After years of languishing in penny stock territory, shares of Calumet Specialty Products Partners (NASDAQ: CLMT) have had a nice run over the past year as its income statement is starting to show the results of management’s turnaround program. This past quarter, the company’s headline numbers didn’t quite show the progress we have seen in prior ones, but there are still reasons to believe that things are picking up at this specialty chemical producer and oil refiner.
Let’s take a look at Calumet’s most recent quarter to see why the less-than-stellar headline numbers are covering up some rather impressive operating results and why investors may finally want to start looking at this stock again.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$750.5 million||$883.8 million||$886.5 million|
|Adjusted EBITDA||$75.0 million||$60.1 million||$78.7 million|
|Net income||($4.8 million)||($64.9 million)||($6.2 million)|
|Limited partners’ interest in net income per share||($0.06)||($0.82)||($0.08)|
|Distributable cash flow||$23.0 million||($8.4 million)||$31.5 million|
When it comes to earnings at refining companies, you sometimes have to dig deep into the numbers to see how things shook out. This past quarter was a great example of that. This quarter’s headline numbers don’t look great compared to the prior year’s. Revenue, adjusted EBITDA, and distributable cash flow all declined. These metrics should be improving as the company continues to wring out costs and invest in its higher-margin specialty chemicals.
One thing that these numbers don’t show, though, was that two of Calumet’s refineries underwent significant turnaround and maintenance work this past quarter. These are routine events for refiners and will occasionally lead to an earnings hit. These maintenance activities meant that Calumet processed 36% less product compared to the prior year, and yet the company was able to post relatively similar EBITDA and net income results. That is actually a good sign. It shows that the company is significantly lowering its cost structure per processed barrel and shifting more production to high-value chemicals.
The most impressive figure in this quarterly earnings report was Calumet’s improving debt. At the end of the quarter, net debt to adjusted EBITDA was 4.9 times. Compare that to only six quarters ago when that ratio was 21.8. We should see that number decline even more in the coming quarter, as management elected to retire some of its highest-interest debt. This 11.5% interest rate loan was eating up loads of cash each year, and management estimates that it will free up about $46 million annually that was previously allocated to interest expenses.
What management had to say
When CEO Tim Go took the reins in 2016, he built a turnaround program that centered around significant cost savings, investing in small initiatives that would result in payouts in a year or less, and making niche acquisitions to expand its specialty chemical offerings. That last part seemed like a pipe dream at the time because the business was hemorrhaging money, but management has actually put itself in a position to make some targeted acquisitions. This happened this past quarter when the company made a unique investment in renewable specialty chemicals. Here’s Go explaining the deal:
[W]e partnered with [private equity company] The Heritage Group to make a commitment to renewable base oil technology through the acquisition of Biosynthetic Technologies, LLC, which is representative of our long-term vision of producing innovative value-enhancing specialty products for our customers. The partners intend to explore a range of alternatives to maximize the value of the acquired estolides technology. This could include internal or external licensing or the sale of the technology for applications across a diverse portfolio of products and solutions in a variety of end-markets. One of the first potential uses of this proprietary technology is commercial production of renewable esters at our Missouri plant. In summary, we look forward to building on the momentum we created, as we continue to transform our specialty products business.
Calumet has come a long way in a relatively short amount of time
Despite the slight drop in a few numbers on the income statement this past quarter, the situation at Calumet looks significantly better than it has in many years. I think if you told any investor when Go took the reins that within two years the company would have a debt-to-EBITDA ratio of 4.9 and would be consistently generating cash from operations, they would be absolutely elated.
Eliminating its high-interest debt was an incredibly important step. It will free up even more cash in the long term and allow the company to either further reduce debt, invest in other ways to expand its specialty chemical platform similar to this recent Biosynthetic Technologies acquisition, or hopefully start to pay a distribution again. After all, this is a master limited partnership.
By no means should investors consider Calumet as a safe or stable investment. The volatile nature of refining crude oil means there will always be some form of uncertainty related to future results. That said, the company has made monumental strides toward becoming a more efficient business that isn’t overburdened with an onerous debt load and underperforming assets — so much so that an investor wouldn’t be completely out of their mind considering Calumet as a potential investment. If management can continue to make the strides it has, it will make Calumet a more and more compelling business.
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