Not that long ago, it was hard to say that Calumet Specialty Products Partners (NASDAQ:CLMT) was a worthwhile investment. Investors simply couldn't trust management to make the right decisions after years of poor capital allocation and a lack of focus on operations. With new management in charge and a turnaround plan in place, though, Calumet's trajectory looks to be back on the right path. This most recent quarter's results was a confirmation that this new plan is working.
Here's a breakdown of what has changed at Calumet over the past couple of quarters that led to this quarter's improved performance and what it will take for the company to get back to being a worthwhile investment again.
By the numbers
|Metric||Q1 2017||Q4 2016||Q1 2016|
|Revenue||$937.4 million||$946.9 million||$713.0 million|
|Adjusted EBITDA*||$78.7 million||$27.7 million||$6.6 million|
|Net income||($6.2 million)||($78.0 million)||($67.7 million)|
|Limited partners interest in net income per share||($0.08)||($1.01)||($0.87)|
|Distributable cash flow||$31.5 million||($22.7 million)||($25.1 million)|
Even the most challenging climbs start with those first few steps, and it looks as though Calumet's management is taking the first steps toward turning around this underperforming oil refiner and petrochemical manufacturer. It's been a little more than a year since CEO Timothy Go outlined a turnaround strategy that started with improving operations at its existing facilities. This is where we're seeing the biggest difference today.
In Calumet's specialty-products segment, average volume sales increased 10% thanks to better-run production facilities and a shift toward manufacturing more lubricants and packaged and synthetic products. Higher feedstock costs largely offset those gains compared with this time last year. It's important to remember that the first quarter of 2016 was the nadir of oil prices, so those higher feedstock costs should be expected. It's also encouraging that this most recent quarter also included some planned downtime for maintenance, so these results have room to improve.
The biggest change in results came from its fuels segment. While there were some gains related to better refining margins and lower Renewable Fuel Standard compliance costs, a significant contribution came from the sale of its 50% interest in Dakota Prairie Refining. Dakota Prairie was a new diesel refinery in North Dakota that was supposed to help supply the booming fracking business. However, Calumet struggled to run the facility at a high enough capacity to turn a profit, and the investment theory in the refinery went belly-up when drilling activity in the Bakken evaporated.
The two blemishes on the quarter are the company's oil-field services segment and little progress on improving its balance sheet. Even though drilling activity has been on the rise, Calumet can't seem to find traction with this business unit. That's not surprising, though, since it isn't a core competency of the company. Perhaps with the oil-services industry on the mend, it would be an opportune time to divest this business.
At the end of the quarter, total debt outstanding was $2.02 billion. It appears that Calumet is at the point where it doesn't need to take on more debt to fund operations, but it's not yet at a point where it can pay down that debt load, either.
What management had to say
If anyone deserves a little bit of a victory lap, it's CEO Go. The concern with his turnaround plan was whether Calumet's management and employees could pull it off before its debt load forced it into bankruptcy. These results suggest that this program has taken hold, and Go touted the progress thus far in his earnings statement:
Our solid performance this quarter shows that we continue to turn the corner on our transformation, as we successfully execute against the strategic goals we set last year. We believe that our ongoing efforts to eliminate waste, reduce costs, and capture increased margins across our business have begun to positively impact our financial performance. This was evident by our decreased net loss, solid improvement in adjusted EBITDA and improved sequential gross margins in both the specialty and fuels businesses. We remain focused on further reducing the costs of doing business, while simultaneously growing our sales volumes and creating innovative new products, all of which should help us drive greater profitability in the future.
What a Fool believes
The market left Calumet for dead this time last year. The company was hemorrhaging cash and was crumbling under its massive debt load. Go has done a remarkable job of resurrecting this business through some internal efficiencies and cost cuts. Calumet even announced that it was making a foray into Group III base lubricants. These are an even higher-margin specialty lubricant that should enable the company to improve profitability from its existing lubricant facilities. For that, you have to give him and the rest of the people at Calumet a hand.
At the same time, management still has its work cut out. The amount of money going out the door every quarter in interest payments remains a drag on profitability, and current operations aren't generating enough cash to chip away at that debt load.
Perhaps we have yet to see the full effect of Go's performance improvement plan, though. If that is the case, then it will certainly be worth checking in when Calumet reports earnings for the rest of the year.