Calumet Specialty Products' Distribution Bucks The Down Market

| About: Calumet Specialty (CLMT)

Summary

Unit price one-day jump of $0.90 clearly defied the oil price drag.

Calumet's annualized return is 16.8%, and it is the first of several MLP refineries that will post a distribution payout over 10% annualized.

Calumet is likely to climb toward its ex-distribution date over the next 2 weeks.

On January 19, 2016 Calumet Specialty Products Partners, L.P. (CLMT) announced their quarterly distribution of $0.685. The distribution will be paid on February 12, 2016 to the owners of units on February 2nd. This is the 10th consecutive quarter that Calumet Specialty Products has paid the same distribution each quarter. The unit price closed up today on January 20 at $16.24, up from a low $15.07 during midday trading on January 19, and up $0.90 from the close yesterday.

Calumet Specialty Products is a master limited partnership and a leading independent producer of high-quality, specialty hydrocarbon products in North America. Calumet processes crude oil and other feed stocks into customized lubricating oils, solvents and waxes used in consumer, industrial and automotive products; produces fuel products including gasoline, diesel and jet fuel; and provides oilfield services and products to customers throughout the United States. Calumet is based in Indianapolis, Indiana and has fourteen manufacturing facilities located in northwest Louisiana, northwest Wisconsin, northern Montana, western Pennsylvania, Texas, New Jersey, Oklahoma, eastern Missouri and North Dakota.

The yield at this price is ($0.685 x 4 / $16.24 = 16.8%), and will likely rise over the next 2 weeks leading to the ex-dividend date. Investors wanting to earn the distribution should hold the units through February 2nd, while those wanting to sell the high price should sell prior to February 2nd.

This is a barometer of what is happening in the stock market due to world oil prices pushing down prices. When the company announced the distribution, investors began buying volume of 1,470,000 units, whereas the average per day is about 500,000. Investors see the yield return and a dropping market provides a bright spot to buy.

There are several other oil MLPs that are coming due in the near future as we track Alon USA Partners LP (ALDW), CVR Refining LP (CVRR), and Northern Tier Energy LP (NTI) that will announce their distributions over the next several weeks and likely to have the same response.

The whole market is being dragged down, but these refinery MLPs should be insulated from the oil price. Here is why.

The refineries buy the oil and sell the refined products on the market at their cost, plus expenses of refining and their profit margin. When the crack spread has been higher, these companies have increased their earnings and over the last year, the crack spread has been higher, and more profitable for these refineries. Although the crack spread is lower this quarter, the companies are stilling going to report a profit and return a distribution of 10% or better this quarter. These stocks can build your portfolio if you take the distributions, or if you buy the units and sell just prior to the ex-distribution date when the unit prices are at their highest price for the quarter.

I anticipate Calumet Specialty Products' unit price to climb over the next 2 weeks leading to the ex-date of February 2, 2016. Although the crude prices are dropping and taking the markets for a ride, I do anticipate the price to climb. In the past quarters, it had risen near the $25-$27 range, but with the drop in crude oil, reaching $20 will be a challenge. It would be a bright spot for investors, but leading to February the price will be much clearer. Today's climb of $0.90 was a great start for the climb, but there will be down days as well. However, if the unit price can reach near $20 per unit by February, we will know the market will recover after oil settles.

I often encourage investors to consider buying the low between the ex-dates and selling just prior the ex-date to capture the rising price. Holding the units often allows the price to rise and fall, and you only receive the distribution. If we assume the distribution to remain at $0.685, and we can buy the units and let the price rise more than the $0.685, we could earn a higher return each quarter. Our estimates look for the unit price to climb toward, if not reach, the $20 per unit price, which would allow the investor to take a short-term position during the rise. If you are able to buy and sell at any price more than the distribution ($0.685), then you would increase your return. Probably the best course of action would allow for you to take the higher price and exit the market with cash, and allow the market to settle before buying back in.

Disclosure: I am/we are long CLMT, ALDW, CVRR, NTI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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