Calumet Specialty Products Parntners (CLMT 0.62%) reported its earnings last week. Like so many refiners that reported before it, cheap oil prices helped boost profitability across several of its refining segments. However, Calumet is more than just a refiner, and that came back and bit the company this quarter. Here's a quick snapshot of the company's earnings, as well as why we may not see any big changes to the company in the coming months despite some clear points in the business that need to be addressed.
By the numbers
| Metric | Q3 2015 | Q3 2014 |
|---|---|---|
| Gross profit (revenue-cost of goods sold) | $164.8 | $182.6 |
| Net income available to limited partners | ($52.2) | $5.4 |
| EPS attributable to limited partners | ($0.68) | $0.08 |
| Distributable cash flow | $44.9 | $72.3 |
Source: Calumet Specialty Products earnings report. Figures in millions, except per-share figures.
One thing to keep in mind here is that the company took about $120 million in one-time charges to the income statement. Adjusting for these non-cash charges, net income for the quarter was $71.1 million. Considering how strong the company's product segments performed this quarter, you can sort of understand why management decided to take them now. Here's what Calumet's gross profits look like broken out by business segment.
Source: Calumet Specialty Products Partners earnings release; author's chart.
Calumet's Product segments that revolve around petroleum refining benefited from a favorable refining environment, but its oilfield services segment was dragged down considerably as oil and gas service activity has been weak across the entire industry. As mentioned, the company did take some writedowns on inventory values this quarter, which is why profits across the two product segments declined sequentially.
What went right
Like other refiners that have recently reported, Calumet is benefiting rather well from lower crude oil prices and the higher-than-average crack spread prices. As long as crack spreads and specialty product margins remain at these levels, the company will generate some pretty impressive results from its products segments.
Another of Calumet's results that look promising is that the company expects two of its major capital projects to come online in the fourth quarter of 2015. It will more than double the refining capacity at its Great Falls, Minn., facility to 25,000 barrels per day and will convert 3,000 barrels per day of its San Antonio facility to produce ultra-low-sulfur diesel. These two projects and its new esters plant in Missouri, slated to start in early 2016, should add another $100 million in annual adjusted EBITDA to the income statement.
What went wrong
The one aspect that doesn't really seem to fit with Calumet's business model is the company's oilfield-services segment. At its core, the company is a refiner, and there are very few overlaps between refining and the oilfield-services business. That seems apparently clear in Calumet's earnings, as the company took a decent sized writedown of those assets.
It wouldn't be surprising to see Calumet sell this segment of the business, but it probably won't make any drastic move like that while it's under the care of its interim CEO. Once the company's new leadership takes over in 2016, don't be surprised if this part of the business isn't around much longer.
What management had to say
From interim CEO Bill Hatch:
As we near completion on our remaining slate of internal growth projects by year-end 2015, our projected capital spending on growth initiatives, which represented more than 50% of our total capital spending during the past two years, will decline. Lower projected capital spending, coupled with the addition of adjusted EBITDA contributions from our completed internal growth projects, should contribute to increased free cash flow in the future. We intend to allocate this incremental free cash flow toward long-term strategic priorities that include paced growth in the quarterly cash distribution, targeted investments in optimization projects, and attractive niche acquisitions.
10-second takeaway
Until Timothy Go takes the CEO reins at the beginning of 2016, Calumet Specialty Products will probably remain in a bit of a holding pattern in terms of strategy. It still has a few capital projects to work on that will help the bottom line, but it's hard to see the company making any significant strategic investments or changes until Go takes charge. As an investor or someone looking at Calumet, it's probably best to do the same thing. Until we get a clearer picture of what the company plans to do under its new CEO, it's best to either hold on to the shares that you do have or wait on the sidelines if you don't own any.
