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CVR ENERGY INC Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 3, 2010 05:33PM
CVR ENERGY INC (CVI) filed Quarterly Report for the period ended 2010-09-30. Cvr Energy Inc has a market cap of $879.1 million; its shares were traded at around $10.6 with a P/E ratio of 145.4 and P/S ratio of 0.3.CVI is in the portfolios of Paul Tudor Jones of The Tudor Group, Chuck Royce of Royce& Associates, Jim Simons of Renaissance Technologies LLC.
Highlight of Business Operations:
Crude oil is supplied to our refinery through our gathering system and by a Plains pipeline from Cushing, Oklahoma. We maintain capacity on the Spearhead Pipeline from Canada and have access to foreign and deepwater domestic crude oil via the Seaway Pipeline system from the U.S. Gulf Coast to Cushing. We also maintain leased storage in Cushing to facilitate optimal crude oil purchasing and blending. Our refinery blend consists of a combination of crude oil grades, including onshore and offshore domestic grades, various Canadian medium and heavy sours and sweet synthetics and from time to time a variety of South American, North Sea, Middle East and West African imported grades. The access to a variety of crude oils coupled with the complexity of our refinery allows us to purchase crude oil at a discount to WTI. Our crude consumed cost discount to WTI for the third quarter of 2010 was $(3.70) per barrel compared to $(2.82) per barrel in the third quarter of 2009.
The nitrogen fertilizer business largest raw material expense is pet coke, which it purchases from the petroleum business and third parties. The nitrogen fertilizer business spent $12.8 million and $6.7 million for pet coke during the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively. If pet coke prices rise substantially in the future, the nitrogen fertilizer business may be unable to increase its prices to recover increased raw material costs, because the price floor for nitrogen fertilizer products is generally correlated with natural gas prices, the primary raw material used by its competitors, and not pet coke prices.
Consistent, safe, and reliable operations at the nitrogen fertilizer plant are critical to its financial performance and results of operations. Unplanned downtime of the nitrogen fertilizer plant may result in lost margin opportunity, increased maintenance expense and a temporary increase in working capital investment and related inventory position. The financial impact of planned downtime, such as major turnaround maintenance, is mitigated through a diligent planning process that takes into account margin environment, the availability of resources to perform the needed maintenance, feedstock logistics and other factors. The nitrogen fertilizer plant generally undergoes a facility turnaround every two years. The turnaround typically lasts 13-15 days each turnaround year and costs approximately $3 million to $5 million per turnaround. The facility underwent a turnaround in the fourth quarter of 2010 which was substantially completed on October 29, 2010 with the gasification and ammonia units in operation. Repairs continue at the UAN unit due to a rupture of a high-pressure UAN vessel at the nitrogen fertilizer facility as described in further detail below. Due to the rupture, certain portions of the scheduled 2010 turnaround were accelerated to minimize downtime of operations.
On September 30, 2010, the nitrogen fertilizer plant experienced an interruption in operations due to a rupture of a high-pressure UAN vessel. There were no injuries as a result of the rupture; however, certain assets were damaged that are currently being repaired. As a result of the rupture, we recorded approximately $0.4 million of asset write-offs in the third quarter of 2010 for assets that could not be repaired. Additional costs will be recorded in the fourth quarter of 2010 for ongoing repairs and maintenance to the nitrogen fertilizer facility. We maintain insurance policies which insure the personal property assets, as well as interruption to the business. The personal property insurance is subject to a $2.5 million deductible and the business interruption insurance commences after a 45 day waiting period. Based upon a preliminary internal investigation, we currently estimate that the costs to repair the damage caused by the incident will be in the range of $7.0 million to $10.0 million and that repairs should be completed prior to the end of November 2010. We anticipate that substantially all of the repair costs in excess of the $2.5 million deductible should be covered by insurance.
terminated and all remaining obligations were settled in advance. We have determined that the Cash Flow Swap did not qualify as a hedge for hedge accounting treatment under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 815, Derivatives and Hedging. As a result, the Condensed Consolidated Statement of Operations reflects all the realized and unrealized gains and losses from this swap which has created significant changes between periods. As a result of the termination of the Cash Flow Swap in the fourth quarter of 2009, there was no impact recorded in the three and nine months ended September 30, 2010 compared to net realized and unrealized gains of $2.8 million for the three months ended September 30, 2009 and net realized and unrealized losses of $55.6 million for the nine months ended September 30, 2009.
Also, in conjunction with the initial public offering in October 2007, the override units of CALLC were modified and split evenly into override units of CALLC and CALLC II. As a result of the modification, the awards were no longer accounted for as employee awards and became subject to an accounting standard issued by the FASB which provides guidance regarding the accounting treatment by an investor for stock-based compensation granted to employees of an equity method investee. In addition, these awards are subject to an accounting standard issued by the FASB which provides guidance regarding the accounting treatment for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. In accordance with this accounting guidance, the expense associated with the awards is based on the current fair value of the awards which is derived under the same methodology as the Phantom Unit Plans, as remeasured at each reporting date until the awards vest. Certain override units were fully vested during the second quarter of 2010. As such, there will be no additional expense incurred with respect to these awards. For the three and nine months ended September 30, 2010, we increased compensation expense by $3.2 million and $7.3 million, respectively, as a result of the phantom and override unit share-based compensation awards. For the three and nine months ended September 30, 2009, we increased compensation expense by $15.8 million and $25.1 million, respectively, as a result of the phantom and override unit share-based compensation awards. We expect to incur additional incremental share-based compensation expense with respect to unvested override units and phantom awards to the extent our common stock price increases.
Stocks Discussed: CVI,