Calumet Specialty Products CLMT
August 31, 2017 - 7:35am EST by
todd1123
2017 2018
Price: 7.35 EPS 0 0
Shares Out. (in M): 77 P/E 0 0
Market Cap (in $M): 564 P/FCF 0 0
Net Debt (in $M): 1,505 EBIT 0 0
TEV ($): 2,069 TEV/EBIT 0 0

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Description

Calumet Specialty Products (CLMT) is an attractive business transformation story with >150% upside return profile as the biz is successfully shifting away from the “bad biz” (refining / oilfield services = 0% contribution to unleveraged FCF) toward the “good biz” (specialty products = >10x EBITDA multiple as comps trade 12 – 15x EBITDA). CLMT was previously written up in late 2016 by altaloma and provides very good background information that I won’t repeat, but to summarize, 2 biz drivers: 1) “Good biz” / Specialty Products – lubricants and greases w/ well-known brands and attractive unleveraged FCF generation of >$200MM per annum w/ limited capex needs + comps trade at >10 – 15x EBITDA given consistency and FCF generation (post recent sale, generates >85% of profits and >100% of unleveraged FCF), 2) “Bad biz” / Refining + Oilfield Services: as altaloma highlighted, old mgmt. burned >$1.4Bln into these assets that are highly cyclical and heavy capex deserving on punitive multiple – however, new mgmt. is focusing on selling the bad biz units that he’s termed non-core and recently announced the sale of the WI refinery for an attractive price (>$250MM better than most analysts expected which is material considering less than 80MM shares outstanding)

 

CLMT is an orphan stock (perceived to be a broken MLP given distributions turned off to restore balance sheet + limited sell-side coverage and those that do follow are mostly refining analysts which represents less than 15% of profits and ~0% of unleveraged FCF + was passed over as “dead” esp in early 2016 when CLMT was forced to issue an expensive 11.5% Secured Note to stay alive, but this will be taken out in the very n-term) and mis-perceived for what the biz was in the past (i.e. highly leveraged, refining biz volatility and capex resulted in punitive multiple to overall biz, limited FCF generation). Over the past 12-months, however, new mgmt. has implemented a couple important changes including: a) significant cost removal programs of $150 - $200MM by 2018E, b) recent sale of Wisconsin refining assets is transformation as will result in significant deleveraging leading to n-term refinancing + pay-down of debt (>$55MM of  interest cost savings) + shifts biz away from volatile and high capex portion of biz + is important evidence of mgmt. strategy working and increases the likelihood of additional non-core asset sales that I conservatively believe will generate in excess of $500MM and will not impact the unleveraged FCF story.

 

Cap structure (current vs YE 17E vs likely YE 18E):

 

      YE 17e   Likely 18E
  Today    Post sale   added sales(1)
           
Net Debt 2,001   1,505   1,005
           
Market Cap 564   564   564
           
TEV 2,565   2,069   1,569
           
           
17E EBITDA 350   300   250
Capex 120   70   30
Interest 180   120   88
FCF  50   110   133
           
% yield 9%   20%   23%
           
TEV / EBITDA 7.3x   6.9x   6.3x
TEV / EBITDA - capex 11.2x   9.0x   7.1x
           
(1) Assume $500MM of additional non-core sales    

 

Fair value approach:  As noted below, based on my YE 17 estimates, CLMT equity is trading at ~19% FCF yield and less than 9x EBITDA – Capex, and on my YE 18E estimates (factoring in additional $500MM of non-core asset sales), trades at 23% FCF yield and ~7x EBITDA-capex. Applying a 10x – 15x FCF multiple to YE 17E figures = 100% - 200% upside to the stock and equates to a ~13x EBITDA-capex multiple at the mid-point which is reasonable considering Specialty Products comparables trade at >12x EBITDA (NEU and VVV in particular). Using realistic 2018E figures, FV / share is likely between $17 - $26 / share and this implies a ~12.7x EBITDA-capex multiple.

