2023-10-02 12:09:09 ET
Summary
- Calumet Specialty Products investors face a quandary on which way the price will head, but I believe it will go higher.
- The chart shows a bullish pattern, with a breakout potentially putting the price at $24-$25.
- Strong crack spread support and positive financial results support the belief that the price will increase.
The September quarter just closed, leaving Calumet Specialty Products ( CLMT ) investors with an interesting quandary, which way does the price head now? In our view, it's higher, maybe much higher. In the past, our articles outlined company virtues, virtues coming to fruition. So what's the deal, why isn't it higher, and what is that alphabet sequence on the last line of the chart? Can investors read it for help? We believe so, and we will be short in words.
The Chart
Beginning with a day chart created using TradeStation Securities, investors must take careful note of the price action in the upper right-hand corner. The price drifts slowly lower on decreasing volume after a strong upward move.
The slightly lower action on falling volume, signals a very bullish pattern, a reliable technical flag . The base of the pole is $15 and the top at $20+. A break-out puts $24-$25, the approximate move of the pole length, in play. So what event might cause a breakout? News, or more specifically, positive news.
The Supporting Fundamentals
Before continuing, a short summary of Calumet's business follows. It consists of three primary entities: Specialty, Performance Brands and Montana Renewables (MRL). Specialty includes fuels and high-margin products. We are anticipating an accounting change for MRL in the September quarter, this business being split into renewables and asphalt/fuels.
Two important fundamentals support a coming strong response. The first is from continued relatively strong crack spreads. From a past article:
"Next, a review of possible financial results for September and December follows. Again, in our previous article , It's the Final Countdown for Calumet Specialty Products, we noted that every $10 increase in GC 2-1-1 spreads adds approximately $30 million of EBITDA per quarter."
Investors can gain a sense of any unreported quarters using the $30 million per quarter delta for each $10 change in crack spreads by comparing the spreads in the last quarter to this quarter, followed by adding the last quarter's result. For the September quarter, the Gulf Coast 2-1-1 spread averaged $36. Remember, management hedged half of the Specialty fuel at $29. The September average with the hedge included equaled $32.5. For the June quarter without the weather loss of $20 million generated $80 million in EBITDA with the Gulf Coast spread averaging $30. Specialty might hit $90 million, approximately $10 million more for the September quarter. The 3rd quarter of the year is generally strong, like June for Performance Brands. We expect a similar result for September at $12.5 million.
MRL results are more difficult. Management announced that a heat exchanger on one of the units failed, dropping renewable production to 8000 barrels per day for the last two months of the quarter. In our Wayne Gretzky Investing: Modeling Calumet Specialty Products , we estimated September MRL at $45 million for renewables and $30-$40 million for the old fossil fuel business. With full operations at renewables, the EBITDA begins at $65 million per quarter.
Our total September estimate equals $90+ million for Specialty, $12.5 million for Performance Brands, $45 million for renewables, $40 million for the old business, and a negative -$20 million for overheads netting approximately $165 million.
The second price mover, the more important short-term announcement, is management's signaling that the renewables repair was complete, bringing the unit back to full operation. If past management practices hold, expect an announcement on this issue by the middle of October. In our view, the chart lettering spells higher prices on significantly higher volume. The flag suggests strongly this is coming. We shall see.
Risk
In our view, the biggest risk for higher prices is a delayed heat exchanger repair at MRL. Other risks do exists but again, in our view, the biggest is a delayed repair. Regardless, the other businesses are still performing exceptionally, and a repair is coming. With a positive announcement on MRL relieving investor concerns about its operation, the market seems poised to head higher, possibly even significantly higher. The chart readers announce a resounding yes. It is simply a matter of news, news most likely to come, soon. We rate the units a strong buy.
For further details see:
The Bullish Calumet Specialty Products' Chart (Technical Analysis)