Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

In case you hadn't heard that times are tough in the oil-refining business, Carl Icahn is apparently out shopping.

Shares in Delek US Holdings, a Midwestern independent refining and marketing firm, jumped 9 percent Friday after a report in the New York Post speculating that rival CVR Energy is considering a bid. Icahn owns about 80 percent of CVR and is reportedly also building a stake in Delek.

It certainly smells like M&A is in the air. Delek's stock price has collapsed; even with Friday's jump, it's less than half where it was just a year ago.

Friday brought some much-needed cheer to Delek's shareholders
Source: Bloomberg

The shift of the glut in crude oil into a glut of refined products has hurt all refiners. Delek has also been hit by the closing of the gap between onshore U.S. crude prices and global benchmarks such as Brent, taking away a nice cost advantage for its inland refineries.

Losing an Edge
Delek's premium refining margins have dropped away
Source: Barclays
Note: Sector average weighted by volume of refinery throughput.

U.S. refining margins look like a bust through the rest of the year, at least. Delek's own CEO, Ezra Uzi Yemin, said as much on the second-quarter earnings call, seeing recovery in 2017 instead. So consolidation would be a natural outcome.

That's even more so in Delek's case, because it could do with just consolidating itself. It owns a 48 percent stake in Alon USA Energy, acquired in May 2015. That deal, designed to give Delek diversification and a stepping stone to future growth, has instead hung over it as a cloud of uncertainty and a persistent reminder of the perils of bad timing. The mostly stock deal was struck at a ratio of about 0.45 Delek shares per Alon share -- which turned out to be pretty close to the low point for last year.

Stock Blocked
The collapse in Delek's shares relative to Alon's effectively stymied a full takeover using stock
Source: Bloomberg

That said, the ratio has now come back virtually to where it was at the time of the original deal, so the chances of a full buyout using at least some stock could be back in the cards.

Delek also owns 61 percent of a master limited partnership, Delek Logistics Partners, a pipelines and storage business. Like most MLPs, its stock collapsed in the past year as access to capital to fund acquisitions of assets from its parent tightened sharply. Assuming capital re-opens at some point, it offers an option for selling more assets from Delek to its subsidiary to raise cash for paying off debt and growing the business.

An added bonus is that Delek's marketing assets could somewhat mitigate the curse of Renewable Identification Numbers, or RINs. These are a regulatory rabbit hole for the refining sector. The short story is that standalone refiners' profits are getting hit hard by the charges they pay to meet the federal government's mandates on blending ethanol into gasoline.

By way of illustration, here's what CVR's CEO John Lipinski had to say on the topic during the company's latest earnings call:

I'm going to go through and repeat what I said on the earlier call about our view and my view on RINs. And so buckle your seatbelts, here we go. RINs continue to be an egregious tax on CVR Refining and have become their single largest operating expense exceeding labor, maintenance, and energy cost. This year, RINs were roughly double the cost of our labor. Since 2013, CVR Refining has spent nearly $500 million on RINs.

That $500 million he mentioned equates to about 45 percent of CVR Refining's operating profit over the same period, according to data compiled by Bloomberg. So you can see why he's a tad exercised.

For CVR, therefore, Delek would represent not merely a bet on refining margins recovering, but also a set of levers to be pulled by cleaning up the current structure and putting the two companies together to help deal with the downturn.

For Icahn, who took a majority stake in CVR via a hostile deal in 2012, it could offer a way to claw back some lost value. He hasn't done too badly. Figures compiled by Bloomberg imply he's received more than $1.5 billion in dividends from CVR since the deal (you'll no doubt be surprised to hear that the company's payouts leaped after Icahn took control). That isn't far short of the $1.7 billion check his fund cut for that deal.

Still, having paid $30 a share at that time and initially putting CVR up for sale, Icahn, like any other investor in the refining sector, has seen huge paper gains burn away in a flash.

Pump and Slump
CVR's stock had doubled a year after Icahn's deal, but now trades below the $30 he paid to take control
Source: Bloomberg


This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at

To contact the editor responsible for this story:
Mark Gongloff at