Fitch Ratings has affirmed CVR Energy, Inc.'s (CVI) Long-Term Issuer Default Rating (IDR) at 'BB-'.
Fitch has also affirmed the unsecured notes at 'BB-'/'RR4'.
The Rating Outlook is Stable.
CVI's ratings reflect its medium-sized operations, an average complexity rating of 10.8, and relatively low operating costs. The company (excluding non-recourse CVR Partners) has approximately $746 million in liquidity as of Sept. 30, 2022 and no near-term maturities, which should provide for more than adequate ability to service current operations. The renewable diesel conversion was completed in April 2022 with CVI continuing to increase production which should help reduce environmental obligations.
These factors are offset by the company's relatively small size, exposure to volatile crack spreads and oil differentials, and historically, high shareholder distributions. The Nitrogen Fertilizer segment is non-recourse, although it can be a source of cash at times through its approximately 37% ownership and corresponding distributions.
Key Rating Drivers
Adequate Liquidity: Fitch believes CVI has adequate liquidity with cash on hand of $499 million and availability under its undrawn revolver of $247 million as of Sept. 30, 2022, excluding CVR Partners. Fitch will monitor cash balances closely going forward given the higher reliance on cash following the shift in structural liquidity recently with the reduction in the credit facility. CVI recently extended the credit facility to June 2027 from November 2022 and reduced the facility to $275 million from $400 million. The company has historically not drawn on the facility with letters of credit currently outstanding. The next bond maturity is not until February 2025.
Fitch expects CVI to generate positive FCF over the forecasted period assuming refinery economics gradually return to pre-pandemic levels. CVR Partners is non-recourse but must distribute all of its available cash less reserves (as defined) to unit holders. CVI's approximate 37% ownership of CVR Partners implies these distributions could be an additional source of liquidity. CVI historically had an aggressive dividend policy and has paid $4.80 per share YTD through ordinary and special dividends funded with positive FCF. Fitch forecasts lower than typical distributions given the potential need for capital to meet environmental regulations.
Strong YTD Results: North American refiners experienced blockbuster YTD results, driven by record crack spreads, with NYMEX 2-1-1 and Group 3 2-1-1 spreads in the $40-$50/barrel for much of the driving season, versus normalized levels in the $10-$20 range. Strong YTD results were driven by recovering product demand, low inventories, market dislocations from Russian sanctions, and structural reductions in U.S. and global refining capacity. Crack spreads decreased in Q3 but remain well above midcycle levels. As calculated by Fitch, CVI generated FCF of just under $700 million YTD compared to negative FCF in 2020 and 2021.
Cautious Macroeconomic Outlook: Fitch remains cautious given refining remains one of the most cyclical corporate sectors, and is subject to periods of boom and bust, with sharp swings in crack spreads over the cycle. Despite record YTD results and a good line of sight for an above-midcycle 2023, Fitch's outlook for the sector remains cautious. We expect the Russia-Ukraine conflict, high inflation, and restrictive global central bank policies to lower global GDP growth and result in a mild recession in the U.S., which could accelerate demand destruction for the industry. (For more details, see Fitch's Global Economic Outlook at www.fitchratings.com/site/re/10212407.) Other challenges include increased Chinese fuel exports, incremental refinery capacity growth in the Middle East and Asia, and long-term secular growth issues from decarbonization trends and electric vehicles that would reduce the demand for hydrocarbons.
Challenging Regulatory Environment: Fitch believes CVI's renewable identification numbers (RINs) obligations will be manageable in the near term. RIN prices remained elevated throughout 2022. . CVI has reduced its RIN exposure through increased biodiesel blending and renewable diesel production. CVI completed their renewable diesel project in April 2022. CVI's Wynnewood refinery previously received a Small Refinery Exemption (SRE) that also reduced RIN exposure. The company has been denied this exemption since 2019 and is pursuing legal action to regain it. Fitch's forecasts do not assume an exemption given the uncertainty of this issue.
Renewable Diesel Project: Fitch believes the renewable diesel production acts as a cash flow hedge against rising RINs costs and improves CVI's emissions profile as part of a larger ESG strategy. The company converted its 19,000 barrels per day (bpd) Wynnewood hydrocracker to process 100 million gallons per year of refined, bleached, and deordorized soybean oil and distiller's corn oil to produce renewable diesel and renewable naphtha. This generates credits from the Blended Tax Credit (BTC) and Low Carbon Fuel Standard and reduces CVI's RINs obligations.
CVI can return the unit to hydrocarbon processing if the margin differential between renewables and hydrocarbons changes. CVR is also building a pre-treatment unit for processing raw soybean oil, corn oil and animal fats that would reduce the premium paid for pre-treated feedstocks and potentially lower the carbon intensity, generating higher LCFS credit values. The company has identified similar renewable opportunities at its Coffeyville refinery.
