Calumet Inc (CLMT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Calumet Specialty Products Partners Q3 2016 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, you may press * then zero on your touchtone telephone.

I would now like to introduce your first speaker for today's conference, Mr. Joe Caminiti with investor relations. Please go ahead, sir.

Thank you, Andrew. Good afternoon, everyone, and thank you for joining us today for our third quarter 2016 earnings results call. With us on today's call are Tim Go, CEO; Pat Murray, EVP and chief financial officer; Bill Anderson, EVP of sales; Ed Juno, EVP of operations; and Bruce Fleming, EVP of strategy and growth.

Before we proceed, allow me to remind everyone that during the course of this call we may provide various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based on the beliefs of our management, as well as assumptions made by them, and in each case based on the information currently available to them. Although our management believes that the expectations reflected in such forward-looking statements are reasonable, neither the Partnership, its general partner, nor management can provide any assurances that the expectations will prove to be correct.

Please refer to the Partnership's press release that was issued this morning as well as our latest filings with the Securities and Exchange Commission for a list of factors that may affect our actual results and could cause them to differ from our forward-looking statements made on this call.

As a reminder, you may now download a PDF of the presentation slides that will accompany the remarks made on today's conference call as indicated in the press release we issued earlier today. You may access these slides in the investor relations section of our website at calumetspecialty.com. Also, a webcast replay of this call will also be available on our site within a few hours, and you can contact the Alpha IR group for investor relations support at 312-445-2870.

With that, I'd like to pass the call to Tim Go. Tim?

Thanks, Joe. And thanks to all of you for joining us today. Let's start on slide 4 and I'll walk through the third quarter's highlights.

The big picture takeaway is that we continue to make solid progress against our strategic priorities to reshape and reposition Calumet. We've come together as an organization with a strong sense of urgency to both change our culture and to simultaneously drive our operations excellence initiative. As a reminder, our operations excellence initiative is being driven by multiple integrated business teams composed of cross-functional groups of leaders who have been tasked with improving the long-term performance of each and every asset and product line in our portfolio.

The success of our team's hard work is readily apparent in our results today as we've driven an estimated $71 million in incremental self-help adjusted EBITDA through the first nine months of the year. These results have already surpassed the midpoint of our annual goal to deliver $60 to $75 million in self-help in 2016. And our teams remain diligent on a daily basis finding new ways to bring stronger financial and business discipline to our organization. In fact, we will talk you through a handful of new margin capture initiatives later in today's presentation, all of which are being implemented as we speak, and were a direct development of this more collaborative culture that we've been fostering.

So let's talk about some of our specific results this period. We were able to deliver solid results again this quarter, not as high as last year but solid given today's still challenging market environment. Specifically, we generated adjusted EBITDA of $53.9 million as a the consistent performance of our specialty products segment was partially offset by lower performance in our fuels products and oil field services segments. Included in the $53.9 million were two negative items, an unfavorable lower cost or market inventory adjustment of $8.4 million and $10.1 million of net expenses related to RINs.

Within our core specialty product segment, we experienced fairly flat volumes year-over-year, but that included some scheduled downtime at both our Princeton and Karns City facilities. Adjusted EBITDA declined $4.2 million year-over-year due primarily to the impact of higher crude oil prices, which outpaced adjustments in product pricing and a scheduled turnaround at those two plants. Please note that adjusted EBITDA included an $8.7 million unfavorable LCM inventory adjustment during the period.

As a reminder, the price increases that were implemented in the segment during June held well throughout the quarter, but their impact is hard to see in the year-over-year comparisons due to rising crude prices outpacing product prices throughout most of 2016.

One of the key underlying contributors to our specialty products segment has been our branded and packaged products, which have strong future growth profiles and continue to deliver strong margins. Some of the top performers in the group include Royal Purple, TruFuel and our Bel-Ray brands. Historically we haven't broken out the performance of these products, but I can tell you that based on their strong performance so far this year we anticipate that they will have a record contribution to our specialty product segments earnings this year. These products, and the branded and packaged niche in general, remain a high priority focus area for us, and we continue to look for ways to accelerate their growth and to add new products to our growing portfolio of specialty product offerings.