 

  FCF multiple   YE 17e   Likely 18E
           
FCF yield - low 10.0x   $14.34   $17.27
FCF yield - mid 13.5x   $19.37   $23.34
FCF yield - high 15.0x   $21.56   $25.97
           
% upside vs current - low     95%   135%
% upside vs current - mid     164%   217%
% upside vs current - high     193%   253%
           
Implied EBITDA multiple - mid     10.0x   11.2x
Implied EBITDA - capex multiple - mid     13.0x   12.7x

 

Catalysts: Additional clarity on Gulf coast outages (this likely boosts CLMT refining profitability by >$15MM during period of tightness which is a net positive especially in accelerating refinancing), closing sale of WI refiner in Q4, likely debt refinancing in next 3 – 6 months, additional clarity on asset sales over next 6 – 12 months, and clarity on distribution being turned back on by YE 18E

 

  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts: Additional clarity on Gulf coast outages (this likely boosts CLMT refining profitability by >$15MM during period of tightness which is a net positive especially in accelerating refinancing), closing sale of WI refiner in Q4, likely debt refinancing in next 3 – 6 months, additional clarity on asset sales over next 6 – 12 months, and clarity on distribution being turned back on by YE 18E

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    Description

    Calumet Specialty Products (CLMT) is an attractive business transformation story with >150% upside return profile as the biz is successfully shifting away from the “bad biz” (refining / oilfield services = 0% contribution to unleveraged FCF) toward the “good biz” (specialty products = >10x EBITDA multiple as comps trade 12 – 15x EBITDA). CLMT was previously written up in late 2016 by altaloma and provides very good background information that I won’t repeat, but to summarize, 2 biz drivers: 1) “Good biz” / Specialty Products – lubricants and greases w/ well-known brands and attractive unleveraged FCF generation of >$200MM per annum w/ limited capex needs + comps trade at >10 – 15x EBITDA given consistency and FCF generation (post recent sale, generates >85% of profits and >100% of unleveraged FCF), 2) “Bad biz” / Refining + Oilfield Services: as altaloma highlighted, old mgmt. burned >$1.4Bln into these assets that are highly cyclical and heavy capex deserving on punitive multiple – however, new mgmt. is focusing on selling the bad biz units that he’s termed non-core and recently announced the sale of the WI refinery for an attractive price (>$250MM better than most analysts expected which is material considering less than 80MM shares outstanding)

     

    CLMT is an orphan stock (perceived to be a broken MLP given distributions turned off to restore balance sheet + limited sell-side coverage and those that do follow are mostly refining analysts which represents less than 15% of profits and ~0% of unleveraged FCF + was passed over as “dead” esp in early 2016 when CLMT was forced to issue an expensive 11.5% Secured Note to stay alive, but this will be taken out in the very n-term) and mis-perceived for what the biz was in the past (i.e. highly leveraged, refining biz volatility and capex resulted in punitive multiple to overall biz, limited FCF generation). Over the past 12-months, however, new mgmt. has implemented a couple important changes including: a) significant cost removal programs of $150 - $200MM by 2018E, b) recent sale of Wisconsin refining assets is transformation as will result in significant deleveraging leading to n-term refinancing + pay-down of debt (>$55MM of  interest cost savings) + shifts biz away from volatile and high capex portion of biz + is important evidence of mgmt. strategy working and increases the likelihood of additional non-core asset sales that I conservatively believe will generate in excess of $500MM and will not impact the unleveraged FCF story.

     

    Cap structure (current vs YE 17E vs likely YE 18E):

     

          YE 17e   Likely 18E
      Today    Post sale   added sales(1)
               
    Net Debt 2,001   1,505   1,005
               
    Market Cap 564   564   564
               
    TEV 2,565   2,069   1,569
               
               
    17E EBITDA 350   300   250
    Capex 120   70   30
    Interest 180   120   88
    FCF  50   110   133
               
    % yield 9%   20%   23%
               
    TEV / EBITDA 7.3x   6.9x   6.3x
    TEV / EBITDA - capex 11.2x   9.0x   7.1x
               
    (1) Assume $500MM of additional non-core sales    

     

    Fair value approach:  As noted below, based on my YE 17 estimates, CLMT equity is trading at ~19% FCF yield and less than 9x EBITDA – Capex, and on my YE 18E estimates (factoring in additional $500MM of non-core asset sales), trades at 23% FCF yield and ~7x EBITDA-capex. Applying a 10x – 15x FCF multiple to YE 17E figures = 100% - 200% upside to the stock and equates to a ~13x EBITDA-capex multiple at the mid-point which is reasonable considering Specialty Products comparables trade at >12x EBITDA (NEU and VVV in particular). Using realistic 2018E figures, FV / share is likely between $17 - $26 / share and this implies a ~12.7x EBITDA-capex multiple.

