March 30, 2020 - 6:17pm EST by
2020 2021
Price: 70.00 EPS 0 0
Shares Out. (in M): 77 P/E 0 0
Market Cap (in $M): 84 P/FCF 0 0
Net Debt (in $M): 1,225 EBIT 0 0
TEV ($): 1,300 TEV/EBIT 0 0

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Calumet (CLMT) bonds


The CLMT bonds offer very good risk reward and I expect them to trade to par (up 30 points) over the next 2 years. I recommend VIC members read the bond (altaloma) and equity (Todd1123, Rulon Gardner) write-ups on VIC from 2016 and 2017/2019. A lot has changed with the cap structure and asset portfolio since altaloma’s write-up, but his note presents a nice overview and contrast.


The Covid crisis, the Saudi-Russia oil war and the CEO leaving have created this mispricing. One needs to have a view that the US and global economy do not go into a 24-month lock down. The Covid economic impact is a 1-2-3q 2020 issue and not a 2020-2023 issue. Given the $2 trillion of fiscal stimulus and $4 trillion of monetary stimulus, I don’t see the U.S. government walking away from this economy. If things don’t improve or the Covid crisis persists for 6-9 months, I expect us government to unleash even more monetary and fiscal stimulus including the Fed buying corporate bonds and providing emergency financing to companies.



Cap structure


7.5 % 2022 $350 mil. @ $73

7.75% 2023 $325 mil. @ $68

11 % 2025 $550 mil. @ $72


Total debt $1225 mil.


Simple Valuation


Specialty chemical business: $210-$240 mil. Ebitda - $250 long term

Shreveport feedstock refinery: $40 normalized ebitda

Administrative expenses: -$60-$70 adjusted

Ebitda $180-$200 @ 10x - $1.8 bil.


Great Falls Montana refinery - being shopped for sale.

$325-$500 mil.


$1800 + $325 = $2125


$2125/$1225 = 1.75x covered on nominal price


$2125/$875 = 2.4x covered on current prices



Two key issues:

1.  Liquidity in 2020


Prior to Covid-19 and the Saudi-Russia oil war, CLMT was estimated to generate approximately $300 mil in ebitda.


$210-$240 mil. from speciality chemicals

$40 mil. from Shreveport Fuels

$100-$120 mil. from Montana Great Falls


$80-$100 mil. of SG&A


The interest expense is $140 mil.

Capex including group cap ex $80 mil.


So free cash was expected around $80 mil. to $100 mil.


With the macro environment today the key for clmt is maintaining liquidity and staying cash flow neutral.


Clmt needs to generate $200 mil in ebitda to stay cash flow neutral. They can cut capex to $40 mil. and delay some growth projects.


Speciality ebitda probably declines 20 percent to $160-$170 mil.

Fuels I expect declines to 30-40 percent to $80 mil. They have some hedges in place for Shreveport, and I expect them to lock in wcs-wti spread to lock in fuel margins at a lower rate.


I expect them to cut sg&a costs and focus on maintaining liquidity.


Low oil prices will release working capital in the speciality chemical business of around $20-$30 mil.


With fuels hedges, sg&a cost controls, low cyclical of the speciality chemical business, and working capital release I expect clmt to get by on liquidity in a world of negative 20-30 plus percent 2q gdp. They forego $80-$100 mil in free cash due to Covid-19 but they survive.


They have bank lines for $375 mil in liquidity tied to PP&E, specialty inventory, and receivables that are not impacted by the price of oil.


They are in full liquidity survival mode, and I expect them to scrape by. The unknown is the magnitude of the Covid recession. If it extends beyond 3q and into 2021 CLMT could have liquidity issues and need to use the revolver.


 2. Rolling the 2022 debt


Via asset sale - Montana Great Falls Refinery.


CLMT purchased the refinery for $180 mil. and invested an additional $400 mil in brownfield capex to double the size of the refinery and increase it complexity. Great Falls is a 25,000 barrel a day 100 percent WCS feed stock refinery. It is the only refinery in US that is 100 percent WCS.


