2023-06-12 05:06:24 ET
Summary
- Calumet Specialty Products has emerged as North America's largest sustainable aviation fuel (SAF) producer, offering lucrative opportunities in the renewable diesel market.
- The company's Great Falls refinery has completed construction and is operating at full capacity, with a run-rate EBITDA expectation of $1.25-$1.45 per gallon.
- Calumet plans to spend $800 million in the next two years for capital and debt reduction, with a potential expansion to maximize SAF production, increasing its EBITDA to $1.1 billion per year.
Almost a century ago, two champion racehorses met, Seabiscuit, hardly big enough to be labeled one, and the monster, War Admiral. The Biscuit in upset fashion won by four lengths. In April, like The Biscuit, a small undersized corporation, Calumet Specialty Products (CLMT) left the post carrying the title, North America's Largest Sustainable Aviation Fuel ((SAF)) producer. SAF and renewable diesel (RND), both being produced at its Great Falls refinery, began production in December of 2022. Both products, with several states offering price incentives in addition to natural profit spreads, offer lucrative investment opportunities. This well trained business horse is now racing toward the final turn where fans will find a clear view of the margin of victory. Let's grab the binoculars, coat and hat from the closet, and head to the track for a closer look.
At The Gate
Calumet has two main businesses -- Specialties and Renewables. Specialties is a leading specialty products company and Renewables is a pure-play maker of SAF, renewable hydrogen and RND. Let's take some measurements for a better assessment. For the last quarter and last four quarters, the results look like this:
- March quarter EBITDA equaled approximately $78 million.
- Core businesses generated almost $450 million in the last 12 months.
- Specialty volumes operated at targeted 20,000 barrels per day.
- Going forward, half the fuels business crack spread is hedged at $27 per barrel.
- One core business, Performance Brands, turned the profitability corner generating approximately $16 million in EBITDA up from near zero in the past few years.
- Montana Renewables is an industry leading Renewable Diesel operation and now the largest SAF producer in North America.
- Construction is complete and operating.
- Run-rate EBITDA expectation reconfirmed at $1.25-$1.45/gal (centered around $250mm Adj. EBITDA per year).
During the March quarter, the company's largest plant, Shreveport, experienced health issues early on but is now striding at full rates. From the chart below, it appears that March dropped by 10%.
With regard to Performance Brand ((PB)), a sub-part of Specialty, the next slide illustrates its disappearance driven by excess raw material costs and volatile crude oil pricing with its recent reappearance.
Last year, it generated $20 million in total EBITDA, almost nothing. In the 1st quarter, the business jumped back to life with its $16 million result. Management expects this new life to continue. In the past, the 1st quarter has been one of the weakest. We expect this result to continue adding to Specialty's long-term performance.
Putting Investor Arms Around the Fixed Costs at Great Falls
In helping with the measuring process, we understood early on the critical importance of knowing the fixed costs at Great Falls. Our initial guess of $100 million a year made in the 2018-19 timeframe, now appears low. The owners offered enough information during the March quarterly public report for a far better estimate. We calculated a new estimate through two approaches. First, management had initially used $2 plus per gallon margin in figuring cash flows from MRL. In more recent information, the number dropped to $1.25-$1.45 with the caveat that the lower number represents profitability after fixed costs. The unit now in operation produces a mixture of renewables with a feed at 12,000 barrels per day. A calculation based on the seventy cents difference resulted in a fixed cost at full rates of $32 million a quarter. The renewable portion of the unit represents approximately half of the utilization or in full total for both units, $65 million. On a yearly basis with this method, the fixed costs are near $250 million.
A second method uses the March quarter results for Great Falls reported at $5 million in EBITDA. From our own crack spreads generated using EIA and Oilprice numbers, we calculated cash flows for the quarter and subtracted off the net EBITDA. The results follow in the next table.
