It wasn't that long ago that investing in refined oil products manufacturer Calumet Specialty Products Partners (NASDAQ: CLMT) was such a bad idea that it bordered on criminal negligence. The prior management team spent money like drunken sailors trying to diversify the niche petroleum product manufacturer into a fuel refiner and player in the shale oil game. Those investments turned out to be awful and, as a result, the company was forced to stop paying a distribution to shareholders and has been in recovery mode ever since.
Under a new leadership team, though, the idea of investing in Calumet doesn't sound nearly as ridiculous as it used to be. The changes management made in 2017 have this company looking better than it has in years. Does that mean the company is a sound investment now? Let's look at what Calumet's management has done and what that will likely translate to in 2018 to determine if Calumet's stock is a worthwhile investment.
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Getting into fighting shape
Calumet's turnaround over the past couple of years resembles a training montage in an 80s action film. We have this down on its luck company with a bloated balance sheet that needs to make a comeback or potentially face bankruptcy. So it brought in a new trainer in the form of CEO Timothy Go to whip the company back into shape. Under his plan, Calumet has drastically cut operating costs and found ways to eke out the most profit from its existing operations; shed its unprofitable or non-core assets to focus on its bread and butter specialty refined product business; and reduce the company's overleveraged balance sheet.
At the end of 2017, we're like halfway through this training montage. While the earnings results are still not where they need to be for this company to sustain itself long term, it's clear that a lot of progress has been made in the past 24 months. Adjusted EBITDA on a trailing 12-month basis has more than tripled over the past year, total debt to adjusted EBITDA is down from its high of 21 times to 6.6 times, and the company has been able to shed some assets in its less profitable fuels and oilfield services business. The sale of its Superior, Wisconsin fuel refinery means that 69% of the company's gross margin will come from its specialty product business. With higher profitability and some extra cash available from those asset sales, the company should be able to retire some of its high-interest debt before maturity.
The ultimate goal is, of course, to start paying a distribution to shareholders again. We're still a long ways off from that point. A company with that kind of debt to EBITDA load doesn't have the luxury of excess cash lying around to give back to shareholders. Pretty much all retained cash is dedicated to debt reduction and some small capital spending projects that, according to management, have one to two year payoff periods.
What can we expect in 2018?
Because of the company's asset sales, chances are we're going to see a reduction in overall profitability for the company. That isn't necessarily a bad thing, though, if that lower amount of profitability comes with high margins and the company is able to eliminate some high-interest debts. Management thinks it can get another few million in cost reduction from self-help initiatives by the end of the year and meet its goal of saving $150 million-$200 million over three years.
One thing that wouldn't be too surprising is if management tries to shore up the balance sheet via other means such as refinancing its existing debt or issuing equity. If the company were to get a credit upgrade from one of the ratings agencies, it could allow the company to borrow at lower rates than its current borrowings at more than 7%. Other companies in situations similar to Calumet have made similar moves and it has given those management teams more flexibility to invest in the business and accelerate the turnaround process.
Ultimately, though, investors shouldn't expect a whole lot from Calumet outside of these small changes. If the company does shift from this strategy, though, it could be a red flag.
What a Fool believes
There is still a lot of risk involved in Calumet's stock right now. The company is a couple bad quarters of backsliding into its troubles from a couple years ago and it still has a concerning amount of debt.
That said, the company appears to be on the road to recovery and is in much better shape than the dumpster fire the previous management team left for Go to address. Go somehow steered this company away from imminent bankruptcy and you can sort of see how this company could become a viable investment in the future -- it requires a lot of squinting, though.
Personally, I'm not ready to say that Calumet is a stock to buy in 2018, but I do think 2018 will be another year of improvements for the company. If it can significantly reduce its debt load using operating cash or some refinancing, then perhaps Calumet Specialty Products Partners will be worth a second look.
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