CVRR’s management has graciously been providing distribution guidance since going public this past January. Here’s how that guidance has changed over the past six months:
- In the IPO Prospectus on pages 63-64 they provided an estimate for Full Year 2013 Distributions of $4.7215. (Prospectus)
- When they reported full year 2012 numbers on March 12, they provided an estimate for full year 2013 distributions of $5.50 to $6.50. (Press Release)
- When they reported 1Q13 results on May 2, they tempered expectations in the conference call by guiding towards the “lower end of this range.” (Press Release, Transcript)
- When they announced the 2Q13 distribution of $1.35 last night, they also provided updated / lowered guidance for Full Year 2013 Distributions of $4.10 to $4.80. (Press Release)
Distribution Estimates and Yields Based on Guidance
Many newswires and financial websites take the most recent quarterly distribution and multiply by four to determine the “yield” of the variable distribution refining MLPs. For example, on the FINVIZ.com page for CVRR they are currently showing a yield of 21.79% (which is $1.58 times 4 divided by $29). On Monday FINVIZ may update its info to use the $1.35 2Q13 distribution that was just announced, if they updated it right now they would calculate a yield of 18.62% (which is $1.35 times 4 divided by $29).
This approach is simply incorrect, a more reasonable short cut method would be to back into what the Company is estimating for 3Q13 and 4Q13 by using its updated guidance. You could then make a rough assumption that the first half of 2014 would be similar to the estimate for the second half of 2013. However, this short cut method is still just a very, very rough estimate because as Jack Lipinski, President and CEO, explained during the 1Q13 conference call:
We are a variable distribution MLP and we do live in a volatile business and these numbers can move overnight one way or another rather significantly, so I would suggest that you take what we give you for operational performance and take your own view of the markets as we go forward.
With that huge caveat in mind, here is how CVRR looks using the short cut method and their updated guidance:
Those rough estimates of forward yield are now substantially below the yield of 21.79% that is shown on FINVIZ. If investors have been buying CVRR expecting a ~21.8% yield and in reality it turns out to be moving downwards do you think they will be happy? I don’t, I think they may be learning what the crack spread means the hard way. The crack spread is one of the most volatile “spreads” in the energy business and refinery assets are the most difficult class of assets to own. The long term economics of refining assets are very difficult, which reminds me of one of Warren Buffett’s quotes:
When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
I purchased a put position in CVRR yesterday afternoon, so we’ll see how it goes next week…