Fixed Costs | 2-1-1 | WTI/WCS | Total | Production Rate | Days | Product Percentage | EBITDA (million) |
Fossil | $36 | $21 | $57 | 12,000 | 90 | 70 | $45 |
Margin | Conversion | Total | |||||
Renewable | 90 | ||||||
$2 | $0.80 * | $1.20 * 42 | 5,000 | 90 | 100 | $23 | |
Total | $68 | ||||||
Reported Performance | $5 | ||||||
Net Fixed Costs | $63 |
* During the calls, management noted that the feed being used today is clean feed purchased at a premium of $0.80 per pound.
For a full year, once again, the fixed costs averaged around $250 million. Going forward this number will be important for gauging seasonal issues for asphalt sales, more heavily priced with the highest volumes in the second two quarters of the year.
A note: The MRL portion at Great Falls produced approximately $25 million in EBITDA during the March quarter with approximately $32 million in fixed costs netting an approximate -$10 million EBITDA for the quarter. The asphalt fossil fuel portion netted about $15 million. Our assumption was that the company sold little if any asphalt in the quarter.
The Capital Plan & Cash Flows: Feeding The Calumet
During this 3rd quarter conference call and also at the 4th quarter call , management made clear certain planned expenses with required cash for capital and debt reduction. The next table summarizes the doctor's order.
Cash (Millions) | 2023 | 2024 | 2025 | Totals |
Capital SPS * | $140 | Unknown | <$60 | $300? |
Capital MRL Expansion ** | $50 | $150 | $50 | $250 |
Debt Reduction *** | < | $300 | > | $300 |
* "Early last year after spending the entire 2021 recovering from winter storm Uri, we commenced a 3-year capital plan focused on modernization, reliability and integration of our Northwest Louisiana assets. . .. We intend to keep the operating improvement to recognize last year and we expect to spend $125 million to $145 million of capital in our legacy business in 2023."
** At the last two conferences, the owners signaled that the MRL upgrade would cost in the $250 million range.
*** "We continue to be committed to taking roughly $300 million of debt out of the Calumet system through excess cash flows and MRL monetization."
Although the total cash needs are not finalized, the company will spend approximately $800 million in the next two or three years for capital and debt reduction.
With the cash needs on hand, let's continue watching the race into that last turn and time the stride. It begins with a performance generated from last year shown in the next table. For more details, investors can view the presentation page on the website for the referenced quarters.
Performance (Millions) | GC 2-1-1 | SPS EBITDA | WCS | Total Cracks | GFs |
2nd 2022 | $50 | $125 | $15 | $65 | $70 |
3rd 2022 | $40 | $130 | $17 | $57 | NA * |
4th 2022 | $40 | $95/$125 ** | $22 | $62 | NA |
1st 2023 | $36 | $75/$85 *** | $22 | $58 | $5 |
2nd Quarter-to-date | $30 | Estimate $70-$85 million **** |
* Greats Falls experienced significant business interruption from its conversion shutdown and start-up invalidating any result.
** Shreveport refining lost almost a month of operation from weather. A full quarter would have yielded near $125 million.
*** Shreveport weather shutdown continued resulting in lower production of fuels by approximately 10%. A more accurate result might be closer to $85 million.
**** The estimate was calculated using two different methods. The average crack spread over the past three quarters minus $30 million per each $10 difference times the whole. Under this method, the 2nd quarter estimate equals $85 million. A second method used the difference between the 1st and 2nd quarter times $30 million per each $10 difference. This method calculated $70 million. In a few more reports, finer results based on crack spread changes will become more apparent. For now, the estimate going forward at $30 GC 2-1-1 crack spread, our personal belief for long-term average values, yields $75 million per quarter.
Next, a review for Performance Brands follows:
PB | 2nd 22 | 3rd 22 | 4th 22 | 1st 23 | 2023 Estimate |
EBITDA (Millions) | $4 | $8 | $3 | $16 * | $50-$60 |
* One-time gain of $5 million in what is the weakest quarter.
PB generated $20 million in all of 2022. With the supply and other cost issues now resolved, it is moving into its own more lucrative stride.
The next table summarizes MRL performance taking advantage of the fixed cost estimate generated above. For us, this was the most informative result.
