Earnings Call Transcript - CVI Q2 2025

Operator, Operator

Greetings and welcome to the CVR Energy Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Roberts, Vice President of Financial Planning and Analysis and Investor Relations. Thank you, sir. You may begin.

Richard J. Roberts, Vice President, Financial Planning and Analysis and Investor Relations

Thank you, Christine. Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy Second Quarter 2025 Earnings Call. With me today are Dave Lamp, our Chief Executive Officer; Dane Neumann, our Chief Financial Officer, and other members of management. Prior to discussing our 2025 second quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law. This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2025 second quarter earnings release that we filed with the SEC and Form 10-Q for the period and will be discussed during the call. With that said, I'll turn the call over to Dave.

David L. Lamp, CEO

Thank you, Richard. Good afternoon, everyone, and thank you for joining our earnings call. Yesterday, we reported a consolidated net loss of $90 million for the second quarter and a loss per share of $1.14. Our EBITDA was a loss of $24 million. Even though crack spreads increased during the quarter, our results were affected by an unfavorable mark-to-market impact of our outstanding RIN obligation and decreased throughputs following the planned turnaround at Coffeyville. In our Petroleum segment, total throughput for the second quarter was about 172,000 barrels per day with a light product yield of 99% on crude oil processed. The turnaround at Coffeyville was completed in April, and we operated at a reduced crude rate for most of the quarter as we reduced intermediate inventories built during the turnaround. We resumed full operating rates at Coffeyville in July, and we don't currently have any additional turnarounds planned in the Refining segment for the remainder of 2025 and 2026. We expect our next planned turnaround to be at Wynnewood in 2027. The Group 3 2-1-1 benchmark cracks averaged $24.02 per barrel for the second quarter compared to $18.83 per barrel for the same quarter last year. Average RIN prices for the second quarter were about $1.11 on an RVO weighted basis, representing an increase of over 70% from the previous year. On a per barrel basis, RINs were around $6.08, making up more than 25% of the Group 3 2-1-1 crack spread for the quarter. Regarding the RFS, the Supreme Court ruled on the venue case in the second quarter, stating that challenges regarding the EPA's 2022 denial of certain small refinery exemptions must be heard exclusively in the D.C. circuit. This ruling shouldn't significantly change our situation as the D.C. circuit, similar to the Fifth Circuit before it, also determined that EPA's denials of small refinery exemptions were arbitrary and capricious. The comment period for the proposed 2026 and 2027 renewable volume obligation ends in August, and EPA has indicated it plans to rule on the 2024 SRE applications before finalizing the RVOs. In the meantime, we have submitted our 2025 SRE petition, and this will be a critical test to see if the EPA can finally adhere to its 90-day statutory deadline for ruling on SRE petitions. As the EPA has indicated a desire to reduce the backlog of outstanding SRE petitions, we are currently refraining from filing additional lawsuits against the EPA, although we are prepared to respond quickly if necessary. We hope that under President Trump's leadership, the EPA will recognize the vital role that small refineries like ours play in supporting rural communities across America and understand why Congress included the small refinery exemption in renewable fuels legislation. For the second quarter of 2025, we processed about 14 million gallons of vegetable fuel oil in the Renewable Diesel Unit at Wynnewood, which was affected by some unplanned downtime in May. The gross margin was approximately $0.38 per gallon for the second quarter of 2025, compared to $0.43 per gallon for the second quarter of 2024. As we await final regulations from the IRS, we did not recognize any PTC benefit in the quarter. As a reminder, we believe we will have the ability to retroactively claim credits once the regulations are finalized. In the Fertilizer segment, we experienced planned and unplanned downtime at both facilities during the quarter, resulting in an ammonia utilization rate of 91%. Nitrogen fertilizer prices for the second quarter of 2025 increased for both UAN and ammonia compared to the same quarter last year, and we witnessed strong demand for both products throughout the spring planting season. Now let me turn the call over to Dane to discuss our financial highlights.

