CVR Energy (ticker CVI) operates in two segments, petroleum refining and the manufacture of fertilizers. The petroleum segment includes a 115,000 barrel per day refinery in Coffeyville, Kansas, a 35,000 barrel per day pipeline network and a 70,000 barrel per day refinery in Wynnewood, Oklahoma which CVR acquired in December for $593.5 million.
CVR’s fertilizer segment has a 69.8% ownership stake in CVR Partners, ticker UAN, which CVR Energy runs. The plant has a capacity of 1,225 tons per day of ammonia, a 2,000 tons per day urea ammonium nitrate (UAN) unit, and a coke gasification system. A bit more than half of the ammonia output of this facility is used in the creation of UAN. The plant uses petroleum coke from the Coffeyville refinery as its nitrogen source, which gives it a cost advantage over other nitrogen fertilizer plants in the US, which use natural gas, although that advantage is fairly small at current natural gas prices. Carl Icahn’s IEP Holdings just increased its stake to around 80% of the company.
rookie964 did a fine write-up of the company in October (http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/58724
), with an especially good discussion of why inland refiners in the US have a cost advantage over refiners in other areas due to the WTI/Brent spread. I agree that HollyFrontier is the closest comp. Here, I take a different route to valuation and also discuss the current significance of Icahn’s position.
Sum of the Parts Valuation
Valuation of the fertilizer business is fairly straightforward. CVR Partners has a market capitalization of $1,523.4 million. CVR Energy’s 69.8% share has a market value of $1,063 million. Giving that a 15% holding company haircut gets us to $904 million. Because CVR Energy pays taxes on income distributed to it by CVR Energy, this structure is not tax efficient. One possible source of value would be a tax-free spin of the rest of CVR Partners, though I don’t expect that for several years, and it’s not in my model.
For the petroleum segment, I scaled last year’s EBITDA to project this year’s EBITDA using the EBITDA ratios for the first quarter. 1Q11 petroleum EBITDA was $91.7 million, versus $144.9 million in 1Q12. This actually represents a slowdown in EBITDA on a comparables basis, since 1Q12 includes results from the Wynnewood refinery that CVR Energy purchased late last year (EBITDA on a comparable basis was $68.6 million, or 75% of 1Q11 EBITDA). Scaling up full year results, I multiply $144.9 / $68.6 by 2011 full year petroleum EBITDA of $581 (this is the Adjusted EBITDA presented in the company’s 10-K, but backing out the $8.7 million in stock compensation, which is a real expense). This gets me to a 2012 EBITDA projection of $918 million.
EV multiples for big US refiners are running between 2.9 and 3.8 for US refiners (it’s 3.1, for example, for HFC). I’m using the bottom of this range, 2.9, for CVR Energy, mostly because I’m concerned about the level of capex that CVR may need to spend to upgrade the Wynnewood refinery. Note, however, that the planned capital expenditures of HFC are roughly in proportion to those planned at CVR. At 2.9 times $918 million of EBITDA, I get a petroleum segment EV of $2,662 million.
CVR has cash and equivalents of $276 million ($551 million consolidated cash, less $225.6 of cash in CVR Partners. Debt, excluding debt of CVR Partners, is $756 million ($86 million outstanding on a line of credit, $447 million of first lien notes, and $223 million of second lien notes).
Adding the EVs of the fertilizer and petroleum businesses to cash, and subtracting debt, gets me to a market capitalization, at fair value, of $3,085 million. I estimate the equivalent of 88.62 million shares outstanding, from 86.8 outstanding on March 31, plus 1.7 million in phantom units and 170,000 in long-term incentive plan units, which I assume vested when Icahn’s tender was successful. That gives me a fair value per share of $3,085 / 88.62 = $34.81 per share. That’s 42% above closing market price of $24.62.
On May 21, IEP closed the second offering period of its $30 per share tender offer. My real thesis is that Icahn is a smart guy who was willing to pay $30 per share, so he’s got to know something that I don’t.
As part of the deal to get the CVR board to remove the poison pill, Icahn agreed that he would shop the company for 60 days, and support any all cash deal with a price of $35.00 or more. The go shop period will end on July 23; Icahn has hired Jeffries & Company to market the business. Should the company be sold before August 18, 2013, IEP would have to give up any excess of the sale price over $30 to the shareholders who tendered to IEP earlier this year pursuant to a contingent value right issued at the time the tender offer closed (the “CVR CVR”).
While my best case would be for a buyer to emerge at $35.00 during the go shop period, I doubt this will happen—if there were a $35.00 buyer out there, they easily could have stepped forward with a competing tender offer. I also don’t expect that Icahn will accept any offers that would close before August 18, 2013, since he’s not in the business of giving away free money to holders of the CVR CVR. So, if we buy now, we’re going along for the ride.
I see two major risks here. The first is that the stock will probably drop a bit if there is an August announcement that no offers emerged at $35.00. I doubt that move will be big, given that I don’t think the market expects Icahn to find a buyer there, but I could be wrong there.
The second is that Icahn may try something to screw over CVR holders. For example, IEP could acquire shares in the open market to boost it above 90% ownership and then do a squeeze-out tender offer at a low price. Two pension funds today sued in Delaware Chancery Court to force the company to adopt a poison pill that would prevent Icahn from acquiring more shares. I don’t make many firm predictions, but I guarantee that the courts in Delaware, under the business judgment rule, are not going to force a company to institute a poison pill.
