What to Expect From Calumet Specialty Products Partners LP in 2018

The specialty hydrocarbon product manufacturer expects to continue its swift turnaround in the coming year.

Matthew DiLallo
Matthew DiLallo
Dec 20, 2017 at 3:48PM
Energy, Materials, and Utilities

Calumet Specialty Products Partners (NASDAQ:CLMT) nearly collapsed in 2016 under the weight of debt after its profitability crumbled, which caused units to lose 80% of their value. However, the master limited partnership (MLP) has worked tirelessly on its turnaround plan and delivered nearly flawless execution on its strategy in 2017. As a result, units almost doubled in value this year.

While that's a tough act to follow, investors can expect the company to continue working on its turnaround plan in 2018, which should further boost profitability.

A refinery storage tank with the sun rising in the background.

Image source: Getty Images.

Expect more self-help actions

When Calumet launched its turnaround plan in 2016, one of its aims was to generate $150 million to $200 million in cost savings and incremental earnings from improved margins via a variety of self-help initiatives by the end of 2018. The company captured $89 million of that target in 2016 and is on pace to realize another $50 million to $60 million in improvements this year, putting it within striking distance of its goal.

Because these efforts are bearing fruit, investors can expect the company to continue pressing on toward its target in 2018, with it needing to capture about $60 million more from its self-help efforts to hit the high end of its target range by year end. If the company can achieve the top end of its goal, it would be in an even stronger financial position going forward.

Expect additional portfolio turnover

One of the drivers of Calumet's transformation in the past year has been strategic asset sales. The most crucial was the sale of its Superior oil refinery, which provided the company with $492 million in cash. Those proceeds enabled it to reduce its leverage ratio from an unsightly 90% to a slightly less concerning 76%. Further, the deal will improve cash flow going forward because the company won't need to spend the $100 million it had planned for maintenance and other activities at the refinery next year. That will free up this capital for further debt reduction and other growth projects.

It's possible that the company could continue trimming its portfolio in 2018 by jettisoning some other businesses. That said, with its balance sheet on a firmer foundation, Calumet doesn't need to sell assets and instead could look to add to its portfolio. In fact, one of the company's aims is to target opportunities to complement its core focus on making higher-value specialty hydrocarbon products like lubricants and waxes with acquisitions. The company would like to buy businesses that will provide stable cash flows and new growth opportunities so it can generate steadier returns for investors in the coming years.

Two hands shaking with a refinery in the background.

Image source: Getty Images.

Expect a new go-forward plan

Next year will mark the final one on Calumet's three-year turnaround plan. Because of that, it's likely that the company will unveil a new long-term vision before the end of 2018. That strategy will hopefully give investors an idea of how much it expects to grow in the future.

In addition to that, the company might even announce a plan to start returning cash to investors once again. As an MLP, Calumet should distribute the lion's share of its cash flow to investors, but it stopped paying them in early 2016 to improve its liquidity position and reduce debt. However, with its financial situation on a firmer foundation, and its revamped portfolio positioned to generate a more stable cash flow profile, Calumet might be able to reinstate shareholder distributions by the end of next year.

Don't expect a repeat performance

Calumet Specialty Products' turnaround plan delivered as hoped this year, which sets the stage for continued success in 2018. That said, it will be nearly impossible for it to mirror 2017's performance when units skyrocketed. While the company's continued turnaround efforts could keep pushing units higher, it's also possible that they could take a breather this year, especially if it falls short of its self-help goal, or the company announces an unpopular acquisition.