CVR Partners, LP Affiliate: CVR Partners is non-recourse to the debt issued at CVI and CVR Refining, LP. Fitch notes that CVI recently announced its exploration of the potential spin-off of CVR Partners, which is early in the review process and is expected to take time before a final decision is made. Fitch does not expect CVI will provide credit support to CVR Partners, which is required to distribute its available cash (as defined) to its unit holders. Fitch expects this to be a source of cash for CVI given its ownership of 37% of the units, which could be material during periods of continued high ammonia and UAN prices.
Size and Regional Concentration: CVI's ratings reflect the business risk associated with its medium-sized operations and location concentration. Its combined crude oil processing capacity is 206,500 bpd with an average complexity of 10.8, and its plants are located in Group 3 of PADD II. The company's two refineries are strategically located near Cushing, OK, with access to over 250,000 bpd of production across the Midwest. However, CVI is an inland refiner with limited export options. The company has a strong asset portfolio of over 1,100 miles of owned and JV pipelines with over 7 million barrels of crude oil and product storage capacity of 39 LACT units and 115 crude and LPG tractor-trailers.
Derivation Summary
CVI's ratings reflect its status as a medium-sized Mid-Continent complex refiner with two refineries and approximately 206,500bpd of nameplate capacity. The company's refining capacity is smaller than peers Valero Energy Corporation (BBB/Stable) with 3.2 million barrels per day (mmbpd) of throughput capacity and Marathon Petroleum Corporation (BBB/Stable) with 3.0mmbpd. CVI is also smaller than peers PBF Holdings Company Inc. (BB-/Stable) with 973mbpd and HollyFrontier Corporation (BBB-/Stable) with 678,000 barrels of oil equivalent per day (boepd) pro forma for the Sinclair transaction.
The company's refining asset quality is strong and advantaged in several ways, such as geographically with a concentration of price-advantaged capacity in the Mid-Continent and operationally with flexibility to take advantage of light, heavy and sour crude. CVI also has strong logistics system that allows the company to easily transport and store crude oil and refined products.
Fitch estimates total debt/EBITDA, for 2022 at 1.2x, although this is expected to increase over the forecasted horizon as refining economics revert to pre-pandemic levels. The major differentiator between 'BB' issuers such as CVI and PBF versus 'BBB' peers is primarily size, geographic diversification and business line diversification.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
WTI oil price of $95/bbl in 2022, $81/bbl in 2023, $62/bbl in 2024 and $50/bbl thereafter;
PADD II 2-1-1 crack spreads averaging $37 in 2022 and decreasing to $20 over the forecasted period;
Refinery utilization around 100% over the forecasted period;
Operating expenses reducing back to approximately $5.00 per barrel over the forecasted period;
Assumed positive FCF is used in part for debt reduction between 2023 and 2025, with refinancing of 2025 notes;
Shareholder distributions of $300 million/year over the forecasted period to CVR Energy shareholders (excludes CVR Partners distributions;
Total capex and turnaround spending of $280 million in 2023 and $250 million thereafter;
No assumptions for acquisition, divestitures, stock repurchases, or equity offerings over the forecasted period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Greater earnings diversification and scale, or evidence of lower cash flow volatility;
Reduced exposure to environmental and regulatory obligations due to increase focus on renewables;
Mid-cycle EBITDA leverage at or below 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Material reduction in liquidity over a sustained period;
A disproportionate increase in dividends or a share repurchase program that leads to a material reduction in liquidity;
Mid-cycle EBITDA leverage above approximately 3.0x;
Material regulatory changes that can potentially reduce earnings.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Sufficient Near-Term Liquidity: CVI (excluding CVR Partners) had $499 million of cash and $247 million of availability under credit facilities as of Sept. 30, 2022. CVR Refining, LP has a $275 million senior secured asset-based lending (ABL) credit facility due June 2027, which was recently extended and reduced to $275 million from $400 million. Only letters of credit of $28 million are currently outstanding.
Fitch believes that existing liquidity should allow CVI to support operational and debt obligations in the near term with the expectation that continued improved refining economics will provide more than adequate liquidity over the forecasted time horizon. The next bond maturity is not until 2025.
CVR Partners' (fertilizer business) only bond maturity is its $550 million, 6.125% secured note due June 2028. CVI recently announced its exploration of the potential spin-off of CVR Partners. Fitch does not expect CVI to support the credit through a cash infusion however a change in financial policy could result in a negative ratings action. CVI owns approximately 37% of CVR Partners and would benefit from a distribution of CVR Partners' available cash, if applicable.
Issuer Profile
CVR Energy, Inc. is a diversified holding company that primarily engages in petroleum refining, renewable fuels and nitrogen fertilizer manufacturing. CVR's petroleum segment is composed of two Mid-Continent refineries (Coffeyville and Wynnewood) and associated logistics assets.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
CVR Energy, Inc. has an ESG Relevance Score of '4' for Governance Structure as Mr. Carl C. Icahn owns approximately 71% of the voting power of the common stock. The substantial ownership concentration has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
CVR ENERGY, INC. 
