CVR Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; financial statements are unaudited and amounts are in millions of dollars except per-share data. CVR operates petroleum refining and nitrogen fertilizer businesses. In January 2019, it acquired the remaining CVR Refining units, making that business wholly owned. CVR owned approximately 34% of CVR Partners; Icahn Enterprises and affiliates owned approximately 71% of CVR Energy.
Financial performance and position
- Q2 revenue and earnings: Net sales were $1.687 billion, down from $1.914 billion in Q2 2018. Operating income rose to $192 million from $107 million; net income attributable to CVR Energy stockholders was $116 million versus $43 million. Diluted EPS was $1.16 versus $0.50.
- First-half results: Net sales were $3.173 billion versus $3.451 billion. Operating income was $352 million versus $244 million; net income attributable to CVR Energy stockholders was $217 million versus $103 million. Diluted EPS was $2.16 versus $1.19. Weighted-average shares were 100.5 million versus 86.8 million.
- Segment results, Q2: Petroleum operating income was $163 million versus $113 million, and EBITDA (non-GAAP) was $216 million versus $164 million. Nitrogen Fertilizer operating income was $35 million versus break-even, and EBITDA was $60 million versus $20 million.
- Refining: Q2 refining margin was $308 million, or $15.66 per throughput barrel, versus $281 million, or $14.13. First-half margin was $625 million, or $16.10 per barrel, versus $581 million, or $15.72. Management cited stronger product crack spreads and, in Q2, lower RIN expense; reduced derivative gains partly offset improvements.
- Cash flow: First-half operating cash flow was $384 million versus $238 million. Investing used $43 million and financing used $469 million, including $301 million to acquire the remaining CVR Refining units and $150 million in CVR Energy dividends. Cash declined to $540 million from $668 million at year-end.
- Liquidity and debt: At June 30, cash was $540 million; reported current assets were $1.157 billion and current liabilities $482 million. Revolver availability was $393 million for CVR Refining and $48 million for CVR Partners. Long-term debt and finance lease obligations totaled $1.190 billion; covenant compliance was reported. The company said available cash, operating cash flow and credit facilities should cover anticipated needs for at least 12 months.
- Dividends: CVR declared a Q2 dividend of $0.75 per share after quarter-end. CVR Partners declared a Q2 distribution of $0.14 per unit.
Material changes and unusual items
- The CVR Refining unit acquisition for approximately $301 million increased CVR Energy’s ownership and changed the consolidated structure. CVR used about $105 million of short-term borrowings, repaid in February, and funded the balance from cash.
- CVR sold its Cushing, Oklahoma crude oil terminal and related inventory for $43 million, recognizing a $9 million gain.
- Effective January 1, 2019, CVR changed petroleum turnaround accounting from expensing costs as incurred to deferring and amortizing them over four years. Prior periods were recast; the change increased December 2018 assets by $93 million and equity by $75 million. CVR also adopted the new lease standard, recognizing lease assets and liabilities.
- Q2 sales fell year over year despite stronger operating income. Petroleum sales declined, while fertilizer sales rose to $138 million from $93 million, reflecting improved pricing and volumes as weather delays shifted customer demand into Q2.
Outlook, risks and contingencies
- No earnings guidance was provided. Management estimated 2019 RFS compliance costs of $70 million to $80 million, subject to RIN prices, production and blending factors. RFS expense was $21 million in Q2 2019 versus $50 million a year earlier, but $33 million for the first half versus $27 million.
- Management estimated 2019 capital expenditures of $160 million to $180 million, including $10 million to $20 million of growth projects requiring further approval. A Coffeyville refinery turnaround is planned for 2020, estimated at $130 million to $140 million; $20 million to $25 million was expected in the second half of 2019. An East Dubuque fertilizer turnaround was planned for the second half of 2019, expected to last 28 days and cost approximately $7 million.
- Management cited volatile refining and fertilizer margins, crude and feedstock prices, RIN costs, weather and seasonal demand, operational interruptions, transportation constraints, regulation and liquidity/financing conditions as significant risks. It reported high facility utilization through Q2; Wynnewood’s turnaround was completed safely, on time and under budget.
- Nine consolidated Delaware lawsuits by former CVR Refining unitholders challenge the call-option transaction and seek damages; CVR says the claims lack merit and intends to defend them. A U.S. Attorney inquiry concerning RFS-related activities had made no claims or allegations against CVR, according to the filing.
- A tax settlement related to the Coffeyville fertilizer plant is expected to provide $7.9 million through favorable property tax assessments over 2019–2028, subject to the agreement. The filing states no material changes to previously disclosed risk factors or market risks.
Important facts for investors to verify
- Whether refining margins, product spreads and RIN compliance costs support earnings and cash generation in subsequent periods.
- Actual 2019 capital spending, project approvals, turnaround timing and costs, particularly the planned 2020 Coffeyville work.
- Cash and revolver availability after dividends, capital spending and other obligations, and the continued satisfaction of debt covenants.
- Developments in the call-option litigation and any changes in the status or potential impact of the government inquiry.
- Comparability of year-over-year results given the CVR Refining buyout, the larger weighted-average share count and the retrospective turnaround-accounting change.