Icahn estimates that after he buys CVR, he can then sell off the firm’s assets for around $37 a share to major refiners like Valero (NYSE:VLO) or Tesoro (NYSE:TSO). I’m not so sure. First, there currently is a lot of extra refinery capacity on the global marketplace. Rising Brent prices have provoked many integrated oil firms into selling or spinning off their refinery assets, and there is glut of plants for sale. Realistically, unless your refinery is in Asia or South America, expect it to sit on the market a while.
The second wrench in Icahn’s cog is that the main advantage the inland refiners had is going away. With Enbridge’s (NYSE:ENB) announcement that it will reverse the Seaway pipeline, the “cheapness” of WTI will be history. The reversal, along with a second pipe running parallel to the original, would send the glut of inland crude at the Cushing storage hub down toward the refineries on the Texas Gulf Coast. This would create a combined southward capacity of 850,000 barrels per day.
This doesn’t even take into account TransCanada’s (NYSE:TRP) Keystone XL Southern Leg expansion or potential reversal of the key Capline pipeline, which runs the length of the Mississippi River. Speaking on terms of anonymity, one money manager told Barron’s, “Opening all these pipelines will relieve the stocks at Cushing and wipe out the Brent-WTI spread.”
Love It or Leave It?
CVR Energy is up more than 50% year-to-date — including 17% gains since Icahn disclosed his stake in the company in January — and CVI currently is trading for just under his buyout price of $30. Already, the market is estimating that the deal will go through.
While I generally don’t like corporate raider capitalism, I have to say current shareholders of CVR should take the money and run. It will take a few years to get all the pipeline capacity up and running, but that change is coming. The days of WTI trading for a significant discount to Brent are over, and the juicy crack spreads many of the inland refiners have been enjoying will end.
I’m not sure CVR, with its limited asset base, is really worth what Icahn is willing to pay. At the same time, Icahn most likely will be stuck with two refineries he can’t unload.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.