CVR Energy: Endorsed by Carl Icahn; Gasoline Tailwinds (NYSE: CVI)

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CVR Energy (NYSE: CVIlisten)) is an American company that specializes in oil refining and fertilizers. It may not sound all that exciting at first glance, but the business has benefited greatly from the rise in gasoline and fertilizer prices that has been fueled. by the Russo-Ukrainian War and macroeconomic factors. The company is also backed by legendary billionaire investor Carl Icahn, who owns roughly 70% of the business. This gives the company a stamp of approval in my view and provides a great starting point for further analysis. In this post, I’m going to break down the business model, financials, and valuation of the company, let’s dive deeper.

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business model

CVR Energy is a diversified holding company that has two main businesses; Oil refining and fertilizer production. Refineries convert crude oil into “refined” petroleum products such as gasoline, diesel, etc. The facilities do this through a process called “fractional distillation” which involves heating crude oil to 350 degrees Celsius to convert it into a gas mixture.

CVR Energy owns refineries in Wynnewood, Oklahoma, and Coffeyville, Kansas. As you can see on the map below, the company also owns 7 million barrels of total crude oil and product storage capacity. In addition to 1,100 miles of own or Joint Venture pipelines. Its oil storage units were immensely popular and were at full capacity during the pandemic when the travel lockdown forced oil prices to go negative. Oil prices can be volatile and therefore I view your storage units as strong strategic assets as most oil refineries were at full capacity during this shutdown. The company has approximately 206,500 bpd [barrels per day] nominal capacity of crude oil in all its facilities in total.

CVR energy

CVR energy (Presentation Q3)

CVR Energy has made strong investments in renewable fuels and recently built a renewable diesel unit at Wynnewood, with an estimated production capacity of 100 mm gal per year. This is part of a multi-stage plan to push renewable diesel across its facilities. Its next stage is a unit at its Coffeyville plant, which is projected to have a production capacity of 150 million gallons per year, with ~25 million gallons available for use as sustainable aviation fuel. The organization sells its products through a “rack marketing” strategy that focuses on easily supplying products to nearby locations.

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Carl Icahn and the competitive advantage

According to SECOND CVR Energy has 70% of its outstanding shares owned by legendary investor Carl Icahn, who has a net worth of $18.6 billion. in a recent interview (Nov 2022) with Forbes, Carl Icahn revealed some interesting insights about the fertilizer part of CVR Energy’s business. Icahn explained that the company bought 36% of a Nitrogen Fertilizer plant that “nobody wanted 6 or 7 years ago”, but now it is paying dividends. Traditional refineries typically require natural gas to produce fertilizer, but CVR Energy does so using another, rather unique method. Icahn affirms “We are the only ones in the country that can make Fertilizer without natural gas”. This is a bold statement and given the increase in the price of gas thanks to the war between Russia and Ukraine and inflation in general. These factors, combined with higher maize prices and reduced fertilizer supply at the macro level, have led to a higher commodity price for nitrogenous fertilizer as a whole. There is also a huge opportunity for US manufacturers to export fertilizer to Europe given the war between Russia and Ukraine and shortages on the continent.

Third Quarter Financials

CVR Energy generated financial strength results for the third quarter of 2022. Revenue was $2.7 billion, up ~50% year over year and beating analyst expectations by $297 million. This has been fueled by widening “crack spreads,” which is the price difference between crude oil and refined products like gasoline and diesel. The company also reported “record exports” of gasoline and diesel outside the US. The company saw a 53% increase in operating expenses from $1.675 billion in the third quarter of 21 to $2.56 billion. This was primarily due to higher repair and maintenance costs, as well as higher natural gas and electricity costs.

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Statement of income

Statement of income (Third Quarter Earnings Report)

Higher operating expenses led to a 41% decrease in operating income. EPS [normalized] was $1.90 which missed analyst estimates by $0.01. This may sound like a mess, but when we factor in taxes and income from non-controlling assets, net income (to CVR Energy shareholders) was actually greater than $93 million for 3Q22 vs. $83 million for 3Q21 .

Adjusted EBITDA for the Fertilizers segment was $10 million for the third quarter. This was affected by lower production volumes and higher operating expenses due to 2 scheduled shutdowns in the quarter and 11 days of downtime at Coffeyville, due to outages at a third party plant. These issues now appear to be resolved and therefore I do not consider them to be a major issue in the future.

Balance, Cash Flow and Dividends

The business generated $93 million in free cash flow during the third quarter of 2022, which was a solid increase from the negative $25 million generated in prior years. The company has a strong balance sheet with $618 million in cash or $746 million in total liquidity, including funds from an asset-based line of credit. In addition, the company has a long-term debt of $1.5 billion. The company has a ~2% dividend yield, which is fairly consistent.

Advanced Valuation

Valuing the CVR’s energy as its profitability depends largely on the future prices of gasoline, diesel and fertilizers. Macroeconomic situations such as inflation and Russia-Ukraine could keep these prices high. However, slowing economic demand due to the pending recession could also lower prices in the long run. In order to quantify these assumptions, I have included the most recent financial data in my advanced valuation model that uses the discounted cash flow valuation method. I have conservatively forecast that their revenues will decline by 10% per year over the next 1-5 years as refined product prices correct.

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Valuation of energy shares of the CVR

Valuation of energy shares of the CVR (created by author Ben at Motivation 2 Invest)

I have forecast that the business will keep its operating margin stable between 7.44% and 8%.

CVR 2 Energy Stock Valuation

CVR 2 Energy Stock Valuation (created by author Ben at Motivation 2 Invest)

Taking these factors into account, I get a fair value of $81.44 per share, the stock is trading at $39 per share at the time of this writing and is therefore 53% undervalued.

As an additional data point, CVR power is trading at a forward price/earnings ratio = 6.6, which is 55% cheaper than its 5-year average.

Legendary investor Paul Tudor Jones was buying shares at an average price of $31 per share in the second quarter of 2022, according to SEC filings, so that could be additional data as well.

risks

Recession/Renewable Energy

As mentioned above, the high inflation and rising interest rates have caused many analysts forecast a recession This environment usually consists of an economic slowdown that could dampen some of the demand for their products. Then we also have the elephant in the room which is climate change and the global push towards electric vehicles and renewable energy.

final thoughts

CVR Energy is a diversified company with two strong business units and a growing renewable fuels segment. The backing of billionaire investor Carl Icahn really gives the company a stamp of approval and it appears to have a competitive advantage in the fertilizer market. The stock appears to be undervalued intrinsically and relative to historical multiples. However, keep in mind that commodity and fuel prices are changing rapidly and therefore expect volatility.

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