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(Idea) Calumet - The Next Special Situation Idea
(Idea) An Important Update On Calumet
By: Jon Costello
The market reacted negatively to Calumet’s (CLMT) fourth-quarter earnings. The magnitude of the selloff is puzzling given the company’s increasingly bullish near-term outlook. Still, longtime holders of the shares are no strangers to these head-scratching selloffs that have occurred consistently for many years.
The initial sell-off was likely a reaction to the company’s poor results, brought about by the worst operating environment for biofuel in the industry’s history. Fortunately, those results are now squarely in the rearview mirror, and the company’s future looks considerably brighter.
The fact is that biofuel economics have improved in recent months and are expected to continue to improve after the EPA announces the renewable volume obligation (RVO) for buyers of Calumet’s biomass-based diesel. The RVO is the government-mandated volume of biomass-based diesel that refiners are required to blend into the petroleum supply. The EPA’s announcement is expected to arrive in mid-to-late March. A bullish RVO in the mid-five-billion-gallon range is likely to cause a scramble for renewable diesel among refineries that will push biomass-based diesel prices higher. Of course, higher prices will significantly boost Calumet’s margins, EBITDA, and free cash flow.
The stock’s recent run-up reflects investor expectations that the looming RVO will drive a bullish inflection in Calumet’s end markets over the next few months.
As detailed in articles published last year, I expect the announcement to be bullish due to its political ramifications for President Trump’s voter base. A bullish RVO can drive Calumet shares toward $40 over the latter half of the year. Risk-seeking long-term accounts should hold onto their shares in anticipation of this event. However, risk-averse accounts should consider lightening up, as a light RVO could spark a selloff.