     

      FCF multiple   YE 17e   Likely 18E
               
    FCF yield - low 10.0x   $14.34   $17.27
    FCF yield - mid 13.5x   $19.37   $23.34
    FCF yield - high 15.0x   $21.56   $25.97
               
    % upside vs current - low     95%   135%
    % upside vs current - mid     164%   217%
    % upside vs current - high     193%   253%
               
    Implied EBITDA multiple - mid     10.0x   11.2x
    Implied EBITDA - capex multiple - mid     13.0x   12.7x

     

    Catalysts: Additional clarity on Gulf coast outages (this likely boosts CLMT refining profitability by >$15MM during period of tightness which is a net positive especially in accelerating refinancing), closing sale of WI refiner in Q4, likely debt refinancing in next 3 – 6 months, additional clarity on asset sales over next 6 – 12 months, and clarity on distribution being turned back on by YE 18E

     

      

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Catalysts: Additional clarity on Gulf coast outages (this likely boosts CLMT refining profitability by >$15MM during period of tightness which is a net positive especially in accelerating refinancing), closing sale of WI refiner in Q4, likely debt refinancing in next 3 – 6 months, additional clarity on asset sales over next 6 – 12 months, and clarity on distribution being turned back on by YE 18E

    Messages


    SubjectEBITDA estimates
    Entry08/31/2017 09:13 AM
    Membersnarfy

    Thanks for posting.  Very interesting.  I had a meeting with IR and the former interim CEO in late 2015 before Tim Ngo took over.  One of the craziest corporate histories I have ever heard.

    How did you come up with your EBITDA estimates?  I am frankly looking for a little help doing my homework before I get started on the word!


    Subject$250 in EBITDA
    Entry08/31/2017 01:17 PM
    Memberscott265

    Thank you for the idea.

     

    You say 250mm in EBITDA is the key.  I see $184mm in trailing EBITDA in Speciality.  Can you bridge to the $250mm?

     

     


    SubjectQ3 earnings
    Entry12/28/2017 03:12 PM
    Membersnarfy

    Is this just getting reamed by bots that screen for earnings misses or internal controls weaknesses?  On the whole I was encouraged by the release.  The miss seems explainable in large part by Harvey's impact on the Specialty segment.  The updated estimate for net proceeds from the Superior refinery and OFS business sales were better than I was modeling, so the debt picture is incrementally better (at least from my perspective).  Full year capex guidance was lowered again.  No change to the moat or the pricing power of the Specialty business.  In fact, I was encouraged the segment was able to produce >28 kbl/d in spite of not being able to move some volumes due to problems at their logistics providers.  The internal controls weakness associated with the ERP system implementation should not be a surprise.

    The main thing not to like as far as I'm concerned is they will likely need to do a secondary offering to get debt down.  Even if they sell the Great Falls and San Antonio refineries at the same valuation they got for the Superior refinery (implying sales proceeds of $400mm.  I also model $110mm of inventory associated with the assets), pro forma net debt would still be $920 million - it's just too much to be shouldered by the Specialty segment alone.  My Low Case EBITDA is ~$100mm.  

    Fwiw I saw the CEO of Par Pacific recently.  He said he is interested in both of CLMT's refineries - in fact Par built their G&A and support functions to be able to support a portfolio with more refineries.  He also said he thinks highly of Tim Go.  

     

     


    SubjectCorporate Expenses Allocation to EBITDA
    Entry12/29/2017 02:05 PM
    MemberRulon Gardner

    Todd, 

    Does the EBITDA figures include allocations to G&A?  Asked another way, does the $250mm of EBITDA for the specialty segment include all the G&A expenses as a standalone publicly traded entity?  Most companies provide EBITDA or operating income figures for each segment and then there's a negative figure for Corporate or headquarters. 


    SubjectRe: Corporate Expenses Allocation to EBITDA
    Entry01/11/2018 04:50 PM
    MemberRulon Gardner

    Todd, 

    Just following up to see if you have any updates on the $250mm of EBITDA.  I've spoken with IR and they don't have an answer on whether the current specialty segment EBITDA is reflective of standalone EBITDA if the two additional refineries are sold off.  I do think that the trailing $188mm figure is the company under earning due to a rising crude environment.      


