Analysis: Another Good Refinery Deal For Calumet

| About: Calumet Specialty (CLMT)

Calumet Specialty Products Partners (NASDAQ:CLMT) announced a refinery transaction today, purchasing a small refinery in Montana.

We have done a lot of work recently on these refinery deals, including the one last week accomplished by Tesoro (NYSE:TSO), and so we can look at CLMT's deal to see whether anything interesting could come of it.

The initial reaction by the marketplace was favorable:

The details of the deal are as follows:

Refinery BPD 9800
Cost of Transaction 120,000,000
Cost per BPD 12245

We know that the Tesoro transaction took place at the friendly bargain basement price of $4100 per BPD, per our previous calculations. However, since this refinery uses Canadian crude oil, it is pretty reasonable to pay a premium. Here is the cost of the rest of Calumet's capacity:

Calumet Refining Cost    
Market Capitalization 1,470,000,000  
Long Term Debt 863,000,000  
Total 2,333,000,000  
Refining Capacity 135,000 bpd
CLMT Value 17281 $/bpd
Refining Margin 27  

If you were to go into the marketplace today, and buy CLMT's 135,000 bpd of refining capacity, it would take a little more than $17000 per bpd of capacity. We know that this is an artifact of CLMT's product mix, which consists of specialty lubricants and waxes and allows them to get a refining margin of $27 per barrel, per their most recent 10Q.

So, we know that the deal was relatively good compared to the rest of CLMT's capacity.

Next, what's the upside:

Incremental Debt (est) 44,389,198  
Incremental Interest Expense 3,995,028  
Capacity 9800 bpd
Throughput/250 days per year 2,450,000  
Potetial Incremental NOI at $27/bbl 64,925,000  
Shares Outstanding 55,000,000  
Incremental EPS 1.18  
Current PE (Average of Forward and TTM) 9  
Potential Effect on Stock Price 10.62  

If the company chooses to finance the deal at the same rate as their current .40 debt/equity ratio, they will borrow about $45M, on which they will pay incremental interest expense of about $4M per year, given the company's 9% line of credit.

The incremental annual throughput of this refinery, at 250 operating days per year will be about 2.45 million barrels.

We know that the rest of CLMT's product line is sold at a margin of $27 per barrel. So, assuming they can do as well with the incremental capacity, this means an incremental $65M per year in NOI, which divided by the number of shares, and multiplied by CLMT's current PE of about 10, leads to a potential stock price benefit of more than $10 per share.

Note that everyplace in the above paragraph that I used the word "estimate" or "potential" there is some uncertainty.

But, you can see why the reaction of the market was positive. The market still has not priced in the Royal Purple transaction that happened in May, so there is actually even more upside.

The world is full of chaos and there are no guarantees on anything.

Disclosure: I am long CLMT, TSO.

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