May 29, 2019 - 6:54pm EST by
Rulon Gardner
2019 2020
Price: 4.52 EPS 0 0
Shares Out. (in M): 78 P/E 0 0
Market Cap (in $M): 352 P/FCF 3.5 0
Net Debt (in $M): 1,379 EBIT 0 0
TEV (in $M): 1,731 TEV/EBIT 0 0

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  • Specialty Chem
  • Deleveraging
  • Asset Sale


Calumet Specialty Products Partners is a rare MLP that is trading at below bankruptcy liquidation value
and yet offers 2-6x upside in the next 5 years if the company simply pays down debt. Calumet owns a
specialty chemical business and a fuel refining business which creates a GoodCo/BadCo dynamic that is
hard for most investors to understand. It is also a MLP that does not pay a distribution which means
there is no natural shareholder base for the company. In the last 8-9 years, the company has gone from
making $2.5bn of acquisitions and capital intensive organic projects to divesting non-core assets and
ramping down to an $80-90mm of annual cap ex run rate. We believe that the sum-of-the-parts is
worth over $2.4-2.8bn today which leaves $896-1246mm to the equity consisting of the following:
$1.8-2.0 billion for specialty chemical business 9-10x of $200 2019 annual EBITDA
$400-500mm for Montana refinery
$50-100mm for San Antonio refinery
$25mm for 10% of a JV for previously sold fluid handling business
$153mm of cash @ Q1 2019
For a total of $2428mm to $2778mm of total gross value
Less $1532mm of long and short term debt @Q1 2019
Implied equity value of $896mm to $1246mm divided by 78mm units equals
Implied share price of $11.49 to $15.97 per unit or upsides of 156% to 256%
The 2019 EBITDA should be in the $280 to $320mm range. This implies a market cap of $350mm and an
EV of $1882mm. Obviously, net debt is higher than we like at 4.3x to 4.9x. We believe that this will
rapidly change in the next 18 months. The reason why we have an opportunity to buy a company
trading below bankruptcy liquidation value with 2-6x of upside in the next 5 years is because there were
some missteps in 2018. Admittedly, some of the missteps were out of the management teams’ control.
But there were some self induced missteps that could have been avoided. First, CLMT had very large
turnaround activities in 2018 that were very poorly communicated to the buy side. Management team
has a tendency to talk to all the sell side analysts and the sell side models tend to be more on par with
the reported figures. But the buy side were blindsided by the degree of the turnaround activities
(shutting down plants to conduct maintenance work so that they can run for another 6-7 years at high
efficiency). We believe this is due to the CEO not having public company experience and is learning on
the job on how to be a public company CEO. Some of the other shareholders has more choice words to
describe this dynamic that starts with F.
Near Term Asset Sale
The company has consistently said that they want to sell the refining assets and go back to being a pure
play specialty chemical business that sells branded lubricants, customized white oil, waxes, base oil, and
specialty solvents. They have been saying this for a couple years now, so why is it going to happen in
the next 18 months? Management team has also consistently said that they want divestitures to be
deleveraging transactions. Now that we have the 2018 reported financials, it is clear that management
team knows that specialty EBITDA will be quite low on a TTM basis. Calendar 2018 specialty EBITDA
came in at about $166mm excluding LCM/LIFO. So if they sold the refining assets for the midpoint of
$450mm and $75mm, they will be left with a net debt of $1532mm-$153mm cash less $525mm sales
proceeds = $854mm which equates to a net debt to remainco EBITDA of 5.3x. Yes, it will be pure play
specialty EBITDA, but it will be hard to try to roll the 2021, 2022, 2023 debt coming due with a high
leverage ratio like 5.3x. We believe that the management team wanted to extract the cashflow from the
fuel refinery for an additional year and show the 2019 results which will not have non-recurring items
like turnaround activities, ERP implementation cost, acquisition cost, etc. We believe that Calumet’s
2019 specialty EBITDA is on target to do $200-225mm. If we fast forward to when the company reports
Q3 2019, we will generate another $50mm of FCF. The net debt will likely be reduced to $804mm. With
a denominator of $200-225mm of specialty chemicals EBITDA, this will imply a 3.6 to 4.0x net debt to
EBITDA. A lot of the MLP unit holders would like the company to start paying a distribution. Frankly, we
prefer the company to get leverage to sub 3.0x before they turn the distribution back on.
