CVI - CVR Energy: Brace For Recession Despite Promising Product Prices

Summary

• Global oil prices could remain volatile in 2023, but supply shocks might push prices back to their 2022 highs.
• The nitrogen fertilizer market is growing steadily, characterized by increasing prices, something which bodes well for the company's margins.
• It is projected that 2023 may face one of the worst recessions, and statistics show that severe economic downturns affect the oil industry adversely. This poses a significant risk.

Investment Thesis

CVR Energy, Inc. ( CVI ) and its subsidiaries refine petroleum and produce nitrogen fertilizer in the USA. Last year, the energy industry was one of the best-performing industries due to the high margins resulting from high oil and gas prices. CVI, a player in the energy industry, also registered good performance, with the company's shares gaining more than 73%.

However, since October, the company has shown some signs of declining share prices, which I believe are caused by the current volatility of oil prices, especially considering oil prices fell towards the end of 2022. As I will discuss later, I expect the company's shares to go up when oil prices go up.

Oil product price increases can be traced back to global supply shocks brought on by the conflict between Russia and Ukraine, which resulted in severe sanctions imposed on Russia. Although prices showed signs of cooling by the end of 2022, they are projected to go up by the second quarter of 2023.

Despite the high margins and supply shocks, investors are hesitant to commit to new projects because of the risk of becoming stranded assets when the industry switches to electric vehicles. This, in my view, is a sign that the market will potentially remain undersupplied, and thus prices will remain high although volatile. Given that the oil prices will likely stay high, and the supply shortfall will therefore continue to exist, I am optimistic that the company will continue with its upward trajectory. However, at a slower rate; I don't expect oil prices to climb dramatically, as was the case last year. In addition to oil prices, the fertilizer market may also be in for a price hike, with forecasts predicting nitrogen fertilizer prices could go up in 2023.

The Energy Sector: What To Expect in 2023

Brent crude oil spot prices averaged $91 per barrel in November. Daily spot prices reached nearly $100/b on November 7 before settling at $86/b at the end of the month, even though the average November Brent price was lower than in October. Even though crude oil prices have recently gone down, it is expected that by the beginning of the second quarter of 2023, supply shortages worldwide will push Brent prices back above $90/b.

Even though expanding oil stockpiles are predicted to exert some downward pressure on oil prices in the second half of 2023, this pressure is likely to be offset by continued supply interruptions or slower-than-expected production increases. For the entire year 2023, it is anticipated that the spot price of Brent crude oil will average $92/b.

There is little wiggle room in the market over the projected period due to very low global petroleum stockpiles and the length and volume of inventory building needed to replenish them, so any unexpected disruption in supply might lead to a sharp increase in oil prices.

The effects of sanctions against Russia on global oil prices are still highly unpredictable. On December 5, the European Union began restricting the import of crude oil by sea from Russia , and on February 5, they began limiting the entry of petroleum products. These sanctions will add to the existing supply shortage, leading to higher oil prices than anticipated.

In light of the foregoing, it seems inevitable that oil prices will remain high in 2023 due to supply constraints, which, in my opinion, will serve as a significant driver for businesses operating in the energy industry, including CVI. Increased revenue due to high prices at the exact production cost should lead to a larger profit margin for the organization.

The Nitrogen Fertilizer Segment Forecast

Anhydrous ammonia prices are expected to rise above $1,100 a ton in the spring of 2023 , based on current projections for corn and natural gas costs. Moreover, nitrogen fertilizer prices may rise due to global economic conditions and supply concerns. The rising prices of nitrogen fertilizers will boost the company's revenue growth and, eventually, its profit margin. At the same time, as agricultural production grows, there will be a bigger market for the product.

A 5.7% CAGR in revenue is forecasted for the worldwide nitrogenous fertilizer industry between 2022 and 2030, increasing from a 2021 valuation of USD 57.2 billion. Rising commercial interest in farming is credited with driving this expansion. Farmers demand nitrogenous fertilizers to increase crop yields by giving the proper nutrients to different types of food plants. Among the most important uses for these fertilizers is in cultivating agricultural products like vegetables, fruits, cotton, and cereals.

Below is a graph showing the US growing market for these fertilizers until 2030.

These numbers demonstrate a fast-expanding demand for the product, especially in the United States, and I anticipate that this, combined with the rising prices, will increase the company's earnings. It is not a surprise that the company is weighing a potential nitrogen fertilizer spinoff which I firmly believe will help maximize this promising venture.

Risks

For investors in the energy sector, the potential for a recession this year poses the largest risk beyond the price volatility that could lead to unstable performance. When the economy is in a deep slump, oil output and consumption are both negatively affected for the foreseeable future, and there is a brief period of excess capacity as a result. Oil output and consumption have been persistently downward during the recessions of 1974, 1980, 2008, and 2020. Based on these numbers, I can confidently say that if a downturn hits this year as expected, it will hurt the oil industry. This year's recession is predicted to be one of the worst ; therefore, I fully anticipate it will be harrowing. This is a significant threat that needs close monitoring.

Conclusion

Despite the uncertainty surrounding global oil prices in 2023, I expect prices to remain high due to supply shortages, which bodes well for oil corporations' bottom lines. The demand for nitrogen fertilizer is rising, and I believe CVI will reap enormous rewards with increasing pricing. Despite these encouraging statistics, keeping an eye on the looming recession is crucial, which might deal a severe blow to the oil industry. Until the economic downturn subsides, I wouldn't risk investing in CVI or the oil business because of the potential for a big blow to this sector.

For further details see: