Calumet And Tesoro Are Attractively Priced

Includes: CLMT, TLLP
by: Tyson Halsey, CFA

We recommended two Master Limited Partnerships "MLPs", Calumet Specialty Products Partners, LP (NASDAQ:CLMT) and Tesoro Logistics, LP (NYSE:TLLP) on August 15th. Both MLPs have lifted in a weak equity market--CLMT from 29.68 to 30.45 and TLLP from 52.28 to 53.20 from their August 14th to their August 27th close or 2.59% and 1.76%, respectively. We are reiterating our positive view on these two MLPs.

The fundamentals for Calumet now are stronger than when we made the case two weeks ago. The Brent to WTI spread has widened out from nil to $6/barrel, and this will help operating margins for their slate of refined products. Additionally, the burden of the EPA mandated purchase of RINs (Renewable Identification Numbers), which equates to a waiver to purchase a gallon of ethanol, has eased. The last year witnessed RIN prices soaring from two cents to over $1.4, and this mandate cost CLMT about $15 million in the second quarter. RIN prices have recently declined to about $0.70 and industry chatter suggests possible EPA relief from this costly environmental fee. The largest factor hurting last quarter's earnings was the outage of the Superior Wisconsin refinery and it is not impacting the current quarter as was expected.

The key takeaway is that the widening of the WTI to Brent spread and the decline in RIN prices are improving operating prospects for the quarter and longer term operating prospects since we first published on Calumet. Additionally, the high yield of 8.84% should offer exceptional compensation while we wait for the earnings to rebound in the quarters ahead. Since MLP distributions offer a tax advantaged return of capital-about 80% tax deferred or effectively tax free in the current year-Calumet is an MLP we would continue to add to on weakness.

While Tesoro Logistics has moved positively, it has not enjoyed the improvement in conditions which should lead to better operating metrics that Calumet should experience. We believe its weakness since its May high is because the company stock has seen competitive interest from other high quality logistics or fee based MLPs with strong refinery general partners such as Philips 66 Partners LP (NYSE:PSXP) ($31.10) and MPLX LP the MLP of Marathon Petroleum Corporation (NYSE:MPLX) ($34.80).

The Stock and Bond Market:

While prospects of a U.S. attack on Syria has led to weakness in the stock market it has also led to strength in the bond market with the Ten Year U.S. Treasury having rallied and experiencing a decline in yield from 2.90% to 2.71%. However, yesterday's weakness in housing data as reported in the Case Shiller Index, may suggest that the expected "taper" of the Federal Reserve's bond buying program may not be as assured as Fed watchers had previously believed. If the recent rise in rates from 1.6% to 2.9% is leading to a significant cooling in housing purchases, prospects for the Federal Reserve's highly anticipated "taper" may in fact be diminished or deferred, and this should be a positive for the bond market and MLPs by extension. MLPs are correlated with both the stock and bond market. The recent weeks' equity market weakness and bond market strength offer an opportunity to pick up MLPs on a pullback while their value proposition has improved due to strength in the bond market.


We remain ardent fans of MLPs whose underlying businesses on the whole are quite stable and whose distribution prospects are exceptionally attractive. We use weakness in MLPs, whenever it occurs, as an opportunity to add to positions. MLPs provide safe, predictable, growing and tax advantaged income streams that make them attractive alternatives to both stocks and bonds. We like to use sector or company specific opportunities to add to our MLP portfolios. In this note, we are highlighting company specific reasons to buy Calumet Specialty Products Partners, LP and Tesoro Logistics, LP while the MLP sector has seen weakness, but whose value proposition has improved due to a firming bond market. Over time investors in MLPs can build solid portfolios based on growing income streams from which they should be better able achieve their financial goals than through stocks or bonds.

Disclosure: I am long CLMT, TLLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.