CVR Energy soars thanks to Trump and Icahn
The price of shares of CVR Energy, Inc (NYSE:CVI) have soared since the election of Donald Trump. This is a quintessential example of how Trump will stimulate the economy by negating oppressive regulation implemented by the Obama administration.
With the influence of CVR Energy Chairman and majority shareholder Carl Icahn, Trump has wisely chosen to end these barriers to the free market. By eliminating what is essentially an overbearing regulatory tax for not adding ethanol to fuel, profits for small to mid cap oil refining companies are set to increase substantially.
There is a risk that Trump will not follow through on his rhetoric. With the nomination of Oklahoma Attorney General to lead the EPA, he seems to be holding fast to his convictions.
"The EPA's renewable identification number program penalizes refineries if they do now meet certain blending requirements (of ethanol per gallon)," noted Trump's campaign. "These requirements have turn out to be impossible to meet and are bankrupting many of the small and midsize refineries in this country. These regulations will give Big Oil an oligopoly by destroying the small to mid-size refineries."
We, by the way, pay a huge premium for marine grade gasoline without ethanol, because it is anti-corrosive in marine environments. The economic loss stemming from these regulations is clear on multiple facets.
Carl Icahn noted recently, "The RIN market is the quintessential example of a 'rigged' market where large gas station chains, big oil companies and large speculators are assured to make windfall profits at the expense of small and midsized independent refineries which have been designated the 'obligated parties' to deliver RINs."
"As a result, the RIN market has become 'the mother of all short squeezes,"' he posited. "It is not too late to fix this problem if the EPA acts quickly."
CEO Jack Lipinki noted that these RINs account for half of CVR Energy's cost of product sold. In the Q3 2016 quarterly statement, we observe that the cost of RINs was approximately 58.3 million. In that same quarter, net income attributable to shareholders was 5.4 million, on 1.24 billion in sales.
In effect, the EPA in the Obama administration levied a regulatory tax of over 1000% of the profit attributable to CVR Energy's shareholders in Q3 2016. These numbers are very pronounced, and seem to be the normal during the regulatory escalation of the back end of the Obama tenure, rather than exception. With the elimination of such an oppressive tax, the profits for CVI will likely increase substantially, as well as profits for other small and mid cap oil refineries.
Disclosure: I am/we are long CVI, TSO, PSX.