Calumet Specialty Products Partners, L.P. has reported its results for the quarter and year ended 31 December 2015.
The Partnership's results for 4Q15 include five special items: a charge related to a lower of cost or market (LCM) inventory adjustment of US$24.1 million; a US$21.7 million loss related to the liquidation of last-in, first-out (LIFO) inventory layers; a US$22.3 million gain on the early settlement of select derivatives contracts; a US$28.7 million adverse mark-to-market impact from the Partnership's existing Renewable Identification Numbers (RINs) liability; and a US$11.8 million unrealised loss on derivative instruments.
"Looking at our full year results in 2015, our core business performed well, as demonstrated by improved operational reliability at our facilities and higher sales across our deep portfolio of refined products," stated Tim Go, Chief Executive Officer of Calumet. "Refining system utilisation and product sales volumes reached all time records last year, the combination of which contributed to a significant year-over-year increase in Distributable Cash Flow, excluding special items. Despite challenging market conditions evident during the fourth quarter of 2015, our full-year 2015 results reflect a combination of stable growth in our specialty products segment and continued contributions from our niche, inland fuels refineries, which stand poised to benefit from increased processing of cost advantaged heavy Canadian crude oil during 2016."
"We are pleased to announce that our Montana refinery capacity expansion, San Antonio refinery solvents project and Missouri esters plant capacity expansion have all been completed," continued Go. "The crude oil unit at our Montana refinery is on-stream and is expected to reach 25 000 bpd of production by the end of March 2016, our San Antonio refinery is producing and selling solvents and our Missouri facility is producing and selling esters, post expansion. Collectively, we anticipate these projects will provide significant incremental adjusted EBITDA for the Partnership over time which, together with a more than 60% year-over-year decline in projected capital spending in 2016, should contribute to improved financial flexibility for Calumet."
"Our senior management team, together with our Board of Directors, is highly focused on owning businesses whose unique competitive advantages and stable cash flow profiles support our long term strategic growth," continued Go. "To that end, we recently introduced a revised corporate vision for Calumet designed to position the organisation as 'the premier specialty petroleum products company in the world.'"
"As part of this vision, Calumet has commenced a multi-year initiative that emphasises a combination of operational excellence, opportunistic investments in 'self help' internal projects and a long term, targeted acquisition strategy that will support the purchase of competitively advantaged assets in the global specialty products markets," continued Go. "We intend to provide supporting data on the financial benefits of this initiative in subsequent updates."
"We believe the Partnership has sufficient liquidity from cash on hand and from operations, as well as availability under our asset based revolving credit facility to fund general business requirements, subject to market conditions," continued Go. "During 4Q15, affiliates of our general partner provided Calumet with an unsecured US$75 million loan, demonstrating their continued long term support for the Partnership."
"During 1Q16, we have taken steps to significantly increase the volume of heavy Canadian crude oil processed at our fuels refineries," noted Go. "Historically, we have processed between 20 000 bpd and 25 000 bpd of heavy Canadian crude oil at our refineries, representing approximately one quarter of our crude slate. By year-end 2016, we intend to process between 40 000 bpd and 45 000 bpd of heavy Canadian crude oil and, longer term, as much as 70 000 bpd of cost-advantaged Canadian feedstock. Given that heavy Canadian crude oil is discounted by more than US$12/bbl versus West Texas Intermediate (WTI) year-to-date 2016, we view this as a clear profit improvement opportunity for the Partnership that we expect to require limited capital investment."
Overall demand for specialty products was essentially flat in 4Q15, when compared to the prior year period. Demand for lubricating oils, white oils and packaged and synthetic specialty products remained stable, while solvents demand remains soft due primarily to less activity in the oilfield services industry. Sales of packaged and synthetic specialty products, which include proprietary product lines such as TruFuel and Royal Purple, achieved a new record in 2015.
During 4Q15, a more than 45% quarter-over-quarter decline in the Gulf Coast 2/1/1 crack spread, together with a narrowing in crude oil price differentials, contributed to lower results within the fuel products segment. The Partnership processed an average of approximately 22 300 bpd of heavy Canadian crude oil in 4Q15, versus 19 500 bpd in 4Q14. Calumet continues to believe a structurally wide WCS-WTI crude oil price differential remains a significant advantage to the overall profitability of its fuel products segment based on current market conditions. During 2016, the Partnership intends to significantly increase the volumes of WCS price-linked crude oil processed at its fuels refineries to further capitalise on this advantage.
