Calumet Specialty Products Partners L.P. (NASDAQ:CLMT) offers income investors a current 7.4% distribution yield. The distribution has increased, in excess of 23%, since the 1st quarter 2010 through the 2nd quarter 2012. Income investors have watched the units increase in value for capital gains. If gross profits remain elevated, the quarterly cash distributions should reward income investors. I have sold my units and await a pullback to the $25 price range.
Calumet has made steady distributions of $0.45 from 1st quarter 2008 to 3rd quarter 09 after which it sharply stepped up distributions, approaching 24%, to $0.59 in the 2nd quarter 2012 including distributions.
For the 2nd quarter, unit holders received $0.59. With units trading at $30.96, the units have gains significant capital gains since the summer months. Units are currently near the upper band of their 52 week range of $17.60 to $33.96. On June 1st, units closed at $21.88. Calumet's 7.4% yield beats the Treasury Bond 10 yield of 1.72%.
Calumet's MLP Business Model
Calumet Specialty Products Partners L.P. is a Delaware limited partnership and a US based manufacturer of specialty hydrocarbons - chemicals produced from the refining and processing of crude oil and natural gas liquids. Calumet produces approximately 1,500 products and has roughly 2,700 customers worldwide who regularly buy Calumet products as raw material for automotive, industrial and consumer goods.
Calumet's products include solvents, petroleum based waxes, mineral oils and gels, and are extensively used, independently or as ingredients, for a variety of applications such as refrigeration oils, insulation within electrical cables, in shock absorbers, in paints and inks, for mining, in cosmetic creams and so on. Calumet also owns a refinery that converts crude oil into diesel, gasoline, fuel oils (such as for heating and energy generation), specialty chemicals and asphalt.
Calumet has facilities, plants and operations in Illinois, Louisiana, Pennsylvania and Texas. Calumet has headquarters in Indianapolis, Indiana, and sells its products in the US and across the world.
Calumet went public in 2006 as a Master Limited Partnership and raised $114 million. Calumet GP is the general partner of the company with a 2% ownership stake, with 98% owned by limited partners. Calumet's founders own roughly 32% of the company. Calumet employs 900 employees in the US across manufacturing, sales and marketing, and operations. It has a well experienced management team with proven success in the specialty chemicals business, each with 25 years of experience on average.
Calumet has a diversified range of products, strong relationships with a broad customer base that is fairly locked into Calumet products, experienced management with large insider ownership and conservative financial management practices that have only recently gotten a little extended on Calumet's capital structure and balance sheet due to multiple acquisitions.
Calumet plans to grow through selective acquisitions as many oil majors exit the specialty chemicals business to focus on their core E&P activities. Calumet intends to plan its growth to support stable and regular cash flows so it can continue to make cash distributions to unit holders. It also intends to diversify its asset base geographically, vertically integrate its operations and increase total refining, production, storage and distribution capacity.
In addition, Calumet is currently pursuing multiple internal projects aimed at growing revenue and profits, with multiple capacity expansions, investments in improved logistics, a biodiesel project at its Dickinson facility, new product development, product line expansion and increased marketing and advertising as strategically needed to gain market share.
Calumet operates eight major facilities across the US with production capacity of 135,000 bpd and storage capacity of over 10 million barrels.
Princeton, Louisiana: Calumet's flagship refinery - produces naphthenic oils, process oils, refrigeration, shock absorber and electrical insulation oils, and other specialty chemicals; 12 million gallons storage capacity; products shipped across the US by truck and rail.
Cotton Valley, Louisiana: Produces specialty solvents and conventional refined products used in paints, coatings, extraction, mining and inks; 100 million gallons of annual capacity.
Shreveport, Louisiana: Acquired in 2001; specialty refinery - produces paraffinic base oils and waxes, naphthenic and paraffinic bright stocks; 12 million gallons storage capacity; products shipped across the US by truck and rail.
Burnham, Illinois: Storage and distribution center for the upper Midwest, east coast and Canada; receives daily shipments from all Calumet refineries; houses a research laboratory, lube oil sales force, extensive storage facilities and a pump room.
Dickinson (near Houston, Texas) and Karns City, Pennsylvania: 2008 acquisition of Penreco; extended Calumet's reach into Texas and Pennsylvania; produces white mineral oils, cable fillers, compressor lubricants, refrigeration oils, specialty solvents, hydrocarbon gels, petrolatums and natural sulfonates; branded products include Conosol, Drakeol, Magiesol, Penreco, Synergel and Versagel.
Louisiana, Missouri: January 2012 acquisition; produces synthetic chemicals for refrigeration and aviation lubrication; annual production capacity of 32 million pounds.
Superior, Wisconsin: September 2011 acquisition; crude oil refinery with 45,000 bpd capacity; produces diesel, gasoline, fuel oils, asphalt, heavy oils and specialty chemicals; serves shipping and industry in the upper Midwest, the Great Lakes region and Canada.
In addition, Calumet operates storage terminals in Rhinelander, Wisconsin; Crookston, Minnesota; and Proctor, Minnesota.
