Value Investing

Carl Icahn Long CVR Refining – Slides

Carl Icahn Long CVR Refining – Slides

Investment Highlights

  • Mr. Icahn believes that the current environment continues to be conducive to activism
    –Several factors are responsible for this:
    1)low interest rates, which make acquisitions much less costly and therefore much more attractive,
    2)abundance of cash rich companies that would benefit from making synergistic acquisitions, and
    3)the current awareness by many institutional investors that the prevalence of mediocre top management and non-caring boards at many of America’s companies must be dealt with if we are ever going to end high unemployment and be able to compete in world markets
    –But an activist catalyst is often needed to make an acquisition happen
    –We, at IEP, have spent years engaging in the activist model and believe it is the catalyst needed to drive highly accretive M&A and consolidation activity
    –As a corollary, low interest rates will greatly increase the ability of the companies IEP controls to make judicious, friendly or not so friendly, acquisitions using our activist expertise
  • Proven track record of delivering superior returns
  • IEP total stock return of 1,104%(1) since January 1, 2000
    –S&P 500, Dow Jones Industrial and Russell 2000 indices returns of approximately 77%, 106% and 168% respectively over the same period
  • Icahn Investment Funds performance since inception in November 2004
    –Total return of approximately 221%(2) and compounded average annual return of approximately 11%(2)
    –Returns of 33.3%, 15.2%, 34.5%, 20.2%(3), 30.8%, (7.4%) and (2.8%) in 2009, 2010, 2011, 2012, 2013, 2014 and 2015(4) respectively
  • Recent Financial Results
    –Adjusted Net Loss attributable to Icahn Enterprises of $66 million(5) for the nine months ended September 30, 2015
    –Indicative Net Asset Value of approximately $7.1 billion as of September 30, 2015
    –Adjusted EBITDA attributable to Icahn Enterprises of approximately $0.9 billion for the last twelve months ended September 30, 2015
  • $6.00 annual distribution (9.0% yield as of September 30, 2015)

The Icahn Strategy

Across all of our businesses, our success is based on a simple formula: we seek to find undervalued companies in the Graham & Dodd tradition, a methodology for valuing stocks that primarily looks for deeply depressed prices. However, while the typical Graham & Dodd value investor purchases undervalued securities and waits for results, we often become actively involved in the companies we target. That activity may involve a broad range of approaches, from influencing the management of a target to take steps to improve shareholder value, to acquiring a controlling interest or outright ownership of the target company in order to implement changes that we believe are required to improve its business, and then operating and expanding that business. This activism has brought about very strong returns over the years.

Today, we are a diversified holding company owning subsidiaries engaged in the following operating businesses: Investment, Automotive, Energy, Metals, Railcar, Gaming, Food Packaging, Real Estate, Mining and Home Fashion. Through our Investment segment, as of September 30, 2015, we have significant positions in various investments, which include Apple Inc. (AAPL), Cheniere Energy, Inc. (LNG), Chesapeake Energy (CHK), Freeport-McMoRan Inc. (FCX), Gannett Co., Inc. (GCI), Herbalife Ltd. (HLF), Hertz Global Holdings, Inc. (HTZ), Hologic Inc. (HOLX), Nuance Communications, Inc. (NUAN), Navistar International Corp. (NAV), PayPal Holdings, Inc. (PYPL), Tegna Inc. (TGNA), Transocean Ltd. (RIG), Mentor Graphics Corporation (MENT), Manitowoc Company Inc. (MTW) and Seventy Seven Energy Inc. (SSE).

Several of our operating businesses started out as investment positions in debt or equity securities, held either directly by our Investment segment or Mr. Icahn. Those positions ultimately resulted in control or complete ownership of the target company. In 2012, we acquired a controlling interest in CVR Energy, Inc. (‘‘CVR’’) which started out as a position in our Investment segment and is now an operating subsidiary that comprises our Energy segment. As of September 30, 2015, based on the closing sale price of CVR stock and distributions since we acquired control, we had a gain of approximately $2.3 billion on our purchase of CVR. The acquisition of CVR, like our other operating subsidiaries, reflects our opportunistic approach to value creation, through which returns may be obtained by, among other things, promoting change through minority positions at targeted companies in our Investment segment or by acquiring control of those target companies that we believe we could run more profitably ourselves.