Should Icahn acquire more shares and do a squeeze-out merger, we tag-along shareholders will have a remedy, asking for appraisal rights rather than receiving the merger consideration. Given where I think the fair value of the stock is, I feel pretty good about that appraisal, though it would be a pain to have to go through the lawsuit and wait to get our money out. The other factor that mitigates this risk is that, to execute it, Icahn would have to buy shares equal to around half of the float to get from 80% to 90%, which would undoubtedly drive the price up.
Note that the price of CVR traded above the $30.00 tender offer after the expiration of the tender offer. I wasn't interested at $30 to $32 (there's enough uncertainty in my valuation that I wanted more upside). The price fell below $24 intraday on Monday. I don't know what the dynamics were that caused the price changes, but the stock is a lot more attractive below $25 than it was at $30.
Finally, while my fund is just long CVI right now, I think that the strategy rookie 964 suggested in October, selling CVR Partners against CVR Energy and hedging the stub with HFC makes sense.
Possible, but unlikely, sale quickly. Otherwise, sale of company by Icahn in 2013 or 2014.
|Entry||06/07/2012 03:45 PM|
"My opinion of Icahn is that he prides himself on creating shareholder value and uses this to establish goodwill to get shareholders to support him"
Was that meant to be a joke?
|Subject||answers to various questions/comments|
|Entry||06/19/2012 04:04 PM|
Sorry about the delay, I've been tied up on about 19 different projects. I don't think it's likely that Icahn will squeeze shareholders out, for the reasons that rh121 stated, but it is a risk that needed to be mentioned. If he does, the only practical remedy, assuming he can get the independent directors to go along with it and the price is not unreasonably low is seeking appraisal. Delaware courts really don't like to find that directors breached their duties.
I don't think Icahn went to all of the trouble of doing the tender if he didn't think he'd reap the lion's share of the reward, so I don't think Icahn expects that he'll find a seller at $35 or above in the next several weeks. Of course, I really hope I'm wrong about that. As for the contingent value rights, we own them, too, because they were very cheap right before the offer closed, so we think they're a good bet, but unlikely ultimately to pay off.
everdeen is right on the money re my thoughts on the extra corporate level tax. The only thing that binds the fertilizer business and the refinery business is that the fertilizer company uses a byproduct from one of CVR's refineries as a raw material. That's not enough to justify paying corporate taxes on 70% of the fertilizer business's profits to keep them under one roof.
mojoris, there's no law that would prevent Icahn from buying shares at any price on the open market. I'm not quite sure what you meant by playing the angle of the buyer group, can you please explain?
ndn86, I don't know what Icahn thinks of the Brent-WTI multiple. FWIW, he indicated when he launched that he doesn't think the wide spread will last long. The old CVR required the go-shop to remove the poison pill.
|Subject||Icahn proposes buyout at $29-$30|
|Entry||08/06/2012 04:59 PM|
Icahn Enterprises sent a letter to the board proposing a buyout of the remaining shares at $29.00, and saying that he'd negotiate a price, but would not pay more than $30 per share.
With the stock trading at $29 and change, it's hard to say what the board would do.
|Subject||RE: Icahn proposes buyout at $29-$30|
|Entry||08/06/2012 05:07 PM|
Unless there is something odd legally, he'd have to get majority of the 18% he doesn't own to agree. Could he do a short form if he gets less than 50%? Why, if they weren't willing to sell at $30 + a CVR two months ago, would they be willing to sell at $29?
|Subject||RE: RE: RE: Icahn proposes buyout at $29-$30|
|Entry||08/07/2012 07:49 AM|
|Subject||Icahn just backed out|
|Entry||08/21/2012 04:55 PM|
He says it's not feasible to do the deal right now because of market conditions that changed since he made the proposal, especially crack spreads.
|Subject||still cheap? what happens now?|
|Entry||08/30/2012 06:48 PM|
i think this looks pretty cheap and i am inclined to take the view that there are potential catalysts which make CVI worth owning. i'd be very interested to get some thoughts.
by my math, at $30 crack spreads the refinery stub is posting a +70% after-tax free cash flow yield. looking out at the curve it seems +$20 crack spreads are here through 2015, which would give ~50% yields. so it's probably cheap, but what is icahn going to do?
our thought is that icahn dropped the offer because he couldn't get over 90% and didn't want to pay the CCP. i wouldnt want to pay them either. it seems that his options now are to: A) continue buying shares in the open market to get over 90% and then initiate the short-form merger at $30/share (volume of 300k shares/day and the likelihood of shareholders exercising appraisal rights makes us think this isn't viable), B) sit on his thumbs for the next eleven months until the CCPs expire, perhaps paying out some special dividends along the way or C) say 82% ownership is good enough and now is a pretty good time to unlock some value (perhaps spinning out the refinery assets into an MLP).
i am new to the story so any thoughts would really be appreciated.
|Subject||closed position/response to yellowhouse|
|Entry||09/05/2012 04:11 PM|
My firm closed out our investment in CVI. I still tend to like it at $31, given my fundamental valuation on the order of $35, but I think it's going to take a while to realize that, and there's still the possibility of an Icahn squeeze-out. Also, as someone with limited experience analyzing energy markets, I have a lot of uncertainty around my valuation.
yellowhouse, the contingent value rights pay off if the company is sold for more than $30 per share before August 2013 (I forget the exact date). Unless the market moves dramatically downward, I wouldn't expect Icahn to sell below $30, but I also don't think he wants to give up his profits, and he's under no obligation to sell before the contingent value rights expire, so I think he'll hold until the CVRs go away. There's a lot to be said for separating the petroleum and fertilizer businesses, so that may be Icahn's plan.