On the one hand, Calumet Specially Products Partners (NASDAQ:CLMT) and Ashland (NYSE:ASH) are polar opposites. The former is an MLP that focuses primarily on specialty petroleum products, while the latter is primarily a specialty chemical maker. That said, at their core, both companies make specialty products, which are not only exposed to commodity prices, but economic sensitivities, too. This exposure isn't necessarily a bad thing, but as I'll point out, one company is going about managing its exposure the wrong way, which makes the other the better buy given that it's a much less risky bet.
Comparing the balance sheets
After a recent debt offering to bolster its liquidity, Calumet Specialty Products Partners' leverage ratio surged to an unsightly 14.3 times debt to adjusted EBITDA. Further, its debt-to-capital ratio now stands at 81%. These are clearly troubling figures and a big reason why the company's unit price is down 80% over the past year. Having said that, another reason its leverage numbers are so high is because the company's fuel products segment is currently generating negative EBITDA thanks to weak margins. That forced the company to take action to bolster its liquidity, which further bloated its already awful leverage metrics.
Ashland, on the other hand, has a much stronger credit profile thanks to the relative stability of its core specialty ingredients and performance materials segments. That said, its credit rating is still below investment grade, which is something to keep an eye on. However, even with that less-than-stellar credit rating, Ashland clearly has the better balance sheet, giving it the points here.
Contrasting the business models
As mentioned, Calumet Specialty Products Partners is structured as an MLP, which gives its investors some tax advantages. However, in an ideal world, an MLP's income would be almost entirely backed by fee-based assets in order to provide greater cash flow stability to support investor distributions. That's clearly not the case at Calumet Specialty Products Partners, because its cash flow is exposed to both commodity prices and volume risk. In fact, more than half of the company's specialty products volume is price-driven, which weighs on margins. Meanwhile, both its fuel products and oilfield services products are exposed to commodity price and volume risk. While the company does hedge some of its commodity price exposure, that hasn't been enough to insulate its earnings from volatility.
Ashland faces many of these same risks, but without the added burden of being structured as an MLP. Because of that, it has been able to retain a lot more cash flow to reinvest in its business than Calumet, which until recently had distributed virtually all of its cash flow back to investors. That's a key reason there's such a big discrepancy between the two companies' balance sheets.
Without the burden of being structured as an MLP, Ashland has the better business model because it can retain more cash flow to ride out the volatility of commodity prices and volume fluctuations.
Considering the upside
With its unit price down roughly 80% over the past year, there's huge potential for a turnaround at Calumet Specialty Products Partners. That's just what the company expects to do, with it recently hiring a new CEO to turn things around. In fact, the company has already outlined its new vision, which includes optimizing its asset base to generate stronger earnings from its current assets, investing in opportunistic "self-help" projects to deliver quick payouts and drive earnings growth, while also restructuring the portfolio to focus on high-return, niche specialty markets. If successful, the company has the potential to not only recapture its recently lost value, but create additional shareholder value as it grows earnings past its recent peak.
Ashland is also pursuing its own value-creation plan, with the company announcing it would separate its Valvoline business via an IPO and subsequent spinoff. That would allow both its retained specialty ingredients and performance materials segments to pursue their long-term growth strategy, while freeing Valvoline to pursue its own growth strategy. It's a transaction that could unlock a lot of value in the near term, while driving solid long-term value creation as both companies pursue their visions for growth.
There's a lot to like about both companies' strategies going forward. There's clear upside at Calumet Specialty Products Partners given its beaten-down unit price and the fact that it's putting a turnaround plan in action. That said, there's a lot of risk the plan won't work. Not to mention the fact that the company has a lot of debt, which limits its flexibility. Ashland's upside, on the other hand, might not be as high, but it is a bit more of a sure thing. These differences make picking a winner for this particular battle hard because an investor could go either way, depending on her risk tolerance.
While there's a ton of upside potential at Calumet Specialty Products Partners, there's a real risk this company could need to restructure its debt in the future if everything doesn't go as planned. However, investors not afraid of that risk could be very well rewarded in the future. That being said, Ashland has solid value creation potential without the added risk, making it the better buy between the two, in my opinion.