Moving to our fuels product segment, this quarter was not as strong as we would have liked. We should have been somewhat [apparent] by the fact of the 2:1 Gulf Coast crack spread was down 35% over the last 12 months, but we still delivered a second consecutive quarter of positive adjusted EBITDA during the period. Volumes were up nearly 7% year-over-year. Our average selling prices per barrel across the segment were down 16.5% year-over-year.

Offsetting some of that pressure and the negative impact of RINs was continued strength in our local market premiums versus the Gulf Coast on our motor fuels sold around Montana and Superior refineries. Both refineries continue to increase their usage of cost advantaged heavy Canadian crude oil, and remain solid earnings contributors.

In terms of our asphalt business, sales were not as strong as last year given the rising crude price environment, but overall they were in line with our expectations. In fact, asphalt volumes hit record levels given our increased use of heavy Canadian crudes and our high quality asphalt that remains in strong demand.

Finally, I'd like to spend a little bit of extra time talking you through our oil field services segment results. As you know, this business has struggled given the dramatic drop in US land-based rigs, which today stand at about one third in total count from their peak levels less than two years ago. While we saw negative adjusted EBITDA out of this segment again this quarter, that loss was substantially lower than the last few quarters. US land-based rig counts remain depressed year-over-year but they did increase 14% on average sequentially quarter-over-quarter. Further, in our business, rig counts improved 32% on average sequentially quarter-over-quarter.

Our outperformance was driven in large part due to our strong market presence in high profile regions like the Permian Basin. This improvement allowed our oil field services segment to increase its revenues by over 60 percent quarter-over-quarter. It also led to a $4.6 million improvement in adjusted EBITDA sequentially off the second quarter. While its' still too early to call the bottom, we're growing more confident that this past spring was hopefully the low point for our business. Our team still has plenty of work to do, but we believe we are well positioned to recover quickly as drilling activity picks up.

Moving to slide 5, you can see our historical adjusted EBITDA performance, as well as the contributions of each of our various segments. The first thing I'd like to point out is the consistency of our specialty products segment, even through a highly volatile period like we saw during the last year's fourth quarter. This performance is exactly why we have been talking to you all year about our long-term goals to reposition our overall business towards the specialty side.

Next, I'd like to point out that even in today's depressed crude oil price environment, we've been able to achieve positive adjusted EBITDA contribution out of our fuels product segment for two consecutive quarters. As we continue to lower our cost base, execute against our organic growth initiatives, and increase our margin capture by focusing on even greater use of heavy crude oils, we expect to increase our performance here as well.

Lastly, while you can see the negative results from our oil field services segment clearly on this slide, we believe that its situation is improving and that its solid market share should position it for better success in the future. Most importantly, to date the oil field services segment has not required Calumet to input any cash into the business since we acquired it, and we hope our cost containment efforts will not only keep it that way, but will continue to work it towards adjusted EBITDA breakeven as the market recovery continues.

On slide 6 I'd like to now remind our investors about our core strategic priorities as these are critical to our short and long-term success. There are four core pillars that will outline our path forward.

First, as I've mentioned before, our vision is to be the premier specialty petroleum products company, and we are reprioritizing the business around our core specialty products. As we just discussed, this segment has been a strong and consistent performer for many years. While it can be impacted by crude oil price volatility as well, we have greater control over margins and thus we have greater control over this segment's financial performance. It's a great business with a diverse set of products, customers and end markets. The business has strong growth opportunities, and as we discussed earlier, the branded and packaged product lines have some real exciting potential for continued growth as we move forward.

It will take time to reweight around our specialty products platform, and the path is not perfectly predictable in today's volatile energy environment. Thus it is critical that we take proactive steps today to improve the performance of all of our businesses. We are operating with a sense of urgency and are assuming that the challenging times that our industry is undergoing will continue. Under these assumptions, it is absolutely critical that we make our business more flexible.

