CVR Energy, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CVR Energy operates petroleum refining and nitrogen fertilizer businesses. Figures are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $675 | $1,687 | $1,806 | $3,173 |
| Operating income (loss) | $(26) | $192 | $(160) | $352 |
| Net income (loss) | $(32) | $128 | $(133) | $230 |
| Net income (loss) attributable to CVR stockholders | $(5) | $116 | $(92) | $217 |
| EBITDA, non-GAAP | $68 | $273 | $30 | $503 |
| Operating cash flow | $9 | $156 | $(49) | $384 |
| Free cash flow, non-GAAP | $(158) | $119 | $(273) | $305 |
Q2 refining margin was $148 million, or $10.43 per throughput barrel, versus $308 million and $15.66 per barrel a year earlier. For the first half, refining margin was $170 million, or $5.97 per barrel, versus $625 million and $16.10 per barrel. These are non-GAAP measures.
At June 30, cash and cash equivalents were $606 million; current assets were $1.259 billion and current liabilities $369 million. Debt and finance lease obligations totaled $1.690 billion including current maturities; debt excluding finance leases was $1.628 billion. The company reported $393 million available under the Refining ABL facility and $46 million under the Partners’ facility. It was in compliance with debt covenants.
Material changes versus prior periods
- Q2 sales fell 60% year over year; first-half sales declined 43%. Management attributed the deterioration primarily to COVID-19-related demand and price declines, lower refinery throughput, and weaker refining margins.
- Petroleum segment operating income fell to $5 million in Q2 from $163 million; first-half results shifted from $319 million of operating income to a $122 million loss. Q2 throughput averaged 156,369 barrels per day, down from 216,283.
- Nitrogen Fertilizer segment recorded a Q2 operating loss of $26 million versus $35 million of income a year earlier. First-half operating loss was $31 million versus $44 million of income. Lower ammonia and UAN prices were a major factor; the segment also recorded a $41 million goodwill impairment.
- First-half operating cash flow declined to a $49 million use of cash from $384 million provided in 2019. Investing cash outflow was $361 million, including $140 million invested in Delek securities and higher refinery turnaround spending.
- Cash declined by $46 million during the first half. The company issued $1 billion of senior notes in January and redeemed $500 million of Refining notes due 2022, extending maturities but increasing reported debt versus year-end 2019.
Outlook, management commentary, and risks
- Management described the energy environment as exceptionally challenging. Regional gasoline and diesel demand in Q2 was down 17% year over year, with a 6% recovery from quarter-end reported by the filing. Commodity prices, demand, margins, and operating results remained uncertain.
- Management said existing cash, expected operating cash flow, and available credit facilities should be sufficient for anticipated operating needs for at least 12 months, while cautioning that operating performance and cash needs could vary.
- Cost and cash measures included deferring most growth capital, targeting $50 million of operating and G&A cost reductions, reducing maintenance spending to critical work, and postponing refinery and fertilizer turnarounds. The Coffeyville refinery turnaround was completed in April.
- Estimated 2020 capital expenditures in the filing’s table were $95–$105 million, excluding capitalized turnaround expenditures. First-half capitalized turnaround expenditures were $147 million in the cash-flow statement. Management estimated 2020 RFS compliance costs of $95–$105 million.
- The board declared no Q2 2020 CVR Energy dividend; the first-half cash dividend payments totaled $121 million. CVR Partners declared no distributions for Q2 and had made none for the first two quarters of 2020.
- CVR Partners’ unit price remained below the NYSE’s $1 minimum average-price listing standard at June 30, with until January 1, 2021 to regain compliance. The filing notes potential options including further repurchases or a reverse unit split, but no assurance of compliance.
- Material legal matters include an EPA/Kansas demand alleging Clean Air Act and consent-decree violations at the Coffeyville refinery, with the potential impact not yet reasonably estimable; RFS exemption litigation; and lawsuits over CVR Refining’s call-option exercise. The company said it intends to defend the lawsuits and could not determine their outcomes.
- Other notable items: Q2 investment income included a $18 million unrealized gain on marketable securities; first-half investment income included a $48 million unrealized gain. CVR held a 14.9% interest in Delek following a $140 million investment. These gains are market-dependent and are not operating earnings.
Most important facts for investors to verify
- Whether refining demand, throughput, crack spreads, and inventory values recover, and how those changes affect margins and cash generation.
- Whether fertilizer prices and demand stabilize, and whether further impairment testing affects goodwill or other assets.
- Cash burn, turnaround and capital spending, and the company’s ability to meet debt service and liquidity needs under continued volatility.
- CVR Partners’ progress toward NYSE minimum-price compliance by January 1, 2021 and any resulting impact on liquidity or asset value.
- Developments and potential financial exposure in the Coffeyville environmental demand, RFS matters, and call-option litigation.
- Actual dividends, distributions, RFS compliance costs, and performance of the Delek investment relative to the filing’s estimates and reported fair-value gains.