MRL/GFs (Millions) | Total Cracks | Gross Profit | Fixed Costs | Net EBITDA | Actual/Estimate | Implied Asphalt |
June Quarter 2022 | $65 | $100 | $35 * | $70 | $35 | |
2nd Quarter 2023 ** | $1.2 RND/$2.2 SAF | $25 *** | ||||
3rd & 4th Quarter 2023 | $250 million per year. | |||||
Great Falls Asphalt **** | $52 | $38 | $6 | $20 # |
* Used $65 million fixed costs per quarter and without asphalt, gross profit equaled $100 million.
** Feed rate of 12,00 barrels per day, 100% conversion.
*** From the call, "As we transition into our steady-state operation, we expect to process the majority of our existing safety stock of clean feed this quarter, clearing the slate to receive the full financial benefit of our pre- treater trader in Q3."
**** Used a crack spread equaling $52 going forward, 67% product production, 12,000 barrels per day in feed.
# 60% of total asphalt profit in the June 2022 quarter.
The totals at the last turn aren't small.
Calumet | SPS | PB | GF Asphalt | MRL | Yearly Total |
Cash/EBITDA (Millions) | $300 | $50 | $100 | $250 | $700 |
With interest expenses in the $100 million range for the debt associated with the old businesses found on the 4th quarter report page 15, the net EBITDA equals approximately $600 million a year. This stride begins in four weeks. Although the total excludes major shutdowns, it is common for minor wins on new assets to appear in the 5-10% range canceling out some or most of the negative shutdown effects.
But The Vet Is Still at Work
The story for the Race of the Century doesn't end. The best stride is yet to come. The next slide introduces a planned expansion most likely toward an almost SAF facility only operation beginning in early 2025.
The track speed for Calumet just kicked into a higher gear. Using projected margins for both SAF and RND, the following table estimates the coming winning length.
MRL Expansion | SAF Margin | Feed | RND Margin | Feed | Gross Margin | Fixed | Net EBITDA |
MRL 2025 | 3.00 * | 15,000 | 2.0 | 4000 | 50,000 M ** | 155,000M | |
Total Margin | |||||||
Asphalt | $52 | 5000 | $24000M | $15,000M | $15,000M *** |
* Management estimated more than a dollar difference between SAF and RND margins. We used a conservative $1.
** Under this expansion, MRL becomes 75% of the feed. The fixed costs were divided by feed percentage.
*** A 75% reduced asphalt value was added at a quarterly average of $6 million per quarter.
The expansion to Max SAF produces $155 million in EBITDA per quarter with the following assumptions: per gallon margins for RND and RNN equal $2; for SAF margins equal $3.00; and fixed costs at Great Falls continue at $65 million per quarter. At these rates, Great Falls asphalt EBITDA falls by $60-$70 million per year becoming more inconsequential. Again the totals follow:
Calumet | SPS | PB | GFs | MRL | Yearly Total |
Cash Speed (Millions) | $300 | $50 | $60 | $620 | $1050 |
These projected results are enormous (again, with shutdown losses excluded). The view at the last turn shows Calumet winning the match race by enormous lengths.
Risk & Reward
Calumet is on an unprecedented ride, uniquely enhanced by its positions both business and physical. The biggest risk, in our view, is that MRL is just one refinery. If that entity shuts down for any length of time, it could be devastating. Recessions too might negatively affect it, but the demand for renewable products is so strong with such limited supply, that this negative risk may just pass by. An additional risk of some level exists with the fuels part of Specialty. Each $10 change in average crack spread moves the results by $100 million yearly. Our own expectation is that the long-term GC 2-1-1 spread pricing is now ranged at $30 plus or minus $5.
Similar to Red Pollard, Seabiscuit's jockey, Calumet's jockey, Bruce Fleming, Executive Vice President, Montana Renewables & Corporate Development, is about to let loose of the reins. The length of the win seems enormous. We continue our strong buy rating.
For further details see:
The Bell Rang: Calumet Specialty Products Is Off To The Race Of The Century