The first step in creating greater flexibility and optionality in the business is to improve our balance sheet and ultimately reduce our leverage, which is our second strategic priority. Therefore, earlier this year we took steps to significantly enhance our liquidity profile through the placement of $400 million in senior secured notes due in 2021. The proceeds from this offering allowed us to pay off all our borrowing under our revolving credit facility, and over the last two quarters we've also paid down another $54 million on a related party note. Additionally, we have just entered into a new crude oil supply agreement which will further enhance our liquidity. I'm going to let Pat talk you through some of these details on that agreement.

With no near-term maturities in our long-term debt profile, we have provided a solid cushion to evaluate a number of business enhancing options. Further, we believe the Partnership will continue to have sufficient liquidity from cash on hand, cash flow from operations, borrowing capacity, and other means by which to meet our financial commitments, debt service obligations, contingencies, and our anticipated capital expenditures.

Our third priority is to execute our strategic plan. As we said in our previous communications, we completed a full review of all our assets earlier this year. Bruce Fleming, our EVP of strategy and growth, with over 30 years of experience leading growth initiatives, and business development for a number of large global energy companies has been instrumental in leading this initiative. We now have a full sense of the whole values of all of our assets as well as a strategic five-year plan. That plan, in part, is supporting and guiding our 2018 operations excellence goals.

Along those lines, last quarter we discussed the sale of our Dakota Prairie joint venture, Calumet's first ever divestiture of a major asset. While we like that plant over the long term, Dakota Prairie had strong value to an outside party that proved more attractive to us than retaining the asset. Given our overarching goal to reduce leverage, we must remain strong stewards of our business, which means that we will remain open to consistently evaluating our business. I can tell you that we are taking a very disciplined approach to ensure we maximize value.

Lastly, given the variety of paths we might take to improve and transform over the long term, we also need to stay 100% committed to driving our operations excellence initiatives. This is our fourth strategic priority designed to improve our business. We've already achieved the midpoint of the goal we set out for 2016 within just three quarters. As we look towards our 2018 goal, which is to drive a cumulative $150 million to $200 million in incremental adjusted EBITDA, all of our employees and teammates need to remain committed to this collaborative effort.

If you move to slide 7, you can see the major components of our long-term strategy. There are three primary drivers of our operations excellence platform, which include targeted cost reductions, increased margin capture, and driving low to no cost organic growth projects. Again, I want all of our investors to understand that all of these concepts are within our control, and all of us here at Calumet are committed to making this program a huge success.

Moving to slide 8, you can see that the majority of 2016's targeted cost reduction achievements to date have been centered around SG&A and eliminating waste. In fact, we've taken out $46 million, or nearly 25% of these types of costs over the last nine months alone. Further, we expect that our total 2016 capital spending will decline by nearly 70% year-over-year, which will the lowest annual capital spending since 2012. Pat will talk you through this in more detail, but we're tracking towards the lower end of our original $125 million to $150 million capital spending guidance for 2016 at this time, and thus we're lowering that guidance today.

In terms of organic growth initiatives, we've updated slide 9 for you to review. Through nine months of the year, we've continued to purchase increased quantities of cost advantage heavy Canadian crude oil. This is feed stock that remains roughly $13 per barrel below WTI, making it one of the lowest cost feed stocks we can process in our system. This quarter we ran nearly 38,000 barrels per day through our refining system, which was a record rate and is getting very close to our short-term goal to start running 40,000 to 45,000 barrels per day through our system.

On slide 10, I'd like to talk you through a few of our newer work streams that are designed to help us achieve our operations excellence goals in 2017 and 2018. The first few concepts on this page are focused on creating greater supply chain efficiency. Over the last few years, when we were in aggressive growth mode, most of our assets were run as silos. So over the last few months, we've done a deep dive into ways that we can better leverage our increased size and scale to reduce our costs. Specifically, we have begun capturing a number of opportunities to reduce our transportation, procurement, raw materials, and feed stock costs.

These types of initiatives are not quick hit ideas, and many require more data centric tools. Therefore, we are also implementing a new ERP system to better manage the business and automate many back office functions related to supply chain, customer services, finance, and accounting functions. This ERP conversion is on schedule to cut over this January. I'm looking forward to providing you with examples on how these new strategies are contributing to our financial performance as we get later into 2017.

