Aug 07, 2008 Calumet Specialty Products (CLMT) Buy: Balance sheet risk seems to be addressed; Now focus on the future SOURCE OF OPPORTUNITY: Calumet appears to have successfully navigated through the challenging operating environment without violating its debt covenants, removing a significant risk overhang. We expect the improving environment to result in 2H08 earnings growth and a potential distribution increase in 4Q08, providing a boost to units trading at a steep discount to the peer group. CLMT reported 2Q08 segment gross profit of $76.1 mn vs. our estimate of $46.5 mn; however, results include a $59.8 mn LIFO gain plus numerous other one-time items making comparisons difficult. We maintain our Buy-rating and $22 12-month target price. CATALYST: Investors’ recognition of an improving operating environment is the main catalyst. With balance sheet concerns seemingly addressed, Calumet can focus on future growth opportunities and asset management. Not only did CLMT pass their strict debt covenants but they exited 2Q08 leaner with lower inventories, a pared-down workforce, and with an improved crude hedging program. More importantly, market dynamics appear to be improving: (1) the difficult refining environment resulted in several competitors leaving the specialty product business reducing competitive supply of CLMT key products and (2) lower feedstock costs (crude down ~15% since 6/30) should enable CLMT’s specialty segment margins to return to 2007 “normal” levels. Also, the Penreco acquisition and Shreveport refinery expansion will both generate EBITDA during a full 3Q. VALUATION: Our price target is based upon a combination of our yield based target price methodology utilizing a 33% 12-month distribution growth rate and sector-high 10.0% company-specific yield as well as a NAV analysis. KEY RISKS: Interest rate changes generally affect MLP valuations. The Goldman Sachs Group Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.