Will 2018 Be Calumet Specialty Products Partners LP's Best Year Yet?

There's no denying that Calumet Specialty Products Partners LP (CLMT 0.94%) is on the right track regarding its turnaround. The company dazzled with its second-quarter 2017 results, finally returning to profitability and delivering a sharp about-face from the year-ago period. A focus on higher-margin products and organic growth promised to make the chemical manufacturer solidly profitable.

But then third-quarter 2017 results were delayed. And then they showed that the company's business couldn't stay in the black for a second consecutive quarter. There were easy explanations, such as the recent hurricane in Texas that disrupted deliveries to customers and one-time costs from implementing a new internal enterprise resources planning system that will ultimately provide real-time business insights, but Wall Street sent the stock lower anyway.

Should investors be worried about the company's turnaround strategy, or will 2018 be the best year yet for Calumet Specialty Products Partners?

Image source: Getty Images.

The year ahead

To understand what factors have the potential to lift the business in 2018, it helps to look back at the trends that were under way in the third quarter of 2017, the last available as of this writing. Calumet reported the following results for its three segments. 

Data source: SEC filings.

The company still appears to be on track with its against-the-odds turnaround. Total revenue jumped 13% from the year-ago period, while adjusted EBITDA climbed 78%. These leaps occurred on just 3% higher sales volume. Throw in $10 million in special charges incurred from implementing the new enterprise resource planning system and transaction fees related to asset sales, and the $24 million net loss looks more palatable. 

Investors should be encouraged by strong revenue and adjusted EBITDA growth on comparatively insignificant gains in sales volume. Much of the growth came from improvements in fuel products that were driven by more favorable spreads in crude oil prices. Oilfield services also reported a sharp recovery from the year-ago period thanks to more drilling in American shale regions.

Specialty products improved little from the year-ago period in both the most recent quarter and the first nine months of 2017. The segment posted adjusted EBITDA of $161 million in the first nine months of 2016 and $156 million in the same period of last year. That's partly because the segment didn't need much improvement, and partly because it will take time for new product launches to make their presence felt on the income statement. 

Image source: Getty Images.

Despite what seems like stagnation for the segment and the fact that fuel products contribute twice as much revenue, Calumet has conducted itself as if specialty products are its primary segment. That will be closer to the truth in 2018.

Last year the company announced plans to sell its refinery in Superior, Wisconsin, and its Anchor Drilling Fluids business, which contributed to the fuel products and oilfield services segments, respectively. The two sales will net Calumet $600 million that can be used to pay down debt and invest in new product launches for the specialty products segment. The transactions will also reduce the company's exposure to commodity pricing and better position its highest-margin segment as the premier business going forward.

Investors who dig through SEC filings can already see the long-term strategy at work. In the first nine months of 2017, the specialty products segment sold 5% lower volumes of waxes and only 3% more solvents than in the year-ago period, but it increased sales volumes of packaged and synthetic specialty products -- the highest-margin goods marketed by the company -- by 21% in the same period. 

These products made up just 8.7% of total sales volume in the period, but that's a sharp rise from 7.6% of total sales in the prior year. Their share will steadily increase as new products are launched in the next several years, which will be key to achieving consistent profits.

The focus on packaged specialty products will be combined with reduced costs (capital expenditures in 2018 will be no more than $90 million, compared to $425 million in 2015) and efforts to improve the balance sheet, although the latter is unlikely to benefit from any quick fixes.

Even if Calumet used all $600 million in asset sale proceeds to deleverage, its debt-to-asset ratio still would exceed 50%. Considering that operating cash flow remains close to neutral, there's a long way to go to shore up the company's financial health. The market will be closely watching the moves management makes on this front in 2018. 

Investor takeaway

Calumet Specialty Products Partners is poised to continue its turnaround strategy in 2018. The recent asset sales will provide a big boost to efforts aimed at cleaning up an awful balance sheet soured by past decisions and to invest in new products for the future. While management probably isn't done making moves, it could be a little quieter this year as the company focuses on in-house improvements and letting the niche business prove that the long-term vision is worth believing in.

Could 2018 be the best year yet for Calumet? Despite the quick results thus far, this management team seems focused on the long term, not on wooing Mr. Market from quarter to quarter. I would expect the company to steadily improve operations and get back to consistent profits this year -- and that could be all Wall Street needs to send the stock higher. It just might be a little difficult to top the awesome gains from 2017.