CVR Energy, Inc. 10-Q Summary: Quarter Ended June 30, 2009
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2009. CVR Energy, Inc. operates as an independent petroleum refiner and marketer in the mid-continental United States and a producer of nitrogen fertilizer products. The company operates through two primary segments: Petroleum (refining crude oil into fuels and by-products) and Nitrogen Fertilizer (producing ammonia and UAN using pet coke gasification). The company is a controlled company, with approximately 73% of outstanding shares beneficially owned by Goldman Sachs Funds and Kelso Funds.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $793.3 million | $1,402.7 million |
| Net Income | $42.7 million | $73.3 million |
| Diluted EPS | $0.49 | $0.85 |
| Operating Income | $108.4 million | $199.4 million |
| Operating Cash Flow (6mo) | $91.5 million | |
| Cash and Cash Equivalents | $73.3 million (as of June 30, 2009) | |
| Total Debt | $481.9 million (Tranche D term loans) | |
| Working Capital | $247.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased significantly compared to the prior year periods due to a sharp drop in petroleum product prices. For the three months ended June 30, 2009, sales fell $719.2 million compared to 2008. Petroleum sales dropped $719.1 million, driven by lower prices ($771.7 million) partially offset by higher volumes ($52.6 million).
- Profitability Increase: Despite lower revenues, Net Income increased to $42.7 million (Q2 2009) from $31.0 million (Q2 2008). This was driven by reduced direct operating expenses, lower net costs associated with the 2007 flood, and a significant reduction in losses on derivatives.
- Derivative Losses: The company reported a net loss on derivatives of $29.2 million for the quarter, a substantial improvement from the $79.3 million loss in the same period in 2008. This improvement was primarily due to lower realized losses on the Cash Flow Swap.
- Cost of Product Sold: Costs decreased $699.8 million year-over-year for the quarter, primarily due to lower crude oil prices. The average cost per barrel of crude oil consumed dropped to $53.29 in Q2 2009 from $119.64 in Q2 2008.
- Share-Based Compensation: Selling, general, and administrative expenses increased due to a $15.0 million increase in share-based compensation expense, reversing a benefit seen in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management expects to maintain operational efficiency and safety while controlling expenditures. The company anticipates spending approximately $71.9 million on capital expenditures for the full year 2009.
- Cash Flow Swap: A significant risk factor remains the "Cash Flow Swap" with J. Aron & Company (a related party). This derivative does not qualify for hedge accounting, causing mark-to-market fluctuations to impact net income directly. Management utilizes a non-GAAP measure ("Net income adjusted for unrealized gain or loss from Cash Flow Swap") to better reflect operating performance.
- Liquidity: The company has $116.1 million available under its revolving credit facility and $73.3 million in cash. It is in compliance with all financial covenants, including a maximum leverage ratio of 2.25:1.00.
- Environmental and Legal:
- Flood Remediation: Costs associated with the 2007 flood have declined significantly as remedial actions are substantially complete. A remaining insurance receivable of $1.0 million is classified as non-current.
- Samson Litigation: Samson Resources filed 15 lawsuits alleging CVR received proceeds from crude oil sold to a bankrupt entity (SemCrude). CVR intends to vigorously defend these claims.
- Regulatory Compliance: The company is working to meet Ultra Low Sulfur Gasoline (ULSG) standards and has requested a one-year extension for FCCU emission controls due to flood-related delays.
Investor Verification Checklist
- Derivative Exposure: Verify the current mark-to-market status of the Cash Flow Swap and its potential impact on future earnings volatility.
- Refining Margins: Monitor the NYMEX 2-1-1 crack spread and the company's specific crude oil differential (discount to WTI) to assess future profitability.
- Capital Expenditures: Confirm adherence to the $125 million capital expenditure limit imposed by the credit facility for 2009.
- Legal Proceedings: Track the status of the Samson Resources litigation and the resolution of the insurance coverage dispute regarding the 2007 crude oil discharge.
- Debt Covenants: Review the company's leverage ratio and interest coverage ratio to ensure continued compliance with the credit facility terms.