CVR Energy, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. CVR Energy is a holding company operating petroleum refining and nitrogen fertilizer businesses through CVR Refining and CVR Partners. Figures below are in millions of dollars except per-share and per-barrel data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,914 | $1,434 | $3,451 | $2,942 |
| Operating income | $111 | $1 | $201 | $69 |
| Net income (loss) | $79 | ($19) | $183 | $19 |
| Net income attributable to CVR Energy stockholders | $51 | ($11) | $117 | $12 |
| EPS, basic and diluted | $0.59 | ($0.12) | $1.35 | $0.13 |
| Adjusted EBITDA | $103 | $38 | $189 | $118 |
| Operating cash flow | Not reported separately for quarter | Not reported separately for quarter | $229 | $242 |
Q2 petroleum segment operating income was $117, versus a $7 loss; nitrogen fertilizer segment operating income was break-even, versus $12. For the first half, petroleum operating income was $214 versus $59, while nitrogen fertilizer recorded a $4 operating loss versus $18 income. Refining margin was $13.71 per total throughput barrel in Q2 and $13.93 for the half, compared with $6.45 and $8.64, respectively, in 2017. Adjusted refining margin excluding FIFO inventory effects was $12.61 and $12.78 per barrel, respectively.
Six-month operating cash flow declined despite higher earnings, principally reflecting working-capital investment; reported cash provided by operations was $229, versus $242. Capital expenditures were $42 versus $58. Financing cash outflow was $136, including $87 of dividends to CVR stockholders and $48 of distributions to CVR Refining noncontrolling unitholders. Cash increased $52 to $534.
Balance sheet and liquidity
At June 30, 2018, total assets were $3,850 and total equity was $1,687. Long-term debt and capital lease obligations, net of current portion, were $1,165; gross debt before issuance costs and current lease obligations was $1,191. The company reported compliance with debt covenants. CVR Refining and CVR Partners had no borrowings under their respective credit facilities; disclosed available capacity was $544 for CVR Refining facilities and $50 for CVR Partners’ facility.
Consolidated cash was $534, including $286 held by consolidated variable-interest entities. The company stated that cash, operating cash flow and available facilities were expected to meet anticipated needs for at least 12 months, while noting that subsidiary cash is subject to separate capital structures and distribution policies. Cash was approximately $602 as of July 24, 2018.
Material changes and management commentary
- Revenue rose 33% in Q2 and 17% for the first half, largely from higher petroleum product prices; sales volumes were lower. Q2 gasoline and distillate average prices increased 32.2% and 42.4% year over year.
- Petroleum results benefited from stronger crack spreads and favorable FIFO inventory impacts: $22 in Q2 and $42 for the first half, versus unfavorable impacts of $15 and $16 in the prior-year periods. Derivative gains were $10 in Q2 and $70 for the first half, compared with zero and $12. These noncash/market-sensitive items materially affect comparisons; adjusted EBITDA excludes specified items.
- The Coffeyville refinery’s FCCU outage lasted approximately 48 days in Q1 and reduced first-half throughput. Total petroleum throughput averaged 202,595 barrels per day for the first half, down from 225,264.
- CVR Partners’ Coffeyville fertilizer facility underwent a full turnaround in Q2 2018, with additional unplanned downtime. Q2 fertilizer sales declined to $93 from $98 and adjusted nitrogen EBITDA to $26 from $32. First-half adjusted nitrogen EBITDA was $39 versus $53.
Outlook, risks and unusual items
- No formal earnings or EPS guidance is provided. Management estimated 2018 net RIN costs of approximately $60, subject to volatile credit prices and operating factors. Net RIN cost was $50 in Q2 versus $106 a year earlier, and $27 for the first half versus $99.
- Estimated 2018 capital spending is $160: $130 for CVR Refining, $21 for CVR Partners and $9 for other. The second phase of the Wynnewood turnaround was expected in the first half of 2019, with estimated turnaround expense of approximately $25; the next Coffeyville refinery turnaround was expected in the second half of 2020.
- CVR Energy commenced an offer to exchange up to 37.2 million CVR Refining common units for CVR Energy shares at 0.6335 shares per unit. The offer was scheduled to expire July 27, 2018, unless extended. Icahn Enterprises and affiliates owned approximately 82% of CVR Energy.
- A U.S. Attorney’s Office inquiry sought information about RFS-related activities and Mr. Icahn’s role as a presidential adviser. The company said it was cooperating, noted no claims or allegations had been made, and did not expect a material impact.
- Because of the greater-than-80% common ownership of Icahn affiliates, CVR may be jointly liable for certain affiliate pension obligations. Two affiliate plans were estimated to be underfunded by $435 in aggregate if voluntarily terminated as of June 30, 2018. CVR recorded no liability because its exposure is contingent.
- Key operating risks include refining-margin and crude-price volatility, RIN costs, outages and turnarounds, fertilizer pricing and seasonality, feedstock and logistics availability, environmental and regulatory requirements, and possible affiliate pension exposure. The filing reported no material changes to previously disclosed risk factors or commitments and contingencies.
Important facts for investors to verify
- How much reported earnings and cash generation depended on FIFO inventory effects and derivative gains, and how those items reconcile to adjusted EBITDA.
- Actual 2018 RIN expense and the basis for management’s approximately $60 estimate, given the filing’s stated RIN volatility.
- Operational recovery and costs following the Coffeyville refinery outage and fertilizer turnaround, and progress toward the 2019 Wynnewood turnaround.
- Availability and transferability of subsidiary cash, distributions, and credit-facility capacity under each entity’s separate capital structure.
- Outcome of the CVR Refining unit exchange offer, the federal inquiry, and changes in contingent affiliate pension-plan exposure.