Refiner enjoys oil boom: Calumet Specialty Products sees stock price take off

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Indianapolis is headquarters for Little Oil-Calumet Specialty Products Partners LP.

Few locally have heard of the west-side refining and petroleum products company, let alone of its Jan. 25 initial public stock offering that raised $144 million. Calumet is controlled by an equally obscure group of families that still own the bulk of company shares. Yet shares of little Calumet-sales last year of $1.3 billion-are up 40 percent since the January IPO intended to fuel acquisitions. The appreciation is partly due to rising prices in the petroleum industry that are reflected in higher prices at the gas pump.

While Calumet refines oil and diesel for gas stations and jet fuel for aircraft, just over half its revenue comes from production of specialty petroleum-based products.

Calumet’s base oils help Goodyear and Michelin make tires. Its waxes wind up in Duraflame fireplace logs and in Wrigley’s chewing gum. Its solvents might be found in WD-40, Liquid Nails or Turtle Wax.

“Specialized high-margin products differentiate Calumet,” said Deutsche Bank analyst Paul Sankey in a recent report.

The company is scheduled to announce first-quarter earnings May 11. Earlier this year, CEO Bill Grube declared: “Calumet is positioned for strong operating performance in 2006.”

Calumet earned $11.3 million last year on sales of $1.3 billion.

Despite what analysts say is a bright future for the company, neither Grube nor other Calumet executives will talk about the city’s newest publicly traded company.

A representative said Calumet prefers a low profile. She also noted public angst against oil companies, lately, over high gasoline prices.

It’s not that Calumet has a big local reputation that requires a high-gloss polish. Only about 50 of its 375 employees are based at its Indianapolis headquarters at 2780 Waterfront Parkway, just west of Speedway at interstates 74 and 465.

Sort of like the late medical-device maker Guidant Corp., acquired last month by Massachusetts-based Boston Scientific Corp., Calumet’s manufacturing operations are out of state. The company operates three refineries in northwest Louisiana with total capacity of more than 65,500 barrels per day. It also has a terminal in Burnham, Ill.

Expansion of Calumet’s refining capacity is one reason cited for the stock’s rise.

For example, Calumet plans to increase the capacity of its Shreveport, La., plant by 2,500 barrels a day-65 percent for fuel and the rest for specialty products. The increased capacity should boost annual earnings before interest, taxes, depreciation and amortization more than $5 million, according to a report by Goldman Sachs & Co. analyst David Chiaro.

He said refinery upgrades companywide could boost EBITDA $35 million to $40 million annually.

Analysts also say Calumet might be able to pick up additional refineries at a discount. It bought the Shreveport plant-an asset with a replacement value of $1 billion-from Pennzoil-Quaker State in 2001 for $25 million, Deutsche Bank’s Sankey said in a recent report. Calumet then spent $81.3 million on capital improvements.

Sankey noted that a number of competitors, such as Shell, are leaving the specialty chemical market, giving Calumet more opportunity to buy assets at a discount. Most of the company’s growth since 1990 has come through acquisitions, after which Calumet reconfigures refineries to make them more efficient and increases product lines, Sankey added.

In the specialty petroleum market, the “individualized nature of the products provides a barrier to entry for competitors.”

New York-based Goldman Sachs, which, with Deutsche Bank, helped take Calumet public, said the company also has managed to reduce its cash flow volatility by diversifying its customer base. With over 1,000 customers, none accounts for more than 5 percent of revenue.

Among risks facing the company and investors, however, are volatile swings in the cost of crude oil and natural gas. The company enters into hedging contracts and says it recently stepped up activities to limit its exposure to the spread between the price it pays for crude and the price of its refined fuel products.

That spread during the 1990s averaged about $3 a barrel but lately has been more than triple that amount.

Also a potential risk, analysts said, is that the newly public company doesn’t have a track record of consistent operating earnings.

Still, while a number of investors have bought the hype about the growth prospects of most every energy-related stock, Calumet “is indicative of a fundamental stock that continues to grow,” said David Menlow, president of New Jerseybased

Another potential draw is an annual cash dividend of $1.80, which Menlow said is a tad higher than comparable petroleum partnerships.

The publicly traded partnership-typical in the petroleum industry as a way of reducing taxes companies pay-has some potential downsides for investors, however.

The general partners-CEO Grube and Chairman Fred Fehsenfeld Jr.-own the bulk of the company while public investors own just under 25 percent. So public investors essentially have no voting rights, nary a say over the direction of the company or about who should run it, said George Farra, a principal of Woodley Farra Manion Portfolio Management in Indianapolis.

Fehsenfeld’s family controls Heritage Group, which has about a dozen businesses, including Indianapolis waste management firm Heritage Environmental Services. The mechanical engineer spent his early career as a process engineer at the now-defunct Rock Island Refining Corp. on West 86th Street.

CEO Grube was executive vice president of Rock Island Refinery from 1974 to 1990 and has a degree in chemical engineering from Rose-Hulman University, and an MBA from Harvard University.

Calumet’s IPO comes as central Indiana has lost public companies, such as former Plainfield sporting goods chain Galyan’s, which was acquired by Pittsburgh competitor Dick’s. An even larger public company locally was Guidant, the former medical-devices arm of Eli Lilly and Co.

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