Calumet Specialty Products Partners, L.P. (NASDAQ:CLMT) is a leading manufacturer, formulator, and marketer of a diverse slate of specialty branded products and renewable fuels. The company operates twelve facilities across North America and is headquartered in Indianapolis, Indiana. Calumet's operations are managed through four reportable segments: Specialty Products and Solutions, Performance Brands, Montana/Renewables, and Corporate.
Business Overview
In the Specialty Products and Solutions segment, Calumet manufactures and markets a wide variety of solvents, waxes, customized lubricating oils, white oils, petrolatums, gels, esters, and other specialty products. These products are sold primarily to domestic and international customers who use them as raw material components for consumer-facing and industrial products.
Calumet's Performance Brands segment blends, packages, and markets high-performance products through its Royal Purple, Bel-Ray, and TruFuel brands. This segment serves a diverse customer base across various end-markets.
The Montana/Renewables segment consists of Calumet's Great Falls specialty asphalt facility and its Montana Renewables facility. At the Montana Renewables facility, the company processes a variety of renewable feedstocks into renewable diesel, sustainable aviation fuel (SAF), renewable hydrogen, renewable natural gas, renewable propane, and renewable naphtha. These renewable fuels are distributed into renewable markets in the western half of North America. The Great Falls specialty asphalt facility processes Canadian crude oil into conventional gasoline, diesel, jet fuel, and specialty grades of asphalt.
Financials
Calumet reported annual net income of $48.1 million, annual revenue of $4.18 billion, annual operating cash flow of -$14.9 million, and annual free cash flow of -$286.7 million in its most recent fiscal year. In the first quarter of 2024, the company generated $1.01 billion in revenue and reported a net loss of $41.6 million.
Specialty Products and Solutions Segment Delivers Consistent Performance
Calumet's Specialty Products and Solutions segment generated $681.6 million in revenue and $41.8 million in adjusted EBITDA during the first quarter of 2024. This segment's performance was impacted by lower throughput volumes due to a planned turnaround at the company's Shreveport facility, as well as weaker asphalt margins. However, the segment continues to benefit from strong demand for its specialty products.
Over the past five years, Calumet's Specialty Products and Solutions segment has seen consistent margin growth, driven by the company's data-driven commercial excellence initiatives, its agile asset base and market reach, a culture of innovation, and a differentiated approach to customer service. The segment's margins have bounced between $60 and $70 per barrel in a more mid-cycle environment, reflecting the strength of Calumet's specialty business.
Montana/Renewables Segment Progresses Through Operational Challenges
Calumet's Montana/Renewables segment reported a loss of $14.5 million in adjusted EBITDA during the first quarter of 2024. This performance was impacted by higher material costs, primarily related to processing more expensive pre-treated feedstocks purchased prior to the summer 2023 slowdown. The segment also faced seasonally weak asphalt and gasoline margins in Montana, exacerbated by a rapid run-up in Western Canadian Select (WCS) prices and higher operating expenses due to a utility surcharge.
However, the company has made significant progress in working through the backlog of old, expensive feedstock inventory at its Montana Renewables facility. By the end of the first quarter, the facility was operating at full rates and demonstrating sequential month-over-month improvements in operational and financial performance. Calumet expects the Montana Renewables business to deliver a clean financial quarter in the second quarter of 2024 as it continues to leverage its competitive advantages, including access to a diverse slate of renewable feedstocks, its leading pre-treatment technology, and its advantaged logistics.
Performance Brands Segment Continues to Grow
Calumet's Performance Brands segment generated $79.7 million in revenue and $13.4 million in adjusted EBITDA during the first quarter of 2024. This segment saw a 13.4% increase in sales volumes year-over-year, reflecting strong execution by the commercial team. The first quarter 2023 adjusted EBITDA also included a $5.0 million insurance benefit, which was not present in the current year period. Excluding this one-time item, the Performance Brands segment's adjusted EBITDA increased by approximately 17.5% year-over-year.
The company remains focused on continuing to grow its core industrial business lines, particularly in mining, power, and marine applications. Calumet views the Specialty Products and Solutions and Performance Brands segments as a single, integrated business, benefiting from the commercial synergies between the two.
Risks and Challenges
Renewable Fuel Standard Compliance Remains a Significant Expense
Like the broader refining industry, Calumet remains subject to compliance costs under the Renewable Fuel Standard (RFS) program administered by the U.S. Environmental Protection Agency (EPA). The company has historically received small refinery exemptions (SREs) from the RFS requirements, but its petitions for the 2018-2022 compliance years were ultimately denied by the EPA.
During the first quarter of 2024, Calumet recorded a $64.5 million gain related to Renewable Identification Numbers (RINs), compared to a $32.1 million gain in the first quarter of 2023. The company's gross RINs Obligation, which includes RINs that must be secured through blending or purchased in the open market, is spread across four compliance categories (D3, D4, D5, and D6).