Dane J. Neumann, CFO

Thank you, Dave, and good afternoon, everyone. For the second quarter of 2025, our consolidated net loss was $90 million, losses per share were $1.14, and EBITDA was a loss of $24 million. Our second quarter results include a negative mark-to-market impact on our outstanding RFS obligation of $89 million, an unfavorable inventory valuation impact of $32 million, and unrealized derivative losses of $2 million. Excluding the above-mentioned items, adjusted EBITDA for the quarter was $99 million, and adjusted loss per share was $0.23. Adjusted EBITDA in the Petroleum segment was $38 million for the second quarter, with a slight increase from the prior year period, driven by the increase in Group 3 crack spreads, offset by increased RINs prices and lower throughput volumes. Our second quarter realized margin adjusted for RIN mark-to-market impacts, inventory valuation, and unrealized derivative losses was $9.95 per barrel, representing a 41% capture rate on the Group 3 2-1-1 benchmark. Our capture rate for the second quarter was negatively impacted by the timing of product sales as Coffeyville was still coming out of turnaround and running through expensive feedstocks in April when cracks were at their highest, and our sales volumes were mostly weighted towards June when cracks were at the lowest levels of the quarter. Net rent expense for the quarter, excluding mark-to-market impact, was $62 million or $3.93 per barrel, which negatively impacted our capture rate for the quarter by an additional 20%. The estimated accrued RFS obligation on the balance sheet was $548 million at June 30, representing 508 million RINs mark-to-market at an average price of $1.08. As a reminder, our estimated outstanding RIN obligation excludes the impact of any small refinery exemptions. Direct operating expenses in the Petroleum segment were $6.45 per barrel for the second quarter compared to $6.94 per barrel in the second quarter of 2024. The decrease in direct operating expense per barrel was primarily due to lower repair and maintenance expenses. Adjusted EBITDA in the Renewable segment was a loss of $4 million for the second quarter, a decline from the second quarter of 2024's adjusted EBITDA loss of $2 million. The decrease in adjusted EBITDA was driven by a combination of a decline in the HOBO spread due to higher soybean oil prices and lower diesel prices, along with the loss of the BTC and nothing for the PTC while we wait for final regulations from the IRS. Adjusted EBITDA in the Fertilizer segment was $67 million for the second quarter, with higher UAN and ammonia sales pricing and volumes driving the increase relative to the prior year period. The partnership declared a distribution of $3.89 per common unit for the second quarter of 2025. As CVR Energy owns approximately 37% of CVR Partners common units, we will receive a proportionate cash distribution of approximately $15 million. Cash flow from operations for the second quarter of 2025 was $176 million and free cash flow was a use of $12 million. Significant uses of cash in the quarter included $189 million for capital and turnaround spending, a $70 million prepayment on the term loan, $26 million for cash interest, and $15 million paid for the noncontrolling interest portion of the CVR Partners' first quarter 2025 distribution. Working capital was a cash source, partially associated with crude oil and feedstock inventory draws following the Coffeyville turnaround. Total consolidated capital spending on an accrual basis was $36 million, which included $23 million in the Petroleum segment, $10 million in the Fertilizer segment, and $2 million in the Renewable segment. Turnaround spending on an accrual basis in the second quarter was approximately $24 million. For the full year 2025, we estimate total consolidated capital spending to be approximately $165 million to $200 million and turnaround spending to be approximately $190 million. Turning to the balance sheet. We ended the quarter with a consolidated cash balance of $596 million, which includes $114 million of cash in the Fertilizer segment. Total liquidity as of June 30, excluding CVR Partners, was approximately $759 million, which was comprised primarily of $482 million of cash and availability under the ABL facility of $277 million. During the quarter, we paid down $70 million on the term loan. And subsequent to quarter end, we repaid an additional $20 million, in total representing a 28% reduction and leaving the current principal balance at approximately $235 million. Looking ahead to the third quarter of 2025, for our Petroleum segment, we estimate total throughputs to be approximately 200,000 to 215,000 barrels per day, direct operating expenses to range between $105 million and $115 million, and total capital spending to be between $25 million and $30 million. For the Fertilizer segment, we estimate our ammonia utilization rate to be between 93% and 98% with some downtime planned at East Dubuque for control system upgrades. We expect direct operating expenses, excluding inventory impacts, to be between $60 million and $65 million and total capital spending to be between $20 million and $25 million. For the Renewables segment, we estimate third quarter 2025 total throughput to be approximately 16 million to 20 million gallons, direct operating expenses to range between $8 million and $10 million and total capital spending to be between $1 million and $3 million. With that, Dave, I'll turn it back over to you.

