A 9% Income Refinery Play With EBITDA Momentum As An Alternative To E&P MLPs

May.27.14 | About: Calumet Specialty (CLMT)

Summary

Calumet Specialty Products Partners is a growing refiner and processor of specialty carbon products.

Calumet Specialty Products Partners is a valid alternative to other high-yield income investments in the MLP sector.

With a near 9% distribution yield and strong adjusted EBITDA growth prospects, this refiner is a Strong Buy.

Calumet Specialty Products Partners (NASDAQ:CLMT) is an interesting oil and gas refinery and marketing business that I first covered at the end of November last year and recommended to income investors mainly because of its extraordinary distribution yield of 10% at the time. I also liked Calumet Specialty Products Partners more than HollyFrontier (NYSE:HFC), for instance, because I found CLMT's distributions to be of higher quality/consistency.

Reason why I cover the specialty products business again is because its stock has been on fire over the last two months rising from $24.61 in mid-March to over $31 now. I have recommended Calumet Specialty Products Partners to income investors at $28.85 and still rate the refinery business as a Buy, despite the recent increase in its equity valuation.

Specialty Products Partners also pointed out recent commercial and acquisition successes which should deliver further EBITDA momentum going forward:

On March 31, 2014, we acquired Anchor Drilling Fluids, a leading independent supplier of specialty products to the oilfield services industry. We paid approximately 7.5x estimated full-year 2013 EBITDA for Anchor - an attractive multiple for a business that grew EBITDA by more than an estimated 20% last year. Anchor's base of more than 250 blue chip E&P customers, coupled with its extensive network of logistics and distribution centers situated near each of the major, active domestic resource plays provides us with a unique opportunity to cross-sell our existing portfolio oilfield-focused products while also enabling the Partnership to expand its relationships with potential crude oil suppliers at the wellhead.

During the first quarter 2014, we grew sales volumes and realized improved pricing on our packaged and synthetic products, when compared to the year-ago period. Sales volumes of Royal Purple, Bel-Ray and TruFuel products all increased on a year-over-year basis during the first quarter. Early indications are that our introduction of Royal Purple products to the Wal-Mart (NYSE:WMT) store network has been very successful, with sales tracking ahead of our forecasts. Once the rollout is completed, at least 2,400 Wal-Mart Stores will be carrying our Royal Purple products, with select products planned for sale in more than 3,000 locations.

The San Antonio refinery operated at record production rates during the first quarter 2014. With the completion of the crude oil unit expansion in December 2013, increased finished gasoline blending capabilities and the pending completion of the TexStar Midstream pipeline by mid-year 2014, we anticipate San Antonio has the potential to contribute meaningful Adjusted EBITDA to our overall business in future periods.

Distributions

Calumet Specialty Products Partners pays investors a quarterly distribution of $0.685 per unit leading to an annualized forward distribution yield of 8.78%. Its high yield makes Calumet Specialty Products Partners interesting for investors who would normally rely on traditional income vehicles such as Real Estate Investment Trusts, Master Limited Partnerships such as Kinder Morgan Energy Partners (NYSE:KMP), Business Development Companies or even high-yielding preferred stock. Calumet Specialty Products Partners has steadily increased its shareholder distributions from $0.45 per unit in 2008 to $0.685 today and I estimate that the refinery company will announce a quarterly distribution of over $0.70 per unit in the current fiscal year, potentially bringing the annual distribution yield over the 9% mark.

Last but not least, Ladenburg Thalmann recently initiated coverage of Calumet Specialty Products Partners with a price target of $36 -- representing about 16% upside potential in addition to the already healthy distribution yield. BUY, Strong BUY on corrections.

Disclosure: The author is long KMP.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.