CVR Energy explores potential spin-off of its nitrogen fertilizer business

Transaction overview

On November 21, 2022, CVR Energy, Inc. (NYSE: CVI, $32.38, market cap: $3.3 billion), a diversified business primarily engaged in renewable fuels, petroleum refining and marketing, and nitrogen fertilizer manufacturing Holding company, announced that its board of directors authorized the management of CVR Energy to explore a potential spin-off of its interest in the nitrogen fertilizer business, CVR Energy, through its general partner held in CVR Partners, LP (NYSE: UAN ) and limited partner interests in the business, CVR Partners, a publicly traded limited partnership (“CVR Partners”). The potential spin-off would create a new public company to hold these interests and combine the nitrogen fertilizer business with CVR Energy’s refining and renewable energy businesses are separate.

If CVR Energy proceeds with a potential spin-off, its structure may result in a pro rata tax-free distribution to all CVR Energy shareholders prior to a record date determined by CVR Energy’s board of directors. If the transaction is validly completed, CVR Energy shareholders will own shares of CVR Energy (which owns the refinery and renewable energy businesses) and a holding company that holds CVR Energy’s current general partner interest and approximately 37% of the common units ( representing limited partner interests) or CVR partners.

There can be no assurance that a potential spin-off transaction will be consummated in the manner described above. CVR Energy has not set a timetable for completing the potential transaction. Closing the potential spin-off transaction will be contingent on various conditions, including receipt of tax advice from attorneys and final board approval. White & Case LLP acted as legal advisor to CVR Energy on a potential spin-off; the board authorized management to retain Jefferies LLC as financial advisor to CVR Energy.

Reason for transaction

For context, in February 2019, while discussing fiscal 2018 results, CVR Energy’s CEO said the company was shopping around for oil exploration and production companies that might be looking to diversify their businesses. It was further reported that CVR Energy is exploring options for a sale with or without an interest in CVR Partner in order to maximize shareholder value. Management believes that oil industry consolidation is the way forward. Additionally, CVR Energy has acquired a 15% stake in Delek US Holdings, an integrated downstream energy company believed to be a possible synergy acquisition opportunity. However, the company had to sell its stake in Delek US Holdings (acquired in May 2020) after Delek’s board rejected its proposal.

The proposed split into two companies will allow shareholders to evaluate each company’s assets and future potential. Likewise, both companies are able to pursue their unique business strategies and capital allocation policies on an independent basis. CVR Energy’s business benefited from higher gasoline and fertilizer prices driven by the Russia-Ukraine war and macroeconomic factors. The situation in the fertilizer market has changed dramatically over the past ten months. Europe’s core gas shortage appears more persistent after Gazprom’s shutdown of the critical Nord Stream 1 pipeline and subsequent mysterious attack on the pipeline. While no physical restoration work has been done, once started, it could take several years to complete. With this in mind, Europe is likely to continue to face gas shortages for a long time to come, which means fertilizer prices are likely to continue to rise even if peace is found. Europe continues to cut its fertilizer production levels, which is a major indirect benefit to CVR Partners as the EU produces 21% of the world’s UAN (urea and ammonium nitrate). U.S. nitrogen margins surged after Russia invaded Ukraine, but the business has few synergies with refining.

Fertilizer production and even pricing are affected by seasonality, as prices are typically highest in late spring, when inventories are usually lowest after farmers’ demand peaks. Fertilizer buying activity is typically lowest in late autumn when harvesting takes place in most of the world (Northern Hemisphere). Therefore, low levels of fertilizer production in Europe (and possibly much of Eurasia) could have a greater impact on prices by spring 2023. Given the value of CVR Partner (UAN), fertilizer prices, global natural gas prices and agricultural commodity prices have been in a tight trading range since spring, and fundamentals are showing signs of getting tighter, UAN today may be a better indicator for the next few months. A strong bet on a severe shortage.

After the spin-off is complete, CVR Energy will focus on its transformation plan to separate the renewable energy business, which is expected to be completed in the first half of 2023. The Company will continue to explore opportunities to return on investment in projects where the Company will receive attractive projects, including renewable energy and refining businesses. The company is said to have identified a number of diesel recovery projects that could boost industry-leading distillate production to nearly 50% of processed crude. It will provide more details on these projects as they develop.

Company Profile

CVR Energy Corporation (Parent)

CVR Energy, Inc. is headquartered in Sugar Land, Texas. is a diversified holding company primarily engaged in the business of renewable fuels, petroleum refining and marketing, and nitrogen fertilizer manufacturing through its interest in CVR Partners, LP. The CVR Energy subsidiary acts as general partner and owns 37% of the common units of CVR Partners. It has two parts: oil and nitrogen fertilizer. The Petroleum segment is an independent petroleum refiner and marketer of high-value transportation fuels. The segment includes the assets and operations of CVR Refining, including two refineries located in Coffeyville, Kansas, and Wynnewwood, Oklahoma, as well as supporting logistics assets in the region. The Nitrogen Fertilizers segment produces and sells nitrogen fertilizers in the form of UAN and ammonia. It owns a complex fully coked medium sour crude oil refinery in southeastern Kansas, about 100 miles from Cushing, Oklahoma. Coffeyville Refinery’s operations include fractionation, catalytic cracking, hydrotreating, reforming, coking, isomerization, alkylation, sulfur recovery, and propane and butane recovery operations.

Nitrogen Fertilizer Business (Spin-off)

The Nitrogen segment includes the assets and operations of CVR Partners, including two nitrogen fertilizer production facilities located in Coffeyville, Kansas and East Dubuque, Illinois. CVR Partners, LP (NYSE: UAN ) is a publicly traded limited partnership that manufactures and markets nitrogen fertilizers based on UAN and ammonia. The company owns and operates a nitrogen fertilizer production facility in Coffeyville, Kansas, which includes a gasifier complex capable of producing 89 million standard cubic feet per day of hydrogen, a 1,300-tonne-per-day ammonia plant and a 3,000-tonne-per-day ammonia plant Unit of device capacity UAN. The Coffeyville Fertilizer Facility is the only nitrogen fertilizer facility in North America utilizing the petroleum coke gasification process to produce nitrogen fertilizer. The company owns and operates a nitrogen fertilizer production facility in East Dubuque, Illinois, which includes a 1,075-tonne-per-day ammonia plant and a 1,100-tonne-per-day UAN plant. East Dubuque Fertilizer Facility has the flexibility to change its product mix, allowing it to upgrade a portion of its ammonia production to varying amounts of UAN, nitric acid, and liquid and granular urea, depending on market demand, price, and storage availability.

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