CVR Refining (CVRR) is a trading case that I've learned from and you can too. When do you let the market tell you what to do and when do you listen to yourself and what your facts tell you is right?
I'm going to go through my thinking a bit, but the bottom line is that CVRR missed its November distribution big time, but I believe that is the best opportunity yet to buy this MLP refiner.
I'm a big holder of this MLP, despite having lightened my positions when the refiner was rallying strongly in the early summer, emboldened by the increasing positions of Carl Icahn and the fair strength of all the downstream/refining spinoffs of the last few years. I believed in this one, particularly because it was using the MLP structure to deliver almost all of its returns directly to the limited partner (shareholder). This was not just an MLP with decaying transport assets. This was an MLP with a future.
But CVRR hit a world of hurt in the third quarter this year, with plummeting crack spread values, which annihilated refining margins and an unusually long outage of one of their main refineries in Coffeyville, Kan.. This is one very focused refiner, with its two main refineries in the heart of the midcontinent it's truly a live-by-the-sword-and-die-by-the-sword setup on the margin advantages it gets when the WTI/Brent spreads are wide and when Cushing sweet crude supplies are plentiful.
I watched those spreads decline massively during the late summer and certainly did not expect the same kind of double-digit distribution returns in the third quarter, but still could not believe the weakness that the stock was showing. This has been one stock that has traded far worse than I thought any margin compression was entitled to destroy it. Had something gone much further wrong that what I could see? Had I missed something else that some insider knew that I didn't?
The November report and 30-cent distribution came as a tremendous shock to me and proved that markets often tell you things that you don't naturally know. An instantaneous down draft of share price of close to 10% followed, dropping shares under $22. But, of course, the question is "what do you do now?"
The Brent/WTI spread is again on a higher march and with it a return of very favorable margins for this mid-con refiner and the Coffeyville refinery is again on line. That should translate into a fourth quarter that, if it's not as good as the distribution in the first quarter of $1.58 or the second at $1.35, should at least return more than a dollar, again aggregating the yearly distribution over 20%.
Will everything go incredibly wrong for this refiner this coming quarter? I can't believe that will happen, but I'm going to watch how the market is trading these shares more closely and perhaps listen more closely to it than what my head is telling me.
Until then, I can't help but feel this is perhaps the best opportunity yet on CVRR to get it at a rock-bottom price. Everything just can't go wrong for this refiner for much longer.