CVR Energy, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. CVR Energy is a diversified holding company operating petroleum refining and nitrogen fertilizer businesses. Icahn Enterprises and affiliates owned approximately 71% of CVR Energy; CVR Energy owned approximately 37% of CVR Partners’ common units.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $2.373 billion | $1.463 billion |
| Operating income (loss) | $220 million | $(135) million |
| Net income (loss) | $153 million | $(55) million |
| Net income (loss) attributable to CVR Energy stockholders | $94 million; $0.93 per share | $(39) million; $(0.39) per share |
| Net cash provided by operating activities | $322 million | $96 million |
| Free cash flow (non-GAAP) | $281 million | $61 million |
- Margins and earnings quality: Petroleum refining margin was $297 million ($16.75 per throughput barrel), versus $51 million ($3.05) a year earlier. Excluding favorable inventory valuation impacts, refining margin was $164 million versus a $15 million loss. Consolidated EBITDA was $278 million; adjusted EBITDA, a non-GAAP measure, was $155 million versus $26 million. Favorable inventory valuation impacts were $136 million in 2022, an important contributor to reported results.
- Petroleum segment: Revenue was $2.154 billion versus $1.404 billion; operating income was $130 million versus an operating loss of $115 million. Management cited stronger crack spreads and throughput, and lower RIN costs than the prior-year period, which was affected by Winter Storm Uri. Average Group 3 2-1-1 crack spread increased to $22.20 per barrel from $16.33.
- Nitrogen fertilizer segment: Revenue was $223 million versus $61 million; operating income was $104 million versus an operating loss of $14 million. Higher prices and sales volumes drove the improvement. Ammonia and UAN realized prices were $1,055 and $496 per ton, respectively, compared with $300 and $159. Production utilization remained 88% in both periods.
- Liquidity and debt: Cash and cash equivalents were $676 million at March 31, up from $510 million at year-end. Total liquidity was approximately $1.082 billion, including $371 million available under the Petroleum ABL and $35 million under the Nitrogen Fertilizer ABL. Debt and finance lease obligations, including current portions, totaled $1.595 billion. CVR Partners repaid its remaining $65 million of 9.25% notes in February; the filing reports annual interest savings of approximately $6 million in the liquidity discussion (and approximately $9 million in the operating achievements discussion). The company and subsidiaries were in compliance with debt covenants.
- Cash flow: Investing activities used $41 million, including $26 million of capital expenditures and $15 million of turnaround expenditures. Financing activities used $115 million, including the $65 million debt repayment, $36 million of distributions to CVR Partners’ noncontrolling unitholders, and unit repurchases.
Material changes versus Q1 2021
- Sales and operating results rebounded materially, with both business segments moving from operating losses to operating income. Petroleum benefited from improved product margins and throughput after prior-year storm disruptions; fertilizer benefited from sharply higher prices and improved sales volumes.
- Net income included no comparable marketable-securities gain in Q1 2022; Q1 2021 included $62 million of investment income from Delek securities. CVR had disposed of its remaining nominal Delek investment by January 2022.
- Operating cash flow rose to $322 million from $96 million. The company attributed the improvement mainly to stronger operations, partly offset by working-capital effects, including the increase in its open RFS position.
- RFS expense recognized was approximately $107 million versus $178 million. The period-end RFS liability nevertheless increased to $585 million from $494 million at December 31, 2021.
Outlook, commentary, risks and unusual items
- Management outlook: Management believed cash, operating cash generation and available borrowing capacity would be sufficient for anticipated needs for at least 12 months, while cautioning that costs, RFS outcomes and operating performance could alter requirements. Estimated 2022 capital spending was $209–$239 million, including $73–$83 million for renewables; approximately $48 million of the estimate was for growth projects requiring further approval.
- Renewables investment: The Wynnewood renewable diesel conversion, estimated at $175 million, was completed in April 2022 and was ramping up. The unit was expected to produce up to 100 million gallons annually. A separate $60 million pretreater project was expected to be completed in Q1 2023. Management said renewable diesel could reduce RFS exposure, but the amount depends on market and regulatory conditions. The company planned to segregate its renewables business, with restructuring expected to be completed in Q1 2023.
- RFS exposure: The company estimated an open position of approximately 426 million RINs for 2020–2022, excluding about 1 million net fixed-price purchase commitments, and recorded a $585 million liability. Based on April market prices and other assumptions, estimated 2022 RFS compliance costs were $400–$410 million before estimated renewable-diesel RIN generation of $160–$170 million, and without regard to possible small-refinery exemptions. RIN prices, EPA decisions and related litigation could materially affect results and cash flows.
- Market and operating risks: Management highlighted commodity-price and refining-margin volatility, Russia’s invasion of Ukraine and related disruptions, elevated fertilizer and energy prices, COVID-19 uncertainty, inflation, seasonal demand, facility outages, and planned refinery and fertilizer turnarounds. The Wynnewood refinery turnaround began in late February and was completed in early April; fertilizer-facility turnarounds were planned for summer 2022.
- Contingencies: Plaintiffs in the Call Option Lawsuits alleged damages exceeding $300 million; the company disputed the claims and said an adverse outcome could materially affect it. Related insurance coverage litigation remained pending. The EPA denied Wynnewood’s 2018 small-refinery exemption in April 2022; the company was evaluating its response and anticipated challenging any final denial of pending exemption petitions. Separately, a court denied review of approximately $6.8 million in Clean Air Act stipulated penalties; escrowed funds were restricted, and related claims remained unresolved.
- Distributions: After quarter-end, the board declared a $0.40-per-share CVR Energy dividend, totaling approximately $40 million, and CVR Partners declared a $2.26-per-unit distribution, totaling approximately $24 million; both were payable in May 2022. These were not Q1 cash payments.
Important facts for investors to verify
- How actual RIN prices, EPA rulings and small-refinery exemption litigation affect the $585 million RFS liability and stated 2022 compliance-cost estimate.
- Whether the Wynnewood renewable diesel unit ramps up as expected, achieves projected production and RIN generation, and stays within project costs and schedule.
- How much of Q1 petroleum profitability reflects sustainable refining economics versus favorable inventory valuation and volatile commodity prices.
- Progress and potential exposure in the Call Option Lawsuits, insurance coverage cases and refinery environmental proceedings.
- Whether fertilizer prices and margins remain strong and planned turnarounds or equipment issues affect production, cash flow and capital spending.
- The filing reports $6 million of annual interest savings in its liquidity discussion and approximately $9 million in its operating achievements discussion following repayment of the $65 million notes; investors may wish to clarify the difference.