CVR Energy Inc. (CVI) refines and markets transportation fuels in the United States, and also markets nitrogen fertilizer products. In my opinion, this company may be the best of both worlds. With PPI starting to show levels consistent with inflation, it won't be long until the consumer will start to feel some of the pain. When consumers pay more, companies begin to reap some profits.
CVR has a very interesting business; it sells ammonia based fertilizers and has a petroleum refining business. When CVR acquired its refinery business it started a process of $521 million in upgrades, which were completed in 2010. These upgrades completed a very flexible refinery capable of changing feedstocks. Its complexity rating increased from 10 to 12.9. Feedstock and throughput increased from 98,000 to 117,500 barrels per day. The refinery conversion created a refinery that was able to process up to 21% heavy sour crude. Gathered barrels increased from approximately 7,000 to around 35,000 per day.
The fertilizer business has also improved. In 2005, total ammonia sold was 141,800 tons per year . By 2010, this increased to 166,250 tons per year. UAN also increased from 646,500 tons in 2005 to 709,207 tons in 2010. This nitrogen fertilizer segment upgrades low cost petroleum coke to high value nitrogen fertilizer. The midcontinent location is a cost advantage as opposed to using natural gas. CVR's plant is located on the Union Pacific mainline. Annual production averages are 155,717 tons of net ammonia and 678,701 tons of UAN. The six month stream efficiency of gasifiers is at 97%, ammonia 96%, and UAN 93%. In 2009, Texas, Kansas and Nebraska were states that purchased the most fertilizer.
CVR has a price advantage when compared to competitors using natural gas to create nitrogen based fertilizers. CVR can produce ammonia for less than a competitor can produce, even if natural gas pricing is $3.50. Although, at this level, the cost is very close. It is my guess that natural gas pricing will stay around $4 or higher in the immediate future.
The other issue with CVR is fertilizer demand. I highlighted this in my article; United States' planting acreage will remain high through 2020. The USDA-NASS also says that corn will increase during that time frame. This is important as corn needs more fertilizer then soybeans and wheat. Fertecon states that nitrogen imports will be increasing through 2014. For the second straight year, corn usage will outpace production as stated by the USDA-NASS. All of this leans to increased demand for nitrogen fertilizer, and in turn, probable increases in pricing.
CVR's petroleum segment has a complex coking refiner with strategic assets. It has significant operating flexibility and feedstock supplied through the pipeline system. This petroleum segment operates at 117,500 bpd. This is 109,300 bpd in crude and 8,200 bpd in feedstock. These numbers are from the first half of 2010. CVR purchases crude at a discount to WTI. Due to their location they have a positive product basis differential. The basis average for the last ten years is $1.69/bbl. The 2001 average was $1.03/bbl.
CVR also has crude storing abilities that total 3.9 MMbbls. Crude throughput slate, in 2007, was 76,317 bpd. Of this total, 71% was sweet, 19% medium, and 9% sour. By the first half of 2010, the number jumps to 109,308 bpd. The mix was 80% sweet, 7% medium and 12% sour. CVR is flexible with respect to production, and has the ability to change 6% from current 49% gasoline and 41% distillate. The other 10% falls into several categories of product which are:
52% pet coke
10% normal butane
6% reformer feed/gas/oil/VTB
This is looking at competition and how levered each is to refining. Each refiner has its own percentage of business based on what it produces.
2009 Segment % of LTM EBITDA in millions
CVI 67% refining ($143), 33% fertilizer ($71)
FTO 100% refining ($222)
WNR 88% refining ($291), 7% retail ($25), other($16)
HOC 59% refining ($136), 41% other ($95)
ALJ 78% retail ($21), 22% asphalt ($6)
TSO 80% refining ($485), 20% retail ($122)
We are limited by what these numbers tell us about CVR, although it is the only company in the fertilizer business. But it does give us a good idea about their competitors. The one that sticks out is Frontier (FTO), it being a 100% refining company. Another is ALJ, as it has the largest portion of their business in retail. CVR's percentage did change in the first half of last year, as the percentage of fertilizer increased to 41% of its business with respect to EBITDA.
In summary, CVR is a refiner with a significant part of its business in nitrogen fertilizer. The company is able to produce nitrogen fertilizer cheaper than those using natural gas, even with natural gas at a very low level with respect to price. Nitrogen demand is high and expected to be high for several years. The refining business is very good. New domestic crude will continue to widen crack spreads, increasing CVR's profitability. They are located in a central location that is good for both businesses. Even more importantly, the company is quite close to the DJ Basin in the Niobrara.
It is my guess this refiner will be garnering increasing profits for some time to come.
Disclosure: I am long FTO.