Just when everything at Calumet Specialty Products Partners (CLMT) looked to be on the upswing last quarter with its first positive earnings result in years, the company took a big step backward recently. Not only did it fail to report earnings on time, but it fell back into the loss column.
Even though these aren't good signs, there are also reasons to be hopeful that the company will produce much better results in 2018. Here's a look at the company's most recent results and why investors may be pleasantly surprised by Calumet's upcoming performance.
Image source: Getty Images.
By the numbers
| Metric | Q3 2017 | Q2 2017 | Q3 2016 |
|---|---|---|---|
| Revenue | $1.1 billion | $1.03 billion | $966 million |
| Adjusted EBITDA | $95.7 million | $101.6 million | $53.9 million |
| Net income | ($23.6 million) | $9.6 million | ($33.4 million) |
| Limited partners' interest in net income per share | ($0.30) | $0.12 | ($0.42) |
| Distributable cash flow | $40.2 million | $45.2 million | $10.4 million |
Data source: Calumet Specialty Products Partners earnings releases.
Let's address some of the most prominent issues this past quarter that resulted in the return to the loss column. Management noted in its press release two things that had the largest impact: Hurricane Harvey and the implementation of a new enterprise resources planning system -- think business management software that handles back-end services like accounting and payroll. According to management, the implementation and delays related to this new system cost an additional $10 million that should be a one-time expense. Additionally, management noted that Hurricane Harvey delayed the delivery of several high-margin specialty and branded petroleum products, which showed up in the company's segment earnings breakdown.
Data source: Calumet Specialty Products Partners earnings release. Chart by author.
If this is the case and those shipments were indeed just postponed, then we should see a drastic increase in specialty product segment earnings in the fourth quarter.
Not everything was bad for the company, though. Continued improvements to operations and improving refining margins led to higher fuel segment earnings, and increased drilling activity helped boost oil-field services results for the quarter. These two improvements suggest that the excuses management gave for the past quarter are indeed legitimate.
According to the improvement plan that CEO Timothy Go implemented in 2016, improved operations are supposed to lead to eventual debt reduction and an improved balance sheet. That part of the plan has yet to materialize, as Calumet still has $1.9 billion in debt on the books. However, the company did announce two asset sales in the quarter -- its Superior, Wisconsin, refinery and its Anchor Drilling Fluids business -- which will likely go to pay down debt.
What management had to say
As part of the press release, Go took some time to discuss the results of those two aforementioned asset sales and how they fit into the long-term strategy of the company.
In November we closed the sale of our Superior, WI refinery, as well as the divestiture of Anchor Drilling Fluids USA, LLC for a total announced consideration of approximately $576 million. We expect that net of final closing cost adjustments and after transaction expenses, we will actually realize approximately $600 million from these divestitures. All of these efforts will allow Calumet to deleverage its balance sheet, lower volatility, and ultimately allow the Partnership to focus more meaningful attention and capital on our core specialty business.
What a Fool believes
Despite the tough quarter, Calumet Specialty Products Partners' management is making the right moves to turn this business around. So far, Go has delivered on the first phase of his turnaround plan, which was to improve operational efficiency to get more out of the existing business. In a little less than two full years at the helm, he has been able to improve operating performance and has sold off its less desirable assets to focus capital spending on its core business.
With that part of the plan more or less complete, the next phase will be to trim down that debt load. That $600 million will be a large chunk of it, but it still has much more to go in 2018. The one thing working in investors' favor for this next step is that Go was able to pull off the first part of the plan. If he can achieve debt reduction this year, then perhaps the company can finally get back to paying a distribution to shareholders.
