CVR Refining is a limited partnership and the refining arm of CVR Energy (CVII), which, in turn, is mainly a holding company that is also engaged in fertilizer manufacturing operations through CVR Partners (UAN). CVRR offers attractive yield of 7.80% and it is trading just 6.6 times its trailing earnings. But this $3.4 billion market-cap company is not without risks.
CVR Refining shares, trading at $23, are down 28% for the past 52 weeks. This price is even lower than its IPO price of $25 in January 2013. Its shares are trading just 0.4 times its trailing sales as opposed to the industry's average of more than 1.2 times, as per data compiled by Thomson Reuters.
It doesn't help the volatile price of ethanol credits has created a challenging business environment. CVR Refining's earnings before interest, taxes, depreciation and amortization dropped from $779 million in 2012 to $748 million in 2013 while adjusted earnings slumped 40% to $712 million. CVR Refining's net income fell 0.8% from 2012 to $590 million.
Oil production isn't the problem. The company owns a crude oil refinery at Coffeyville, Kansas, that can handle 115,000 barrels of oil per day and a smaller facility at Wynnewood, Okla., with daily capacity of 70,000 barrels. Besides these, CVR Refining also owns 350 miles of pipelines and more than six million barrels of oil storage capacity.
In 2013, the company's daily throughout and refining production rose 9.7% and 10.2%, respectively, from 2012. However, due to weakness in fuel prices, higher volumes did not result in a commensurate increase in net sales, which were up just 5% to $8.7 billion. A 3.7% increase in average cost of crude oil consumed and a nine-fold increase in prices of ethanol credits to $181 million further exacerbated the situation.
Refiners are required to either blend renewable fuels into gasoline and diesel, or purchase the ethanol credits, also called Renewable Identification Numbers (RINs).
The extremely volatile RIN prices pose a big challenge for the company's future. CVR Refining's management has acknowledged that the RIN prices are still going up. In the current year, the refiner has forecast that it could spend anything between $75 million and $150 million as RIN expense. Although this would be a decline from the current year, the company only paid $21 million in 2012 and $19 million in 2011.