CVRR Stock: This Generous 14.3% Yielder Is Paying Out All Its Cash

cvrr stock

The Most Generous Dividend Payer on the Market?

As a risk-averse income investor, I usually prefer companies with conservative payout ratios. When a company pays out less cash than it generates, it creates a margin of safety. Therefore, even if business slows down, there’s a good chance that the company can still cover its dividends.

That’s why most companies would brag about their strong dividend coverage or low payout ratio. However, a company’s management can also do something else, such as paying out all of the company’s available cash.

CVR Refining LP (NYSE:CVRR) is one of the rare finds in today’s market. On the partnership web site’s distribution information page, it says: “It is currently the policy of the Board of Directors of the general partner of CVR Refining to distribute all of the available cash we generate each quarter, as determined by the Board of Directors.” (Source: “Distribution Information,” CVR Refining LP, last accessed August 15, 2018.)

CVR Refining reports something called “available cash for distribution.” It is calculated by taking adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) and then subtracting cash needed for debt service, reserves for environmental and maintenance capital expenditures, reserves for major turnaround expenses, and reserves for future operating or capital needs.

At the end of each quarter, the partnership calculates its available cash for distribution. Then it usually pays investors the distribution within 60 days.

And based on its recent financial results, CVR Refining has been following this distribution guideline.

A Generous Distribution Policy

In the first quarter of 2018, CVR Refining LP generated $75.7 million in cash available for distribution. (Source: “CVR Refining Reports 2018 First Quarter Results and Announces Cash Distribution of 51 Cents,” CVR Refining LP, April 26, 2018.)

In the same earnings release, the board of directors of CVR Refining’s general partner declared a first-quarter cash distribution of $0.51 per common unit. Since the partnership had 147.6 million common units outstanding, its total cash distribution for the quarter came out to $75.3 million.

In the second quarter, CVR Refining’s cash available for distribution increased to $97.0 million. (Source: “CVR Refining Reports 2018 Second Quarter Results And Announces Cash Distribution of 66 Cents,” CVR Refining LP, July 25, 2018.)

As you would expect, the company also declared a higher cash distribution of $0.66 per common unit. And because the number of common units outstanding remained the same at 147.6 million, the partnership paid out total distributions of $97.4 million for the second quarter of 2018.

If the partnership can maintain the quarterly payout of $0.66 per unit, it would offer investors a staggering annual yield of 14.3% at the current stock price.

CVR Refining LP: A Downstream MLP

Now, you are probably wondering how the partnership can afford to make those oversized distribution payments. So let’s take a look at its business.

CVR Refining is a master limited partnership (MLP). While most MLPs are in the midstream energy sector, CVR Refining focuses on downstream operations. It was created by CVR Energy, Inc. (NYSE:CVI) to own, operate, and grow its refining and related logistics businesses.

Right now, the partnership has two main refineries: 1) a complex full coking, medium-sour crude oil refinery with a capacity of 132,000 barrels per calendar day in Coffeyville, Kansas, and 2) a complex crude oil refinery with a capacity of 74,500 barrels per calendar day in Wynnewood, Oklahoma.

Through its subsidiaries, CVR Refining also operates around 570 miles of pipelines, approximately 130 crude oil transports, a network of crude oil gathering tank farms, and around 6.4 million barrels of crude oil storage capacity.

Of course, while the partnership can generate oversized cash flows from these operations, investors should keep in mind the risks associated with such a generous distribution policy.

Because CVR Refining LP aims to pay out all the available cash for distribution, it does not leave any margin of safety. Therefore, if business slows down the next quarter, chances are that unitholders will receive a smaller cash payment.

But so far, business has been going quite well. In 2017, CVR Refining’s Coffeyville Refinery had a crude throughput of 131,569 barrels per day, up from 2016’s 124,169 barrels per day. (Source: “4th Quarter 2017 Earnings Report,” CVR Refining LP, February 22, 2018.)

At the same time, Coffeyville’s refining margin expanded from $8.74 per crude throughput barrel in 2016 to $11.70 per throughput barrel in 2017.

Things were also going well at the partnership’s Wynnewood Refinery. From 2016 to 2017, Wynnewood’s refining margin increased from $8.07 to $9.85 per crude throughput barrel.

Bottom Line on CVRR Stock

Because CVR Refining LP’s payout could fluctuate as time goes by, I wouldn’t call it a slam dunk.

But for those who understand the underlying risk with a variable distribution MLP, CVRR stock’s double-digit yield might be worth a look.

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