Calumet Specialty Products: Growth, Income And Fracking

| About: Calumet Specialty (CLMT)

Buzz words dominate media coverage of markets and stocks. Growth means a rapidly growing company and appreciating stock that typically pays no or low dividends. Income means a slow or no grower that pays high dividends, although I take exception to analysts who speak of a 4% or 5% dividend as a feature of a high yield” stock.

One company combines these two and another buzzword, fracking – Calumet Specialty Products (NASDAQ:CLMT). For a company sitting in the middle of where a lot of shale oil and gas is flowing, and with a dividend north of 8%, a company actually buying refineries rather than shut them down, CLMT is relatively unknown.

About the company –

CLMT is in the oils, lubricants and waxes industry – not exciting stuff until you get that first dividend check.

  • Revenue and profit grew nicely in the last quarter with sales topping one billion. Last quarter’s net income was $27 million compared to slightly less than $10 million for the same period in 2010.
  • The company is aggressive in its niche – it just bought a refinery in Wisconsin from Murphy Oil. It also recently bought an aviation and refrigeration lubricants business from Superior Oil. These are accretive and can only help the stock.
  • About 89% of revenue is from the lubricants and waxes, making it a great play compared to other refiners. The company made, in Q1, $19.40 on each barrel of specialty products, $3.26 on each barrel of fuel products. This compares to losses on each barrel of fuel it refined in Q1 2011 and $18.09 in profit on specialty products.
  • CLMT gets its oil from domestic and Canadian sources, which also helps on costs. Margins expand as the price of oil falls. Which it is doing right now.
  • In that 11% of the business that is gasoline and diesel, it produces them on a one for one basis, a superior mix to other refiners far more dependent on gasoline as diesel fuel typically commands higher profit margins.
  • The company hedges feed stocks costs more than most of its competitors, making the business, profits, the stock and the dividend more stable than others in the industry.
  • One detail of concern is the relatively low capacity utilization at its refinery – 70%. If the company can get it up to where it should be – 90% - it will create a while new slug of revenue and profits.

I also like the company because of hydraulic fracking. The company has its plants and storage in the Midwest, Texas, Pennsylvania and Louisiana – fracking country. This means it will have ready access to fracked oil and gas byproducts – and has the refineries that can clean that stuff up. Roughly two hundred refineries in the US have closed in recent years due to falling demand for gasoline and falling margins. CLMT is buying refineries – in the Midwest – and is far less reliant on gasoline than others in the industry, focusing on specialty hydrocarbon-based products. It will have a cost advantage over competitors because of proximity to fracked oil flowing into the US and the company can handle it – fracked oil is nasty stuff.

The stock has done well in recent months.

Management boosted the dividend to $.56 a share.

  • Insiders like the stock, buying shares for the first time in almost a year.
  • The stock went ex-dividend and should soon begin the climb back towards the next ex-dividend date at the beginning of August.
  • The company recently filed to sell another 6MM shares (there are roughly 51MM outstanding) – this caused the stock to take a bit of a hit but is now fully priced into the shares. Investors are waiting to see if the $.56 quarterly dividend will hold, will fall or will increase for the next quarter.
  • The stock broke through a technical level at $23, ran to $27--$28 before reversing with the price of oil and is back near $23.

CLMT is a Master Limited Partnership, making shareholder partners and the distribution of dividends more of a function of cash flow than net income.

Bears dislike the stock because the company has a fairly large amount of expensive (greater than 9% interest rate) debt. It is due in 2019 and given increases in revenue, cash flow and net income the interest payments are manageable and I expect the company to eventually restructure this debt to lower interest payments.

I like the stock because I like management and the extreme excellence of execution seen in the company’s performance. The company hedges its oil costs fare better than its peers; in a soft economy it is being aggressive and buying up discounted assets to boost cashflow and profitability, and ultimately the dividend. And its financial reporting is very transparent.

Disclosure: I do not own the shares or options on the shares and will not do so until three trading days after this is published. I do recommend CLMT in my service The New Normal Investor.