Fitch rates CVR Energy, Inc.'s (CVI) proposed $600 million 8.50% new senior unsecured 2029 notes 'BB-'/'RR4', in line with CVI's existing senior unsecured debt ratings.

This new issuance, along with cash on hand, will be used to redeem CVI's outstanding $600 million 5.25% senior unsecured 2025 notes on or after Feb. 15, 2024. Fitch notes CVI's debt will be elevated in the short-term from closing of the new issuance until repayment of the 2025 notes in February 2024 when its redemption price is equal to 100% of the principal amount plus accrued and unpaid interest.

Key Rating Drivers

Fitch currently rates CVI's Issuer Default Rating 'BB-' with a Stable Rating Outlook. The rating reflects the company's medium-sized operations, an average complexity rating of 10.8, and relatively low operating costs. The company (excluding non-recourse CVR Partners) has approximately $1.05 billion in liquidity as of Sept. 30, 2023 (CVI cash of $800 million), proposed refinancing of its 2025 notes with no near-term note maturities until 2028, which should provide for more than adequate ability to service current operations. The renewable diesel conversion was completed in April 2022, which assists CVI in reducing 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.

Adequate Liquidity: Fitch believes CVI has adequate liquidity, with cash on hand of $800 million and $251 million of availability under its undrawn revolver as of Sept. 30, 23, excluding CVR Partners. Fitch continue to monitor cash balances closely given the higher reliance on cash following the recent shift in structural liquidity with the reduction in the credit facility in November 2022. The company has historically not drawn on the facility with LOCs currently outstanding. Following the proposed issuance and refinancing of its 2025 notes, there will be no near-term note maturities until 2028.

Fitch expects CVI to continue to generate positive FCF over the forecast as refinery economics gradually moderate to pre-pandemic levels. CVR Partners is nonrecourse, but must distribute all its available cash less reserves (as defined) to unitholders. 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 $4.00 per share in 9M23 through ordinary and special dividends funded with positive FCF.

Strong 2022 Results: North American refiners experienced blockbuster 2022 results, driven by record crack spreads, with NYMEX 2-1-1 and Group 3 2-1-1 spreads in the $40 barrel (bbl)-$50bbl for much of the driving season, compared with normalized levels in the $10bbl-$20bbl range. Crack spreads decreased from 2022 highs but remain well above midcycle levels.

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. In addition to cyclical challenges, the sector is also facing secular challenges with the growth of electric vehicles, which could reduce demand for refined 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 but have moderated considerably in the second half of 2023. CVI reduced its RIN exposure through increased biofuel blending and renewable diesel production following the completion of its renewable diesel project in April 2022.

In previous years, CVI's Wynnewood refinery received a Small Refinery Exemption 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 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 up to 100 million gallons per year of refined, bleached, and deodorized soybean oil and distiller's corn oil to produce renewable diesel and renewable naphtha. In addition to generating RINs, this generates credits from the Blended Tax Credit 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. CVI 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 identified similar renewable opportunities at its Coffeyville refinery.

CVR Partners, LP Affiliate: CVR Partners is nonrecourse to the debt issued at CVI and CVR Refining, LP. CVI explored the potential spinoff of CVR Partners, however, decided not to proceed at this time. Fitch does not expect CVI will provide credit support to CVR Partners, which is required to distribute its available cash (as defined) to its unitholders. 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 high ammonia, and urea and ammonium nitrate (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 206,500bpd, 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 250,000bpd 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 joint venture pipelines with over 7 million barrels of crude oil and product storage, 39 lease automatic custody transfer (LACT) units and 115 crude and liquefied petroleum gases (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 2.6 million barrels per day (mmbpd) of throughput capacity, and Marathon Petroleum Corporation (BBB/Stable) with 2.9mmbpd. CVI is also smaller than peers PBF Holdings Company LLC (BB/Stable) with 1.0mmbpd and HF Sinclair Corporation (BBB-/Stable) with 678,000 bpd.

The company's refining asset quality is strong and advantaged in several ways. 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 a strong logistics system that allows the company to easily transport and store crude oil and refined products.

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 increased focus on renewables;

Midcycle 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;

Midcycle EBITDA leverage over approximately 3.0x;

Material regulatory changes that can potentially reduce earnings.

Liquidity and Debt Structure

Sufficient Near-Term Liquidity: CVI (excluding CVR Partners) had $800 million of cash and $251 million of availability under credit facilities as of Sept. 30, 2023. CVR Refining, LP has a $275 million senior secured asset-based lending (ABL) credit facility due June 2027. Only LOCs of $24 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.

Refinancing risk reduces with the proposed 8.50% 2029 note issuance as funds will be used to repay the 2025 notes. Following the repayment, the next maturity is the 2028 notes.

CVR Partners' (fertilizer business) only bond maturity is its $550 million, 6.125% secured note due June 2028.

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.

Date of Relevant Committee

30 November 2022

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 66% 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.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2023 Electronic News Publishing, source ENP Newswire