While many energy companies have spent the last few years running from their refining operations, Calumet Specialty Products (Nasdaq:CLMT) has not only been content to be in the business, but has actively looked to expand its operations. A focus on specialty products such as customized lubricants and solvents has long served this company well, but beneficial spreads have kicked in their share more recently. With an impressive-looking dividend yield and certain advantages to its status as a partnership, Calumet could be a stock worth further exploration from income-oriented investors.

SEE: Guide To Oil And Gas Plays In North America

Refining, but with a Difference
Refining is a pretty well-known and understood business on the whole. Companies such as Valero (NYSE:VLO) and Marathon Petroleum (NYSE:MPC) take inputs such as crude oil and transform them into higher-value products: gasoline, diesel, oils and so on. It's also a generally low-margin business - one with a lot of volatility and capital demands.

Calumet is a little different than most. While its refineries do produce gasoline, diesel and jet fuel (particularly ultralow-sulfur varieties), the bulk of its profits come from more specialized products such as custom lubricants, fuels, solvents and waxes. These products give Calumet incrementally more pricing power, and as a result the company has historically produced margins and returns that stack up well within the refinery industry.

A Very Willing Buyer
Calumet has also shown it is more than willing to buy assets to augment its operations. The company bought Montana Refining for $120 million back in October. It followed that up two months later by purchasing NuStar's (NYSE:NS) San Antonio refinery for about $115 million in total. A little further back, in the summer of 2012, Calumet also ponied up more than $335 million for Royal Purple, a company with a line of branded automotive and industrial lubricants, fluids and additives.

To a certain extent, Calumet thrives on acquiring assets and running them better than their former owners. In the case of the San Antonio refinery, this was an asset that NuStar bought out of bankruptcy but struggled to really turn around. With its position close to the Eagle Ford region, however, it could be an invaluable asset for Calumet.

Speaking of location, that's a major factor to consider with Calumet. Refiners often build their facilities near major oil terminals, but Calumet has positioned itself to accept oil from Canada and the mid-continent of the U.S. In so doing, Calumet has been able to pay less for the oil it uses, while still enjoying good prices for the finished products (this is the spread). While economics would suggest that spreads shouldn't last (companies will build pipelines to bring oil to markets with higher prices), the realities of pipeline permitting, construction and operation can sometimes support those spreads longer than you might think.

SEE: Investing In Oil And Gas UITs

The Bottom Line
The durability of those spreads is a risk factor for Calumet. The company saw a major improvement in realized fuel margins in the third quarter of 2012, but what can go up can also go back down. Nevertheless, Calumet has shown over time that while spreads may expand and contract, this is, on balance, a high-quality operator.

At the same time, I wouldn't pay just any price even for a quality operator. I expect the company to pay a distribution of $2.54 next year, and I would want an 8% yield from a company like this. That argues for a fair value of $31.75 - basically in line with today's price. Investors who are willing to accept a lower yield (or expect a higher payout) will obviously see more value here (and vice versa), but for now this looks like a credible idea for income-seeking investors.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.



Tickers in this Article: CLMT, VLO, MPC, NS

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