CVR ENERGY INC quarterly report, Q2 FY2022

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CVR Energy, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022; unaudited. CVR Energy operates petroleum refining and nitrogen fertilizer businesses. Icahn Enterprises and affiliates owned approximately 71% of CVR Energy at quarter-end.

Financial performance and liquidity

  • Revenue: Q2 revenue was $3.144 billion, up from $1.783 billion a year earlier. First-half revenue was $5.517 billion versus $3.246 billion. Higher refined-product and fertilizer prices were key drivers.
  • Profit: Q2 operating income was $402 million and net income was $239 million, compared with $6 million and a $2 million net loss, respectively, in Q2 2021. Net income attributable to CVR Energy stockholders was $165 million ($1.64 per diluted share), versus a $6 million loss ($0.06 per share). First-half attributable net income was $258 million ($2.57 per share), versus a $45 million loss ($0.45 per share).
  • Segments: Q2 Petroleum operating income was $297 million, compared with a $20 million loss; Nitrogen Fertilizer operating income was $126 million, up from $30 million. First-half segment operating income was $427 million for Petroleum and $230 million for Nitrogen Fertilizer, versus losses of $136 million and income of $16 million, respectively, in the prior-year period.
  • Margins and costs: Petroleum refining margin was $478 million, or $26.10 per throughput barrel, in Q2, versus $133 million, or $6.72 per barrel. First-half refining margin was $775 million, or $21.50 per barrel, versus $184 million, or $5.04 per barrel. Stronger crack spreads helped; higher labor, utility and repair costs, lower throughput, and derivative losses were offsets. Q2 net derivative losses were $68 million consolidated.
  • Cash flow: First-half operating cash flow was $712 million, up from $243 million. Free cash flow, as defined by the company, was $556 million versus $115 million. Investing cash outflow was $156 million, including $88 million of capital expenditures and $68 million of turnaround expenditures.
  • Cash, debt and liquidity: At June 30, cash and cash equivalents were $893 million, total debt and finance lease obligations were $1.594 billion, and total available liquidity was approximately $1.2 billion, including $281 million of undrawn ABL capacity. CVR Partners repaid its $65 million 2023 notes in February. The company reported covenant compliance.
  • Other balance-sheet items: Current assets were $2.119 billion and current liabilities were $1.695 billion. The accrued Renewable Fuel Standard (RFS) obligation was $708 million, up from $494 million at year-end 2021.

Material changes versus the prior comparable period

  • Results improved substantially as refining crack spreads and nitrogen fertilizer selling prices rose. Q2 Group 3 2-1-1 crack spreads were up $29.35 per barrel year over year; first-half averages were $35.56 per barrel versus $17.76.
  • Fertilizer prices increased sharply: Q2 ammonia and UAN realized prices were $1,182 and $555 per ton, compared with $403 and $237. Production interruptions at both fertilizer facilities reduced utilization to 89% from 98% in Q2 2021.
  • RFS expense was $259 million for the first half, down from $351 million, while the period-end RFS liability increased. The company cited lower RIN prices and revised/finalized EPA volume obligations as factors in the expense comparison.
  • First-half 2021 results included an $83 million gain on marketable securities; there was no such gain in 2022. Q2 and first-half 2022 other expense included an estimated $79 million loss for a proposed litigation settlement.
  • First-half 2022 dividends declared per share were $0.40, compared with $4.89 in the 2021 comparison period, which included a special distribution tied to Delek shares and cash.

Outlook, risks and notable items

  • Management said cash from operations, existing cash and available borrowings were expected to be sufficient for anticipated operating needs for at least the next 12 months, while noting that costs and cash requirements could exceed expectations.
  • Based on June RIN prices and other assumptions, management estimated 2022 RFS compliance costs of $320 million to $330 million, net of expected renewable diesel RIN generation of $120 million to $130 million, and without assuming small-refinery exemptions. The company estimated an open position of approximately 440 million RINs, excluding about 19 million RINs under fixed-price purchase commitments. Adverse EPA or court outcomes could materially affect results and cash flows.
  • The Wynnewood hydrocracker conversion to renewable diesel service was completed in April 2022; production was still ramping up. The unit is expected to have capacity of up to 100 million gallons annually. A related pretreater project is estimated at $95 million and expected to be completed in Q2 2023. Estimated 2022 total capital expenditures were $195 million to $224 million.
  • The company expected its renewables restructuring to be completed in Q1 2023. Fertilizer facility turnarounds began or were expected in summer 2022; management estimated costs of $12 million to $15 million at Coffeyville and $19 million to $21 million at East Dubuque.
  • On August 1, after quarter-end, CVR Energy declared a $0.40-per-share regular dividend and a $2.60-per-share special dividend, totaling approximately $301 million, payable August 22. CVR Partners also declared a $10.05-per-unit distribution, totaling approximately $106 million.
  • A confidential binding term sheet contemplated settling the Call Option Lawsuits for $79 million, subject to court approval and other conditions. The company recorded that estimated probable loss at June 30 and said insurance recovery remained uncertain. Other risks include volatile commodity and refining margins, Russia-Ukraine-related market disruption, RFS exposure, facility outages, inflation, and environmental and regulatory proceedings.

Important facts for investors to verify

  • Whether the $79 million Call Option Lawsuits settlement receives court approval and whether insurance recovery is available.
  • Actual RFS costs, RIN pricing, EPA exemption decisions and litigation outcomes versus management’s 2022 estimate.
  • Renewable diesel ramp-up, its realized contribution to RFS obligations, and the schedule and cost of the pretreater and restructuring projects.
  • Refinery and fertilizer operating reliability, including the effects of planned turnarounds and unplanned equipment downtime on throughput and production.
  • Cash remaining after the declared special dividend and CVR Partners distribution, and whether liquidity and debt covenant headroom remain adequate.