Fools who know me would say that I'm a pretty patient guy. Given these extraordinary times, however, I believe that three consecutive strikes are sufficient to call a company "out!" 

For refiner Calumet Specialty Products (NASDAQ:CLMT), each of the past three quarters have raised major red flags. First, we had a net gain achieved largely by a one-time LIFO liquidation. In the third quarter, the company reported a loss from massive derivative losses and reiterated warnings concerning its ability to maintain compliance with debt covenants. For the fourth quarter, Calumet again managed to profit, and even perpetuated a dividend that's yielding over 14%, but severe underlying challenges provide the third and final strike.

As with fellow refiners Valero (NYSE:VLO) and Holly (NYSE:HOC), the abrupt collapse in oil prices during the second half of 2008 permitted profitable operations despite a challenging demand environment. Calumet earned $18.5 million as last year's Penreco acquisition and Shreveport refinery expansion bolstered gross profit from almost $28 million a year ago to more than $81 million for the quarter ended. Gross profit from the specialty products unit continues to gather strength, but that's about where the good news ends.

Cheaper oil was certainly a double-edged sword for Calumet in the fourth quarter, with leaner crack spreads on unhedged fuel sales dragging the fuel segment's gross profit down more than 75% from the prior year. Derivative contracts of the type that plagued third-quarter results reared their head once again for a $28.4 million loss.

With a third blow from cheaper oil, Calumet also indicated that sustained low prices could limit the company's borrowing capacity by reducing the value of existing crude oil inventories. While not as hefty as Western Refining (NYSE:WNR)'s $1.48 billion debt, Calumet's $460 million in long-term debt remains an unwelcome burden. Since compliance with debt covenants remains a stated concern for management, it appears Calumet faces a conundrum where it needs oil prices to move higher even though cheaper oil is typically best for refiners.

Citing these significant constraints upon Calumet's ability to benefit from lower oil prices, the stock pickers at Motley Fool Income Investor struck Calumet from their roster of recommended dividend plays in December. As long as major players like Conoco Phillips (NYSE:COP) and Tesoro (NYSE:TSO) continue to operate well below capacity, the operating environment for refiners remains too tough to call. The easy call, however, is to avoid Calumet Specialty Products.

Further Foolishness:

343 CAPS members expect four-star pick Calumet Specialty Products to outperform the S&P 500. Will you follow the Fools, or blaze your own trail? Join the free CAPS community today and share your own thoughts about Calumet.

Fool contributor Christopher Barker reminds Fools to perform DDDD: due diligence on demand destruction. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Valero Energy.

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