    SubjectSolvent and Base Oil Business
    Entry03/06/2018 03:32 PM
    MemberRulon Gardner

    Todd, 

    Do you have any read on the nature of the Solvent and Base Oil business within the specialty's segment?  Per my conversation with management, both the Solvent and Base Oil each consist of 1/4 of the EBITDA of the specialty segment.  Obviously the branded and packaged is a highly valuable and the customized formulation of wax, lotions, and human products are stickier businesses.  It seems like there's a rush to add Group III capacity, Group I is no longer profitable.  Group II is trending that way.  These are preliminary reads of the market.  Any color on this would be helpful. 


    SubjectRe: CLMT Q4 call
    Entry03/08/2018 01:51 PM
    Membersnarfy

    Thanks for your ongoing updates.  I still own a little bit.  Why do you have such confidence in additional cost savings?  Is there anything concrete you can point to, or is it a general sense that Tim Go is good (I would agree and have confirmed with other folks in the business) and the company was so messed up under Jennifer Straumens that there has got to be more (I wouldn't disagree with that).  

    You mention the possibility of switching to a C corp.  Why would Fehsenfeld be game for that?  On your estimates the IDR cash flow would start to come alive.  

     


    SubjectRe: Re: Solvent and Base Oil Business
    Entry03/08/2018 11:22 PM
    MemberRulon Gardner

    Todd, 

    I am assuming the 35% of specialty that you cited is the branded products such as Royal Purple, Belray, and TruFuel.  I agree that there is $20-30mm of low hanging fruit that to increase revenue and EBITDA.  The CEO basically told me that TruFuel sells itself.  It has grown largely organically at 20-30% CAGR without any sorts of marketing.  Under the previous regime, they opted to shove $400mm into refining assets while a 12x EBITDA subsegment of the specialty business is starved for capital.  My understanding and take away from my meeting is that both Royal Purple and True Fuel literally do not have enough capacity to meet demand.  

    What is the 40-50% of the specialty segment profit that's on solid footing?  Is that the base oil business?  Per my convo with the CFO, he mentioned that Solvent, Base Oil, Wax/Lotion/human products, and the branded (Royal Purple/TrueFuel/BelRay) etc are each 1/4 of the EBITDA with no one of those subsegments accounting for 40% of the EBITDA.  Given the over $300m of revenue in the branded in the 10-K, I assume that the implied Branded EBITDA is roughly $63-65mm which is about 32-33% of the overall EBITDA.  So, we look like we're in the same ballpark with regard to the branded business.  Any additional granularity you can provide on the wax, Solvent, and Base Oil would be helpful.  I'm generally more confident that the stuff that they provide customization for Johnson and Johnson baby oil, WD-40, Vaseline, Hawaiian Tropic etc have much higher switching cost.  From our my convo with management, the solvent used to be mixed with drilling mud by the Shale drillers.  That's why the specialty did $280mm of EBITDA in the early 2010s.  Now they just add diesel to the drilling mud.  It seems like there's a ton of supply coming online in the base oil business.  If you're not group III, your profitability will likely go away.  That's why HollyFrontier and Calumet have both announced Group III base oil.  Group I capacity is dwindling as most producers can't turn a profit and everything that I've read indicates that Group II will likely trend that way in the near future.

     

      


    SubjectRe: CLMT Q4 call
    Entry03/09/2018 12:54 AM
    MemberRulon Gardner

    1) I generally agree with this assessment.  I think there's another $20-30mm of organic growth in the 1-2 years from Royal Purple and TruFuel.  Those are 12x EBITDA type of business due to the branded nature.  But the 2018 growth is included in the $40-50mm figure in 3)   

    2) Hmm, this would be about $30mm higher than I thought as the Superior takes away 1/2 of the EBITDA.  I was assuming $70-80mm.  The wider WTI-WCS spread may push the remaining fuel EBITDA to $100mm.  This assumes RINs exemptions.  