The replacement value on 25,000 barrels of WCS feedstock refinery using the recent Sturgeon refinery built In Alberta is around $3 bil. It cost $120k a barrel for a new build refinery to use WCS. At 15 percent of replacement the Great Falls Refinery should be worth $450 mil. $450 mil is 78 percent of CLMT acquisition and recent brownfield capex.


25,000 x 330 (assuming 35 days shut down for maintenance) x $12 WCS discount capture is $100 mil a year in Ebitda. I assume in a normalized world the 2-1-1 crack covers the asphalt cut and operational cost. All ebitda is driven from wcs spread.


I value Great Falls around $450 mil. without working capital adjustment.


Before the March market meltdown and Covid, I did not expect CLMT to sell the Montana asset at fire sale prices. If CLMT did not generate interest close to $400-$500 mil. I expected them to operate the Montana asset. Given the macro backdrop and CLMT’s need to roll its 2022 debt, I now believe the company would sell the asset for $300-$350 mil. The company has finally come out and said the asset is for sale. Tudor Pickering is running a sales process in this pretty nasty tape. Buyers seeing thru the short term refining and energy tape will be a key factor.


Refining Valuation


There are around 125 refineries in the US. The last new refinery built was a micro refinery in North Dakota in which CLMT had a JV interest. It went bankrupt and was later bought out of bankruptcy and is currently operational. No one is building new refineries given the exorbitant cost associated with their construction.


If there is feedstock available, refineries in the US will run. WCS production is a high capex long life production cycle. Great Falls has probably 40 years of feedstock, and it is a perfect complementary asset for a Canadian Integrated firm. For $350 mil., a Canadian integrated can buy Great Falls for 10 percent of replacement cost or significantly less than rail cars capacity and have control and ownership of a long lived risk mitigating asset.


Montana refinery economics in the long term are primarily driven by rail shipment economics. The refining crack spread volatility at CLMT’s Great Falls refinery is dominated by WCS spread which is primarily driven by rail economics. In the long run the cost of shipping via rail cars and congestion of rail lines will determine the WCS spread and the cash flows to the Montana asset.


The biggest risk before Covid and the Saudi oil war was the Alberta government imposing production caps. Alberta imposed productions caps in December 2018. I think it is unlikely Alberta will reimpose production caps. Alberta has been actively funding rail car purchases and building new refinery but those just reconfirm the strategic value of CLMT’s Montana refinery as both rail cars and new refineries are very expensive and refineries are also very long time lagged. Buying or leasing rail cars does not address rail congestion issues and adjusted for congestion, adding new 25,000 rail car capacity is a multi billion dollar endeavor.


The current market is ugly in refining equities and generally in the energy space. However, the refining sector is generally not highly leveraged and credit is available at very very low rates (sub 4 percent). Same can be said for larger Canadian integrateds. I have the Great Falls refinery generating $100 mil in ebitda and $70 in cash flow in a $12-$15 wcs spread environment. Anyone buying Great Falls at $400 mil financed at 4 percent can make $50-$60 mil. in cash that can be used to pay down debt or buy back stock or pay a dividend. The equity market wont be happy with a refiner or Canadian integrated issuing debt to buy back equity or pay a dividend, but the markets would be comfortable with them buying cash flowing assets with leverage in this tape. CLMT’s outgoing CEO has said he is completely focused on selling Montana before he leaves on June 1.  He can earn a $1 mil bonus by selling Montana by YE 2020. If Tudor can get bid in this tape, I expect CLMT to sell at $300-$350. The asset is sufficiently valuable that it’ll get sold even if the sales process bleeds into 2021.


Bond refinance and 2025 bond covenants


Franklin is a major player in the debt and owns more than half the outstanding debt. Franklin anchored the 2025 bonds and negotiated the covenants.


Without an asset sale CLMT will be back in the high yield refinance markets in 2021-2022 and will most likely require franklin to participate and/or anchor the new deals.


As a $700 mil unsecured creditor in CLMT, Franklin is in the driver’s seat. They anchored and own 60 percent of the 2025 bonds and own 50 percent plus of the 2022 and 2023. Franklin’s purchase of CLMT bonds (2021,2022&2023) largely occurred in the distressed cycle (2016) and its exit of CLMT will not be via the market but via organic deleveraging and asset sales. For CLMT, the $700 mil gorilla in the room is franklin.


