Perhaps I'm biased because I spend most of my working time looking at oil and gas companies, but Calumet Specialty Products Partners (NASDAQ:CLMT) CEO Timothy Go has to be in the running for chief executive of the year after this most recent earnings report. This is a company that looked like it was on the brink of financial failure, and in just 18 months, Go has turned it around into a well-run, profitable business.
Let's examine Calumet's second-quarter earnings report to see what Go has done to turn this ship around.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$1.03 billion||$937.4 million||$972.9 million|
|Adjusted EBITDA*||$101.6 million||$78.7 million||$70.0 million|
|Net income||$9.6 million||($6.2 million)||($147.9 million)|
|Limited partners interest in net income per share||$0.12||($0.08)||($1.89)|
|Distributable cash flow||$45.2 million||$31.5 million||$31.7 million|
For years, Calumet couldn't get out of its own way to be a profitable company. Its original business model of selling specialty refined petroleum products was a unique niche that was one of the higher-margin businesses for the oil and gas industry. The problem was that the previous management team was poor at allocating capital and running a tight operational ship, leaving the company with an unprofitable business completely overburdened with debt.
So, at the beginning of 2016, the board brought in Go, who immediately went to work improving operations by cutting costs, divesting of unprofitable assets, and focusing on its suite of specialty products. This quarter was the culmination of this effort as the company posted its first profitable quarter in over two years. In fact, EBITDA from its bread-and-butter business this past quarter was the highest since 2014.
With all three of Calumet's business segments generating a positive result, the company was able to produce enough free cash flow to pay off some borrowings under its credit revolver and add $22 million in cash to the balance sheet. The higher EBITDA result and extra cash helped to lower the company's debt-to-adjusted EBITDA ratio to 7.7 times. That number by no means is a good result, but it is a lifetime better than what it was a year ago.
If Calumet can maintain these kinds of results for a couple more quarters, then it wouldn't be surprising of management made some big financial moves to improve its debt profile. As it stands, the average interest rate on its debt outstanding is 7.9%. Don't be surprised if management uses some combination of debt and equity raises to refinance some of these borrowings and lower its interest rates.
What management had to say
Go has made a lot of progress thus far at Calumet, and he touted the company's improvement since he took the reins in Calumet's press release. He also said he thinks there are more opportunities to wring out more inefficiencies and grow earnings from its existing asset base.
Through the first half of 2017, we have seen significant year-over-year improvements in margin and Adjusted EBITDA contribution from all of our business segments. Our core specialty products segment delivered another strong quarter of margin growth and Adjusted EBITDA. Our oilfield services segment returned to profitability for the first time since 2014, and our fuels segment had increased year-over-year margins despite a turnaround at the Superior refinery during the second quarter. The Partnership's performance this quarter resulted in net income of $9.6 million and Adjusted EBITDA of $101.6 million, an improvement of 45% year-over-year. We remain focused on our efforts to increase operating efficiencies, grow our sales volumes and deliver new and innovating products to the marketplace, all of which will support our efforts to drive even greater value over the long-term for Calumet's unitholders.
What a Fool believes
Calumet's stock looked toxic a couple of years ago, but Go has done an incredible job of transforming this company. Even the most aggressive investors couldn't have anticipated how quickly Calumet returned to profitability. Management may have a few more tricks up its sleeve to improve operations, but it appears that the first phase of Calumet's transformation is complete.
The next big step will be to repair its balance sheet. Ideally, the company will use a combination of free cash flow and new debt issuances to lower its overall debt load and interest expenses. Hopefully, in the next several months, we will see some progress on this front as well.