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A truly scary movie can make you jump, even if you've seen it before.
Fools may recall one of the scariest horror shows of 2008, starring the screaming refiner Calumet Specialty Products (Nasdaq: CLMT ) . Like the ill-fated character who descends into the basement while the audience screams not to, Calumet dragged investors into a dungeon of pain.
After a brief hiatus, the thriller is playing again, and Fools are reminded that it's safer to leave than to explore the dark unknown. The entire refining industry enjoyed a reversal of fortunes in the first quarter that restored profitability for a moment. As second-quarter results from majors such as Valero (NYSE: VLO ) and ConocoPhillips (NYSE: COP ) have shown, however, conditions have turned decidedly spookier. Western Refining (NYSE: WNR ) recently announced a $7.8 million adjusted loss, as revenue was brutally chopped in half.
Calumet managed to beat expectations with adjusted earnings of $0.70 per share, despite missing on revenue by $50 million. Shares plunged after the release, supporting the refreshing notion that investors might look beyond the expectations game while digesting results. What startled the Calumet faithful?
For starters, Calumet's results corroborated the debilitating margin weakness observed last week by Valero, exacerbated by the anticipated impacts of a 2008 LIFO inventory liquidation. Unlike the fuel-focused refiners, however, Calumet suffered a significant disruption to demand for products like lubricating oils and solvents, which dampened specialty sales volumes by nearly 15%.
Even scarier, Calumet replayed a memorable scene wherein earnings were once again ravaged by derivative losses. Total derivative losses were enormous, and the accounting of them downright fuzzy. The company reported a $9.9 million net derivatives loss on the income statement, already representing more than half of gross profit, but recorded another $24.6 million mark-to-market writedown of derivative hedging instruments within the reconciliation of cash flows. As I suggested in the case of Yamana Gold (NYSE: AUY ) , betting on the derivatives casino often feels scarier than the risks it's meant to protect us from.
The crude conclusion
Refining is presently an impaired industry. When a leader like Valero is projecting a third-quarter loss, and oil prices face the specter of inflation-fed price increases that may well be unmatched by fuel demand, I consider the sector unsound. Some may see that assessment as a buy signal, but I follow the fundamentals. I believe that opportunities further upstream, like natural gas movers Energy Transfer Partners (NYSE: ETP ) and Kinder Morgan (NYSE: KMP ) , offer a nearly comparable dividend yield to Calumet, with a far more refined outlook.
Further Foolishness:
- Valero's sledgehammer.
- Sour crude discounts have gone sour.
- Not all movies are scary.
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Report this Comment On August 07, 2009, at 2:48 PM, clmt1680 wrote:
What a joke - comparing Valero and Calumet - I will give you 3 to 1 odds that CLMT will be 25 by the end of 2010 and you can name the amount - Now lets see what a FOOL you really are - I put my money where my mouth is - come on
Report this Comment On August 07, 2009, at 4:35 PM, oneijoe wrote:
LOL...it's funny how MF waited for a share pullback to put together yet another anti-Calumet feature.
Why no counter bullish argument, MF ?!? You guys have been incessantly deriding this company for more than a year. During that time, CLMT has gone from a low of sub $5 to a peak of just over $18 (a triple), all while paying a $.45/sh dividend !!
Even the Fool CAPS rates the company as 4 stars, for heaven sake !!
Report this Comment On August 10, 2009, at 12:02 PM, clmt1680 wrote:
S & P just raised their price target to $23 - whats up with you guys
Report this Comment On August 11, 2009, at 9:38 AM, XMFSinchiruna wrote:
My opinions on Calumet are mine alone, and I have spelled out my rationale for concern in each of the articles you refer to.
Oneijoe, the timing of the article was simply a result of the earnings release.
As for a counter-bullish argument, I would love to hear it. Write it up in a CAPS pitch and send it to me (my e-mail link is above), and I'll consider referencing your viewpoints in a future article.
Thanks for voicing your opinions, and please keep it up!
Fool on!
Report this Comment On August 16, 2009, at 2:39 PM, oneijoe wrote:
Just so you know, Sinchiruna, I haven't profited by CLMT's performance during this bear rally (had my money elsewhere).
The real "tight spot" CLMT found itself passed last fall/winter when its loan covenants were in danger of breach. There was also a cash loss in covering hedges after an earlier management decision to hedge its feedstock at just under $100 (at the time crude was >$135) early this year.
The thing is, both of these uber-bearish events have now PASSED.
While no one expects CLMT to be a huge money-maker, it can't be denied the company was priced for failure for a very long time (book value is $13.38 while shares were < $12 as recently as May). Once the bankrupting factors mentioned above passed (as disclosed in Mar '09 ER), CLMT became a compelling value.
And that's my point. CLMT should be evaluated on a value basis for the equity + the $ paid as dividends. As such, CLMT is a reasonable refinery investment, especially so if/when industrial demand recovers.
Report this Comment On August 26, 2009, at 7:28 PM, XMFSinchiruna wrote:
oneijoe,
Thank you for the discussion.
If I may, permit me to correct one point of fact from your statement above. While the worst of Calumet's brush with potential insolvency appears to have passed, the hedging losses are NOT yet a thing of the past. As I point out in the article, CLMT continues to reel from massive derivative losses.
The remaining derivative "assets", furthermore, appear poised to force additional losses under several plausible scenarios for commodity prices.
Please understand that a contributing factor in my cautious outlook for Calumet relates to my macroeconomic outlook for the American economy at large and a persistently tight credit environment as an ancillary concern. I am wary of all these quick declarations that the worst is over. I am not recommending any exposure to the refiners at present, as I see them facing a potentially perpetual squeeze that could last some time. Due to currency factors, specifically, it's conceivable that oil prices could rise significantly independent of domestic demand for refined products.
When it comes to Calumet, I always come back to the same point ... there are far better options out there for Fools to choose from elsewhere in the energy complex that also offer investors double-digit yields and compelling valuations without the daunting debt load nor fundamentally impaired business outlook.
I am not a Fool to cast my opinions in cement, and I'm very open to changing my tune on the company if someone can build a compelling investment thesis that sets Calumet apart from other available vehicles for both income and growth. To date, no one has presented me with a compeling counter-argument to change my cautious tune.
I appreciate the dialogue, and welcome your reply.
Fool on!
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