The key question going forward is will the debt capital markets allow the company to roll the debt. We
have spoken to many smart distressed debt investors. When we bring up potential liquidity induced
bankruptcy a la General Growth Properties style, we essentially got called a “lunatic” for even imagining
such a possibility. The view is that the debt will be rolled and the key question is at what coupon rate.
The debt currently trades at roughly an 8% yield. It is easier to refinance the debt on a secured basis.
But that would prime the unsecured that are coming due in 2022 and 2023. Thus management team
would like to access the unsecured market in 2019 if possible.
Business Description - Fuel
So what does Calumet do? On the fuel refining side, they source crude oil and turn it into gasoline,
diesel, asphalt etc. It is important to point out that Calumet owns a strategic asset in Great Falls,
Montana just across the border from Canada’s oilsand fields. Over time, we have grown to appreciate
the strategic value of this asset. It is well known that there isn’t enough takeaway capacity to handle
the Western Canadian Select crude produced by the Canadian E&P companies. A lot of the crude leaves
via rail to the Gulf coast in the US. Hence, this facility can capture a $20 spread between WCS to WTI.
Its refining spread is essentially the cost to ship a barrel of oil from Alberta to the Gulf via rail. We do
not like the capital intensive fuel refining business given that it requires a lot of capital and occasionally
the refineries blow up. But there is a lot of NIMBYism dynamic in owning a fuel refinery and there has
only been five new refineries built in the US since 1998 adding 231,000 barrels/day of capacity while US
crude production has surged from 6.25mm barrels/day in 1998 to almost 11mm barrels/day. Nobody
wants a giant crude refinery in their backyard. This is the reason why banks will finance fuel refineries
and why they get sold in bankruptcy auctions. While they trade for low EBITDA multiples of 4-5x, they
are not like shipping assets.
In 2018, Calumet’s fuel refining business generated $134.5mm of adjusted EBITDA excluding LCM/LIFO.
The figures for 2019 will be lower as the WCS/WTI spread has narrowed. By applying a 4-5x EBITDA
multiple, we arrive a combined value of $450 to $600mm for the two refineries.
Business Description Specialty Chemical
What about CLMT’s specialty business? The previous write ups on VIC have done a good job describing
Calumet’s various specialty businesses. We have spent quite a bit of time looking at them and talked to
industry folks. The way that we understand the business is that there are four subsegments of the
specialty business, Solvents, Base oil (Naphthenic and Paraffinic), Penreco (White Oil), and Branded
products (Royal Purple, Belray, and TruFuel).
Per our conversation with an industry contact, Calumet makes non-commoditized solvents that occupies
a bit of niche market. On the Naphthenic side, Calumet and Argon are the only remaining players.
Many players exited this space in the 90s leaving a bit of a duopolistic/oligopolistic structure. The
Paraffinic base oil is currently being hurt by addition of capacity worldwide. On the white oil side,
Calumet provides custom formulations for their customers. Think Hawaiian Tropic tanning oils, body
lotions, Jergen’s, etc. People put this stuff on their body and the relationship is very sticky, pun
intended. Renkert (Chevron) and Sonenborn (HollyFrontier), and Calument are the three main players in
the white oil business. Calumet can make the white oil from crude while Renkert has to buy an
intermediate product. Calumet also makes the wet content inside a WD-40 can. They make the content
for Vaseline.
