2016 continues to be a tough year for refiners in general, but it has been especially hard on CVR Refining (NYSE: CVRR). On top of the lower-refining-margin environment, CVR has also had to deal with operational issues from some of its partners, and the seemingly out-of-control costs to comply with the U.S. Environmental Protection Agency's Renewable Fuel Standard. The company was able to produce modest profits this past quarter, but management wasn't too positive about the future of the industry if it continues down its current track.
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Here's a quick look at CVR's results, and why management foresees some big issues related to the way the industry is structured today.
Image source: Getty Images.
By the numbers
|Results||Q3 2016||Q2 2016||Q3 2015|
|Earnings per share||$0.11||($0.46)||$0.94|
|Cash available for distribution||$0.3||$0||$0.3|
All numbers in millions, except per-share data. EBITDA = earnings before interest, taxes, depreciation, and amortization. Data source: CVR Refining earnings results.
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From an operational standpoint, CVR continued to do relatively well despite some hiccups that were out of its control. One of those was the suspension of operations at one of Magellan Midstream Partners' (NYSE: MMP) refined-product pipelines that exclusively carries product from CVR's Coffeyville refinery. The other big issue was a power outage at an Oklahoma Gas and Electric substation that resulted in reduced run rates at the Wynnewood facility for 25 days. Overall, these impacts resulted in reduced crude-oil throughput. Despite these issues, the company's per-barrel operating costs when fully operational were still rather low, which allowed the company to eke out a modest profit for the quarter.
While the company did generate a marginal amount of cash for distribution, both management and the board of directors have elected to not pay out that cash, instead conserving cash for turnaround activity and capital investments in the coming year.
The theme of CVR's most recent earnings report was, again, the cost of compliance with the Renewable Fuels Standard. In this quarter, total compliance costs of buying Renewable Identification Numbers (RINs) to meet ethanol-blending needs jumped to $58.3 million. For the rest of the year, CVR estimates that it will spend $210 million to $250 million on compliance credits. With profit margins as thin as they have been this year, that is a large chunk of change.
Aside from the regular operating statistics and the rants about RINs, the other big news for the quarter was the announcement that the company had signed an agreement to build a 65,000-barrel-per-day pipeline from the SCOOP shale formation in Central Oklahoma to the company's Wynnewood refinery. The goal of the pipeline will be to source cheaper crudes from this region -- a region that doesn't have as many pipeline options as others. CVR's capital contribution to the pipeline is rather small, about $9 million. It will take a few quarters before the pipe is up and running, so investors shouldn't expect an impact from the deal until at least the end of 2017.
What management had to say
For the past several quarters, CEO Jack Lipinski has been very vocal about his distaste with the way the Renewable Fuels Standard is set up. The more CVR's results get impacted by the cost of RINs, the more acerbic his comments seem to get. While he did highlight the operational performance of the company as a bright spot, he went into detail as to why this impacts independent refiners such as CVR, and why it doesn't really make sense for the company to make acquisitions or change its current strategy to ease the burden of these costs:
Right now, if you take a look at it, the mid-continent refiners are pretty much captives to the systems they operate in. Please go to one of our prior IR presentations and you could see a map of where -- what we serve aside from the two [product blending and distribution] terminals which we control in Wynnewood and Coffeyville. We are on a common carrier pipeline selling at, I think, 42 other locations in the NuStar [Energy] and Magellan [Midstream Partners] systems, where we compete with a dozen other people. So to go out and say we're going to put in blending facilities would indicate that we'd have to build the pipelines to these blending facilities. And then we would be in the same market competing with an existing [blending] rack, which is serving the market adequately right now.
So the real issue we and others are having is as big oil divested their refineries to the smaller guys, they didn't give us an integrated system. They sold the refineries. And those refineries are kind of stand-alone. They have a very valuable place in the American process. We supply the Ag markets. If you look around at where we are, we have no ability to export. I mean, yes, we could, but the transportation cost bringing it to the Gulf Coast, putting it on a ship and taking it overseas, it would be more than the RIN cost. So it depends on where you are located. And the EPA is failing to recognize this very, very important distinction.
If we set out a rack and, let's say, pick a big city, Kansas City, where we may have 15 or 20 competitors, and gasoline, the hydrocarbon is $2. We are not selling blended gasoline to the big guys. The big oil companies or the bigger retailers, they do it themselves. They will buy the hydrocarbon, buy the ethanol/blended in a truck. And the next thing you know, they generate a RIN. So use my example. We sell gasoline hydrocarbon for $2 at rack. That's what we get. But because we sold it, we have to buy a RIN. And let's just say the RIN is $0.10. We sell that to a large retailer or a big oil company who blends it with ethanol. They buy it for $2 and they generate a RIN. So they get $2.10. My net back is $1.90. That is what is causing the aberration in the market. You can't compete when you are buying something from your competitor and they control it.
What a Fool believes
If the narrower refining margins weren't challenging enough for CVR Refining, the increased costs of RINs that have taken on a life of their own is putting a big damper on the company's results. Unless there's considerable improvement over the next several quarters, it's hard to see CVR Refining reinstating its distribution to shareholders. Without that, there isn't much incentive to own this master limited partnership.
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