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…
The best way to look at their hedging in future quarters is to compare the amount of volumes hedged for a quarter to the projected amount of production to figure out how much they are hedged on a percentage basis. As far as guidance is concerned in the post I discuss their entire history of guidance and show how it has changed over time (with the most recent change being to lower their guidance for full year 2013).
I think we can agree that CVR Refining has some pretty solid management. That being said do you feel their hedging (gain on derivatives +210% from 1Q13) will make any difference? Or, as noted in their PR, that their quarterly production records will continue? I know they are shutting down for a period of time in Q3(?), but they continue to impress. Do you see CVRR beating or raising guidance? Thanks for your thoughts,
If you have something specific that I may be able to help you with please feel to email me directly the exact scope of work that you require so I can give you an estimate on what it would cost. My contact info can be found in any of the Weekly Snapshot reports.
Thank you a lot for your letter and CVRR estimates.
What is your price idea for CVRR for next 6 month, based on 4.10/ share distribution ?
If CVRR will lower its distribution it will effect even more CVI price since guidance for both CVRR and UAN are lower.
I am looking POT, MOS fall and downgrades for most of fertilizers could effect UAN sales.
When price of potash will go down 25- 30 % next year due to Russian cartel breakdown it can effect
the price of most fertilizer companies.
Dec 2013 price of corn is under $5.00 / bushel vs $ 8.00 in 2012 and farmers can not afford to pay more for UAN than before.
I will be very thankful for your input and any additional information you cn share with me and willing to compensate you for your work via Paypal .
Yes that’s right, what matters for the quarterly performance is the average realized crack spread for the entire quarter at each specific refinery location. I think the point the CEO was making was that the crack spread is very volatile so “market conditions” are constantly changing. As a case in point, just look at how much CVRR’s internally prepared guidance for 2013 has changed over the last six months and how big the margin of error has been in their guidance.
Thanks for the update on CVRR. Do not own, but am long CLMT, NTI, and ALDW.
“…these numbers can move overnight one way or another rather significantly…”
But aren’t they averaged over 90 days?