In the past I've explained why Calumet Specialty Products Partners (CLMT +0.00%) is my favorite refiner and why I believe its sky-high 9.6% dividend yield is relatively safe. That investment thesis is partly based on the somewhat contradictory fact that refining margins can increase when oil prices crash, especially with specialty refiners such as Calumet. That's because oil, the primary input cost, usually declines far more than the price of the 5,000 specialty chemicals the master limited partnership produces.
Calumet's latest earnings show it is firing on all cylinders in executing on its long-term plan to diversify its operations and permanently secure its distribution.
Blowout earnings results
Calumet's sales for the quarter came in at $1.339 billion, up 7.7% from the same year-ago quarter. Full-year 2014 revenue increased 6.8% to $5.79 billion.
Adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, increased more than 43.6% for the quarter, to $76.4 million, excluding one-time items, compared to last year's quarterly result of $53.2 million. For the full year, adjusted EBITDA was up 152%, to $156.1 million, from $51.4 million in 2013.
The massive improvement in adjusted EBITDA came from reduced downtime at the MLP's refineries and improved gross profit margins in its specialty products.
Most important to income investors was that distributable cash flow, or DCF -- the cash left over after paying expenses and maintenance capital spending -- which is used to pay distributions, nearly quadrupled during the quarter, from $10.6 million to $38.2 million. For the full year, DCF soared 672%, from $18.5 million to $142.9 million.
While that did not cover the $190.6 million in total distributions paid out over the year, excluding special one-time items Calumet generated $203.8 million in DCF, resulting in an adjusted distribution coverage ratio of 1.07 for the year and 1.9 for the quarter.
What investors should focus on going forward
Refining is a highly cyclical business, which is why I love Calumet's long-term strategy of diversifying away from commodity fuels and into specialty chemicals and the oil services industry.
Management's main focus for driving growth is its four refinery-based organic growth projects, including a joint venture to construct the first new American oil refinery since the late 1970s, in North Dakota. Calumet has thus far invested $440 million into these projects, and expects all of them to be complete within one year and require an additional $200 million to $225 million in capital investment.
Investors should be excited about these projects because Calumet is achieving an average rate of return of 24% on its invested capital and estimates these projects will add $128 million to $157 million in annual EBITDA. This represents a potential increase of up to 100% over 2014.
Management said it has $323 million in available liquidity and estimated it will need $285 million to $335 million to complete its 2015 growth and maintenance needs. This should allow Calumet to complete its growth initiatives with a minimum of new equity issuances, which should help the MLP permanently secure the distribution and set the stage for future growth of the payout.
Takeaway: Calumet's latest results mean a distribution cut is less likely and make this an appealing long-term investment
Long-term investors know that a single quarter's or even an entire year's results are not necessarily representative of a company's potential to generate income and wealth. However, given investors' concerns with Calumet's difficulties in 2013, I think the latest quarterly and full-year numbers show a promising upward trend that justifies income investors considering Calumet Specialty Products Partners for a spot in their diversified income portfolios.
