Written by Greg Andrews
Investors fled Calumet Specialty Products Partners two years ago after new management took the helm of the oil refiner and manufacturer of specialty petroleum products, reversed course on an aggressive expansion that had caused debt to skyrocket, and canceled what had been a massive quarterly cash dividend.
Few investors have paid much attention since. But a prominent investment manager in New York now sees robust opportunity—thanks to a dramatic refashioning of Indianapolis-based Calumet under the new management team, led by petroleum-industry veteran Timothy Go, who joined the company in January 2016.
Calumet is essentially in year three of a turnaround situation led by an incredible CEO who has successfully rescued the company from the jaws of insolvency.
“Calumet is essentially in year three of a turnaround situation led by an incredible CEO who has successfully rescued the company from the jaws of insolvency,” according to a report by Bill Chen of New York-based Rhizome Partners that was recently picked up by the investing publication Barron’s.
His bullishness stems in part from the company’s newfound financial discipline and its decision to zero in on its specialty-products line—which has strong and predictable profit margins and includes such products as Royal Purple synthetic oil and Bel-Ray grease. In contrast, refining is notoriously volatile, with wild swings in profit and a host of huge competitors.
Chen said Go and his management team have “re-focused capital allocation away from mindless capital-intensive refinery acquisitions and toward branded and IP-rich products with one- to two-year payback periods.”
Before the company halted its dividend in April 2016, Calumet’s rich payout combined with its depressed stock price generated an annual dividend yield approaching 30 percent, among the highest of any U.S. public company.
Calumet shares now trade around $6.65, nearly double their October 2016 low but way down from October 2015, when they fetched around $27. Chen wrote that, as the company pays down debt, free cash flow will increase rapidly, potentially setting up the shares to rise to between $17 and $18 in the next two to five years.
Calumet maintains a low profile in Indianapolis, despite racking up $3.8 billion in revenue in 2017, ranking it as the fifth-largest public company in central Indiana. That’s because its refining and manufacturing occurs outside the Midwest, including in Louisiana, Montana and Texas.
Under Go, Calumet has cut more than $140 million in costs, sold hundreds of millions of dollars in assets, and added efficiencies in its supply chain. Its debt-reduction push included paying off $400 million in notes with an onerous 11.5 percent interest rate.
While the divestitures—including the $450 million sale of a Wisconsin refinery last year—and other restructuring steps have complicated the company’s financials, Go said on a conference call this month that the upshot is that, “after adjusting for divestments, we have now delivered seven quarters of continuous year-over-year improvement.”
After adjusting for divestments, we have now delivered seven quarters of continuous year-over-year improvement.
Chen calls Calumet’s two parts GoodCo (specialty products) and BadCo (refining). “We will not dwell on BadCo much as it will be sold eventually,” he predicted.
On the conference call, Go insisted Calumet remains committed to fuel refining—to a point.
“We continue to look at all opportunities, whether it be on the specialty side or the fuel side—we continue to look at divestments; we continue to look at acquisitions,” Go said.
“What I would tell you is, we’re probably not going to grow in the fuels area,” he added. “We are looking to continue to grow in the specialties area. … But just because we’re not going to add more assets in the fuels business doesn’t mean that fuels business isn’t still important to Calumet.”
These actually are good times for oil refiners, thanks to strong “crack spreads”—the difference between the price of crude and the petroleum products extracted from it. Even so, specialty products drive most of Calumet’s profit. In the second quarter, the fuels business accounted for 60 percent of the company’s $946 million in sales but just 29 percent of its $123 million in profit.
The company got knocked off its game partly because of a crude oil glut, which caused the price of West Texas Intermediate to tumble from $110 a barrel in the fall of 2013 to below $30 a barrel in early 2016. It’s since risen back to about $67.
Before its 2006 initial public offering, Calumet was part of the private business empire of Indianapolis’ Fehsenfeld family, founders of the waste-management firm Heritage Environmental Services. The family, under the Heritage Group umbrella, still is the largest shareholder, with a 15 percent stake.
