CLMT has finally switched from a credit centric investment to a equity centric investment. I value the stock between $12-$16. I expect the company to undertake the announced asset sale/moneitization  of Great Falls in the near future (next 6 months). What remains of the company will be a high quality speciality chemical company with significant consumer branded products and minimal refining exposure.

On February 16th 2021 CLMT laid out its strategic plan

http://calumetspecialty.investorroom.com/2021-02-16-Calumet-Specialty-Products-Partners-L-P-Provides-Update-on-Strategy-M-A-and-Business-Resegmentation

It calls for CLMT to: 

   1. Focus resources on volume and margin growth in specialty products

   2. De-hybridize business model / create investor transparency

   3. De-lever the Partnership's balance sheet

This clearly places CLMT on divesting refining and focusing on speciality chemicals. It also addresses its focus to de-hybridize its business model, which would involve moving away from its orphaned non-distribution paying MLP structure in the future. 

Valuation 

Debt approx $1,125 mil.

Speciality chemicals w/ Shreveport Merchant Refining 

- $200 mil of ebitda 

Great Falls

- $500 mil value 

Units worth $15 (($1800+$500 -$1175)/80 )

I would go back and revisit all the valuations on CLMT presented in the 4 writes up on VIC. The valuations are relatively similar, as are multiples, and you can map free cash flow and organic deleveraging from 2017 through 2021. Due to numerous non-fundamental events (failure to sell assets, broken MLP structure, high yield credit crisis), the stock has gone in the other direction as hundreds and hundreds of million dollars worth of cash flow has been generated and debt reduced. I am assuming it’s finally different this time around. 

Catalyst 

Refining asset sale/monetization 

This was me valuing Great Falls thru the depths of the covid crisis in my VIC bond write up last March:

“There are around 125 refineries in the US. The last new refinery built was a micro refinery in North Dakota in which CLMT had a JV interest. It went bankrupt and was later bought out of bankruptcy and is currently operational. No one is building new refineries given the exorbitant cost associated with their construction.

If there is feedstock available, refineries in the US will run. WCS production is a high capex long life production cycle. Great Falls has probably 40 years of feedstock, and it is a perfect complementary asset for a Canadian Integrated firm. For $350 mil., a Canadian integrated can buy Great Falls for 10 percent of replacement cost or significantly less than rail cars capacity and have control and ownership of a long lived risk mitigating asset.

Montana refinery economics in the long term are primarily driven by rail shipment economics. The refining crack spread volatility at CLMT’s Great Falls refinery is dominated by WCS spread which is primarily driven by rail economics. In the long run the cost of shipping via rail cars and congestion of rail lines will determine the WCS spread and the cash flows to the Montana asset.

The biggest risk before Covid and the Saudi oil war was the Alberta government imposing production caps. Alberta imposed productions caps in December 2018. I think it is unlikely Alberta will reimpose production caps. Alberta has been actively funding rail car purchases and building new refinery but those just reconfirm the strategic value of CLMT’s Montana refinery as both rail cars and new refineries are very expensive and refineries are also very long time lagged. Buying or leasing rail cars does not address rail congestion issues and adjusted for congestion, adding new 25,000 rail car capacity is a multi billion dollar endeavor.

The current market is ugly in refining equities and generally in the energy space. However, the refining sector is generally not highly leveraged and credit is available at very very low rates (sub 4 percent). Same can be said for larger Canadian integrateds. I have the Great Falls refinery generating $100 mil in ebitda and $70 in cash flow in a $12-$15 wcs spread environment. Anyone buying Great Falls at $400 mil financed at 4 percent can make $50-$60 mil. in cash that can be used to pay down debt or buy back stock or pay a dividend. The equity market wont be happy with a refiner or Canadian integrated issuing debt to buy back equity or pay a dividend, but the markets would be comfortable with them buying cash flowing assets with leverage in this tape. CLMT’s outgoing CEO has said he is completely focused on selling Montana before he leaves on June 1.  He can earn a $1 mil bonus by selling Montana by YE 2020. If Tudor can get bid in this tape, I expect CLMT to sell at $300-$350. The asset is sufficiently valuable that it’ll get sold even if the sales process bleeds into 2021.”

What happened in 2020 as they ran the sales process was the industry focus switched from looking at the best use of the asset as a WCS differential investment to a renewable fuels asset. The distressed fire sale bid was from parties looking at the asset as WCS differential refining play, and the other non distressed interest was from parties looking at the asset as a renewable diesel growth play.

