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CVR Energy (CVI): A Diversified Refining and Fertilizer Giant Navigating Volatile Markets
Published on September 24, 2024 | Ticker: CVI

CVR Energy, Inc. (CVI) is a diversified holding company primarily engaged in the petroleum refining and marketing industry through its Petroleum Segment, and the nitrogen fertilizer manufacturing industry through its interest in CVR Partners, LP, a publicly traded limited partnership (the "Nitrogen Fertilizer Segment" or "CVR Partners").

The company reported strong financial results for the full year 2023, with annual net income of $769 million, annual revenue of $9,247 million, annual operating cash flow of $948 million, and annual free cash flow of $686 million. In the first quarter of 2024, the company generated consolidated net income of $90 million and earnings per share of $0.81, with EBITDA of $203 million.

Business Overview

The Petroleum Segment refines and markets high value transportation fuels primarily in the form of gasoline and diesel fuels. CVR Partners produces and markets nitrogen fertilizers primarily in the form of urea ammonium nitrate (UAN) and ammonia. The company also produces and markets renewable diesel.

The Petroleum Segment's earnings and cash flows are primarily affected by the relationship between refined product prices and the prices for crude oil and other feedstocks that are processed and blended into refined products, as well as the cost of refinery compliance, including the cost of compliance with Renewable Fuel Standard (RFS) regulations. The Nitrogen Fertilizer Segment's earnings and cash flows are primarily affected by the relationship between nitrogen fertilizer product prices, utilization, and operating costs and expenses, including pet coke and natural gas feedstock costs.

Operational Highlights

In the Petroleum Segment, the company's combined total throughput for the first quarter of 2024 was approximately 196,000 barrels per day, with a late product yield of 101% on crude oil processed. The company completed a planned turnaround at the Wynnewood refinery during the quarter and does not have any additional turnarounds planned until the Coffeyville refinery's turnaround in the spring of 2025.

In the Nitrogen Fertilizer Segment, the company achieved consolidated ammonia plant utilization of 90% in the first quarter of 2024, which was impacted by some planned downtime at the Coffeyville facility. Nitrogen fertilizer prices in the first quarter of 2024 remained fairly steady with the fourth quarter of 2023 pricing, and the company saw strong demand for ammonia due to favorable weather conditions during the quarter.

Financials

For the full year 2023, CVR Energy reported annual net income of $769 million, annual revenue of $9,247 million, annual operating cash flow of $948 million, and annual free cash flow of $686 million. In the first quarter of 2024, the company generated consolidated net income of $90 million and earnings per share of $0.81, with EBITDA of $203 million.

The company's first quarter 2024 results include a reduction to quarterly RINs expense due to a mark-to-market impact on its estimated outstanding RFS obligation of $91 million, a favorable inventory valuation impact of $37 million, and unrealized derivative losses of $24 million. Excluding these items, the company's adjusted EBITDA for the quarter was $99 million, and adjusted earnings per share was $0.04.

Petroleum Segment Performance

In the Petroleum Segment, the company's adjusted EBITDA was $67 million for the first quarter of 2024, with the decline from the prior year period primarily driven by lower product cracks in Group 3. The company's first quarter realized margin adjusted for inventory valuation, unrealized derivative losses, and RIN mark-to-market impacts was $10.46 per barrel, representing a 54% capture rate on the Group 3 2-1-1 benchmark. RINs expense for the quarter, excluding the mark-to-market impact, was $45 million or $2.52 per barrel, which negatively impacted the company's capture rate for the quarter by approximately 13%.

Nitrogen Fertilizer Segment Performance

In the Nitrogen Fertilizer Segment, the company's adjusted EBITDA was $40 million for the first quarter of 2024, with lower feedstock costs and direct operating expenses somewhat offsetting the decline in prices relative to the prior year period. The partnership declared a distribution of $1.92 per common unit for the first quarter of 2024, and as CVR Energy owns approximately 37% of CVR Partners' common units, it will receive a proportionate cash distribution of approximately $7 million.

Liquidity

As of March 31, 2024, CVR Energy had a consolidated cash balance of $644 million, which includes $65 million of cash in the Fertilizers segment. The company's total liquidity as of March 31, 2024, excluding CVR Partners, was approximately $831 million, which was comprised primarily of $580 million of cash and availability under the ABL facility of $251 million.

For the full year 2024, the company estimates total consolidated capital spending to be approximately $225 million to $250 million and turnaround spending to be approximately $55 million to $65 million. The company's Board of Directors recently approved a $0.50 per share quarterly cash dividend for the first quarter of 2024, which is payable on May 20, 2024, to shareholders of record as of May 13, 2024.

Outlook

Looking ahead, the company is still assessing the impact of a recent fire incident at its Wynnewood refinery, and it will provide an updated outlook for the Petroleum Segment and the renewable diesel unit once the impact of the incident is determined. For the Nitrogen Fertilizer Segment, the company estimates its second quarter 2024 ammonia utilization rate to be between 95% and 100%, with direct operating expenses of approximately $50 million to $55 million, excluding inventory impacts, and total capital spending between $15 million and $20 million.

The company continues to explore opportunities in the renewable space, including the potential conversion of the Wynnewood renewable diesel unit up to 100% sustainable aviation fuel (SAF). Additionally, the company is considering potential strategic transactions, which may include the acquisition of additional entities, assets, or businesses, including the acquisition of material amounts of refining assets through negotiated mergers or stock or asset purchase agreements. The company is also considering strategic options involving CVR Partners, which may include the acquisition by the company or its affiliates of some or all of the outstanding common units of CVR Partners not already indirectly owned by the company.

Risks and Challenges

CVR Energy faces several risks and challenges, including volatile margins in the refining industry, exposure to the risks associated with volatile crude oil, refined product and feedstock prices, the availability of adequate cash and other sources of liquidity for the capital needs of its businesses, the effects of the Russia-Ukraine war and the conflict in the Middle East, changes in market conditions, crude oil and other commodity prices, demand for those commodities, storage and transportation capacities, inflation, and the impact of such changes on the company's operating results and financial condition.

The company is also impacted by significant volatility and costs associated with current and proposed laws, rules, regulations, and policies relating to climate change, the RFS, energy transition, and related matters. The company's cost to comply with the RFS is dependent upon various factors, including the availability of ethanol and biodiesel for blending, the actions of RIN market participants, the price at which RINs can be purchased, transportation fuel and renewable diesel production levels and pricing, and certain waivers or exemptions to which the company may be entitled.

Conclusion

CVR Energy is a diversified refining and fertilizer giant navigating volatile market conditions. The company's strong financial performance, with annual net income of $769 million, annual revenue of $9,247 million, annual operating cash flow of $948 million, and annual free cash flow of $686 million in 2023, demonstrates its ability to generate substantial cash flow. The company's focus on safe, reliable, and environmentally responsible operations, as well as its strategic initiatives in the renewable space and potential M&A opportunities, position it for continued success in the years ahead.

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