In 2000, we began to expand our business beyond our traditional real estate activities, and to fully embrace our activist strategy. On January 1, 2000, the closing sale price of our depositary units was $7.625 per depositary unit. On September 30, 2015, our depositary units closed at $67.02 per depositary unit, representing an increase of approximately 1,104% since January 1, 2000 (including reinvestment of distributions into additional depositary units and taking into account in-kind distributions of depositary units). Comparatively, the S&P 500, Dow Jones Industrial and Russell 2000 indices increased approximately 77%, 106% and 168%, respectively, over the same period (including reinvestment of distributions into those indices).

During the next several years, we see a favorable opportunity to follow an activist strategy that centers on the purchase of target stock and the subsequent removal of any barriers that might interfere with a friendly purchase offer from a strong buyer. Alternatively, in appropriate circumstances, we or our subsidiaries may become the buyer of target companies, adding them to our portfolio of operating subsidiaries, thereby expanding our operations through such opportunistic acquisitions. We believe that the companies that we target for our activist activities are undervalued for many reasons, often including inept management. Unfortunately for the individual investor, in particular, and the economy, in general, many poor management teams are often unaccountable and very difficult to remove.

Unlike the individual investor, we have the wherewithal to purchase companies that we feel we can operate more effectively than incumbent management. In addition, through our Investment segment, we are in a position to pursue our activist strategy by purchasing stock or debt positions and trying to promulgate change through a variety of activist approaches, ranging from speaking and negotiating with the board and CEO to proxy fights, tender offers and taking control. We work diligently to enhance value for all shareholders and we believe that the best way to do this is to make underperforming management teams and boards accountable or to replace them.

The Chairman of the Board of our general partner, Carl C. Icahn, has been an activist investor since 1980. Mr. Icahn believes that the current environment continues to be conducive to activism. Many major companies have substantial amounts of cash. We believe that they are hoarding cash, rather than spending it, because they do not believe investments in their business will translate to earnings.
We believe that one of the best ways for many cash-rich companies to achieve increased earnings is to use their large amounts of excess cash, together with advantageous borrowing opportunities, to purchase other companies in their industries and take advantage of the meaningful synergies that could result. In our opinion, the CEOs and Boards of Directors of undervalued companies that would be acquisition targets are the major road blocks to this logical use of assets to increase value, because we believe those CEOs and boards are not willing to give up their power and perquisites, even if they have done a poor job in administering the companies they have been running. In addition, acquirers are often unwilling to undertake the arduous task of launching a hostile campaign. This is precisely the situation in which a strong activist catalyst is necessary.

We believe that the activist catalyst adds value because, for companies with strong balance sheets, acquisition of their weaker industry rivals is often extremely compelling financially. We further believe that there are many transactions that make economic sense, even at a large premium over market. Acquirers can use their excess cash, that is earning a very low return, and/or borrow at the advantageous interest rates now available, to acquire a target company. In either case, an acquirer can add the target company’s earnings and the income from synergies to the acquirer’s bottom line, at a relatively low cost. But for these potential acquirers to act, the target company must be willing to at least entertain an offer. We believe that often the activist can step in and remove the obstacles that a target may seek to use to prevent an acquisition.

It is our belief that our strategy will continue to produce strong results into the future, and that belief is reflected in the action of the board of directors of our general partner, which announced in March 2014, a decision to modify our distribution policy to increase our annual distribution to $6.00 per depositary unit. We believe that the strong cash flow and asset coverage from our operating segments will allow us to maintain a strong balance sheet and ample liquidity.

In our view Icahn Enterprises is in a virtuous cycle. We believe that our depositary units will give us another powerful activist tool, allowing us both to use our depositary units as currency for tender offers and acquisitions (both hostile and friendly) where appropriate. All of these factors will, in our opinion, contribute to making our activism even more efficacious, which we expect to enhance our results and stock value.

