogen Fertilizer EBITDA was $29.1 million in Q2 and $57.0 million for the first half. East Dubuque added sales and operating costs, while fertilizer pricing was lower.
- Cash flow: Six-month operating cash flow was $69.9 million, down from $376.4 million. Investing activities used $155.1 million, including $82.8 million of capital expenditures and $63.9 million net acquisition cash outflow. Financing activities provided $10.7 million. Cash declined by $74.5 million to $690.6 million.
- Liquidity: Working capital was $898.3 million. Cash comprised $455.0 million at CVR Energy, $159.3 million at CVR Refining and $76.3 million at CVR Partners. CVR Refining had $255.1 million of ABL availability, subject to borrowing-base limits, and no ABL borrowings.
- Debt: The balance sheet reported $1,196.9 million of debt and capital lease obligations before unamortized issuance costs and discount; this includes capital leases. MD&A separately reported total debt, including current portion, of $1,167.2 million. CVR Partners issued $645.0 million of 9.25% secured notes due 2023, used principally to repay affiliate financing and repurchase 2021 notes. It repurchased about $315.8 million of the 2021 notes, leaving $4.2 million outstanding. CVR Refining had $500.0 million of 6.5% notes due 2022. Interest expense rose to $18.5 million in Q2 and $30.6 million for the first half.
- Margins and costs: Lower petroleum sales prices and weaker refining spreads drove much of the earnings decline. The NYMEX 2-1-1 crack spread averaged $15.98 per barrel in Q2 versus $23.85 a year earlier. Six-month RIN costs were $94.1 million versus $74.1 million. The filing estimates full-year 2016 RIN costs of $200–$235 million.
Material changes versus prior periods
- Q2 revenue fell $341.0 million year over year; first-half revenue fell $824.4 million. Lower fuel prices were the main cause, with reduced petroleum sales volumes also contributing.
- Operating income and earnings attributable to CVR Energy stockholders declined substantially. Petroleum results reflected weaker refining margins, Coffeyville turnaround costs and the absence of the prior-year $27.3 million flood insurance recovery.
- First-half crude throughput decreased about 5.7%, primarily due to the second phase of the Coffeyville refinery turnaround. Q2 throughput was also affected by a temporary Magellan refined-products pipeline suspension.
- The East Dubuque acquisition increased fertilizer sales and expanded assets, but comparison with 2015 is not like-for-like. The acquired facility had a full-quarter turnaround in Q2 2016.
- Six-month cash from operations was sharply lower, while reported debt increased following the acquisition and related refinancing.
Outlook, commentary and risks
- Management said existing cash, operating cash flows and available facilities were expected to cover anticipated operating requirements for at least 12 months, while cautioning that performance and cash generation depend on market conditions and other factors outside its control. No formal earnings guidance is provided in the filing.
- Estimated 2016 capital spending was $203 million, including $160 million for petroleum and $33 million for nitrogen fertilizer. The Coffeyville hydrogen plant was estimated to cost $108.3 million, with $95.6 million incurred by June 30 and completion anticipated in Q3 2016.
- Key exposures include volatile crude and refined-product prices, refining and fertilizer margins, RIN availability and cost, facility downtime, feedstock and transportation disruptions, environmental regulation, and the seasonal and cyclical nature of the businesses. Partnership distributions are discretionary and subject to debt covenants; the 2023 notes restrict distributions depending on a fixed-charge coverage test.
- Unconditional purchase obligations totaled $1,325.3 million, including approximately $770 million of long-term crude transportation commitments. The filing also describes potential joint liability for approximately $533.3 million of underfunded pension obligations at Icahn-affiliated entities; CVR recorded no liability because exposure is contingent.
- A July 2016 pipeline-safety notice alleged violations and proposed a preliminary civil penalty of approximately $0.5 million; the company said it did not expect a material adverse effect. Environmental accruals were $5.6 million at June 30.
- CVR declared a $0.50-per-share second-quarter dividend, payable August 15, 2016. CVR Partners declared a $0.17-per-unit distribution for the same quarter.
Important facts for investors to verify
- Whether refining margins, throughput and RIN costs improve or deteriorate, and whether the disclosed $200–$235 million 2016 RIN estimate remains appropriate.
- East Dubuque’s post-acquisition production, turnaround performance and contribution to fertilizer earnings and cash flow.
- Debt service capacity under the 9.25% 2023 notes, covenant headroom, refinancing options and the sustainability of distributions.
- Progress, spending and expected returns for the Coffeyville hydrogen plant and other capital projects versus the $203 million estimate.
- Developments in the pipeline-safety matter, environmental obligations, affiliate pension exposure and the large long-term transportation commitments.