Calumet Specialty Products Partners Q2 Earnings Are a Testament to Its CEO's Turnaround Plan
Perhaps I'm biased because I spend most of my working time looking at oil and gas companies, but Calumet Specialty Products Partners (NASDAQ: CLMT) CEO Timothy Go has to be in the running for chief executive of the year after this most recent earnings report. This is a company that looked like it was on the brink of financial failure, and in just 18 months, Go has turned it around into a well-run, profitable business.
Let's examine Calumet's second-quarter earnings report to see what Go has done to turn this ship around.
By the numbers
For years, Calumet couldn't get out of its own way to be a profitable company. Its original business model of selling specialty refined petroleum products was a unique niche that was one of the higher-margin businesses for the oil and gas industry. The problem was that the previous management team was poor at allocating capital and running a tight operational ship, leaving the company with an unprofitable business completely overburdened with debt.
So, at the beginning of 2016, the board brought in Go, who immediately went to work improving operations by cutting costs, divesting of unprofitable assets, and focusing on its suite of specialty products. This quarter was the culmination of this effort as the company posted its first profitable quarter in over two years. In fact, EBITDA from its bread-and-butter business this past quarter was the highest since 2014.
With all three of Calumet's business segments generating a positive result, the company was able to produce enough free cash flow to pay off some borrowings under its credit revolver and add $22 million in cash to the balance sheet. The higher EBITDA result and extra cash helped to lower the company's debt-to-adjusted EBITDA ratio to 7.7 times. That number by no means is a good result, but it is a lifetime better than what it was a year ago.
If Calumet can maintain these kinds of results for a couple more quarters, then it wouldn't be surprising of management made some big financial moves to improve its debt profile. As it stands, the average interest rate on its debt outstanding is 7.9%. Don't be surprised if management uses some combination of debt and equity raises to refinance some of these borrowings and lower its interest rates.
What management had to say
Go has made a lot of progress thus far at Calumet, and he touted the company's improvement since he took the reins in Calumet's press release. He also said he thinks there are more opportunities to wring out more inefficiencies and grow earnings from its existing asset base.
What a Fool believes
Calumet's stock looked toxic a couple of years ago, but Go has done an incredible job of transforming this company. Even the most aggressive investors couldn't have anticipated how quickly Calumet returned to profitability. Management may have a few more tricks up its sleeve to improve operations, but it appears that the first phase of Calumet's transformation is complete.
The next big step will be to repair its balance sheet. Ideally, the company will use a combination of free cash flow and new debt issuances to lower its overall debt load and interest expenses. Hopefully, in the next several months, we will see some progress on this front as well.
10 stocks we like better than Calumet Specialty Products PartnersWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Calumet Specialty Products Partners wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 1, 2017
Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.