On the branded side, they paid over $331mm to acquire Royal Purple. We have spoken with a car
enthusiast who claims that Royal Purple helps the engine run cooler and throws off more power. When
we were at a base oil conference, everyone has heard of Royal Purple and was amazed that people will
pay $11-12 a quart for engine oil. Management team has consistently said that Royal Purple is great as
industrial lubricants. By comparing notes with another manager, we realized that after Calumet
acquired Royal Purple at 11.7x 2011 EBITDA in 2012, Royal Purple lost a large industrial customer that
accounted for about half of their EBITDA. Hence, the $28mm of EBITDA associated with Royal Purple is
likely about $15mm today. While previous management team has focused on large acquisitions and cap
ex that are in the hundreds of millions of dollars, the current management team headed by Tim Go has
focused on incremental projects that generates 2 year paybacks. They have recently expanded
production capacity for Royal Purple and want to grow their sale into the industrial lubricant market
such as paper and pulp mills, refineries, steel plants, etc. Calumet also owns Belray which is a heavy
grease used in industrial applications. Per a previous write up on VIC, people have very high ratings for
products like Belray. Belray was acquired for $54mm and seems to have done more in line with
Perhaps Calumet’s most prized asset is a product called TruFuel. After the US introduced the blending
of Ethanol into gasoline, it created a crisis for 2 cycle engines, thinking leaf blowers and chainsaws.
Consumers have to mix 40 to 50 parts gasoline to 1 part engine oil. The problem is that they have to
drive around town to find a gas station that does not blend ethanol. Then they have to blend it
correctly. It’s a pain in the butt and messy. Most consumers prefer to buy an off-the-shelf solution like
TruFuel which allows them to pour the product into their leaf blower and go to work. Plus the product is
shelf stable for up to five years and you can leave it in your engine rather than having to drain the fuel
mixture at the end of the season. TruFuel has been growing 20-30% a year and sports a 20+% EBITDA
margin. We believe that TruFuel is roughly a $15-20mm business today and growing rapidly. This is the
key difference between the previous management team and the current management team. TruFuel
owns the category and makes private label products for Husquvarna and Stihl. They essentially have a
monopoly. The previous management team would have starved this unit of capital and would have
chose to make acquisitions and spend heavily on cap ex. The new management team is putting capital
into products like TruFuel and Royal Purple. The difference is that each incremental dollar of EBITDA in
the branded side creates $12 of additional value. With TruFuel growing 20% a year on a $15-20mm
EBITDA base, Calumet’s value is growing $36mm to $72mm a year. Due to the market’s focus on debt
refinance and lack of attention to the granular details, these value creation dynamics are easily gloss
over by the buyside. These detailed observations are also why we are confident that specialty EBITDA
will grow from $200mm to $225mm and eventually to $250mm. It is important to note that as the
company grows their branded products and the White Oil business with investments such as Versagel,
the mix will shift to above 10x EBITDA lifting the overall EBITDA over time. Although, the path has been
more arduous than we have previously envisioned. We are reluctant to give a time line, but 2-5 years is
likely the right range.
Organizational Changes and Management Observations
From 2011 to 2015, the company made $2,514mm of acquisitions and cap ex. Cap Ex has since trended
down to the $80-90mm range. The mix has also shifted towards specialty chemicals which is really
getting back to basics for the company. Over time, the market will be able to more easily value the pure
play segment. From our conversation, the previous management team lead by the founder’s daughter,
made 10 acquisitions but never actually integrated them. Feedback from employees is that Calumet
would do a deal and then have to get ready for another deal before they can fully integrate the first
deal. This is why the company winded up with a bloated structure that doesn’t talk to each other. The
decision making came from the top and general manager did not have P&L responsibility. The sales guys
sold and the production guys produced and the procurement guys procured. Often times, the company
winded up with excess inventory of certain products because the sales guys and the production guys
were not coordinated. Excess inventory over time gets liquidated at unattractive margin. This is
changing as the company recently experienced a lot of pain implementing their ERP. Going forward, the
ERP will allow the company to identify and eliminate low margin customers. We have learned that
implementing an ERP is never as easy as they sound and takes a while. The ERP has been implemented
for 1.5 years now and they are starting to reap the benefits of it. There are benefits of digitizing some
process such as invoices which will allow them to reduce a few personnel here and there which will
generate $1-2 million of cost savings here and there. Most importantly, each general manager that
reports to the CEO now has P&L responsibility. So they are driven by financial incentives to make sure
that their division generates profit. We believe a lot of these incremental improvements in process,
incentives, alignment, and culture were masked by the charges of 2018.
