Why This Icahn-Backed Refiner Is Not for the Faint of Heart

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NEW YORK ( TheStreet) -- CVR Refining is an independent refiner based in Sugar Land, Texas, with a market cap of $3.3 billion. The firm, which is a master limited partnership (MLP), was formed by CVR Energy to handle its refining and related logistics operations. The most recent quarterly earnings of the refiner witnessed a significant drop. But that was largely due to an equipment failure at one of its refineries, which caused a considerable drop in throughput. More important, CVR Refining has cut down its cash distribution. The business is a variable rate MLP and has just two refineries, which makes it an inherently riskier investment than other traditional MLPs. Although CVR Refining has decent long-term growth prospects, it is certainly not for the fainthearted.

CVR Refining owns two of the seven refineries in Group 3 of the PADD II region of the United States: a 115,000-barrel-a-day oil refinery in Coffeyville, Kan., and a 70,000-barrel-a-day oil refinery in Wynnewood, Okla. The refiner also owns pipelines, crude oil gathering tank farms, storage capacity and other related assets.

The company supplies its products to Kansas, Oklahoma, Missouri, Nebraska and Iowa. This is an area where the demand for gasoline and distillates has exceeded the supply. As a result, CVR Refining benefits from favorable market fundamentals.

CVR Refining is backed directly, and indirectly, by the activist investor Carl Icahn. The billionaire owns 80% of CVR Energy, the second biggest holding in Icahn's portfolio. CVR Energy owns 71% of the common units of CVR Refining. This gives Icahn a sizeable indirect exposure to the refiner. According to data provided by Thomson Reuters, Icahn has also purchased 6 million shares CVR Refining in the first half of the current year, giving him direct exposure to the company.

Earlier this month, CVR Refining released its quarterly results that came well below investors' expectations and as a result, its shares dropped by 9% on the day of the earnings release. The business reported a net income of $86 million from net sales of $1.9 billion, a significant drop from net income of $319 million and net sales of $2.3 billion in the same quarter last year. The huge decline was attributed to a one-off event in which an equipment failure at the Coffeyville refinery had an adverse impact on its operations. The refinery ran at just 79,400 barrels a day, which is 35,600 barrels below its normal capacity. Moreover, the firm also suffered from reduced crack spreads and narrowing crude differentials.

CVR Refining also cut down its cash distribution to just $0.30 per unit. This is a big drop because the company has paid out $2.93 in the first half of the current year. CVR Refining was one of the six MLPs that reduced their cash distributions in the previous quarter. This list also includes CVR Partners , the nitrogen fertilizer arm of CVR Energy.