Now I'd like to introduce you to another new initiative, one that provides another great example of how we can execute against our low to no cost opportunities to increase our margin capture. This quarter we've entered into a new packaging relationship with a large global integrated oil and gas company. This new tolling agreement puts us in a position to blend and package between 10 million to 15 million gallons of their branded lubricants per year in our facilities. This new relationship serves a number of important purposes. First, it increases our volumes at least 30% in our Shreveport package facility. Second, it develops a platform for us to expand our relationship across multiple opportunities, which could have numerous benefits to both parties in the future. We look forward to growing with this new partner in the future, and will be starting this program during the impending fourth quarter.

Slide 11 wraps up and summarizes the discussion of our operations excellence platform. In reviewing the major components of 2016's year-to-date results, you can see that $46 million in savings were driven by cost reductions, primarily SG&A. Another $19 million have come from our organic growth projects, which again has been centered around running more heavy Canadian crude through our two northern refineries. And then we've achieved another $6 million in our supply chain efficiencies. We're moving quickly. We're well ahead of where we thought we'd be today. And we remain committed to our 2018 goal to drive $150 million to $200 million in self-help benefit.

The last slide I'll talk to you will be slide 12. Here we've outlined a few of our key assumptions as we look forward to the fourth quarter. Let me talk you through these quickly. We expect all of our business to come under typical seasonal pressure, in particular our fuels businesses will have to work through elevated supplies and RINs headwinds. We expect consistency and stability of our specialty product segment despite seasonal headwinds that are likely to occur, which should be offset somewhat by the aforementioned price increases. Regardless of oil prices, we expect the specialties business to remain our core profitability contributor, and we will continue to look to grow and expand its opportunities.

In oilfield services we will continue to focus on improving our market share in our core focus areas, like the strong Permian region. In the near term, we remain cautious around fourth quarter customer activity due to holiday and seasonal weather-related down times. However, it does not change our view that things are getting better for us and our customers. We will remain dedicated to driving our operations excellence initiatives, including the new supply chain efficiencies and new specialties tolling agreement.

Lastly, we'll complete our capital spending for 2016 and will start to prepare for 2017. Now I'd like to ask Pat to talk you through a few more specific details of our performance this last quarter. Pat?

Thanks, Tim. Good afternoon, everyone, and thank you for joining us today. I'll start on slide 14, which provides our adjusted EBITDA bridge year-over-year. We reported adjusted EBITDA of $53.9 million in the third quarter of 2016 versus $75.4 million in the third quarter of 2015. Third quarter of 2016 reported adjusted EBITDA includes an unfavorable lower cost to market inventory adjustment of $8.4 million, a net expense of $10.1 million related to the Partnership's ongoing compliance with the US renewable fuel standard.

There have been a lot of questions about RINs of late by our investors and we want to take the opportunity to provide some context on our exposure there. For the full year 2016, we anticipate our gross RINs obligation to be approximately 120 million RINs based on the recent production capacity expansions at two of our fuel products refineries. As we've talked about before, we have multiple ways to reduce this obligation through blending activity, such as through the biodiesel production that we have at our Dickinson, Texas plant.

These capabilities allow us to blend away approximately 50% of our obligation. We continue to examine other ways that we can minimize the liabilities associated with RINs. We have more work to do, but we believe that through a combination of initiatives we'll be able to reduce our liability slightly further as we move forward.

Now please turn to slide 15 for a review of our year-to-date adjusted EBITDA comparison. Most of the drivers (inaudible) from our nine months in 2016 versus the same period last year are similar to the quarter-over-quarter explanations. However, as illustrated in this chart, we estimate a benefit of $71 million in adjusted EBITDA generated in the nine months of 2016 resulted from our self-help program, underscoring the overall importance of this effort to the ongoing turnaround of our business.

I'd like to reinforce the significance of what you're looking at on this slide. The market effectively took away over $300 million in adjusted EBITDA year-over-year, so between our self-help initiative and our operational flexibility, we've been able to substantially offset a great deal of the impacts of these challenging market conditions.