We have had disagreement with other shareholders on the quality of the current management team.
We think Timothy Go is a good candidate. We think he is not the best communicator. But he came from
the Koch industry and is implementing many of the best practices at Koch. He lacks public company CEO
experience in being able to charm investors. The CFO is okay. We would probably prefer a better one.
2019 Compared to 2018
We had previously thought 2018 would be the year when Calumet showed a $225mm of EBITDA in its
specialty business. With the heavy turnaround activities, ERP implementation costs, acquisition cost of
BioSynthetics, etc, it was a disaster from a reporting perspective. But the company did manage to pay
off $400m of 11.5% secured bond and recently bought back $50mm of their 2021 unsecured bonds. At
the end of Q1 2019, the company still had $153mm of cash and their intention is to further pay down
the debt and refinance the $900mm bond coming due in 2021. Traditionally, Q2 and Q3 are the
company’s best quarters. We believe that the 2018 results would be very easy beats due to the large
non-recurring items in 2018. Investors may come out of the wood works and start buying the units.
Over time, the company can extract more cash out of the business by simply asking vendors to extend
payment terms. Right now Calumet can’t pay their vendors the typical 30-45 days. With potential rating
upgrades, Calumet could potentially extract $50mm of additional working capital unwind by simply
paying their vendors later.
Risk 2021 Technical Bankruptcy Scenario
In the worst case scenario, let’s assume that the capital markets shuts down and Calumet has to file for
bankruptcy in 2021.
$1.6billion for specialty chemical business 8x of $200 annual EBITDA
$350mm for Montana refinery
$50mm for San Antonio refinery
$15mm for 10% of a JV for previously sold fluid handling business
$153mm of cash @ Q1 2019
$200mm of FCF from Q1 2019 till Q1 2021
$100mm of FCF during one year spent in bankruptcy process
For a total of $2368mm of total gross value
Less $1532mm of long and short term debt @Q1 2019 and less $100mm of professional fees in
Implied equity value of $836mm divided by 78mm units equals
Implied share price of $10.71 for upside of 140%
The EBITDA multiple would have to drop to a 5x AND the specialty chemical business would have to
drop to $160mm of EBITDA for the equity to be totally impaired in 2021. I think I like these odds.
Five Year Projection
If Calumet refinance the debt at 8% and sell off the fuel refineries in the next 18 months, we wind up
with a clear path to $16-31 in the next five years.
Net debt gets down to $804mm (see previous part of thesis) at year end 2019/early 2020, and the
specialty EBITDA is $200-225mm. Cap ex trends down to $30-50mm. At 8% interest, the interest
payment is only $64mm. This leaves about $86 to $131mm of FCF available to pay down more debt.
With each year of debt pay down, the FCF compounds by 8% times by the debt pay down amount. In
four more years after the refining divestiture, the net debt could be around $300-400mm. Which would
be less than 2x EBITDA. Thus the FCF would be in the range of $126mm to $171mm. In a bullish case
where the EBITDA goes to $250mm in four years after fuel refining divestiture, we can have potentially
have close to $200mm of FCF as the net debt could be lose to $100-200mm by then. By paying out 70%
of the FCF, CLMT Could pay $0.96, $1.53 to $1.85 of distribution per share. Applying a 6% dividend
yield, the units could be worth $16, $25.5 $30.8 respectively. We think the long game is very important
and can be very lucrative. But this is a bumpy ride and it often feels very lonely.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Sale of Refining Assets 

Refinancing of Debt Coming Due

Deleveraging of Balance Sheet

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