CVR Energy, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

CVR Energy, Inc. is a diversified holding company engaged in the petroleum refining and nitrogen fertilizer manufacturing industries, mainly operating in the Petroleum and Nitrogen Fertilizer segments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview CVR Energy, Inc. operates primarily through two segments: Petroleum and Nitrogen Fertilizer. The Petroleum segment refines crude oil into gasoline, diesel, and other products and primarily utilizes sweet crude oil. The Nitrogen Fertilizer segment produces and markets ammonia and urea ammonium nitrate (UAN) fertilizers. This dual focus is significant in understanding CVI’s diversified nature.

Revenues by Segment:

  • Petroleum: The petroleum segment is the core of CVI, accounting for $2.02 billion in revenues in Q3 2023 and $5.83 Billion in 9 months ended Sep 2023. Revenue from gasoline, diesel, and other refined products is heavily influenced by commodity prices and refining margins.
  • Nitrogen Fertilizer: This segment had $1.04 Billion in revenue in Q3 2023 and $3.51 Billion in 9 months ended Sep 2023.. The market for nitrogen fertilizers is primarily driven by agricultural demand, which means revenues are also seasonal.

Industry Trends:

  • Petroleum: The petroleum refining industry is cyclical, significantly influenced by global crude oil prices, refining margins, and seasonal demand for refined products such as gasoline and diesel. Companies face pressures from price volatility, regulatory changes, and shifting consumer preferences towards sustainable energy.
  • Nitrogen Fertilizer: The nitrogen fertilizer industry experiences demand fluctuations based on planting seasons and crop prices, which affects fertilizer demand. The industry is also subject to changes in input costs like natural gas, trade policies, and regulatory issues. Moreover, this industry is currently experiencing an increase in pricing power by a few main players.

Margins:

  • Petroleum: CVI’s petroleum segment operates on a volume-driven strategy. However, margins are volatile and depend on refining spread. Reported operating margin was 11.8% in Q3 2023 and 12.9% for 9 months ended Sep 2023. There is also reliance on inventory and production strategies, thus can be impacted by timing.
  • Nitrogen Fertilizer: The Nitrogen Fertilizer Segment historically shows better operating margins than the Petroleum segment. The segment’s operating margin was 43% in Q3 2023 and 42% for 9 months ended Sep 2023. Though, these numbers are extremely dependent on natural gas prices and volatility.

Competitive Landscape:

The petroleum and fertilizer industries are highly competitive and fragmented, resulting in limited pricing power for most players. CVR Energy competes against large multinational and regional players. It faces price competition from both domestic and international competitors and its operations can be significantly impacted by market supply, demand, regulations, and economic factors.

What Makes CVR Different:

CVR operates two businesses that are largely independent of each other in a single portfolio, which potentially allows the company to leverage strength in either to help the weakness in the other. This creates an opportunity for CVR to reallocate cash flow to where it’s most needed or rebalance its operations. However, most investors perceive the company as a commodity business and price it according.

Financials in Depth

Revenue and Earnings: CVR Energy reported total revenues of $3.05 billion in the third quarter of 2023 and $8.79 billion in 9 months ended September 2023. Net income was $358 million and $850 million respectively. The petroleum segment accounted for 66.3% of the total revenues, while the nitrogen fertilizer segment accounted for 33.7% in Q3 2023. CVR has a trend of earnings heavily skewed towards its nitrogen fertilizer business, as it has had much better operational efficiency, and pricing power.

Cash Flow: In Q3 2023, cash flow provided by operating activities was $398 million, and for the nine months it was $1.3 billion. The company has a volatile cash flow which changes based on commodity prices and their respective profitability. CVR also engages in M&A activity and allocates capital expenditures based on which business has better opportunities.

Capital Structure: CVR Energy primarily finances its operations through a mix of debt and equity. As of September 30, 2023, its long-term debt stood at $2.54 billion. While the company has high leverage, it still has a good amount of liquidity at $1 billion.

Concerns and Problems

  • Volatile Commodity Prices: CVR’s profitability is highly correlated with the prices of crude oil and fertilizers, which can experience substantial price swings, impacting both revenue and profit.
  • Operational Risks: CVR has incurred operational issues at its Coffeyville facility in the past year that has impacted its performance. Some of its planned maintenance projects have also been affected by delays in the timeline or in cost. Moreover, the uncertainty surrounding the conflict in Ukraine could create further volatility in operations.
  • Debt Burden: CVR carries a high debt load, making the company susceptible to fluctuations in interest rates, which in turn affect net income and profitability.
  • Exposure to commodity prices: Being dependent on commodity prices, CVI is exposed to volatile markets, resulting in fluctuations in its profits that do not always correlate with good business.
  • Capital Allocation Strategy: The company invests heavily into expansion for its businesses, and these investments might not be productive if prices drop in the commodity markets.
  • ESG and Environmental Concerns: The company’s operating businesses are very energy intensive and have a negative impact on the environment, which requires a lot of investments into reducing emissions and for compliance.

Business Resilience

  • Diversification within the Energy Sector. Although most of CVR’s operations are related to fossil fuels, the company has some diversified operations. Also, the company’s operations in nitrogen fertilizers create a buffer against the volatility in fossil fuel prices.
  • Strong Operational Capabilities. CVR has been increasing its refining capacity and achieving higher production volumes of fertilizers. It also has strong cost-cutting mechanisms.
  • Investments and Growth. The company is investing a lot of its earnings to make the company’s future more sustainable.

Moat Rating: 2 / 5 CVR has a very narrow moat. It is primarily dependent on being a producer in a commodity market, and despite the differentiation, there is little evidence to conclude it can obtain pricing power against competitors. However, there is some durability to its business which stems from operational efficiency and some cost advantages, as well as diversification, although to some degree it is also the companies biggest risk.

Understandability: 3 / 5 CVR’s business model is relatively easy to understand because it engages in commodity markets which are easy to grasp. However, there is some complexity when trying to understand the operations of both of its segments and all the moving pieces. The financials are more complex and requires some experience to navigate.

Balance Sheet Health: 3 / 5 CVR’s balance sheet has a reasonable strength, with liquid assets offsetting a part of its large debt. However, its overall debt position combined with commodity prices create a volatile situation. Furthermore, high debt might make it hard for the company to grow in turbulent economic times. As CVR depends on energy-intensive processes, it is susceptible to price fluctuations in energy costs.