Calumet: Now We Know More About Its Positive Financial Future

seekingalpha08-19

Calumet reported in line second quarter results, with the Great Falls asphalt business $10 million below our estimate.Management offered financial hints for balance sheet fixes, leading to a ...

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(NASDAQ:CLMT) reported its 2nd quarter with results in line with analysts and slightly lower than our last estimate. Great Falls asphalt business reported results $10 million less than our guess being the major difference. But management offered otherwise expected results and important and significant hints on how the balance sheet will be fixed. The market responded with a significant positive change in the stock price. This article continues our long line of multiple writing outlining, with the best information available, our thoughts for investing. The previous article discussed the coming direction for the company with the conversion to a C-Corp accomplished. With a lot discussed on the call, would you join with us again for a look inside the head of Calumet? It is more than interesting. The Quarter & Next Quarter The company reported reasonable results, shown in the next slide. Calumet, Inc. From the call, the total EBITDA equaled $67 million. Next, we include a table comparing our estimate with the actual.   2nd Quarter (Millions) PB * SPS ** MR ***   Our Estimate $15 $70 $15   Actual $14 $66 $7.5   Click to enlarge * Performance Brands ** Specialty *** Montana Resources (Great Falls) including the asphalt business. The most significant difference from our estimate and the actual came with Great Falls. Also of note, specialty margins remained weaker, not recovering from the sharp oil price increase headwind during the 1st quarter. Estimating the 3rd quarter carries some risk once again. First, management communicated that a hurricane outage at Shreveport resulted in a 500,000-barrel loss. If that number can be represented with a loss of fuel, that equals $10 million. If it is a mixture between specialty at $60 margin and 40% and fuels at 60% with a $20 profit, the loss number is in the $15 million range. Second, the margin for MRL remains choppy and will likely remain that way through the rest of the year. Performance Brands will be stronger in September than June. Grasping a number for September MRL is once again a crap shoot. Management noted that margins for Renewable Diesel (RND) are now trading \"more like $0.95 to $1.10, while all of this clearing activity sets up to rebalance.\" Bruce Fleming, MRL CEO, remarked positively about realities for a lower breakeven cost now at $0.85 reaching $0.65 - $0.70. The company is working through a punch list of 78 action items which by the end of the year will bring $0.70. The big item, expensive handling of process created wastewater, is being targeted in the MaSAF project. Thus, for the September quarter, a reasonable average might be $0.25 profit spread. By December, the profit will be above $0.35. Our September estimate follows in the next table.   2nd Quarter (Millions) PB * SPS ** MR ***   Our Estimate $16 $55 - $60 $15-20 ****   Last Quarter $14 $66 $7.5   Click to enlarge * Performance Brands ** Specialty *** Montana Resources (Great Falls) including the asphalt business. **** The RND portion EBITDA equals 12000 b/d times 42 g/b times $0.25 times 91 days times 0.9 (ownership factor) or $9 million. The asphalt business will be significantly above the $1 million EBITDA generated in June with the retail rack open all quarter rather than the late mid-May opening in the June quarter. A reasonable value for September EBITDA is $70 million, or unchanged approximately quarter over quarter. When asked about mid-cycle, the company answered that specialty fuels are mid-cycle. The headwinds reside mostly with supply side issues rather than demand. They expect 3rd quarter demand and margins to be similar with last quarter. With respect to fuels, several major refiners cut production for the 3rd quarter, seeking to support weakening margins. Investors may expect 90% utilization vs. 95. Management at these refineries planned fall outages. The Balance Sheet Calumet created a balance sheet issue with too much interest from the debt it needed to transform the company. The debt, $2 billion, costs approximately $230 million per year. Management understands this issue clearly planning solutions through several approaches, low interest DOE loan of several hundred million, add a strategic operating partner or IPO a small portion of MRL and finally pay off debt using excess cash once long term MRL margins return. With regard to the first pong, Todd Borgmann, CEO, answered a question of which we include the full response:  Got to be careful about getting too deep into the details of the DOE loan as, obviously, we're just at a sensitive phase there and don't want to cross any boundaries. But I think Bruce said in a prior question, and I'll just reiterate, the purpose of the loan is to launch MaxSAF and to clean up the balance sheet. So, right now, when you look at Montana Renewables' balance sheet, it has all sorts of