Editor’s note: Ideas from HFI Research is a separate paid subscription from HFI Research. CLMT is not a holding in the HFI Portfolio, so this write-up is only for Ideas from HFI Research subscribers.
By: Jon Costello
Trump’s executive order entitled “Unleashing American Energy” has caused another violent selloff in Calumet (CLMT) shares. The executive order mandated a freeze on government expenditures relating to certain policy and spending priorities of the Biden administration. The spending freeze throws into doubt the prospect that CLMT’s Montana Renewables (MRL) segment will receive a Department of Energy loan guarantee that closed on January 10. The company will use the loan proceeds to facilitate MRL’s expansion of its renewable diesel (RD) and sustainable aviation fuel (SAF) production.
Investors have made a killing in the weeks since Trump’s election, betting on stocks poised to benefit from his administration’s policies. CLMT shares have undergone a reverse Trump trade, similar to what has occurred with Canadian E&P stocks in response to the threat of U.S. tariffs. In both cases, I believe the selloff is overdone. For CLMT, they’ve created an attractive buying opportunity.
CLMT’s selloff is the latest of several instances over the years in which the shares lost more than 20% of their market value in a matter of days. Since we began following the name and bought CLMT equity for our HFIR Energy Income Portfolio in June 2022, each instance has been a buying opportunity. I believe this one is no different.
Despite CLMT’s stock price volatility and some valid concerns about the status of its DOE loan, my CLMT investment thesis remains unchanged. I expect the company to receive the DOE loan, albeit with a several-month delay. If and when it does, I expect the shares to trade up to $24 before heading toward $30 over the subsequent 12-18 months. Additional upside is likely as MRL executes on its growth plan.
This Selloff Ignores Tremendous Improvements
At its current price in the low-$16 range, CLMT’s shares are essentially unchanged over the last two-and-a-half years. The market is ignoring the significant positive changes since then. Three years ago, CLMT was a broken MLP that was overleveraged after years of financial mismanagement. Its operating and financial results were consistently sub-par, its manufacturing facilities experienced recurring unplanned outages, and its cost structure was structurally higher. Meanwhile, its MRL segment was operating at low capacity and had yet to produce SAF. The segment’s value had yet to be confirmed by outside equity investors, and its growth prospects were a fraction of what they are today.
CLMT is in far better shape today. Its operating costs and capex are structurally lower, financial results have improved, and facility outages are a thing of the past. As for CLMT’s MRL segment, its manufacturing facility is up and running profitably, its growth prospects are significant, and it has closed on a $1.44 billion loan guarantee that provides low-cost funding for growth.
Given these improvements, the market is completely missing the considerable upside potential and relatively low downside of the shares at their current depressed price.