If it looks like CLMT cannot sell Great Falls in 2020, it’ll need to do a refinance in the 4th quarter of 2020. Franklin will be the key because the 2025 bondholders will be required to give waivers to do a new secured financing. I expect if Franklin gives the waiver Franklin will particulate in the new deal. Franklin is not going to let an outside creditor group prime its other bonds.


So the ability to refinance the bonds is largely dependent on Franklin. Does Franklin want a credit outcome or a reorganized equity outcome? I expect Franklin to choose a credit outcome. Take its $160 mil worth of 2022 and swap them into a new secured 11-12 percent bond with a 2024-2026 maturity. A reorganization would take way income producing securities and require Franklin to run a bankruptcy process.  It is something they would do for downside protection but if they can structure a new bond I expect them to roll their position into a new secured debt instrument, particularly given the consistency of CLMT’s specialty business and inevitable sale of Great Falls, even if not in 2020.




If Great Falls is not sold this year, and a secured bond is issued, the focus will be on selling Great Falls in 2021 and generating free cash. The proceeds from Great Falls will then be used to retire the 2023 bonds.


However, if Great Falls is not sold this year and no secured financing is raised, I expect CLMT to attempt to sell Great Falls next year and use the proceeds to retire its 2022 bonds.  Going into 2021 without retiring the 2022 bonds will make them a current liability on balance sheet.


All of this assumes the blowout in high yield spreads due to Covid carries into 2021. With the massive liquidity thrown by the Fed and central banks around the world, plus global fiscal stimulus, I don’t expect another 2008 type credit cycle.


Post Great Falls sale Clmt


Assume Great Falls is sold for $300-$350 mil. What does CLMT look like?


$220-250 mil. Speciality Ebitda

$40 mil Fuels Ebitda

$75 mil SG&A


$185 mil. ebitda

$100 mil. Interest

$50 mil. Capex

$35 mil. Free cash


$875 mil of debt at 11-12 percent


4.75x net debt/Ebitda


There is no MLP model with a $35 mil cash flow on 80 mil units.


There is no organic delevering a $875 mil. balance sheet at $35 mil. a year.


The only path for clmt is sale of the company to a better capitalized and lower capital cost speciality chemical company.


$ 225 mil @ 10x multiple is $2250

Most of the SG&A becomes synergy in a merger


$875 mil. of debt - $975 mil. with make holds


$2250-$975 = $16 per unit.


I don’t see CLMT as a public company in next 2-3 years. After Montana is sold, I don’t see a 4.75x levered specialty chemicals company around for long - it will be sold to someone with a lower cost of capital.


At $70-$77 all the bonds in CLMT are offering significant upside in a bankruptcy or non bankruptcy outcome. The Covid crisis along with an oil war has created a opportunity to own some cheap bonds.


Restructuring Downside Scenario


If CLMT cannot sell Great Falls or raise capital it will file for bankruptcy in late 2021. With Franklin controlling $700 mil of bonds it will be a pre pack. Turning off interest expense, CLMT throws off of a ton of cash and there is no need for a DIP. In a normalized operating environment with debt turned off, CLMT will generate close to $225 mil. in pretax cash flow.


With Franklin’s controlling positions, CLMT is not going to attract other control distressed players. I doubt Franklin wants to reorganize CLMT under most states of the world and would prefer to throw it a lifeline via rolling debt.


Unless Franklin sells its position I don’t expect CLMT bonds to crater into a bankruptcy. The Franklin fund that owns CLMT has $70 bil in capital, and most of its credits are not energy or small cap high yield but large cap corporate bonds. I expect Franklin to have stable capital and defend its positions and run a non-dilutive restructuring if a restructuring is necessitated.




My valuation has them at $15-$16 and they are trading at $1. They are held by a broken mlp structure and have terrible GP governance. I recommend capital be allocated to bonds before the units. After an asset sale one can revisit the units. I don’t think the bankruptcy analysis in Rulon Gardner’s write up is grounded in the reality of chapter 11 reorganizations. The equity will be wiped out in any reorganization.

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


Asset sale - Great Falls Refinery 

Debt Refinace 

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