Description

I have written up CLMT equity in February of 2021 and CLMT debt in March of 2020.  Since my February 2021 write up the equity is up over 300 percent form $4 to over 14.  I am rewriting CLMT again because I expect the equity over the next 24 months to  trade significantly higher.  My 24 month target price is $35 and I see it one of the best risk reward trades in the renewable/green energy space backed up real assets, cash flows and a floor valuation form a speciality chemical business.   

Please read my two writes and all the other VIC write ups for a background on the business and the company.  The Q&A on the write ups and the comments by Todd are worth reviewing very closely. The events that were the core to my February 2021 write up of an asset sale and/or an asset monetization at Great Falls did not occur as expected.  Instead the CEO very astutely raised project finance capital from Oaktree to fund capex and development  of the renewable diesel project and partially pay down 2022 debt.  The focus of the CEO has been of maximizing real/asset optionality and he has successfully managed to retain 100 percent equity upside in a top tier renewable diesel project.  

The CLMT long game 

• Develop Great Falls into a top tier renewable facility 
• Optimize the speciality chemical company 
• De-hybridize the business model 
• Delever the company and lower credit cost of capital
• Clean up the convoluted legal structure 
• Maximize value for Unit Holders 

So what is the CLMT long game that will be played in 2022

http://filecache.investorroom.com/mr5ir_calumetspecialty/481/download/20211208%20Wells%20Fargo%20Conference%20vFINAL.pdf

Page 6 lays out what management expects of CLMT’s future 

The key valuation driver - Develop and get the renewable diesel facility operational in 2022.

The focus for management is getting the Renewable diesel plant operation.  They expect the renewable diesel facility to generate between $175-$350 mil in ebitda.  Renewable diesel is a volatile cash flow stream.  I expect maintenance  cap ex for the facility to be around $40-$50 mil annually.   There is an additional $60-$75 mil. cap ex funding requirement in 2022. 

I expect CLMT to fund the Renewables Diesel via either a partial asset sale or small debt capital raise.  

The most likely outcome is CLMT sells 25 percent of Montana Renewables at a valuation of between $1.75 bil - $2.25 bil.  The proceeds from that sale will be used to fund cap ex ($60-$75 mil.) and either reduce oaktree project debt or parent hold co debt.  

If the company does not do a partial sale.  I expect CLMT to do a debt raise and then  set Montana Renewables for a 2023 IPO.

I don’t think public equity market participants understand how difficult it is for ESG focused capital (infrastructure and pension funds) to acquire quality renewable diesel assets.  The top quartile or decile Renewable Diesel assets to date are all held by majors and large independent refiners.  These assets are critical offsets for refining entities and are never sold.  What CLMT is offering to ESG motivated investors is an investment opportunity in an asset (Renewable Diesel) that is almost never offered independently.  

Rolled 2023 debt 

CLMT rolled 2023 debt in January 2022.  There was strong demand for what is likely to be CLMT last high yield bond.  The 2024 and 2025 will be rolled at investment grade rates when Montana Renewables is monetized.  

Retain maximum upside in assets 

CLMT CEO has focused on maximizing optionality.  The Oaktree deal reflected the maximizing optionality and ownership in renewable diesel approach.  By choosing project finance instead of asset sale when the project was in early development stage, CLMT retained optionality to maximize value.  By controlling engineering and construction, CLMT is in a position to offer partial (non control) ownership stakes to ESG sensitive capital.  

Get market to look at 2023.  The market clearly does not believe management’s view that the MR asset is worth $2 billion. 

Next 6 months we will either see CLMT do a partial sale or go it alone.

Asset sale will set a clear valuation mark.  

Go alone is more complicated but has potential for even more upside.  The funding gap is small and the path is IPO in 2023.  The MR asset is a cash generating asset when operational and there are clear market comps so an IPO is very doable. 

Either way 

(1) MLP structure and its associated overhang is dead going forward 

(2) Management and GP focused on the valuation gap.

Simple Valuation 

Montana Renewables - $2 bil.

Specialty Chemicals - $2 bil.

Legacy Refining -$.2 bil.

Debt  - $1.3 bil.

$2.9 bil. / 82 mil units - $35 price per unit

Upside Case 

Montana Renewables - $2.75-$3.5 bil.

Speciality Chemicals - $2.5 bil.

Legacy Refining - $.35 bil.

Debt - $1.3 bil.

$5 bil. / 82 mil units - $60 plus 

What upside requires is 

Montana Renewables fully operational and cash flowing.  Valuation Variation between $2.75 and $3.5 bil. is dependent on whether there is a partial asset sale. 

Speciality Chemicals has been capital starved to the tune of between $150-250 mil between 2015-2022.  Going forward there are numerous low hanging high irr projects.  

The legacy refining business is very attractive to a asphalt trader or asphalt marketing intermediary. 

Management is intensively focused on long term value creation.  They also want to get as much long term stock compensation as a possible.  

https://ih.advfn.com/stock-market/NASDAQ/calumet-specialty-produc-CLMT/stock-news/86887035/proxy-statement-definitive-def-14a

Management, GP, MLP structure and Governance 

The CEO is moving to the position of executive chairman, the CFO is becoming the CEO and the chairman is leaving the board. 

Given management turnover between 2015-2022 - 4/5 CEOs and 4/5 CFOs - it’s like every red flag going off.  But it is just noise now.  The CEO/Steve Mawer moving to Chairman is a positive.  It’s removes any governance overhang from Heritage/GP.  Fred retiring is a positive.  The new CEO will follow the game book and strategic direction of Steve Mawer. 

This signals to me that focus has completely shifted to monetizing Montana Renewables and addressing the valuation gap.  Steve Mawer will focus on the big picture of unwinding this non integrated collection of assets thru the convoluted MLP structure addressing all the tax and legal structural issues. 

Risks

People playing the short game.  Everyone focused on partial asset monetization.  CLMT.  My conversations with CLMT management are very much in line with their presentation.  CLMT management believes the asset is worth $2 bil today and $3-3.5 in the 2025-2027 time frame. 

If CLMT management does not get bids in the $2 bil range they will go alone.  The funding gap to get Montana Renewables operational is minimal.  Debt, equity and structured finance (sale lease back) are all avenues to raise the $60-$70 mil. needed to go it alone. 

Operational risk - oil prices, supply chain weather and the inherent risk in operating a complex petrochemical facility. 

Catalysts 

Asset sale in next six months 

Or

Montana Renewables IPO in 2023 

Catalyst

Partial asset sale of Montana Renewables asset 

or

2023 IPO of Montana Renewables asset