metamorworks
The following segment was excerpted from this fund letter.
Calumet Specialty Products Partners (NASDAQ:CLMT)
We recently initiated an investment in Calumet in the event-driven portfolio. Calumet fits firmly within the “moderate risk, high reward” bucket of our portfolio for reasons that will be apparent.
Calumet is a refining and specialty chemical company with three hard catalysts expected to play out in the next year. First, the company is planning to monetize its renewable energy business through either an outright sale or an IPO. Second, CLMT is converting its corporate structure from an obscure master-limited partnership (“MLP”) to a Delaware C-Corp. Finally, the company is in the process of refinancing its capital structure with low-cost debt from the Department of Energy. If these catalysts play out as expected, I believe Calumet’s shares could be worth over $30 vs. the current share price of $16; although there are notable risks to achieving that outcome.
I spent a significant amount of time researching Calumet’s renewable energy business and the more I learned about this asset the more I got excited about what it could be worth. The company invested ~$550 million over the past 3 years to reconfigure a dirty refining plant into a low-cost producer of renewable diesel and sustainable airline fuel. With an additional expansion project planned for 2025, Calumet is poised to become the leading provider of sustainable airline fuel (“SAF”) in North America.
SAF is a renewable jet fuel that currently represents the only viable way for the airline industry to decarbonize over the coming decades. SAF is a proven technology with millions of commercial miles flown and already has an established market in Europe. North American airliners are also eager to blend SAF into their existing jet fuels. While jet fuel is a commoditized market, SAF is in short supply and Calumet will have one of the first scaled operations when its Montana plant expansion project is complete in 2 years. The first stage of the renewable plant’s production came online last year and is expected to generate over $200m in EBITDA in 2024.
Due to several unique characteristics of the plant including its physical location, access to cheap transportation, and access to cheap inputs, I believe Calumet’s renewable energy business is a crown jewel asset that is worth more than the current market cap of the company. Calumet’s management intends to take advantage of the current appetite for high-quality renewable projects by monetizing this asset. The company has an ongoing sales process and I believe unitholders will receive a premium valuation for the business at the end of this process.
The second catalyst is the conversion of the legal structure from an MLP to a C-Corp. LVS Advisory has had past success investing in companies undergoing C-Corp conversions. MLPs and other obscure legal structures cannot be purchased by most institutional investors due to tax reasons. MLPs are also not eligible for inclusion in a mainstream equity index. As a result, many sub-scale MLPs become orphaned securities with limited trading liquidity. On the other side of a C-Corp conversion, there is a wave of buying from active and passive funds that are suddenly able to own the stock. This improved trading liquidity can help re-rate a stock’s valuation higher and open the door to other strategic options including a merger. Taking on a C-Corp conversion causes the General Partner and management team to lose some control over the enterprise; therefore, Calumet’s C-Corp conversion demonstrates the General Partner’s seriousness in realizing the full value of its assets for minority owners.
The final catalyst mentioned is the potential re-financing of CLMT’s capital structure with low-cost debt from the Dept. of Energy (“DOE”). This is important because Calumet has a terrible balance sheet with high-interest debt. A low-cost DOE loan in conjunction with the increased cash flow from the renewables project will serve to massively de-risk Calumet’s financial position overnight. This is where I see the most risk in the Calumet setup because the DOE financing looks promising but isn’t guaranteed at this point. However, if the DOE loan were to fall through, there are likely other, albeit more expensive, sources of financing available.
It is unusual to find a company like Calumet with several hard catalysts and such a clear path to unlocking value for minority investors. In my experience, having multiple ways to get paid tends to increase the odds of success in an event-driven situation.
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ABOUT LVS ADVISORY LVS Advisory is a boutique investment firm focused on providing active investment management services for individuals, families, and institutions. The LVS Event-Driven Portfolio is an absolute return strategy focused on capital preservation. The LVS Growth Portfolio is a global equity strategy focused on capital appreciation. Luis V. Sanchez CFA is the Founder and Managing Partner of LVS Advisory. Luis is a licensed Investment Adviser Representative and a CFA Charterholder. LVS Advisory is a Registered Investment Adviser based in New York City. LEGAL DISCLAIMER The information and statistical data contained herein have been obtained from sources, which we believe to be reliable, but in no way are warranted by us to accuracy or completeness. We do not undertake to advise you as to any change in figures or our views. This is not a solicitation of any order to buy or sell. We, any officer, or any member of their families, may have a position in and may from time to time purchase or sell any of the above mentioned or related securities. Past results are no guarantee of future results. This report includes candid statements and observations regarding investment strategies, individual securities, and economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. These comments may also include the expression of opinions that are speculative in nature and should not be relied upon as statements of fact. LVS Advisory LLC is committed to communicating with our investment partners as candidly as possible because we believe our investors benefit from understanding our investment philosophy, investment process, stock selection methodology and investor temperament. Our views and opinions include “forward-looking statements” which may or may not be accurate over the long term. You should not place undue reliance on forward-looking statements, which are current as of the date of this report. We disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. The information provided in this material should not be considered a recommendation to buy, sell or hold any particular security. LVS Advisory | luis@lvsadvisory.com |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
