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CVR Refining Is Poised To Ride The Shale Boom

 February 14, 2013 01:12 PM
 


(By Philip Trinder) The financial media hyped the "fiscal cliff" last year. Now, they have turned 180 degrees and are overly optimistic, emphasizing "five year highs" and "rotation from bonds into equities." The media's job is to get ratings and our job as investors is, as I see it, to ignore the hype as much as possible.

The New Year is out of the blocks and off to a strong start for the Master Limited Partnership (MLP) space with fourth quarter distribution announcements coming in slightly ahead of my expectations and with three MLP IPOs being completed in January: USA Compression Partners, L.P. (USAC), CVR Refining, L.P. (CVRR) and SunCoke Energy Partners, L.P. (SXCP).

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USAC is a gathering and processing MLP focused in the contract compression space. CVRR is a downstream and marketing and variable rate MLP with two refineries and related logistics assets strategically located in Oklahoma and Kansas.

And SXCP is another new asset class MLP that holds 65% ownership in two coke making facilities with long-term take-or-pay contracts (viewed as part of the coal MLP segment since it is part of that value chain).

In my opinion, the favorable U.S. crude oil production growth trend from the Bakken Shale in North Dakota down to the Eagle Ford Shale in South Texas looks to continue to directly benefit refineries physically located in the middle of the country. I believe CVRR is well positioned to benefit from this trend.

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Pro forma for its IPO proceeds, CVRR has very low net debt to EBITDA of approximately 0.2x, which I believe makes it well capitalized to weather the notoriously volatile crack spread. Additionally, Carl Icahn's investment vehicle Icahn Enterprises, L.P. purchased four million common units in the IPO. In May of 2012 Icahn Enterprises took control of parent company CVR Energy, Inc. (CVI).

Icahn Enterprise's purchase of CVRR units at the IPO price appears to indicate that they see additional upside in the newly formed MLP as opposed to viewing the IPO as a way to exit some of the exposure to the assets. The strengths of the CVRR deal make it look attractive in my opinion when weighed against its risks, so in keeping with the higher risk higher return philosophy; the Sprint Portfolio opened a position in CVRR on its first day of trading.

As the Sprint Portfolio was essentially fully invested coming into January, the difficult decision was made to exit the Compressco Partners, L.P. (GSJK) position in order to provide the liquidity needed for the CVRR investment. The exit decision was not a reflection of GSJK's future prospects and was more a result of it having the smallest market capitalization in the portfolio, the lowest trading liquidity and the highest bid-ask spread.

Due to the way model portfolios are replicated at Covestor, the comparatively high bid-ask spread for GSJK could add slightly negative performance drift for accounts mirroring the Sprint Portfolio. Just like you, I too am strongly against negative performance drift.

For full disclosure, I continue to own GSJK elsewhere and they recently announced their fourth quarter 2012 distribution at $0.42, up a solid 5.7% from $0.3975 for the third quarter.

And the sprint continues…

The investments discussed are held in client accounts as of February 1. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

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