Moving to slide 16, let's talk through our sequential cash bridge detail. As you can see, the largest positive driver of cash from the second quarter to the third quarter this year came in the form of strong operating cash flows, which were $40.2 million. On the uses of cash, I'd like to point out that the $20.9 million repayment on a related party note, excluding this repayment, our cash position would have increased.

Slide 17 shows you a visual of the strong liquidity position that Tim already outlined. We ended the third quarter with $388 million of cash and availability under our revolver, versus $239 million as of yearend 2015. It's critical to reinforce again that we believe the Partnership will continue to have sufficient liquidity from cash on hand, cash flow from operations, borrowing capacity, and other means by which to meet our financial commitments, our debt service obligations, contingencies, and anticipated capital expenditures.

As Tim mentioned earlier, enhancing our liquidity profile and strengthening our balance sheet remains one of our core goals. As an example, in the fourth quarter we have entered into a new crude oil supply agreement designed to optimize our utilization of $150 million allowed lien on our fixed assets, which in turn enhances our liquidity through extended payment terms on a significant portion of our crude oil purchases.

I'll end my remarks with a review of our capital spending, so please now turn to slide 18. We've talked a lot about our shift away from the large capital intensive projects of the past, and have guided you towards a more sustainable level of $125 million to $150 million for fiscal 2016. Through three quarters, our capital spend total is $98 million, down 71% compared to the same period in 2015. Our team has done an outstanding job managing these costs, and thus we are updating our guidance today to a lower range of $125 million to $135 million for 2016.

With that, I'll turn the call back over to Tim to provide a few closing remarks. Tim?

Thanks, Pat. As you can see, we are making progress to really change the way we do business. We have created flexibility and optionality in our business as well. This positions us to continue to evaluate a number of different paths forward for the organization, all centered around our great core specialty product platform that will maximize value for all of our stakeholders. Our operations excellence activities are exceeding our initial expectations, and they are bringing us together and making us a stronger team. We have more work to do, but we're growing more and more confident about our path forward, and we look forward to talking to you further about our plans for 2017 when we discuss our fourth quarter results early next year.

That concludes our prepared remarks, so Andrew, we'll go ahead and open the line for questions at this time.

Certainly. (Operator instructions) Our first question comes from the line of Neil Mehta with Goldman Sachs. Your line is now open.

Good afternoon, everyone, and thank you for your comments today. I have a couple questions just around the strengthening of the balance sheet which you spoke to a little bit today. What do you think the opportunity is there for asset monetization and asset sales, specifically as it relates to some of the fuels refining assets to help bring in cash flow to reduce the debt load?

Yes, Neil, this is Tim. We talked about this a little bit in our prepared remarks. What I will tell you is that we've completed our valuation effort. We talked about the role that Bruce Fleming has played in our organization. We've incorporated our five-year plan outlooks into all of these assets, and developed our hold analysis based on those future growth opportunities that we see. And we know and are executing against those strategic plans for those assets.

Just like Dakota Prairie, if an opportunity comes up where there is value to another portfolio that's higher than ours, and they can provide value that's more than what we can see in our own portfolio, we will certainly consider those opportunities. Just like we did with Dakota Prairie, we are continuing to entertain those types of opportunities, but we remain very disciplined in our approach, and right now we're focused on executing our strategic five-year plans for all of our assets, including our refining assets.

I appreciate that. And I know, Tim, we'll get a better look at 2017 on the fourth quarter call, but big picture, can you talk about the 2017 capital spending plan? What are the pluses and minuses and how should we think about it relative to where we're tracking here in 2016?

Yes, Neil, that's a good question. I know you're getting into that time of the cycle where these questions are going to become more relevant. We're still in the middle of our planning phase. I would say we were preparing to provide firm guidance in the fourth quarter call.

