Does a Better Balance Sheet Make CVR's Future Brighter?

Does a Better Balance Sheet Make CVR's Future Brighter?

Source: CVR Refining.

CVR Energy has been able completely turn its balance sheet around. The company went from being $487 million in debt to having $210.7 million in cash over the past five years.

CVR Energy may have turned its balance sheet positive with $887.1 million in cash and $676.4 million in debt, but its YTD stock performance has been dismal. This can be attributed to shrinking crack spreads and the 53-day shutdown at its refinery in Coffeyville, KS, which has sent CVR's earnings lower year over year.

The refinery in Coffeyville is owned by CVR Refining LP , which CVR Energy has a 71% stake in. CVR Refining is an MLP with a 5% distribution, so CVR Energy receives 71% of that payout. The refinery had a capacity of 115,000 bpd, so taking that out of the picture puts a huge damper on CVR Refining's distribution and thus CVR Energy's income.

CVR Refining operates two refineries: the Coffeyville refinery, and a 70,000 bpd refinery in Wynnewood, OK. With the majority of CVR Refining's capacity taken out of the picture, you can see why CVR Energy has been taking a hit.

Now that the refinery is up and running again, CVR Energy and CVR Refining investors have something to look forward to. CVR Energy sees crude differentials widening again going into the fourth quarter, which is supported by E&P companies like Kodiak Oil & Gas stating that seasonality trends tend to increase the differential as refineries shut down for maintenance.

CVR Refining will be able to purchase crude oil at a lower price for the next few months as the differential widens, a move that will boost its margins. CVR Refining has been doing pretty well considering the circumstances, posting revenue of $6.323 billion with net income of $700.6 million in the first nine months of 2013. This is compared to net income of $540.7 million on $6.466 billion in revenue for the first nine months of 2012.

While CVR Refining's latest quarter was dismal due to the refinery shutdown, it still has done pretty well as a standalone entity since its IPO. The reason why CVR Energy wasn't able to profit as much as investors would think is because CVR Refining's distributions were smaller than expected.

Back in 2010, CVR Refining (which was still a part of CVR Energy at that point) invested roughly $500 million into upgrading its refineries. Now that it has a positive balance sheet, it can upgrade and improve its operations once again. This will help it increase its margins and revenue.

With 350 miles of pipelines and a crude gathering system already in place, CVR Refining can expand both its refining and gathering capacity to grow beyond crack spreads.

Where's the love?
On a side note, CVR Energy is also invested in making fertilizer through CVR Partners LP , an MLP with a 10.11% distribution. CVR Partners makes a fertilizer out of UAN, a combination of urea and ammonium nitrate.

CVR Partners converted approximately 70% of its NH3 ammonium production to UAN, allowing it to make more money per ton of fertilizer. CVR Partners sees an additional $70 per ton of fertilizer if it converts its last NH3 production into UAN. UAN is currently selling at a premium to traditional fertilizer, and CVR Partners wants to make the most of that premium.

As CVR Partners continues its switch to 100% UAN, it will earn more. This will in turn allow it to pay out a larger distribution. CVR Energy owns approximately 53% of CVR Partners and profits off of its distribution.

Final thoughts
CVR Energy is a holding company with two segments: refining, which is done through CVR Refining, and UAN fertilizer production, which is done through CVR Partners. Both are MLPs that pay the majority of their distributions to CVR Energy.

CVR Energy pays out a large 8% yield and is a way to play two different industries at once; in this sense, it's almost like a mini-MLP ETF. CVR Energy has had a rough 2013, but looking ahead the skies look a little more clear. As CVR Partners fully upgrades its fertilizer production to UAN and CVR Refining experiences better crack spreads in the fourth quarter with both refineries up and running, both segments can start increasing their distributions again.

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