CVR ENERGY INC (CVI) filed Quarterly Report for the period ended 2009-09-30.
Headquartered in Sugar Land Texas CVR ENERGY INC. is an independent refiner and marketer of high value transportation fuels and through a limited partnership a producer of ammonia and urea ammonia nitrate fertilizers. CVR Energy's petroleum business includes full-coking sour crude refinery in Coffeyville Kan. In addition CVR Energy's supporting businesses include a crude oil gathering system serving central Kansas northern Oklahoma and southwest Nebraska; storage and terminal facilities for asphalt and refined fuels in Phillipsburg Kan.; and a rack marketing division supplying product to customers through tanker trucks and at throughput terminals. Cvr Energy Inc has a market cap of $890.1 million; its shares were traded at around $10.32 with a P/E ratio of 11 and P/S ratio of 0.2.
Highlight of Business Operations:
Crude oil is supplied to our refinery through our owned and leased gathering system and by Plains Pipeline, L.P. pipeline from Cushing, Oklahoma. We also maintain capacity on the Spearhead Pipeline receiving crude oil from Canada and receive foreign and deepwater domestic crude oils via the Seaway Pipeline system. 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 optionality of 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 West Texas Intermediate (“WTI”). Our consumed crude cost discount to WTI for the third quarter of 2009 was $(2.82) per barrel compared to $(0.32) per barrel in the third quarter of 2008.
Although the 2-1-1 crack spread is a benchmark for our refinery margin, because our refinery has certain feedstock costs and logistical advantages as compared to a benchmark refinery and our product yield is less than total refinery throughput, the crack spread does not account for all the factors that affect our margin. Our refinery is able to process a blend of crude oil that includes quantities of heavy and medium sour crude oil that have historically cost less than WTI. We measure the cost advantage of our crude oil slate by calculating the spread between the price of our delivered crude oil and the price of WTI. The spread is referred to as our consumed crude differential. The consumed crude differential will move directionally with changes in the West Texas Sour crude oil (“WTS”) differential to WTI and the West Canadian Select (“WCS”) differential to WTI as both these differentials indicate the relative price of heavier, more sour, slate to WTI, directly impacting refinery margin. The correlation between our consumed crude differential and published differentials will vary depending on the volume of medium sour crude and heavy sour crude we purchase as a percent of our total crude volume and will correlate more closely with such published differentials the heavier and more sour the crude oil slate. The WTI less WCS differential was $9.21 and $18.69 per barrel, for the three months ended September 30, 2009 and 2008, respectively. The WTI less WTS differential was $1.81 and $2.31 per barrel for the three months ended September 30, 2009 and 2008, respectively. While the sweet-sour and heavy-sour crude oil markets remained tight during the third quarter of 2009, the related impact of this on our crude differential was offset in part due to the ongoing contango in the WTI crude oil market. Contango markets are characterized by prices for future delivery that are higher than the current or spot price of the commodity. Our quarterly crude oil costs benefited in the third quarter of 2009 from the ongoing contango. Our consumed crude oil less WTI differential was $(2.82) and $(0.32) per barrel for the three months ended September 30, 2009 and 2008, respectively.
We produce a significant volume of high value products, such as gasoline and distillates. We benefit from the fact that our marketing region consumes more refined products than it produces so that the market prices in our region include the logistics cost for U.S. Gulf Coast refineries to ship into our region. The result of this logistical advantage and the fact that the actual product specifications used to determine the NYMEX are different from the actual production in our refinery, is that prices we realize are different than those used in determining the 2-1-1 crack spread. The difference between our price and the price used to calculate the 2-1-1 crack spread is referred to as gasoline PADD II, Group 3 vs. NYMEX basis, or gasoline basis, and Ultra Low Sulfur Diesel PADD II, Group 3 vs. NYMEX basis, or Ultra Low Sulfur Diesel basis. If gasoline and heating oil basis are greater than zero, this would mean that prices in our marketing area exceed those used in the 2-1-1 crack spread. Ultra Low Sulfur Diesel basis for the third quarter 2009 and 2008 averaged $1.97 and $4.68 per barrel, respectively. Gasoline basis for the third quarter 2009 averaged $(1.81) per barrel, compared to an average of $2.62 per barrel in the third quarter of 2008.
For the three months ended September 30, 2009 and 2008, we recorded net realized and unrealized gains of $2.8 million and $65.2 million, respectively, related to the Cash Flow Swap. For the nine months ended September 30, 2009 and 2008, we recorded net realized and unrealized losses of $(55.6) million and $(38.7) million, respectively, related to the Cash Flow Swap. On July 1, 2009, the Cash Flow Swap decreased from approximately 5.9 million barrels per quarter to approximately 1.5 million barrels per quarter.
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 the accounting guidance in FASB ASC 323, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee and FASB ASC 505, Accounting for Equity Investments that Are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services. In accordance with that 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. 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. For the three and nine months ended September 30, 2008, we reversed compensation expense by $26.4 million and $37.7 million, respectively. We expect to incur continued incremental share-based compensation expense to the extent our common stock price continues to increase.
We recorded pre-tax expenses, net of anticipated insurance recoveries of $0.5 million and $0.6 million in net costs associated with the flood for the three and nine months ended September 30, 2009, respectively, compared to pre-tax expenses, net of anticipated insurance recoveries of $(0.8) million and $8.8 million for the same period in 2008. The net costs have declined significantly over the comparable periods as the majority of repairs and maintenance to the facilities associated with damage caused by the flood were completed by the second quarter of 2008. In addition, the majority of the environmental remedial actions were substantially complete as of January 31, 2009.
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