expensive project financing from various providers, Calumet is certainly one of those providers. Calumet certainly expects to get repaid on that in the near future. But now is not the time to get too far into that. And exactly what that means for the broader plan. We want to see this process play out. And what I can tell you is we have an executable plan that provides both short-term deleveraging at Calumet and removes the 2025. So, there's some moving pieces in there. So, we want to be careful not to get too far out over our skis. But when we talked about shedding more light on that in the near future, we do expect it will be the near future that we'll be able to talk about that plan more publicly. But I just want to make sure that you understand that there is one and that we're excited about it, and it continues to progress well.\"  Inside the comment, Borgmann discussed a major first step in fixing the balance sheet, a source for funding the MaxSAF project and a means to pay off the egregious 2025 bond. Interest payments might drop into the range of $120 million to $130 million shortly thereafter. A reminder, the debt goal for the old business equals $800 million, a longer-term feat. We also expect the MaxSAF restart shortly after the DOE loan is announced. MRL Margins Since last summer, the long-term RND margins have suffered from an oversupply of product coming from several sources. The EPA set the production value at 4.5 billion gallons for the RVO in 2024. Earlier in the year, the total production equaled closer to 6+ billion. One source, overseas RND, adds a billion gallons a year by itself. A lucrative tax credit disappears for foreign produced product in December. How much that might decrease imports is still uncertain, but it will be significantly less, if not zero. Until then, management expects volatility. Unprofitable capacity continues to shut down or transform back to fossil fuel production. On the cost of production front, MRL identified 78 points of change targeted for completion by year's end. Bruce Flemming, CEO of MRL, committed to $0.70 per gallon for the breakeven cost compared to $0.80 - $0.85 today, once finished. He also discussed a long-term problem, production of process wastewater, a strange issue, but requires a fairly major capital project in order to avoid the costly method of off-site cleanup. Plans for fixing this issue co-inside with MaxSAF. The sales price is now range bound around $1 plus. We used $1.05 for calculating the September performance included above. Lower production breakeven costs coupled with an approaching steady predictable marketplace are approaching. It must be noted that with normalized RND and SAF margins, the quarterly cash flows equal $55 million and $150 million respectively. (MaxSAF operates at 18,000 barrels per day vs. 12,000 barrels per day today.) Future Growth Outside MRL Management continues to discuss growth and integration opportunities in particular with Performance Brands. They believe significant opportunities exist though yet still without detail. With MRL now operating close to design, resources are moving back toward unlocking PB opportunities. Stock Charts & More From TradeStation Securities, we once again include a stock chart. TradeStation Securities This is a stock price healing itself nicely. The lower Bollinger Band has turned up after a brutal crash. The volume suggests a long-term pattern is now in play. Notice the higher volume accompanying the up move. And finally, the drop back to $10 puts $30 in play once $20 is broken. This very positive. One interesting source of higher prices comes from the fact that now the converted stock is illegible for indexes. Management included a graphic and this statement. Yes, hey Jason, it's Todd. I'll add a bit. I think we've said historically that peers of ours typically have about 20% of their float kind of held by passive indices, and Calumet was basically zero and continues to be. But obviously, now that can change with the conversion behind us.\" Calumet, Inc. This process through time will drive prices higher. Risks  Risk always exists. With Calumet, a failure to procure the low interest DOE loan could be catastrophic, with MaxSAF not occurring on any reasonable time frame and interest rate costs continue high. Another risk, the rebalance of RND margins, fails to occur. This is unlikely. By-partisan support for farmers and industries directly related to the farmers exists in Washington. And of more importance, even at 6 billion gallons per year of production, the long-term need for this RND is far greater. We should note one important fact with MRL; its breakeven margin will equal $0.65 times 42 or $27 per barrel, a price very similar to current fossil produced products. We view these risks, immaterial and should be disregarded. We continue our buy under $20 and strong buy under $16. Looking inside Calumet's head revealed relative timing for the next step, balance sheet repair being soon; followed by a slow but real cost improvement at MRL; and then higher sales prices for RND coming in early 2025. 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