Calumet has grown its business through complementary acquisitions and recently appears to have stepped up the pace of acquisitions. Calumet strategically makes acquisitions to increase its reach and production capacity within the US and to vertically integrate its operations.
2001: Shreveport, Louisiana facility; specialty refinery - produces paraffinic base oils and waxes, naphthenic and paraffinic bright stocks; 12 million gallons storage capacity; products shipped across the US by truck and rail.
January 2008: Penreco (joint venture between M.E. Zuckermann & Co. and ConocoPhilips); acquired facilities in Dickinson, Texas and Karns City, Pennsylvania; produces white mineral oils, cable fillers, compressor lubricants, refrigeration oils, specialty solvents, hydrocarbon gels, petrolatums and natural sulfonates; branded products include Conosol, Drakeol, Magiesol, Penreco, Synergel and Versagel.
September 2011: Superior Refinery from Murphy Oil Company for $413.2 million; acquired facility in Superior, Wisconsin; produces diesel, gasoline, fuel oils, asphalt, heavy oils and specialty chemicals; serves shipping and industry in the upper Midwest, the Great Lakes region and Canada.
January 2012: Hercules Inc., a subsidiary of Ashland Chemical for $19.6 million; acquired facility in Louisiana, Missouri; produces synthetic chemicals for refrigeration and aviation lubrication; annual production capacity of 32 million pounds
January 2012: TruSouth Oil, LLC for $26.8 million; acquired facility in Shreveport, Louisiana; focuses on petroleum packaging and distribution
June 2012: Royal Purple; leading independent formulator and marketer of premium lubricants for industrial and consumer markets; food grade oils, industrial oil, gear oil and motor oil; operates formulation blending tanks and finished goods storage tanks.
October 2012: Montana Refining Company, Inc., a refinery owned and operated in Great Falls, Montana. The crude oil throughput capacity is approximately 9.800 per day. The deal closed on October 1st for a $201 million cost.
Products and Sample Uses
Naphthenic Oils: lubrication, transmission fluids, hydraulic fluids, compressors, electrical transformers, gears, greases, tanning, metalworking, printing inks, refrigeration
Paraffinic Oils: engine oils, adhesives, agricultural sprays, automatic transmissions, compressors, drilling fluids, gears, grease, heavy duty lubrication, passenger car motor oils, rubber and textile productions
Hydrocarbon Gels: aromatherapy, body lotion, cleaning products, candles, crop protection, degreasers, diapers, lip balm, paints and coatings, paper, pharmaceuticals, polishes
Petrolatum: animal feed supplements, polishing compounds, carbon papers, fruit and vegetable coatings, creams, lotions, dental adhesives, food packaging, general purpose lubricants, hair products, lip balms, cosmetics, ointments, petroleum jelly, PVC, rubber
Specialty Aliphatic Solvents: asphalt, automotive, camping fuel, cleansing agents, degreasers, drilling fluids, furniture polish, heat transfer fluids, thinners, minimg extraction solvents, paints and coatings, printing ink, water treatment, waterless hand sanitizers
Specialty Oils: adhesives, athletic shoes, belts, cable filler, clear tape, caulking compounds, foams, hoses, refrigeration, textiles, thermoplastics, tires, weather stripping
Waxes: adhesives, candles, crayons, floor care, paint strippers, polishes, printing inks, PVC production, ski wax, skin and hair care, textile production, waterproofing
White Oils: adhesives, bath and baby oils, bakery pan oils, creams and lotions, food grade lubricants, food packaging, gelatin capsule lubricants, hair products, household cleaners, laxatives, cosmetics, suntan oils, topical ointments
For its quarter ended March 31, 2012, Calumet reported initial results from its Superior, Hercules and TruSouth acquisitions which resulted in a significant jump in year over comparisons. Per the below 2nd quarter 2012, the gross profit margins have expanded:
Because of acquisition related expenses (additional employee compensation, higher incentive compensation and higher professional fees), the 1st quarter SG&A increased 72% to $18.1 million and transportation expenses were 19% higher at $27.5 million. Operating income jumped 208% to $35 million from $11.4 million in Q1 2011.
Calumet's major balance sheet items are shown in the table below. On the assets' side, these include accounts receivable, inventories and property and equipment net of depreciation and amortization. On liabilities, prominent items are accounts payable and long term debt. Long term debt was up quarter 13% in year over year comparisons. Long term debt is slightly larger than Total Partners' Capital which isn't necessarily a good long term trend but understandable given the company's recent acquisitions. Calumet plans to reduce long term debt to about 50% of Partners' Capital. However, it does generate sufficient cash flow to comfortably pay its interest each quarter.
In the past 6 months, I bought Calumet units in the low $20 range. I sold the units as the price experienced significant capital gains. I remain on the sideline looking for a pullback in the unit price. The units have pulled back slightly from recent highs. The name has a distinct partnership business model with strong current gross profit margins. I'll wait for an attractive entry price in the mid $20 price range.
A 50% unit price is a strong move. I believe waiting for a pullback is prudent.