Overview of Icahn Enterprises

  • Icahn Enterprises L.P. is a diversified holding company with operating segments in Investment, Automotive, Energy, Gaming, Mining, Railcar, Food Packaging, Metals, Real Estate and Home Fashion
  • IEP is majority owned and controlled by Carl Icahn
    –Over the last several years, Carl Icahn has contributed most of his businesses to and executed transactions primarily through IEP
    –Approximately $600 million of equity raised in 2013 to broaden our shareholder base and improve liquidity
    –Issued $5 billion of new senior notes in January 2014 which refinanced $3.5 billion of existing senior notes and provided $1.3 billion of additional liquidity.
    –As of September 30, 2015, Carl Icahn and his affiliates owned approximately 88.8% of IEP’s outstanding depositary units
  • IEP benefits from cash flows from its subsidiaries:
    –CVR Energy: $2.00 per share annualized dividend
    –CVR Refining: $3.12 per common unit of distributions declared for the last twelve months of operations ended September 30, 2015
    –American Railcar Inc: $1.60 per share annual dividend
    –Recurring cash flows from American Railcar Leasing and Real Estate segment
  • IEP has daily liquidity through its ability to redeem its investment in the funds on a daily basis

Carl Icahn CVR Refining

Carl Icahn CVR Refining

Segment: Energy

Company Description

  • CVR Energy, Inc. (NYSE:CVI) operates as a holding company that owns majority interests in two separate operating subsidiaries: CVR Refining, LP (NYSE:CVRR) and CVR Partners, LP (NYSE:UAN)
    ?CVR Refining is an independent petroleum refiner and marketer of high-value transportation fuels in the mid-continent of the United States
    ?CVR Partners is a leading nitrogen fertilizer producer in the heart of the Corn Belt

Highlights and Recent Developments

  • Crude supply advantages supported by increasing North American crude oil production, transportation bottlenecks and geopolitical concerns
    ?Strategic location allows CVR to benefit from access to price advantaged crude oil
  • CVR Partners expansion of UAN capacity completed in March 2013
  • CVR Partners announced an agreement to acquire Rentech Nitrogen Partners giving it more geographic and feed stock diversity
  • CVR Energy has annualized dividends of $2.00 per unit
    ?CVR Refining full year distribution was $2.85 per common unit in 2014 and $2.75 per common unit for the first nine months of operation in 2015
    ?CVR Partners full year distribution was $1.39 per common unit in 2014 and $0.84 per common unit for the first nine months of operation in 2015

Carl Icahn CVR Refining

CVR Refining, LP (NYSE:CVRR)

  • Two PADD II Group 3 refineries with combined capacity of 185,000 barrels per day
  • The Company enjoys advantages that enhance the crack spread
    ?Has access to and can process price-advantaged mid-continent local and Canadian crude oils
    ?Markets its products in a supply-constrained products market with transportation and crude cost advantage
  • Strategic location and logistics assets provide access to price advantaged mid-continent, Bakken and Canadian crude oils
    ?~60,000 bpd crude gathering system, 336 miles of pipeline, approximately 150 owned crude transports, a network of strategically located crude oil gathering tank farms and ~6.0 million bbls of owned and leased crude oil storage capacity

Carl Icahn CVR Refining

CVR Partners, LP (NYSE:UAN)

  • Attractive market dynamics for nitrogen fertilizer
    ?Decreasing world farmland per capita
    ?Increasing demand for corn (largest use of nitrogen fertilizer) and meat
    ?Nitrogen represents ~61% of fertilizer consumption
    ?Nitrogen fertilizers must be applied annually, creating stable demand
  • Expansion of UAN capacity completed in Q1 2013
  • United States imports a significant amount of its nitrogen fertilizer needs
  • Cost stability advantage
    ?Utilize pet coke as feed stock versus natural gas
    ?Operating costs are competitive to natural gas fed nitrogen fertilizer producers
  • Strategically located assets
    ?49% of corn planted in 2014 was within ~$45/UAN ton freight rate of plant
    ?Transportation cost advantage to Corn Belt vs. U.S. Gulf Coast

Carl Icahn CVR Refining

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