The average price of WTI crude oil declined by more than 40% between 31 December 2014 and 31 December 2015. In response to lower crude oil prices, domestic oilfield services activity declined sharply during the past year, as the US land rig count dropped by nearly 50% on a year over year basis. The decline in drilling and completion activity had a material adverse impact on our oilfield services segment throughout 2015, a trend which continued into 4Q15.
In response to these market conditions, the Partnership took steps to significantly reduce costs in the business during the past year, efforts that included capturing increased supply chain efficiencies in addition to a series of targeted workforce reductions that better positioned the segment relative to the needs of existing customers. While the oilfield services segment remains challenged in a lower commodity price environment, the Partnership continues to position the business for cash flow neutrality, given the current challenges evident in this market.
On 31 December 2015, Calumet had availability under its revolving credit facility of US$233.5 million, based on a US$411.3 million borrowing base, US$66.8 million in outstanding standby letters of credit and US$111.0 million in outstanding borrowings. In addition, Calumet had US$5.6 million of cash on hand as of 31 December 2015. Calumet believes it will continue to have sufficient liquidity from cash on hand, cash flow from operations, borrowing capacity and other means by which to meet its financial commitments, debt service obligations, contingencies and anticipated capital expenditures. On a continuous basis, the Partnership focuses on various initiatives, including working capital initiatives, to further enhance its liquidity over time, given current market conditions.
2016 capital spending forecast
For the full year 2016, the Partnership anticipates total capital expenditures between US$125.0 million and US$150.0 million. Anticipated 2016 capital spending includes US$60.0 million to US$70.0 million for capital improvement expenditures; US$50.0 million to US$60.0 million for replacement and environmental expenditures; US$5.0 million to US$10.0 million for turnaround related expenditures and US$10.0 million for joint venture contributions.
2016 RFS compliance impact forecast
In conjunction with the Partnership's ongoing compliance with the US Renewable Fuel Standard (RFS), Calumet expects to purchase blending credits referred to as RINs. The Partnership records its outstanding RINs obligation as a balance sheet liability. This liability is marked-to-market on a quarterly basis to reflect the market price of RINs on the last day of each quarter. The Partnership expects its gross estimated annual RINs obligation, which includes RINs that are required to be secured through either blending or through the purchase of RINs in the open market, will be up to 120 million RINs for the full-year 2016, excluding the potential for any subsequent hardship waivers that may or may not be granted by the US Environmental Protection Agency (EPA) to any of the Partnership's fuel refineries at a later time.
In early 2016, Calumet introduced a revised vision designed to position the organisation as the premier specialty petroleum products company in the world. As part of this vision, Calumet has commenced a multi-year initiative that emphasises a combination of operational excellence, opportunistic investments in ‘self help’, high return internal projects and a targeted acquisition strategy that seeks to support the purchase of complementary, competitively advantaged assets in the global specialty products markets.
Calumet will seek to optimise its existing asset base through a series of improvement initiatives that are expected to position the Partnership for sustained, profitable growth. Calumet has identified key areas of opportunity within the business that carry ‘low/no’ capital investment requirements and attractive return profiles. Key initiatives under evaluation as part of the operational excellence initiative include efforts to further optimize the procurement of feedstock, efforts to improve refinery yields, efforts to improve the efficiency of assets by operating at higher utilisation rates and efforts to lower margin product streams into higher margin finished products.
Self help project investments
Calumet expects to pursue a series of self help projects characterised by high return investment profiles and sub-US$50 million capital investment requirements. The Partnership will evaluate projects that are smaller in size/scope than the prior organic growth campaign and that carry shorter durations to completion. These projects will carry high return investment profiles capable of supporting growth in adjusted EBITDA and Distributable Cash Flow.
Targeted acquisition strategy
Calumet seeks to acquire complementary, immediately accretive businesses with sustainable competitive advantages that further entrench Calumet as a global leader in the specialty products markets. The Partnership's acquisition focus will narrow versus prior years to include specialty businesses where, firstly, the Partnership has an existing core competency and, secondly, that have a sustainable competitive advantage. At the same time, the Partnership regularly evaluates its portfolio to identify potential asset divestiture candidates that do not fit its core asset portfolio criteria.
Adapted from press release by Rosalie Starling
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