From the 2/16/2021 press release 

“Renewable Diesel

Great Falls Renewable Diesel Opportunity

We believe Great Falls, which connects western agriculture with West Coast and Canadian clean product markets, presents one of the most compelling opportunities for Renewable Diesel production in North America.  We estimate the oversized hydrocracker built in 2016 can be reconfigured to process 10-12,000 BPD renewable feedstock at the lowest capital cost per barrel of any announced industry project.   Hydrocracker conversions are typically faster to market, cheaper, and less technically challenging.  In addition, the planned configuration could retain 10-12,000 BPD low-cost Canadian crude processing, providing Montana customers with clean energy and our unique specialty asphalt.  Future dual train operations are currently estimated to generate $220 to $260 million of Adjusted EBITDA assuming mid-cycle market prices and existing environmental market structure (BTC, RINs, LCFS).

Given strong investor interest in renewables, Calumet expects to utilize third party equity for this unique opportunity, without expending Calumet funds. “

Within the next six months, I expect CLMT to undertake a partial monetization of Great Falls and team up with a source of capital (strategic, PE, SPAC).

The renewable diesels market requires speed to build, and I don’t think CLMT is waiting around milking refining cash flows. It needs to act on renewable diesel in the next 6 months or the opportunity is gone. There is a definite advantage to being a first mover and being in the top quartile of the cost curve. 

CLMT brings a hydro cracker and refining infrastructure built for cracking heavy Canadian sour crude that can easily transition to renewable diesels (pipes, etc., that can handle acidic renewable feedstock) and critical rail infrastructure. It needs a partner with stable capital that can access feedstock (soy oil) and long term view in California, British Columbia and other Western/Pacific state renewable diesel credits.

The path to monetization of Great Falls will be more complex than a simple sale. In conservations with CLMT management, an asset value of close to $2 bil is achievable in switching to renewable diesel . I don’t expect CLMT to try and achieve that value on its own. CLMT simply does not have the capital, the balance sheet or the structure to fully realize the renewable diesel potential at Great Falls. I expect them to partner with a strategic, private equity or a SPAC to fund the transition of Great Falls to renewable diesel.

CLMT believes the renewable diesel transition can generate around $220-$260 mil. in Ebitda. Public comps in the space trade with a 12x multiple. If CLMT gets a 8x multiple the Great Falls asset could be worth $2 bil. Again, this requires several assumptions on the renewable diesel standard refining ebitda cut, the multiple given by the market, renewable diesel credits in Pacific coast states, etc.

My conservative expectation is that CLMT management monetizes 25 percent of the asset’s renewable fuel potential via a partial sale/jv. The payout on this will be structured over time but in the near term I expect CLMT to try monetize something. Near term (2022) they need $375 mil to address 2023 bond and any revolver drawings. I expect them to have access to credit markets if their monetization is partial.

My worst case scenario for Great Falls is no renewable fuels transition is successful and they run the refinery for cash flows based on WCS differential in 2021. In 2022, they sell the refinery to CVR or another merchant refinery for $350 or 3-4x multiple. 

My best case scenario is they get a partial monetization for $300-$400 mil and residual equity upside in the renewable diesel project. This could be $600-$800 mil.

My base case is they monetize Great Falls over a few realization installments netting $500 mil. Basically the replacement cost of the hydro cracker.

Motivate GP 

The move towards de-hybridization and shareholder transparency is a move away from the MLP structure. After a Great Falls monetization, I expect the GP and CLMT management to address the MLP structure. I don’t see the GP IDR having any value in a speciality chemical company. 

The Heritage Group, which controls the GP, has been focusing on venture and alternative energy investments (batteries, etc.). I don’t see them as long term control holders of CLMT and I expect CLMT to be eventually sold and the GP to monetize its holdings. 

Risk 

Failure to monetize on Great Falls. It will force CLMT to sell its Crown Jewels the lubricants business that it just took off the market. It will also force an eventual sale of Great Falls to a CVR, etc., at distressed prices.

The CEO quits. The last CEO and last 2 CFOs quit.  I did not see their departures as negatives as I think current CEO Steve Mawer is a huge upgrade over prior CEO Tim Go. I don’t think Steve is quitting anytime soon. Mawer is also well regarded by the GP, unlike the previous CEO and CFO (West Griffin).

Cyclical Macro cycle - unlikely as Global economies are just getting out of the covid crisis and world is awash in govt stimulus.

Credit Crisis - again unlikely with all the fiscal and monetary stimulus. Also CLMT with $1125 mil of debt is less than 4.0x levered.

GP continues to hold an orphaned MLP structure extending its 5 year structural destruction of CLMT equity ownership base.