Trying to strike oil in public markets: Indianapolis-based Calumet Specialty Products files for IPO, hopes to raise $140 million

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An Indianapolis-based oil company with ties to a wealthy local family plans to go public in what analysts describe as a hot-butvolatile market.

Calumet Specialty Products Partners LP wants to raise $140 million by selling 6.4 million units at an expected price of $22 each, according to papers filed this month with the U.S. Securities and Exchange Commission.

Calumet has been part of the private business empire of the Fehsenfeld family, which 35 years ago founded Heritage Environmental Services, a waste-management firm that now has more than 500 North American employees. The family also owns a range of other industrial businesses under the Heritage Group umbrella.

The company’s going public is substantial by itself. Calumet owns three refineries in northwest Louisiana producing unleaded and diesel fuel as well as solvents and waxes. In the first six months of this year, it earned $18.6 million on $526.7 million in sales.

The SEC filing shows that, after the offering, public investors will have little sway over the company’s future. They’ll own just 24.9 percent of the limited partnership, and won’t have the right to elect direc- tors of the general partner, which is headed by Chairman Fred Fehsenfeld Jr. and CEO F. William Grube.

“This is not your standard … ‘one man, one vote,’ like Eli Lilly and Co. and other corporations,” said George Farra, a principal at Indianapolis-based Woodley Farra Manion Portfolio Management Inc. “Here, the general partner more or less calls the shots.”

Publicly traded partnerships are popular in the oil and gas fields. Under federal laws, firms can pass along earnings to investors without paying income taxes.

Calumet is dangling a particularly big carrot. It says in the SEC filing that it intends to distribute an annual dividend of $1.80, or 8 percent, a couple of percentage points higher than similar energy companies.

“That’s going to be attractive to investors,” said David Menlow, president of New Jersey-based

Calumet’s oil refineries in northwest Louisiana crank out more than 65,000 barrels a day. All three escaped damage when hurricanes Katrina and Rita recently caused devastation farther south.

The company also operates a distribution terminal in Burnham, Ill. Its customer base includes more than 800 companies, including heavyweights like ExxonMobil, Cooper Tire, Goodyear and Shell Chemical.

The SEC filing says 375 of the general partner’s employees will run Calumet. It doesn’t say how many work at Calumet’s headquarters at 2780 Waterfront Parkway E. Drive or elsewhere in Indianapolis.

Pat Murray, the general partner’s chief financial officer, declined to comment last week, citing SEC restrictions before an offering. Fred Fehsenfeld Jr., 54, did not return calls. Since 1980, Fehsenfeld also has served as managing trustee for The Heritage Group.

Heritage Group’s roster of companies includes Heritage Environmental, which bills itself as the largest privately held environmental company in North America. Fehsenfeld family holdings also include Michigan-based Crystal Flash Energy.

The SEC filing says Calumet buys crude oil from suppliers, reducing the risk of price fluctuations through hedging contracts and other risk-management techniques. So far this year, Calumet has made about 70 percent of its gross profit from specialty products like lubricating oils, and the rest from fuel production.

The IPO will allow Calumet to reduce debt, including paying off $117 million in loans.

Calumet is the fourth Hoosier company to file to go public this year. The others are Evansville-based auto-parts maker Accuride Corp., Jeffersonville-based barge company American Commercial Lines and LaGrange-based van-conversion firm Legend Motors.

Market watchers say Calumet picked the right time to make the move.

Refiners that avoided hurricane disruptions are enjoying “exceptionally strong” profit margins, according to Jacques Rousseau, an analyst with Arlington, Va.-based Friedman Billings Ramsey, who recently raised his 2005 and 2006 earnings estimates for all independent refiners.

“It’s not a bad time to raise some money, clean up your balance sheet and, at the same time, provide an above-average yield to the marketplace,” added Mark Foster, chief investment officer for Columbus, Ind.-based money manager Kirr Marbach and Co.

Companies like Calumet make their profits on the spread between what they pay for a barrel of crude oil and what they charge for the refined products they sell. That spread averaged slightly more than $3 a barrel through the 1990s, but hit $9.10 during the second quarter of this year.

“You certainly have peak investor enthusiasm in the oil industry right now,” said Ken Skarbeck, a managing partner of Indianapolis-based Aldebaran Capital LLC. “That’s obviously, for a seller, a good time to bring a company to market.”

Still, investing in Calumet is not without risk, Farra said. A shrinking spread would pinch profits. Continued high fuel prices also could spur customers to drive more efficient vehicles and turn down their thermostats, reducing demand.

“The payout is dependent on cash flow, and if cash flow goes down, the dividend goes down,” he said. “It’s happened before and it will happen again.”

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