Expenses related to RFS compliance have the potential to remain a significant expense for Calumet's Specialty Products and Solutions and Montana/Renewables segments. If legal or regulatory changes occur that have the effect of increasing the company's RINs Obligation or eliminating or narrowing the availability of SREs, Calumet could be required to purchase additional RINs in the open market, which may materially increase its costs related to RFS compliance and could have a material adverse effect on its results of operations and liquidity.
Recent Developments
Conversion to C-Corp Structure Unlocks Significant Potential
Calumet recently announced that it has entered into a Conversion Agreement to transition the company to a C-Corporation structure. This strategic move is expected to be completed in mid-2024 and will allow the company to access a broader pool of institutional and passive investors, who have been largely unable to invest in Calumet due to its current Master Limited Partnership (MLP) structure.
The company believes the conversion will be a significant catalyst for the business, as it will enable index inclusion and increase demand for Calumet's equity. Management has highlighted that passive investment strategies now make up over 50% of the public equity market, yet they own almost no Calumet shares due to the MLP structure. The conversion is expected to remove this barrier and attract new institutional investors who have been unable to invest in the company previously.
Calumet's Specialty Products and Solutions Segment Demonstrates Resilience
Calumet's Specialty Products and Solutions segment has proven to be a resilient and consistent performer, generating $681.6 million in revenue and $41.8 million in adjusted EBITDA during the first quarter of 2024. This segment has seen five consecutive years of margin growth, a testament to the company's data-driven commercial excellence initiatives, agile asset base and market reach, culture of innovation, and differentiated customer service approach.
While the current market environment is more mid-cycle compared to the record highs experienced in the second half of 2022 and early 2023, the Specialty Products and Solutions segment's margins have remained elevated, bouncing between $60 and $70 per barrel. The company has also made meaningful progress in improving the reliability of its operations, as evidenced by its ability to quickly restart its Shreveport facility following a recent winter storm event.
Montana Renewables Facility Demonstrates Competitive Advantages
Calumet's Montana Renewables facility is a key asset within the company's Montana/Renewables segment. The facility processes a variety of renewable feedstocks into a range of renewable fuels, including renewable diesel, sustainable aviation fuel (SAF), renewable hydrogen, renewable natural gas, renewable propane, and renewable naphtha.
The Montana Renewables facility has several competitive advantages, including its access to a diverse slate of renewable feedstocks, its leading pre-treatment technology that allows for rapid switching between feedstocks, and its advantaged logistics. These capabilities have enabled the facility to work through a backlog of old, expensive feedstock inventory and demonstrate sequential month-over-month improvements in operational and financial performance.
Calumet is also making progress on securing a Department of Energy (DOE) loan to support the final investment decision on its MAX SAF expansion project at the Montana Renewables facility. This project represents a significant opportunity for the company, as the global demand for SAF is expected to grow rapidly in the coming years due to corporate decarbonization targets, sustainability initiatives, and governmental mandates and incentives.
Liquidity
As of March 31, 2024, Calumet had total liquidity of $211.8 million, comprising $23.9 million in unrestricted cash and $187.9 million in available borrowing capacity under its credit facilities. The company's revolving credit facilities had a $563.9 million borrowing base, with $43.6 million in outstanding standby letters of credit and $332.4 million in outstanding borrowings.
Calumet's long-term debt structure includes $413.5 million in 11.00% Senior Notes due 2025, $325.0 million in 8.125% Senior Notes due 2027, $325.0 million in 9.75% Senior Notes due 2028, and $200.0 million in 9.25% Senior Secured First Lien Notes due 2029. The company also has $74.3 million in borrowings under its MRL Term Loan Credit Agreement and $380.6 million in financing through its MRL asset financing arrangements.
Calumet is focused on deleveraging its balance sheet and has repaid $50 million of its 2025 Notes earlier this year. The company believes it has sufficient liquidity and access to capital markets to meet its financial commitments, debt service obligations, and anticipated capital expenditures for at least the next 12 months.
Outlook
Calumet remains optimistic about the company's outlook, with several key catalysts on the horizon. The successful completion of the C-Corp conversion in mid-2024 is expected to unlock significant potential by enabling index inclusion and attracting a broader pool of institutional and passive investors.
The company is also focused on demonstrating the competitive advantages of its Montana Renewables business, which has made significant operational and financial progress in recent months. Calumet is awaiting a decision from the Department of Energy on a loan to support the final investment decision on its MAX SAF expansion project, which represents a significant growth opportunity given the rapidly growing global demand for sustainable aviation fuel.
Additionally, Calumet's Specialty Products and Solutions segment continues to deliver consistent performance, leveraging its data-driven commercial excellence, agile asset base, and differentiated customer service approach. The company believes this segment's resilience and growth potential will be a key driver of value creation going forward.
Conclusion
Overall, Calumet's diversified business model, focus on operational excellence, and strategic initiatives position the company for continued success in the years ahead.