MLPs and Shareholder Activism: Is That Beneficial to Investors?

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An activist shareholder acquires an equity stake in a company for the sole purpose of putting pressure on its management, in order to achieve a diverse range of goals from unlocking shareholder value through changes in corporate policy, financing structure, to adoption of environmentally friendly policies, etc. The fascination for shareholder activism lies in its relatively low cost compared to a full takeover bid, which is both costly and difficult to stage. A fairly small stake of less than 10% of the total float may be enough to launch a successful campaign.

CVR Energy

Taking the case of CVR Energy (NYSE: CVI), Carl Icahn spent $2 billion for an 82% stake in CVR at a share price of just $35 per share in 2011, by pushing out its majority shareholders who were concentrating on the short term, thus locking shareholder value in the company. CVR energy consisted of a Nitrogen fertilizer business and oil refining business with 115,000 bpd Coffeyville refinery in Kansas, and the 70,000 bpd Wynnewood refinery in Oklahoma.

CVR Partners

After Icahn took over the company and assumed the position of Chairman of the board of directors, CVR Energy repackaged its nitrogen fertilizer business into CVR Partners (NYSE: UAN) in order to take advantage of strong and growing demand for fertilizers in the midst of a severe drought facing the country in the past year. CVR Partners has also taken full advantage of its lower corporate tax rate as a limited partnership by spending $130 million on plant expansions in the last two years, increasing the company's urea-ammonium-nitrate production capacity by 50%. The company also benefits by sourcing petroleum coke, its feedstock from the Coffeyville refinery, which supplies 70% of the pet coke required.

CVR Refining spin-off

CVR Refining L.P. (NYSE: CVRR) sold 24 million common units at the mid-price of the price-range of $24 to $26 per common unit. The spin-off from CVR Energy will remain under the control of CVR Energy, which will retain ownership of 86% of the new refiner’s common units. Carl Icahn, who already owns a controlling interest in CVR Energy, has purchased nearly 4% of the common units of CVR Refining for a consideration of $100 million.

The company was spun-off as a Master Limited Partnership (MLP). A MLP is a type of limited partnership that is publicly traded with two types of partners: The limited partners are those that purchased the units of the MLP, providing the capital and receive periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's businesses and receives compensation based on the performance of the venture.

The advantage of an MLP is that it combines the tax benefits of a limited partnership with the liquidity of a publicly traded company. The company will pay $4.72 a common unit, or an annual yield of nearly 19% based on the offer price.

Low price crude

Owing to the strategic locations of its two refineries, CVR Energy has access to inexpensive variants of crude oil. Both the refineries are within a 100-mile radius from Cushing, which is the West Texas Intermediate (WTI) storage hub. The WTI trades at an average $17/barrel discount when compared to the other internationally-traded Brent benchmarks. This price advantage is also enjoyed by the CVR Partners nitrogen fertilizer business, as they source 70% of the pet coke requirement from the Coffeyville refinery.

Midstream opportunity

The surge in production of oil and natural gas from shale fracturing and horizontal drilling is creating massive blockages in takeaway volumes. On the other hand, this problem for producers creates a massive and immense-profitable opportunity for midstream companies.

  • CVR Refining has generated $6.5 billion in sales in the first nine months of 2012, up 76% from the year-earlier period.
  • Adjusted EBITDA for the first 3 quarters up from $603 million in 2011 to $1.065 billion in 2012, an increase of 76%.
  • Net income also rose to $541 million, up 34% from $403 million.
  • Net debt has shrunken from $465 million in 2011 to a net cash position of $137 million at the end of Q3 2012.
  • Refining margins at the Coffeyville refinery up from $28 to $33.5 for Q3 2012.
  • Refining margins at Wynnewood refinery up from $25 to $33 for Q3 2012
  • Even the stock price of CVR Energy has returned 5% Year-To-Date on the back of nearly 160% in 2012

Conclusion

It is very obvious as to what an activist shareholder can do to a company with some strategic assets, and how the shareholder value has been unlocked via strategic sales, spinning off divisions, identifying synergy benefits between the two carved out entities. In this case Carl Icahn has seen his stake grow a whopping 117% since he took over the company in April 2011.


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