There are two things that need to happen for Calumet Specialty Products Partners (CLMT) to get back to being a profitable business that pays a generous distribution to its investors: Cut costs from its operations to ensure better cash flows, and get its debt levels under control. This past quarter, the company made continued progress on operations, but debt remains a big issue.
Let's take a look at some of the things Calumet has done to improve its operations and when those things will translate into the bottom line results investors have been hoping for.
Image source: Getty Images.
By the numbers
| Results* | Q4 2016 | Q3 2016 | Q4 2015 |
|---|---|---|---|
| Revenue | $946.9 | $966.6 | $898.0 |
| Adjusted EBITDA | $27.7 | $53.9 | ($37.6) |
| Net income | ($78.0) | ($32.7) | ($116.8) |
| Limited partners interest in net income per share | ($1.01) | ($0.42) | ($1.56) |
| Distributable cash flow | ($22.7) | $10.4 | ($54.9) |
*IN MILLIONS, EXCEPT PER-SHARE DATA. DATA SOURCE: CALUMET SPECIALTY PRODUCTS PARTNERS EARNINGS RELEASE.
Calumet's most recent on paper results seems to be a retread of the same thing we have seen over the past several quarters. Namely, it can't seem to translate its operations into actual profits. While there are still some big hurdles to overcome in that regard, there are some initial signs that CEO Timothy Go's plan to turnaround the company are actually starting to work.
The two examples of this are in the company's specialty products and fuels segments. In both business lines, we saw some tangible improvements in operations. Even though gross margins for its specialty products segment declined significantly because of higher feedstock -- crude oil -- costs, it was able to produce similar adjusted EBITDA results because of a big decline in costs.
Similarly, its fuels segment saw a strong turnaround in its results despite this past quarter being a very tough one for refiners in general. One of the big reasons it was able to achieve this is it improved its operations at its fuels facilities. Refining crude oil into things like gasoline and diesel is a high fixed cost business, so to be profitable a company needs to run its facilities at a high utilization rate and keep its costs down. Calumet increased its total volumes sold by 13.7% thanks to the recent completion of a refinery expansion project as well as using more heavy sour Canadian crude -- a less expensive crude oil than domestic light sweet crude -- to improve margins.
The one segment that continues to lag is Calumet's oilfield services business. What is even more discouraging about those results is that total rig counts this past quarter continue to rise. This business hasn't produced a positive result since Q4 2014, and it will take a much higher rig count to turn a profit. Considering the strides the company is making on its other two business lines, one has to wonder if oilfield services will continue to be a part of the long term business at Calumet.
Source: Calumet Specialty Products Partners earnings. Chart by author.
Despite these operational improvements, they have yet to translate to improved bottom line results. One big reason for that is that the company's interest payments continue to balloon. Cash interest for the fourth quarter increased from $25 million in Q4 2015 to $44 million in Q4 2016. So even after the improvements in operations, it is being quickly sapped by its debt load that now stands at $1.99 billion. The next big step for the company after improving operations will be to start tackling this bear of a debt load, without doing so, it will be extremely difficult for the company to ever get back to paying a distribution to its shareholders.
What management had to say
CEO Timothy Go; on the outlook for 2017:
As we enter 2017, we do so with cautious optimism as we believe our strategy to eliminate waste, drive efficiencies and develop best practices across our organization is working. We completed additional cost reductions early in 2017, through ongoing headcount rationalization and other waste reduction initiatives. We believe these efforts will remove an additional $10 million to $20 million in annualized SG&A expenses. Further, we adjusted our product pricing within our specialty products segment in January to increase our margin capture and to offset the continued increases in prices of our crude oil feedstocks. Both of these initiatives, as well as several others like our recently announced packaging agreement with BP, have us on track to hit our original $150 million to $200 million Adjusted EBITDA target for our operations excellence self-help initiatives by the end of fiscal year 2018.
What a Fool believes
Calumet looked like a company being left for dead less than a year ago. The company's operations were bleeding cash and it's a surprise that its creditors haven't come calling. It is still way too soon to tell if Go's plan of turning this company around will be successful, but there are some small promising signs. If the company can continue to cut costs and start generating some consistent cash flows, then it may be able to start finally paying down its onerous debt load.
The degree of difficulty for this plan is still high, though, and it will take a lot of things to swing Calumet's way for it to happen. The company may be headed back in the right direction, but it is still a long ways away from being a worthwhile investment.
