CVR Energy (CVI) has been overlooked by investors who are focused on emerging earnings power at other refining companies like Marathon Petroleum (MPC) and Valero Energy (VLO). Lagging CVI share performance is not justified given the over $6/share of cash on the balance sheet and strong exposure to a structurally wide Brent/WTI crude oil spread. Today's bounce marks the beginning of CVI being revalued on 2014 earnings instead of just lackluster 4Q 2013 distribution guidance at its two majority owned subsidiaries.
One driver of CVR underperformance was the weak 3Q 2013 earnings report at CVR Energy's 71% owned CVR Refining (CVRR) subsidiary. CVRR is an MLP and trades based on the distribution yield offered to investors. CVRR guidance for 4Q distribution was weak, creating a lack of buying interest. Furthermore, 3Q results were hurt by an operating outage at the larger of their two refineries. This short-term overhang is an opportunity for investors willing to look ahead to 2014. CVI has $550 million in cash and ownership stakes in CVRR and CVR Partners (UAN).
Another driver of CVR underperformance has been a preference for refiners exposed to the Brent/LLS crude oil spread (e.g. MPC and VLO). MPC and VLO have had a strong bounce recently, while CVR Energy has gone down. Put simply a wider Brent/LLS crude oil spread also means that the Brent/WTI crude oil spread will be wide. The VLO slide below highlights a 12-24 month outlook for Brent/WTI to average $5-$8/bbl, while Brent/LLS averages a lesser $1-$5/bbl. The improving outlook for Brent/LLS spreads will benefit Brent/WTI spreads as well.