David L. Lamp, CEO

Thanks, Dane. Refining market conditions continue to improve in the second quarter. The combination of the heavy spring maintenance season and the closure of one U.S. refinery led to a decline in refined products inventories, particularly diesel inventories, which are nearly 15% below 2021 to '24 averages. Refined product demand in the U.S. remained steady with year-to-date gasoline and diesel demand both in line with 2021 to 2024 averages. Within the Mid-Con where we operate, we're seeing similar trends with gasoline and diesel inventories at or below recent historical averages, and demand remained steady. We are also seeing strong premium gasoline pricing in the Group 3, which benefits our system as premium typically makes up 15% of our gasoline pool. The alkylation project at Wynnewood should further increase our ability to make premium gasoline as well. This project is currently 40% complete and expected to come online in 2027. We are also in the process of revamping tankage and pipelines to allow us to produce jet fuel out of Coffeyville, where we've already made some progress on the commercial front. With higher RIN prices and jet demand, the market is favorable. Overall, we are cautiously optimistic about the near and medium-term outlook for the refining sector. As I mentioned, refined product inventories are relatively low and there are still several refineries in the U.S. and Europe that are scheduled to shut down. In addition, the forward curve for diesel remains backward dated, providing no incentive to increase inventories in the near term. Outside of the startup of new refineries in Mexico and Nigeria, there are a few new refineries under construction around the world that will be starting over the next few years. Meanwhile, refined product demand appears stable. Any pro-growth initiatives from the economic bill should be positive for GDP growth and demand for transportation fuels in the United States. In the Renewables segment, we've been near breakeven on an adjusted EBITDA basis year-to-date, with the loss of the Blenders' Tax Credit and increase in soybean oil pricing mostly being offset by increased RIN prices. Assuming we booked PTC in line with proposed regulations, our year-to-date adjusted EBITDA in the Renewable segment would have increased approximately $6 million. We have ordered our next load of renewable diesel catalyst, and we currently plan to remain in renewable diesel production as we wait to see how credits line out with the PTC and other potential positive changes to come out of the economic bill. We'll also continue to weigh all our options for the future of our renewable business. As we have stated in our last few earnings calls, we remain fully willing to participate in the renewable space, but we cannot invest additional time or capital without further assurances from the government that it will support the business it created. In the Fertilizer segment, the spring planting season went well and demand for nitrogen fertilizer is strong with corn acres planted increasing 4% over 2024 levels. Recent USDA estimates are calling for inventory carryout levels for corn and soybeans at 10% or less for 2026, which are below the 10-year averages. Between robust demand in the spring and tight supply of nitrogen fertilizer in the U.S. and globally, we are seeing continued support for pricing, and the normal seasonal pricing declines for summer fill and fall prepay of UAN have been much narrower this year than in the past. Looking at the third quarter of 2025, quarter-to-date metrics are as follows. Group 2-1-1 cracks have averaged $25.57 per barrel. Brent-TI spread at $2.28 per barrel. And the WCS differential at $10.73 per barrel under WTI. The HOBO spread has averaged a negative $1.75. As of yesterday, Group 3 2-1-1 cracks were $25 per barrel. Brent-TI was $3.24 per barrel, and WCS was $11.65 under WTI. The HOBO spread was a negative $1.85 per gallon, and RINs were approximately $690 per barrel. Prompt fertilizer prices are approximately $600 per ton for ammonia and $300 for UAN. In conjunction with improving refinery fundamentals and the completion of payments of the Coffeyville turnaround in the second quarter, we were pleased to begin making progress on our deleveraging strategy by paying $90 million of the principal on the term loan between the second and third quarters. Returning our balance sheet to target leverage levels is key for us in the near term, in addition to our constant focus on safe and reliable operations of our facilities. We will also continue to look for ways to improve capture, reduce costs, and ultimately grow our business profitably. Finally, as mentioned in our earnings release, I have announced my intention to retire as President and CEO at the end of the year. It's been a privilege to have spent the past 45 years in the oil industry that I love. I truly enjoy working with the talented CVR team and look forward to continuing to serve as a member of its Board. Mark Pytosh has done great things for both our companies, and I look forward to watching him lead CVR Energy into the future. With that, operator, we're ready for questions.

