Some investors were concerned when CVR Refining LP (NYSE: CVRR) only returned a distribution of $0.30 for the third quarter of 2013, after the first two quarterly distributions this year were $1.58 and $1.35 respectively. The company also paid out $0.19 per share after the initial IPO, for a total of $3.52 distributions so far in 2013. The return on investment with the current share price of 21.48 is 16%. That is an excellent return for the year, but the $0.30, third quarter return needs some explanation. On August 26, 2013, the company announced damage to the Fluid Catalytic Cracking Unit (FCCU) at the Coffeyville Refinery. Production continued in other parts of the refinery, but that part of the refinery was under repair until on September 11, 2013. Production has been brought back up to normal operating levels. Investors reaped the benefits during the first two quarters, and should again profit this fourth quarter. This defines the risk of a small company with two refineries and the threat of equipment downtime.
The Coffeyville Refinery
The stock price opened November 5 at $21.48, down 1.67% year to date (January 17, 2013 was the first day of trading, with the price at $25.25.) The high and low for the year are 20.80 - 35.98. The book value is listed at $12.10; stock is trading at 1.8 times its book value. With the profit the company displayed during the first two quarters, I expect the price of the stock to return to the $25-28 dollar range after the fourth quarter financials are released. To buy in now while the share price is in the low 20s would build value in your portfolio.
The third quarter financial statement and conference call were released November 1, 2013, by the CEO, Jack Lipinski. He clearly defined the results in one short paragraph: "The third quarter results were significantly impacted by the unprecedented downtime associated with the outage of the Fluid Catalytic Cracking Unit (FCCU) at the Coffeyville refinery due to a failure of a major piece of equipment in the unit. The Wynnewood refinery exceeded planned throughput rates for the quarter, somewhat offsetting the impact from the FCCU outage at the Coffeyville refinery."
The Fluid Catalytic Cracking Units shown here in the refining process. If you go to the website, they have an animated demonstration of this process. Click on the oil drop at the bottom of the page.
The financial and operational data were fairly impressive as the earnings statement showed a year to date increase of $160 million increase over 2012 in the net income with a $4.22 per common unit profit. The net income for Q3 was $86 million, or $0.58 per unit. The adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $33.9 million for the quarter. The available per cash distribution was $0.44, and $0.30 was paid. This is a strong indicator that the company is not overpaying in the distribution, and this is a sustainable dividend rate into the future. Our projections for the fourth quarter are for another distribution of one dollar-plus and stock value increases as well.
A report in the media from the Energy Stock Channel argued CVRR was oversold, as it hit levels as low as $20.90 per share.
I believe this is an example of the market's short-sightedness as investors, both big and small, attempt to get in and out of the market to capture short-term gains. CVRR has displayed excellent returns and outside the downtime caused by the damage at the refinery, the company has excellent operations and a business model that provides opportunity for smart investors to buy and hold, and reap the benefits from a long-term investment.
On September 17, 2013, CVR Refining, LLC and Coffeyville Finance Inc. (the "Issuers"), closed an offer to exchange up to U.S. $500 million of their outstanding 6.500% senior notes due 2022 (the "Outstanding Notes") for a like principal amount of their 6.500% senior notes due 2022 (the "Exchange Notes" and, together with the Outstanding Notes, the "Notes"). The registered exchange offer fulfilled the Company's obligations regarding the registration of its Outstanding Notes pursuant to a registration rights agreement entered into by the Company in connection with the sale of the Outstanding Notes in a private placement that closed on October 23, 2012. CVR Refining, LP is a parent guarantor of the Notes.
This senior note is a win-win for the investors in the company. If you want more guarantees in your investment, a 6.500% return is better than many in the market. But better yet, for the common unit holder, this provides capital to the company and with the increased profitability, the 6.5% fixed allows the common unit holder to achieve a strong double-digit return. I would not expect the board or common unit holders to encourage any repurchase of the senior note prior to the maturity date.
The Crack Spread is talked about often and rarely explained. For those not familiar with the crude oil business, here is a break down. The spread between West Texas Intermediate (WTI) and Brent crude represents the difference between two crude benchmarks, with WTI more representing the price that U.S. oil producers receive and Brent more representing the prices received internationally. The two crudes are of similar quality and theoretically should price very close to each other. However, the prices had differed greatly between the two crudes because a recent surge in production in the United States has caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is priced. This created a supply and demand imbalance at the hub, causing WTI to trade lower than Brent. Before this increase in U.S. oil production, the two crudes had historically traded in line with each other. The spread opened slightly during the third quarter 2013, and even wider in October/November. The current spread at open on November 5, 2013 is $11.30 (Brent at $105.91 and WTI at $94.61 per barrel).
The company has some risk with only two refineries and could experience a decrease in revenue if one or both refineries is shut down or if demand would decrease. This is exactly what happened during the second quarter of this year.
Additional disclosure: The company website has a wealth of knowledge on the company operations and financial reports. I recommend each investor conducts his or her own research to ensure this investment meets your investment criteria.
CVR Refining is a growth-oriented, independent downstream energy company (downstream refers to processing and sales to market, while upstream refers to exploration and extracting crude oil). CVR Refining refines, gathers, refines petroleum products and marketing operations. The company has 2 main operating plants, more than 125 crude oil transports, a network of 350 miles of pipelines, strategically located crude oil gathering tank farms, and more than six million barrels of owned and leased crude oil storage capacity.
CVR Refining, LP is an independent downstream energy limited partnership that owns refining and related logistics assets in the Midcontinent United States. CVR Refining's subsidiaries operate a 115,000 barrel per day complex full coking medium-sour crude oil refinery in Coffeyville, Kansas, and a 70,000 bpd medium complexity crude oil refinery in Wynnewood, Oklahoma.
Additional disclosure: I am long in CVRR and will continue to increase my position over the next quarter. I hold CVRR because of the double-digit return in the distribution. As always, each investor should review the risks and decide if this investment is right for your portfolio.