Business context and reporting period
CVR Energy, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. It consolidates its petroleum refining and marketing business, CVR Refining, and nitrogen fertilizer business, CVR Partners. Icahn Enterprises and affiliates owned approximately 82% of CVR Energy at quarter-end.
Key financial metrics
Amounts are in millions except per-share data, percentages, and operating statistics.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,624.2 | $2,540.3 | $3,013.1 | $4,987.8 |
| Operating income | $274.2 | $164.6 | $410.8 | $348.1 |
| Net income | $192.1 | $144.0 | $276.8 | $357.7 |
| Net income attributable to CVR stockholders | $101.9 | $83.7 | $156.7 | $210.4 |
| Diluted EPS | $1.17 | $0.96 | $1.80 | $2.42 |
| Operating cash flow | $198.2 | $124.2 | $376.4 | $405.5 |
| Capital expenditures | $41.2 | $53.0 | $86.7 | $114.9 |
- Q2 operating income margin was approximately 16.9%, versus 6.5% in Q2 2014; the reported result includes a $27.3 million flood insurance recovery.
- Petroleum refining margin was $19.12 per crude-oil throughput barrel in Q2 and $16.47 for the first half, compared with $15.22 and $16.17, respectively, in 2014. Petroleum Adjusted EBITDA was $194.3 million in Q2 and $356.0 million for six months.
- Nitrogen fertilizer operating income was $28.7 million in Q2 and $60.2 million for six months, compared with $18.8 million and $41.9 million. Adjusted Nitrogen Fertilizer EBITDA was $36.1 million and $74.5 million, respectively.
- Cash and cash equivalents were $937.7 million at June 30, 2015, up from $753.7 million at year-end 2014. Working capital was $1,008.2 million, versus $1,033.0 million.
- Total debt, including current portion, was $674.2 million, compared with $674.9 million at year-end. It included $500 million of 6.5% senior notes due 2022 and a $125 million nitrogen fertilizer term loan classified as current because it matures in April 2016. No borrowings were outstanding under either revolving facility; refining ABL availability was $322.7 million and nitrogen fertilizer facility availability was $25 million.
Material changes versus prior comparable periods
- Sales fell sharply as petroleum product prices declined: Q2 gasoline and distillate average selling prices per gallon decreased 34.8% and 39.1%; first-half prices declined 39.7% and 41.3%. Petroleum sales volumes were down approximately 1.0% in Q2 and 1.2% for six months.
- Despite lower sales, Q2 operating income increased by $109.6 million, primarily on improved refining margin, a $27.3 million insurance recovery, and stronger fertilizer results. First-half operating income rose $62.7 million, supported by higher refining margin, lower direct costs, the insurance recovery, and improved fertilizer performance.
- Six-month net income attributable to CVR stockholders declined to $156.7 million from $210.4 million. The comparison reflects a $64.0 million derivative loss in 2015 versus a $145.3 million gain in 2014, partly offset by stronger operating income and $36.3 million of other income, mainly securities-related gains.
- Six-month operating cash flow decreased $29.1 million. Working capital absorbed cash, including increases in receivables and inventory; cash rose overall as investing outflows were much lower than in 2014 and the company sold securities.
- CVR declared dividends of $0.50 per share in Q2, versus $0.75 in Q2 2014. A further $0.50-per-share dividend was declared July 29 for payment in August. Partnership distributions are discretionary and may be changed or suspended.
Outlook, commentary, risks and unusual items
- Management stated that existing cash, expected operating cash flows, and available credit were expected to cover anticipated operating needs for at least 12 months, while cautioning that cash generation depends on margins and other external factors.
- Estimated 2015 capital spending was $304 million to $337 million. The Coffeyville refinery’s first turnaround phase was scheduled to begin in late September 2015, expected to last six to seven weeks and cost $80 million to $85 million; a second phase was planned for early 2016 at $30 million to $35 million. The fertilizer plant planned a third-quarter 2015 turnaround estimated at $7 million.
- Management estimated 2015 RIN costs of $110 million to $150 million; final EPA renewable-fuel requirements were pending. RIN availability and pricing, refining-margin volatility, crude supply and pricing, operating interruptions, fertilizer-market cyclicality, and environmental compliance were identified risks.
- The nitrogen fertilizer partnership’s $125 million term loan matures in April 2016. It was considering capital structure and refinancing options; management expected these to be adequate but refinancing remains dependent on market conditions.
- A settlement of the Coffeyville flood and crude oil discharge insurance litigation generated $31.3 million in proceeds; $27.3 million was recorded as income and $4.0 million reduced a previously recorded receivable. A Wynnewood RCRA consent order requires corrective actions, including groundwater remediation and monitoring; management did not expect compliance costs to be material.
- CVR disclosed potential contingent exposure to approximately $500.4 million of underfunded pension obligations of Icahn-affiliated companies if specified plan or controlled-group events occur; no liability was recorded. Unrecognized tax benefits were $62.6 million, with $8.5 million accrued interest related to uncertain tax positions.
- No formal earnings or revenue guidance was provided. Management cited volatile refining and commodity markets and stated that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether refining margins, crude differentials, product pricing, and refinery throughput sustain Q2 performance after the one-time insurance recovery.
- Final EPA RFS requirements and actual RIN costs versus the company’s $110 million to $150 million 2015 estimate.
- Completion, timing, and cost of the Coffeyville and fertilizer-plant turnarounds, along with the remaining 2015 capital program.
- Refinancing arrangements for the $125 million nitrogen fertilizer term loan before its April 2016 maturity.
- The amount and timing of partnership distributions and parent dividends, given distribution policies are discretionary and partnership cash is not freely available to CVR Energy.
- Potential exposure from affiliate pension obligations, tax examinations, and environmental matters, including developments beyond recorded accruals.