Operator, Operator

Our first question comes from Paul Cheng with Scotiabank.

Yim Chuen Cheng, Analyst

Dave, first, I just want to congratulate you on your pending retirement. We really appreciate, over the years, your insight and very candid comments. We really appreciate that. I guess 2 questions. One, on the cost of fuel. I'm just curious, Dane, from a planning standpoint, is it really necessary to have all this excess inventory and end up then to get into a situation where margin is very strong, but you can't run at full capacity because you have to work off that inventory? I assume that has some negative financial impact in the quarter. Can you quantify it? And also from a planning standpoint, is there any way to lessen that kind of impact in the future? That's the first question. Second question that I know it's a little bit early. Can you maybe, Dane, give us some idea of how 2026 CapEx and turnaround that is going to look like given that you don't have any major turnaround for next year?

David L. Lamp, CEO

Paul, on your first question, is there a way to mitigate the inventory we built during the turnaround season? There is some we could do there, leaving it stored in tankage for a period of time. But the problem with that is if you have another problem, you have nowhere to go. So most of our strategy is to pull the inventory back towards target. This gives us some degrees of freedom should some other incident occur like weather or something else that we can't control. Regarding the second part of your question, I can't remember now.

Yim Chuen Cheng, Analyst

What's the financial impact in the quarter because of that?

David L. Lamp, CEO

Dane, do you want to have that?

Dane J. Neumann, CFO

Yes. I'll kind of cover the capture overall, Paul. So obviously, 41% was a decline from the first quarter's performance. The draw definitely had an impact. As I mentioned, sales timing, while we were at lower throughputs and drawing that inventory, cracks were at their best of the quarter. Rolling into June when we got back to full rate, cracks were depressed. In addition, that feedstock draw that we had was more heavily weighted towards gasoline, which relative to the crack pricing was also disadvantaged against diesel. Pulling all of these factors together, our estimate is about 7% to 9% on capture, which would have pushed us closer to 50%.

Yim Chuen Cheng, Analyst

About the second question regarding the CapEx and turnaround for next year?

Dane J. Neumann, CFO

Yes. So Paul, for '26, obviously, we wait until later in the year to give guidance on capital. I don't think there's anything at this time that's going to suggest it will be an exceptional year compared to past years. In the prepared remarks, we did mention we don't have any planned turnarounds until potentially the Wynnewood turnaround in '27. Depending on the timing of when that turnaround would happen, there could be some pre-spending towards the end of the year. But if it happens later in the year, I wouldn't expect any significant impacts.

Operator, Operator

Our next question comes from the line of Neil Mehta with Goldman Sachs.

Neil Singhvi Mehta, Analyst

Thanks for all the guidance over the years, and we're going to miss you very much. Well, maybe that's a good place to start, which is, as Mark steps into the role, are there areas of strategic focus that you think CVI should really be focused on? And how do you think about this being a continuation of the existing strategy or whether there's some white space that you want the business to move towards?

David L. Lamp, CEO

I believe, Neil, you've likely heard me mention this before. Our main challenge is that we are concentrated in a single market, primarily reliant on one main driver. In the future, I hope that the gap between selling and buying prices narrows for new assets that could help us diversify or make us an attractive option for acquisition to achieve the same goal. This isn’t a new strategy for us. When we look at fertilizer, it raises an interesting point. There is significant value in that sector, and with current geopolitical events, the short supply of fertilizer might worsen. I'm sure, Paul, that Mark will have plenty to manage in navigating this situation moving forward.

Neil Singhvi Mehta, Analyst

And David, as you think about a longer-term question, you've always had a very good perspective on the refining cycle. There's a rich debate out right now about whether we're in a new refining upcycle given limited capacity adds, or if we're still going to go through a tough period given crude differentials and demand uncertainty. What's your multiyear outlook for refining?

