Image Source: Kinder Morgan
According to the management team of specialty refining MLP Calumet Specialty Products Partners (CLMT +0.00%), the company's gigantic distribution is safe. However, with a yield north of 24%, the market isn't buying that one bit because the numbers don't back up the company's claims. That's a big problem because numbers don't lie.
A cavernous cash flow deficit
In January, Calumet Specialty Products Partners declared its quarterly distribution, which was in line with the previous quarter's level. In doing so it said that it was "reaffirming its objective of providing all unitholders a stable-to-growing quarterly cash distribution, consistent with expectations for long-term growth in Adjusted EBITDA and Distributable Cash Flow." However, a month later the company reported its fourth-quarter financial results and those numbers were rather atrocious. The company lost money during the quarter with Adjusted EBITDA coming in at a negative $37.6 million, while distributable cash flow was a negative $54.9 million. That's in stark contrast to the year-ago quarter when those numbers were a positive $76.4 million and $39.4 million, respectively.
For the full-year the numbers weren't any better, with adjusted EBITDA falling from $305.9 million in 2014 to just $257.7 million last year. That said, distributable cash flow did increase from $146.3 million in 2014 to $161.9 million this past year. Still, that resulted in the company's distribution coverage ratio remaining a very weak 0.7 times, implying that it is paying out everything it earns, and then some.
Having said all that, the company's results both years were affected by a number of special items, which if adjusted produce slightly better performance. These adjustments actually push the company's coverage ratio back to a more comfortable 1.1 times for the full-year. However, that still doesn't help with the fact that its distributable cash flow last quarter, once adjusted, plummeted to a mere $4.4 million due to very challenging market conditions, down from $94 million in the year-ago quarter.
Leveraged to the hilt
Just as concerning is the fact that Calumet Specialty Products Partners has a very high leverage ratio, whether adjusted or not. For 2015 its leverage ratio, which is measured by debt-to-Adjusted EBITDA, stood at a very worrisome 7.0 times using reported numbers and a just slightly less worrisome 5.3 times using adjusted numbers. Not only that, but the liquidity it is banking on to fund its capex and maintain its very generous distribution is its weakening cash from operations as well as the availability under its $1 billion credit facility, which currently has just $234 million in borrowing capacity remaining. Overall, most of the company's key credit metrics are heading in the wrong direction:
Source: Calumet Specialty Products Partners Investor Presentation.
The concern is that if market conditions worsen it could grow the company's leverage further, especially if it needed to borrow money from its credit facility just to maintain its distribution. That's something a growing number of energy-related companies have been reluctant to do, with many of them choosing instead to slash dividends or distributions and use that cash to fund obligations and bolster their balance sheets.
A prime example of that was Kinder Morgan (KMI 0.88%), which saw its debt-to-EBITDA ratio creep up to 5.8 times last year before it chose to significantly reduce its dividend and use that cash to fund its internal needs. In doing so, Kinder Morgan now expects its debt-to-EBITDA ratio to slowly improve, with it expected to average 5.6 times this year. The point being, if energy infrastructure kingpin Kinder Morgan's dividend wasn't safe, that really doesn't bode well for Calumet's distribution.
Investor takeaway
With a current yield north of 20%, investors don't buy the company's assurances that the payout is safe, and instead have already priced in a steep distribution reduction. The only way to convince them otherwise is for the company to improve its balance sheet and its cash flow, so that its numbers clearly show that it can adequately cover the payout in good times and in bad.
