Refining is a similarly cold market, which is why Calumet Specialty Products Partners (NASDAQ: CLMT) is also in the icebox. Calumet refines oil and manufactures specialty waxes, lubricants, and oils. It sports a unit-price chart similar to Diamond Offshore Drilling. In other words, it sports a buying opportunity. Calumet’s low unit price is the byproduct of a perfect storm of problems.
The crack spread – the difference between the cost of oil input and the refined output – is at the forefront. The crack spread has declined through most of 2013. In the final quarter of 2013, it averaged $16 per barrel of oil compared to $30 per barrel in the same quarter in 2012. A declining crack spread leads to declining operating margins. By the end of 2013, Calumet’s operating margins had constricted to 2.3% from 6%.
Compliance costs have also contributed to Calumet’s woes. Because Calumet forgoes ethanol in refining many of its products, it must purchase credits – known as renewable identification numbers (RINs). The cost of these credits soared in 2013. Calumet spent $29.6 million on credits in 2013 compared to $3.8 million in 2012.
Major periodic maintenance costs, though necessary, were another inconvenience. In 2013, Calumet spent $67 million in maintenance and repairs to its refineries. This compares to $14.3 million in 2012. To be sure, much of this maintenance was scheduled, but the timing was suboptimal, given the fall in margins and rise in regulatory costs.
When these negatives are aggregated, the impact becomes apparent on the bottom line. In 2013, Calumet generated a $0.17-per-unit loss compared to a $3.50 profit the year before.
I don’t expect another perfect storm in 2014; I do expect cash-flow growth. Thanks to recent acquisitions – Royal Purple among them – and organic CAPEX, Calumet management forecasts a surge in cash flow. The partnership will generate between $190 and $215 million in additional adjusted EBITDA annually over the next three years. If we add $200 million to the $242 million in adjusted EBITDA generated in 2013, we get $442 in adjusted EBITDA for 2014. This is more than enough to cover Calumet’s $2.74 distribution per unit, which yields over 11% on the current unit price.
I sold my CLMT last week after reading about the President’s sale of units, so I no longer have skin in the game for a while. But the article you quote from is simply wrong about 2014. Maybe the problem is that you only quoted a portion of the article, and that makes it misleading. But the part you quoted is wrong.
What’s wrong? Most importantly, the article says that CLMT’s growth initiatives will add $ 190 - $ 215 MM in adjusted EBITDA for 2014. That is flat out wrong. The company said the growth initiatives would add $ 200 MM to adjusted EBIDTA by the time the initiatives are complete in Q1 2016. Nowhere does the company say the $ 200 MM adjusted EBITDA number will be achieved in 2014. In fact, the company says it will spend $ 200 MM on these projects in 2014 and another $ 175 MM in 2015, before all of the extra EBITDA can be achieved. So no way can you add that EBITDA to 2014 numbers. So that’s the big problem.
But there’s more. The article mentions that replacement & environmental costs and turnaround costs will decline in 2014. CLMT says that replacement & environmental costs were $ 64 MM in 2013, and projects that they will be $ 50 - $ 60 MM in 2014. Not much of a drop. Turnaround costs will drop from $ 68 MM to $ 20 - $ 25 MM, so that’s good. But the article doesn’t mention the 2014 elephant in the room. It says RIN costs were $ 30 MM in 2013. It fails to mention that CLMT says the cost of RINs in 2014 is expected to rise to $ 90 - $ 95 MM in 2014, more than offsetting any savings from lower turnaround costs.
The key for distribution coverage is DCF, not adjusted EBITDA. There are 70 MM units outstanding, and to fund a $ 2.74 distribution, CLMT needs to generate about $ 210 MM of DCF, including the GP units and the IDRs. Working backwards, to fund $ 210 MM in distributions, $ 80 MM in replacement and environmental and turnaround costs, $ 100 MM in cash interest expense (probably light considering CLMT’s added debt in 2013), and $ 60 MM in added RIN costs, CLMT needs to get adjusted EBITDA up to $ 450 MM in 2014 (before the added RIN costs, obviously). This isn’t going to happen in 2014. Adjusted EBITDA was $ 20 MM in 2013. It was $ 400 MM in 2013 when everything went the company’s way. Prior to 2013, it was in the $ 150 MM - $ 200 MM range. So I really doubt the distribution will be covered in 2014.
And I’m still upset about the President’s sale of units with no explanation.
great comment as always @jrad52...a welcome voice in the morass of noise
i would say that I think actual cash costs to CLMT for '14 RINs will be lower.. I think they get some offsets? Looking at where RINs traded last year and their cash costs, should be 25-30mn for the year (unless I've got something wrong)....totally agree, coverage is weak in '14 but they will chalk up a decent Q1 based on spreads and declare victory. I also think that at least 2-3mn shares were issued maybe 5-6mn just looking at volumes...so wouldn't surprise me if this runs into the upper 20s into earnings -- now why she sold, that is the rub!
In an extraordinary turn of events the IPCC has called the conversion of food crops for biofuels a big mistake in terms of EROI, consumption of fossil fuels and contribution of CO2.
Not a surprise to anyone who has ever looked at the process and outcome. (That means that the ethanol fuel lobby has ignored the science and focused on the money, only). I wonder if we will ever consider what a poor decision this was and reverse course? The whole RIN thing is not much more than a joke.