David L. Lamp, CEO

I believe we won't see new construction globally until 2030. While demand isn't rapidly increasing, I am hopeful that the economic bill will stimulate demand to some extent due to GDP growth and the need for products. Many countries would aspire to the level of consumption and living standards that the U.S. achieves. This ongoing pressure is significant, and the alternatives to oil are not particularly appealing, especially with crude prices ranging from $50 to $70. Therefore, it's clear that oil maintains its market share because there are no better options available. Overall, I anticipate a positive outlook for the future, and this industry will remain essential for many years to come.

Operator, Operator

Our next question comes from the line of Manav Gupta with UBS.

Manav Gupta, Analyst

Dave, congrats on the retirement. We really appreciated all your insights over the years. My question here is it looks like you are more constructive on refining than sometimes you have been in the past. You also do not have any major planned turnarounds approaching. At what point do you and the Board sit together and think about rewarding shareholders with some kind of a dividend reinstatement, if you could talk about that?

David L. Lamp, CEO

Sure, Manav. I think, first off, I'd just say we're well known in the industry to be a dividend machine. We'd love to return to that as fast as possible. I'm much more optimistic than I was because I just believe the penetration of EVs is going to slow, and has, to some degree already. Americans will wake up and the rest of the world will wake up that the most versatile and flexible fuel in the world is gas and diesel. I'm afraid this shift is going to be much more difficult than it was thought of 3 or 4 years ago. So on that basis, I think it has a bright future. The second part of your question was, I forgot.

Manav Gupta, Analyst

No, I think you're hoping for a dividend at some stage that you mentioned that you have been known in the industry as a cash machine. So how should we think about a possible dividend reinstatement there?

David L. Lamp, CEO

The Board continually evaluates this situation. Our strategy has included a recent $90 million repayment, and we plan to maintain a similar trend moving forward. However, the Board reviews this regularly. Our objective is to return to a dividend at a sustainable level in the long term. I cannot specify when that will happen, but that is our aim.

Manav Gupta, Analyst

Perfect. My quick follow-up here is on the small refinery exemptions. In the past, whenever you have been denied, you have gone all the way to the Supreme Court and proven your case. But there are a number of people who have applied for these small refinery exemptions. Some may not be having as compelling a case as you. So just trying to understand from your view, how do you think this plays out? If the small refinery exemptions are actually given out, do you think there would be some kind of a reallocation from the top? Or would it be without reallocation? What are you hearing? And what are your thoughts on that?

David L. Lamp, CEO

Well, I think I've said many times that Wynnewood is our poster child for an SRE. The numbers are compelling. Without a doubt, we're disproportionately economically harmed by the RFS rule. It's significantly more pressing when RINs are high than when they are low. We've just gone through a cycle here, and we're in an upcycle of RIN prices, with the BTC eliminated, the PTC in a state of uncertainty, and a huge RVO increase for '26 and '27. I don't know if this program ever goes away, but Congress always intended for small refiners that operate in rural areas to have relief, considering the long supply chains and lack of alternatives. The supply lines are long for small refineries in rural areas, and if fuel prices go up, it directly impacts them. Congress has consistently intended this, whereas EPA has fought it vigorously, and courts have ruled against them for being arbitrary and capricious. Regulation was poorly written and poorly managed politically. It’s untenable for those in the business to think that all small refinery waivers will be denied without consideration. The Department of Energy has used rigorous scoring that appears politically influenced rather than reality-based. We’ll return to court if this does not go our way, and we've seen indications from the EPA, including Zelden, that they will reconsider this. They're looking to clear the backlog and get timely responses, which is a test as we've already submitted our '25 application. The 90 days aren't up yet, but we'll see if they're serious. Regarding reallocation, I believe there's nothing in the law that requires SREs to be reallocated. EPA has been operating under the notion that it should, but this hasn't been legally challenged, and I'm confident that if I were a large refinery, I would argue against the necessity of reallocation.

Operator, Operator

We have reached the end of the question-and-answer session. I'd now like to turn the floor back over to management for closing comments.

David L. Lamp, CEO

Again, I'd like to thank you all for your interest in CVR Energy. Additionally, I'd like to thank our employees for their work and their commitment towards safe, reliable, and environmentally responsible operations. We look forward to reviewing our third quarter results in '25 in our next earnings call. Thank you all very much.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.