CVR Energy, Inc. — Q3 2020 Form 10-Q
Business context and reporting period: CVR Energy is a holding company operating petroleum refining and nitrogen fertilizer businesses through CVR Refining and CVR Partners. This unaudited filing covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Icahn Enterprises and affiliates held approximately 71% of CVR Energy’s shares at quarter-end.
Financial highlights
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,005 million | $1,622 million | $2,811 million | $4,794 million |
| Operating income (loss) | $(46) million | $159 million | $(206) million | $511 million |
| Net income (loss) attributable to CVR stockholders | $(96) million | $119 million | $(188) million | $336 million |
| EPS, basic and diluted | $(0.96) | $1.18 | $(1.87) | $3.34 |
| Operating cash flow | $111 million | $269 million | $62 million | $653 million |
| Free cash flow | $76 million | $239 million | $(197) million | $544 million |
At September 30, cash and cash equivalents were $672 million (plus $7 million restricted cash). Total current assets were $1.254 billion and current liabilities were $457 million. Long-term debt and finance lease obligations, including current portions, were $1.690 billion; debt excluding finance leases was reported as $1.629 billion. The company had $393 million available under the Petroleum ABL and $25 million under the Nitrogen Fertilizer ABL, and reported compliance with debt covenants.
Q3 consolidated EBITDA, a non-GAAP measure, was a loss of $39 million versus income of $235 million a year earlier. Nine-month EBITDA was a loss of $8 million versus income of $738 million. Nine-month free cash flow was negative chiefly because of weaker earnings and higher capital and turnaround spending.
Segments and material changes
- Petroleum: Q3 sales were $927 million versus $1.535 billion; operating loss was $39 million versus income of $173 million. Nine-month sales were $2.556 billion versus $4.484 billion; operating loss was $161 million versus income of $492 million. Q3 refining margin fell to $101 million, or $5.47 per throughput barrel, from $334 million, or $16.34. Nine-month refining margin was $271 million, or $5.77 per barrel, versus $959 million, or $16.18. Lower demand, selling prices, crack spreads, and throughput drove the decline; the Coffeyville refinery also underwent a planned 57-day turnaround.
- Nitrogen fertilizer: Q3 sales were $79 million versus $89 million and operating loss was $3 million versus $8 million. Nine-month sales were $260 million versus $318 million and operating loss was $34 million versus income of $36 million. Lower ammonia and UAN pricing was partly offset by higher sales volumes. A $41 million noncash goodwill impairment was recorded in Q2; no goodwill remained at September 30.
- Consolidated balance sheet and financing: Cash was $672 million versus $652 million at year-end 2019. Total equity declined to $1.302 billion from $1.668 billion, reflecting losses and dividends. In January, CVR issued $1.0 billion of senior notes due 2025 and 2028 and redeemed $500 million of CVR Refining notes due 2022, extending maturities but increasing reported debt.
Outlook, risks and unusual items
- Management described the COVID-19 and oil-market environment as exceptionally challenging. It cited weak refining margins, reduced fuel demand, volatility in crude and product prices, and uncertain economic recovery. Regional gasoline and diesel demand in Q3 was down 9% year over year, though up 7% from Q2.
- Management said cash, operating cash flow and available borrowing capacity were expected to cover anticipated operating requirements for at least the next 12 months, while noting that future cash needs and financing access remain uncertain.
- Management reduced spending and deferred most growth projects, while retaining the Wynnewood renewable diesel project. Estimated 2020 capital expenditures were $121 million to $135 million, including $15 million to $19 million for that project. Planned turnarounds were deferred: Wynnewood from spring 2021 to spring 2022, Coffeyville fertilizer from fall 2020 to summer 2021, and East Dubuque from 2021 to 2022.
- No CVR Energy dividend was declared for Q2 or Q3 2020; the Q1 dividend was $0.40 per share. CVR Partners also declared no distributions for the first three quarters of 2020.
- CVR recorded a $65 million Q3 investment loss from marketable securities, including an unrealized loss on its Delek investment; the nine-month investment loss was $13 million. It had invested approximately $140 million in Delek shares.
- RFS compliance expense was $36 million in Q3 and $71 million for nine months, versus a Q3 benefit of $2 million and nine-month expense of $31 million in 2019. Management estimated 2020 RFS compliance costs of $110 million to $115 million.
- CVR Partners’ unit price remained below the NYSE continued-listing threshold at September 30. After quarter-end, it announced a 1-for-10 reverse split, effective November 23, 2020, intended to help regain listing compliance; success was not assured.
- Legal and regulatory matters include DOJ and Kansas environmental allegations concerning the Coffeyville refinery and litigation related to CVR Refining’s call-option exercise. The filing says the ultimate impact of the environmental matter could not yet be reasonably estimated and the call-option lawsuits were in early stages. The company also disclosed an ongoing federal inquiry relating to RFS matters and a pending Supreme Court petition concerning a refinery small-refinery exemption.
Investor verification priorities
- Track refining demand, crack spreads, throughput, inventory valuation effects, and RIN prices and costs.
- Verify the pace of operating cash generation, capital and turnaround spending, and available borrowing capacity against management’s 12-month liquidity assessment.
- Monitor fertilizer prices, input costs, customer demand, and any further asset impairment indicators.
- Review the carrying value and market performance of the Delek investment, and confirm the effect of any subsequent transactions.
- Follow CVR Partners’ reverse split and NYSE listing status, as well as the status and potential financial effects of disclosed legal and environmental proceedings.
- Confirm future dividend and distribution decisions and whether the stated 2020 capital-spending estimates change.