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Did a Quadruple Downgrade Just Doom Calumet Stock? 3 Things You Need to Know
http://www.fool.com/investing/general/2016/04/18/did-a-quadruple-downgrade-just-doom-calumet-stock.aspx?source=yahoo-2&utm_campaign=article&utm_medium=feed&utm_source=yahoo-2
The most important thing: These downgrades were inevitable.
Calumet Specialty Products Partners fails every major safety test for an MLP. Because of that, there's a very real risk that its distribution could be reduced at some point in the future. ... Investors looking for safety should steer clear of this one. ... -- Matt DiLallo
Five days ago, my Foolish colleague Matt DiLallo penned this warning to investors considering an investment in Calumet Specialty Products Partners (NASDAQ:CLMT) stock. Two days later, Calumet announced it was taking on $400 million in debt to try to keep itself liquid, and suspended payment of its dividend, which had been averaging an annual yield of nearly 27%.
Three days after that -- this morning -- four Wall Street analysts woke up to the fact that Calumet is in trouble, and downgraded the stock.
Calumet is celebrating today. Investors are not. .
The news
Oil refiner and master limited partnership (MLP) Calumet has suffered at least four (and counting) downgrades in the wake of its dividend cut. So far, RBC Capital, Janney Capital, and Wells Fargo have all downgraded the company to various flavors of hold, while investment banker Raymond James went one step farther and cut the stock to underperform (aka sell).
And yet, across the spectrum of analysts commenting on Calumet, expectations continue to call for the stock price to rise at Calumet. According to a survey of analyst comments published on TheFly.com, these same analysts who are downgrading Calumet today expect the stock to rise to anywhere from $7 to $10 within a year!
Now here's the question to ask: Given that these analysts were so very wrong about Calumet before, is there any reason to trust their predictions today? To help you answer that question, here are three things you need to know.
Thing No. 1: Calumet's dividend was unsustainable
Wall Street's analysts were taken by surprise when Calumet cut its dividend. They should not have been. As Matt clearly pointed out last week, Calumet's business as an oil refiner "has a lot of variability to it," while the company's dividend (technically, in an MLP, it's called a distribution) commitment was set at a fixed rate. That meant that the dividends Calumet was paying weren't well correlated to how well its business was doing.
Need an example? Prior to suspending its payouts, Calumet had been promising to pay shareholders $2.74 per year in divvies -- but the company had lost $2.05 per share in the preceding 12 months.
Needless to say, it's hard to pay dividends on profits that don't exist.
Thing No. 2: Things are getting worse
Simultaneous with its dividend cut, Calumet gave investors a preview of what's to come in Q1 -- and the news is not good. "Based on preliminary data," warns Calumet, it's going to lose somewhere between $59 million and $83 million in Q1 as "weakness in our fuel products segment" continues to drain away profits.
So no profits this quarter, either.
Thing No. 3: And Calumet could have farther to fall
Calumet shares are down nearly 50% in the first trading day after it slashed its payout. But the company's not out of the woods yet. At last report, the MLP had a market capitalization of just $414 million -- but nearly $1.8 billion in debt, and less than $6 million in cash on hand to pay it.
Last week's announcement of $400 million in new debt issuance will be used primarily to roll over old debt, postponing liquidity concerns for the moment -- but leaving Calumet saddled with a frightening debt burden.
And now, the really important thing
That debt simply has to go away if there's any hope of Calumet surviving as a company, much less resuming paying distributions to its shareholders.
Last year, despite reporting $153 million in losses on its income statement, data from S&P Global Market Intelligence showed Calumet still realizing $162 million in distributable cash flow. With "distributions" now suspended, this cash flow should be available for use in paying down debt. But with $1.8 billion in debt to work through, that's a task that could take a decade or more to accomplish.
The moral of this story: There's not a moment to lose. Now that the dividend has gone the way of the dodo, Calumet must convince shareholders that it's committed to using the freed-up cash the right way: Paying down the debt.
Will Calumet Specialty Products Partners LP Sink or Swim?
A number of changes just might be what keeps this company afloat.
http://www.fool.com/investing/general/2016/04/18/will-calumet-specialty-products-partners-lp-sink-o.aspx?source=yahoo-2&utm_campaign=article&utm_medium=feed&utm_source=yahoo-2
Calumet Specialty Products Partners (NASDAQ:CLMT) had a big problem that made the company very unsafe for investors. It's a problem, however, that the company recently addressed by undertaking two very important strategic initiatives: Raising additional debt and suspending shareholder distributions. In doing so it put the company in a much better position to stay afloat, at least in the near-term.
Say goodbye to the distribution
Due to a combination of deteriorating market conditions and the company's weakened financial situation, Calumet Specialty Products Partners recently made the tough choice to suspend its quarterly distribution. It's a decision that CEO Tim Go noted was a "difficult one," however, he pointed out that, "over time this action is expected to further support our liquidity position and financial flexibility."
It's a move that the company really had to make given that it was already paying out all of its adjusted cash flow at a time when its underlying business was deteriorating significantly. In fact, last quarter the company only produced $4.4 million of adjusted distributable cash flow, which is a huge drop from the year-ago period when its adjusted distributable cash flow was $94 million. That meager cash flow didn't come close to supporting the company's distribution last quarter, which was more than $50 million. Meanwhile, operating conditions weren't getting any better, and were actually growing worse in some of the company's markets, meaning it would continue to pay out a lot more than it brought in.
Suffice it to say, maintaining a distribution that it couldn't support with cash flow had the potential to sink the company. So, while it might be painful to see this payout go away, it does put the company in a much better position to stay afloat.
Piling on even more debt
In addition to suspending the distribution, the other initiative that Calumet Specialty Products Partners recently completed to bolster its financial situation was to raise another $400 million in debt. It's debt the company plans to use to pay down the borrowings under its revolving credit facility as well as to terminate or cash collateralize some of its hedging obligations.
This is a move that in the short term should also help keep the company afloat. As the chart in the bottom left-hand corner on the slide below shows, it was running low on liquidity with the availability under its revolving credit facility shrinking each quarter:
Calumet Credit
Source: Calumet Specialty Products Partners Investor Presentation.
As a result of this transaction the company estimates that it will be able to completely pay off the outstanding borrowing under that facility, which should boost its liquidity to $397.9 million on that facility to go along with $7.4 million in cash. That's a much better liquidity position to weather the storm than the company had prior to the debt offering.
Having said all that, Calumet's leverage ratio had already risen to a very worrisome 5.3 times on an adjusted basis, which will only go up if conditions continue to deteriorate. That's a grave concern because this debt could sink the company if it doesn't do something about the situation. That said, CEO Tim Go does have a turnaround plan in place that is focused on a number of self-help projects to boost its underlying earnings in order to better support its leverage. In addition to that, non-core asset sales are not out of the question, with those proceeds potentially being used to reduce leverage.
Needless to say, the company still needs to get its debt situation under control in order to stay afloat over the long-term
Investor takeaway
Calumet's decision to suspend its distribution and raise incremental debt to pay down its credit facility puts it in a much better position to stay afloat during the currently weak market conditions. That said, the ballooning debt on its balance sheet is a longer-term concern that could end up sinking the company if conditions continue to grow worse and the company doesn't do anything to address the situation.
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