    3) I think the $40-50mm includes growth in the branded per page 16 in their Q4 earnings presentation 

    4) Yeah, at some point this cost drops and will start to normalized 

    My overall number is probably about $30mm less than yours as I think that the Fuels runs $70mm rather than $100.  I think the $45mm figures includes both further cost cuts and organic growth in branded, i.e. TruFuel and Royal Purple.  Another way of looking at this is that the company provide a 2017 Pro-Forma of $242 net of Superior and Anchor disposition.  Assume we add $20mm of ERP and add another $45mm of cost cuts and organic growth gets us to $307mm which is about $70mm less than your figure.  If CLMT can capture some WTI and WCS spread in 18 and 19, then it may add another $30mm.  I think I'm about $30-70mm less than you on the company wide EBITDA for 2018.  Even with a $307mm figure, less $128mm of interest and $85mm of cap ex, net us $94mm of FCF which can be used to further deleverage the balance sheet and also implies a 15% FCF yield.  With incremental growth in 19 and 20 and further deleveraging, we can potentially exceed over 20% FCF yield at today's price assuming additional EBITDA growth and further debt pay down.    

    Agree with you that Montana will be sold.  They will keep San Antonio because it produces the feedstock for their business. 


    SubjectRe: Re: Re: Solvent and Base Oil Business
    Entry03/11/2018 11:33 PM
    MemberRulon Gardner

    Todd, 

    Just following up on my questions about the sub segments within the specialty business.  Thanks.  

    "Todd, 

    I am assuming the 35% of specialty that you cited is the branded products such as Royal Purple, Belray, and TruFuel.  I agree that there is $20-30mm of low hanging fruit that to increase revenue and EBITDA.  The CEO basically told me that TruFuel sells itself.  It has grown largely organically at 20-30% CAGR without any sorts of marketing.  Under the previous regime, they opted to shove $400mm into refining assets while a 12x EBITDA subsegment of the specialty business is starved for capital.  My understanding and take away from my meeting is that both Royal Purple and True Fuel literally do not have enough capacity to meet demand.  

    What is the 40-50% of the specialty segment profit that's on solid footing?  Is that the base oil business?  Per my convo with the CFO, he mentioned that Solvent, Base Oil, Wax/Lotion/human products, and the branded (Royal Purple/TrueFuel/BelRay) etc are each 1/4 of the EBITDA with no one of those subsegments accounting for 40% of the EBITDA.  Given the over $300m of revenue in the branded in the 10-K, I assume that the implied Branded EBITDA is roughly $63-65mm which is about 32-33% of the overall EBITDA.  So, we look like we're in the same ballpark with regard to the branded business.  Any additional granularity you can provide on the wax, Solvent, and Base Oil would be helpful.  I'm generally more confident that the stuff that they provide customization for Johnson and Johnson baby oil, WD-40, Vaseline, Hawaiian Tropic etc have much higher switching cost.  From our my convo with management, the solvent used to be mixed with drilling mud by the Shale drillers.  That's why the specialty did $280mm of EBITDA in the early 2010s.  Now they just add diesel to the drilling mud.  It seems like there's a ton of supply coming online in the base oil business.  If you're not group III, your profitability will likely go away.  That's why HollyFrontier and Calumet have both announced Group III base oil.  Group I capacity is dwindling as most producers can't turn a profit and everything that I've read indicates that Group II will likely trend that way in the near future." 


    SubjectRe: Re: Re: Re: Re: Solvent and Base Oil Business
    Entry03/20/2018 03:16 AM
    MemberRulon Gardner

    I tend to think of the business in EBITDA terms 

    1) Branded - Royal Purple, Tru-Fuel, Belray etc - Looks like just over $300mm of revenue with an estimated 20+% EBITDA margin, this brings us to $65mm of EBITDA.  Company is trying to grow this segment via capital allocation towards Royal Purple and Tru-Fuel.  

    2) Solvents - Least attractive - 1/4 of EBITDA 

    3) Base Oil - More attractive than Solvent, - 1/4 of EBITDA, trying to wrap my head around this.  Market is migrating towards Group III.  I'm trying to figure out what that meanings for future profitability.   

    4) Petroleum Jelly, Wax, Human Contact (baby oil, sun tan lotion etc) - 2nd most attractive 1/4 of specialty EBITDA.  This is a sticky and high switching cost business IMO.  


    SubjectERP Implementation Pain
    Entry03/20/2018 03:17 AM
    MemberRulon Gardner

    10-K not filed on time, expected by April 2nd 

    Actual NI and EBITDA lower than previously disclosed NI and EBITDA in press release 

    New Management team + ERP implementation = pain  

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