A quick look at CVR Energy's (NYSE: CVI) stock will show the company's paying an out-of-this-world dividend yield of 15%. If you look at its most recent earnings results -- or, more importantly, the results of its subsidiaries -- though, there are plenty of reasons to think that dividend won't be around much longer. Let's take a look at the company's most recent results and why its huge payout is on such shaky ground
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By the numbers
Figures in millions, except per-share data. Data source: CVR Energy earnings release.
For CVR Energy's results this past quarter, it all pretty much comes down to the success of its refining subsidiary,CVR Refining (NYSE: CVRR). In the third quarter, the refining aspect of CVR Energy's business generated 92% of operational profits -- and that's at a time CVR Refining hasn't been doing so hot. CVR Energy's nitrogen fertilizer business, operated by CVR Partners (NYSE: UAN), has struggled mightily with the extremely low prices for nitrogen-based fertilizer products as of late. It also doesn't help that the acquisition of Rentech Nitrogen Partners last year has brought on some extra layers of operational costs, which have impacted overall profitability.
The thing that is going to get very challenging for CVR Energy in the near future is to keep paying out its $0.50 quarterly dividend when its two subsidiaries aren't generating any cash to fund that dividend. Even though CVR Energy reports its earnings as though it consolidates the results of the two subsidiaries, CVR Energy generates cash by owning a stake of the two subsidiary partnerships and receiving cash distributions from them. Since both CVR Refining and CVR Partners have been forced to suspend their distributions lately, there is no cash coming in the door -- so CVR Energy is paying its dividend with cash on hand. That is something it can't do for long. Based on the outlook for the two subsidiaries, this business lull could last for a while.
With the cost of complying with the U.S. EPA's Renewable Fuels Standard drastically impacting operational results for the refining industry, management hasn't given any indication that results for the refining industry will improve much. On the nitrogen fertilizer side of the business, though, there are indications that things will start to get a little better. According to CEO Jack Lipinski, there are signs of life for its two major products:
Right now, margins for these two products are razor thin. The good news is that the manufacturing of nitrogen-based fertilizers is a business with very high fixed costs but low variable costs. So any improvement in price from here should have a significant impact on the bottom line for CVR Partners. Whether that bump will be enough for management to reinstate its distribution is anyone's guess.
What a Fool believes
There were a lot of rumors flying around this past quarter that CVR Energy was interested in making a big splash acquisition in the refining industry. With no debt on the books and a decent chunk of cash, CVR Energy probably has the firepower to make such a deal. Also, the refining industry in general is selling for a decent discount right now. That being said, the proposed acquisition wouldn't really help alleviate the issues of Renewable Fuel Standard compliance today, and taking on debt to fuel such an acquisition could cut into the already modest profits.
Based on the outlook for both CVR Refining and CVR Partners, it doesn't look like CVR Energy's prospects are going to improve much over the next few quarters. It will likely have to rely on its cash hoard to keep paying its investors. That may not be able to last much longer, though.
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