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):

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.

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

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