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By Siraj Sarwar

Calumet Specialty Products Partners L.P. (CLMT) is one of the most well established MLPs in the industry. Calumet specializes in the conversion of crude oil and feed stocks into customized lubricating oils, waxes, and solvents used in consumer and automotive goods. CLMT also provides fuel products such as gasoline, diesel and jet fuel. Calumet Specialty Products Partners is headquartered in Indianapolis, Indiana. As an MLP, the company has been offering substantial distributions.

Cash Distributions

Calumet offers steady distributions and has an impressive history of distribution hikes. Calumet made steady distributions of $0.45 between Q1 2008 and Q3 2009. After the third quarter of 2009, CLMT sharply stepped up distributions to $0.62 for the third quarter of 2012. Calumet has elevated distributions by nearly 24 percent over the past four years and currently dishes out an outstanding 7.5 percent yield. On July 20, Calumet hiked its cash distribution to 59 cents per unit, showing an increase of five percent over the former payout.

click to enlarge images

CLMT Dividend Chart

CLMT Dividend data by YCharts

The partnership recently announced an increase in cash distribution for the quarter ending September 30, 2012. Cash distribution stood at $0.62 per unit or 2.48 per unit on an annual basis. According to Dividend Channel, CLMT has been named as a Top Ten dividend paying energy stock. CLMT shares have shown both appealing valuation profitability metrics.

Recent Earnings

CLMT reported net income of $65.7 million for the quarter ended on June 30, 2012, whereas it presented a net loss of $7.7 million for the same period in 2011. The partnership has reported $15.3 million in noncash unrealized derivative losses for Q2 2012, as well as a net income of $117.6 million for the six months ended on June 30, 2012. However, CLMT reported a net loss of $3.5 million in the first half of 2011. These results include $10.8 million in noncash unrealized derivative gains. Overall, Calumet is increasing its financial strength. This is an optimistic sign for unit-holders.

Cash Flows

I believe that CLMT have sufficient liquid assets, cash flow from operations and borrowing capacity to meet its financial commitments. In addition, the company's current cash flow levels are adequate for meeting debt service obligations and anticipated capital expenditures. Cash flow from operating activates stood at $44.6 million for the first half of 2012. The increase in cash from operating activities is mainly due to growth in net income amounting to $121.0 million. Cash from investment activities stood at $330.3 million during the six months ending on June 30, 2012. Furthermore, Calumet made a deal for 2020 notes, that has successfully increased cash funneled into investment activities by $263.3 million. Meanwhile, cash received from financing activities stood at $351.1 million in the first half of 2012. This can largely be attributed to the net proceeds received from the public offering of common units.

Stock Performance

(Chart sourced from finviz.com)

Since June of this year, CLMT units have been showing an upward channel. CLMT units rose by nearly 40 percent, and managed to set a new 52-week high in the process. Calumet has an attractive forward P/E of 8.4. In addition, the partnership has a market capitalization of 1.8 billion. Following the second quarter, Calumet showed top earnings in August. Since then, CLMT has also been easily outperforming the S&P 500. With high expectations for profit and distribution growth in the near future, CLMT stocks look ready to continue their current success.

Growth Prospects

Calumet has a proven history of progress through acquisitions. The partnership has been ambitious in acquiring assets that assist with cash flow stability and enhance its business operations. The newest in this collection is the proposed acquisition of a small refinery in Montana for about $120 million. The transaction is projected to close in the fourth quarter of 2012. This acquisition will improve Calumet's refining capacity by a further 9,800 Bbl/d. The acquisition of a refinery from Murphy Oil late "last year" also raised company potential by 50 percent. In fact, growth over the past several years has helped to generate a 24 percent raise in the distribution rate.

Peer Analysis

CLMT

EPD

WPZ

Market Capitalization

1,824

48,303

18,686

Gross margin

9.6%

7.3

-

Net margin

3.90%

5.48

13.65

D/E

1.0

1.1

0.9

Yield

7.5%

4.66%

5.6%

(Chart is sourced from Morningstar.com)

Calumet Specialty Products Partners' main competitors are Enterprise Products Partners LP (EPD) and William Partners LP (WPZ). MLP's always have a high COGS, though CLMT has better gross and net margins of 9.62 percent and 3.90 percent, respectively, in the past twelve months. While, it's main industry peer EPD has low gross margin of 7.35 percent and high net margin of 5.48. CLMT has high yield of 7.5 percent in comparison with EPD and WPZ. EPD and WPZ have yields of 4.66 percent and 5.6 percent, respectively. In addition, CLMT has increased its distribution by 24 percent in the latest quarter while EPD has increased its distributions by only five percent.

Summary

Investors who own Calumet shares at lower prices will be happy with the long-term results. The exposure to fuel and gas prices delivers wonderful profits in good times. Calumet has been on an excellent growth spurt for the last three years. The Calumet business model will provide appealing profitability levels. CLMT also has attractive future projections. It looks to produce $3.17 per share by the end of 2012. In addition, it is expected that CLMT will generate $3.58 per share in 2013. I am expecting an improvement in its operating margins as it integrates its acquisitions. This improvement in operating margins will further raise cash flows and cash distributions.

Disclaimer: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: Calumet Specialty Products Partners: Attractive Business With Strong Cash Distributions