Carl Icahn's refinery investment stumbled last year as the activist investor's push to overhaul U.S. energy policy stalled. However, that investment has now rebounded to the tune of more than $1 billion.
While Icahn's unsuccessful bid to change federal refinery rules indirectly dented the investment last year, the turnaround has been helped by the Trump administration's willingness to offer regulatory relief to the nation's oil refiners.
In recent months, the U.S. Environmental Protection Agency has granted about two dozen hardship waivers that allow small refineries to avoid tens of millions of dollars in costs tied to a federal biofuels program.
The Oklahoma refinery linked to Icahn received one of the exemptions, according to Reuters, but the benefit of the exemptions goes far beyond a waiver for a single facility. The EPA's approach has slashed the price of complying with federal rules for all refiners, cutting expenses at a time when lower crude oil costs are boosting profit margins.
"A lot of these refiners have the best of both worlds," said Tom Kloza, global head of energy analysis at Oil Price Information Service. "They're seeing much wider refining margins than last year, and they're seeing much lower compliance costs."
Shares of CVR Energy, the refining and fertilizer business Icahn controls, have more than doubled since August, when the stock hit a 52-week low. Up to that point in the year, the stock price had slumped more than 30 percent as investors lost hope that President Donald Trump's EPA would overhaul federal policy to benefit refiners.
The change in the stock price through Thursday amounts to a $1.4 billion gain on paper for Icahn, who holds an 82 percent stake in CVR Energy.
The unit price for CVR Refining, a master limited partnership that manages CVR Energy's refining assets, has run up even more on a percentage basis. Its up about 150 percent since its August low. CVR Energy holds a two-thirds stake in CVR Refining, while Icahn Associates controls nearly 4 percent of the MLP's units.
The reversal of fortune caps a challenging year for Icahn, who stepped down as a regulatory adviser to Trump in August after coming under scrutiny for seeking to overhaul federal rules that would directly benefit CVR Energy. In November, federal prosecutors subpoenaed Icahn as they sought information about the advisory role.
Icahn has since stepped back from Washington and no longer addresses the biofuels regulation issue. He declined to comment for this story. Last month, he wrote in an op-ed that he found the "constant drumbeat of vitriol and rhetoric in Washington — on both sides of the aisle — to be distasteful and a distraction from my busy schedule."
The fall
Long before Trump named him an advisor, Icahn argued for overhauling an EPA program called the Renewable Fuel Standard, which requires refiners to blend biofuels like corn-based ethanol into fossil fuels such as gasoline. He said the program was poorly designed and unfair to so-called merchant refiners like CVR Refining, which do not have the capacity to blend biofuels and must buy credits from rivals that do.
Icahn's plan would have shifted responsibility for blending biofuels from refiners to companies that operate retail gas stations. The cost of those credits, called renewable identification numbers, or RINs, fell after Icahn was named Trump's special adviser and built some industry consensus around the plan.
Analysts say the market was betting — perhaps unwisely — that Icahn's proposed policy change was a done deal and that demand for RINs would dry up.
CVR Refining does not discuss its RINs-buying strategy, but analysts say the company's financial disclosures show that it built up a large short position in 2017. That means it was not buying RINs — or possibly even selling them — on the expectation that prices for the credits would fall and it could purchase them cheaply later on.
But when it became clear that the EPA would reject Icahn's proposal and other changes to the program, RINs prices surged throughout much of last summer. As CVR's RINs liability ballooned to more than $200 million, analysts warned that the refiner might have to buy RINs at sky high prices to cover its obligations.
But the RINs market has now reversed course, with prices for ethanol credits dropping from nearly $1 in November to about 30 cents this week. Energy analysts say the catalyst for the reversal is clear.
"It's due to the increasing amount of small refiner exemptions that the EPA has granted, which reduces the demand for RINs," said Andrew Lipow, president of Lipow Oil Associates.
The Trump EPA has reportedly encouraged dozens of refineries to apply for waivers, and has so far granted about two dozen, according to Reuters. By comparison, the Obama EPA granted about eight waivers annually, though a U.S. Court of Appeals ruled last year that the administration improperly denied waivers to some refineries.
The rebound
To be sure, falling RINs costs are by no means the only reason CVR Energy and CVR Refining have rallied.
The biggest driver has been the widening of so-called crack spreads, the industry's term for the difference between the cost of crude oil that goes into refineries and the selling price of fuels that come out of them.
CVR Refining is among the refiners with access to crude from the Permian Basin, the epicenter of the U.S. shale oil boom. The price of oil extracted from there has been heavily discounted lately.
CVR Refining posted nearly $147 million in profit in the first quarter, more than double its income from a year ago and its best quarterly earnings in nearly three years. Its full-year profit for 2017 grew nearly six-fold to about $89 million, though it remains well below the nearly $600 million CVR Refining earned in 2012 and 2013.
The drop in RINs prices, a significant expense for small refining facilities, has relieved pressure on CVR's bottom line. Indeed, CVR Refining CEO David Lamp highlighted lower RINs prices as one of four factors that boosted the company's first-quarter performance.
"It's been one of the bright spots for refiners in 2018," said Kloza. "Lower RINs prices for most refiners, but particularly merchant refiners, have been the gift that keeps on giving this year."
CVR Refining expects to spend $80 million to buy RINs this year, down from an earlier forecast for $200 million. It is unclear to what degree CVR has been able to benefit from the drop in RINs prices in the final weeks of 2017 and throughout 2018.
The company declined to comment on several questions regarding its RINs strategy. Reuters reported that the EPA granted its Wynnewood, Oklahoma, refinery a small refinery exemption and the benefit of that waiver.
Some of its peers have offered more details. Dallas-based refiner HollyFrontier, which earned $268 million in the first quarter, reported on Wednesday that waivers for its Cheyenne, Wyoming, refinery amounted to a $72 million benefit during the quarter.
Lamp said the company will continue to lobby for change to the Renewable Fuel Standard, but CVR Refining is preparing for the program's survival. In February, Lamp announced the company will expand into wholesale or retail fuel businesses, which will allow it to blend ethanol into fossil fuels and reduce its obligation to buy RINs.