What I can tell you is it will be similar to what our guidance was this year. We had the SAP/ERP project this year that we've talked about in prior calls. That is not going to be capital spending next year, so that's a minus in the capital spending plan. However, we are starting our turnaround cycle plan, and so between 2017, 2018 and 2019 we'll see some increased turnaround activities across those years, again starting to ramp up in 2017. And just in round numbers, Neil, we're not ready to give final guidance, but in round numbers that turnaround load will basically offset the SAP project that's not in the 2017 plan. Does that make sense?

That does. Appreciate the comments, Tim, and talk to you soon.

Thanks, Neil.

Our next question comes from the line of Ed Westlake with Credit Suisse. Your line is now open.

Hi, it's Johannes Van Der Tuin here. Thank you for taking my questions. Thanks for speaking (inaudible) today.

Hi, Johannes.

Just to confirm a little bit on what Neil was getting at previously. You know, key to moving the company forward will be reducing leverage and repairing the balance sheet. Within your five-year plans, do you have a sense as to when you'll feel like you'll start to get a better hold using that kind of base case on the balance sheet and bringing down the debt levels?

Yes, Johannes, this is Tim. What I would tell you is when we put together our strategic five-year plan, we put together our operational excellence goals. That's the $150 million to $200 million that we talked about at the last quarter and that we continue to track against. The way I would try to answer your question, and I would say you've got to look at that target and that guidance and start applying that towards our balance sheet, and that's the way we're looking at it right now.

You know, we've got more aggressive internal goals that we're going after than the $150 million to $200 million that we are putting out there for public consumption. And our teams, as I mentioned earlier, have been working very hard here over the past six months in putting these plans together and actually starting to execute a system. And the $150 million to $200 million is the way I would tell you to put into your models to try to figure out how we're going to deleverage our balance sheet over time.

Okay. Thank you. And as just kind of a follow up on that. You had mentioned before that as a team you're willing to entertain the possible sale of assets if a company comes and approaches you and says we are willing to pay you enough that it's worthwhile to do so. Is that a comment that's reserved just for the fuels assets, or would you also entertain the sale of a core asset if something came up?

Yes, Johannes, that's a question that I often get asked too. And we would entertain -- I mean the way we articulated our strategy, and the way I look at our assets, is the same regardless of whether it's a specialty asset, an oil field services asset, or a fuels refining asset. We have hold values for all of our assets, and we know what they're worth to us. And if someone comes and sees more value, even in our specialties assets because of their synergies, or because of their outlook or goals, then as good stewards of this company we have an obligation to look at that. So yes, we would consider it.

Okay. And internally, just kind of looking at the fourth quarter and into next year, have you been sensitizing how you think the company is going to perform based off of some of the volatility that could exist within the market? Specifically what I'm thinking about is that I know many of my colleagues and I are thinking about okay, where are oil prices going to go. What's the effect of the OPEC meeting going to be? Therefore is oil going to be up or down into the first part of next year? How kind of sensitive is your plan to those sorts of fluctuations in the macro environment around you when it comes to execution?

Yes, Johannes, we've got a strategic planning group that continues to look at various scenarios, various market cases that could happen, especially through the fourth quarter and the first quarter, which seasonally tends to be tougher for example on fuels. We look at expected cases, and then we look at high cases and low cases. And we build our strategies off of a range of outcomes of those various scenarios. We don't look at just one of them. And we continue to run our business off of that, Johannes. So I don't know what else to say, but many of those include stress tests and we continue to plan our business around that.

And I guess then drilling down on that is how comfortable are you in a stress scenario according to the stress test in terms of being able to push the business forward?

Yes, we are comfortable, Johannes. We pass in all of those scenarios in what we have to do. Now in different scenarios we do different things, and we have different actions, but we pass on all our scenarios.

Okay. Thank you very much. Appreciate it.

Our next question comes from the line of Brad Heffern with RBC Capital Markets. Your line is now open.

Good afternoon, everyone.

Good afternoon, Brad.

Tim, I appreciated the chart that you put in the deck about basically you're relating crude pricing versus WTI. One thing I was noticing and wondering about was you've run an increasing amount of Canadian heavy every quarter for the last four quarters, but the discount versus WTI has been going down since the beginning of 2016. Is that just worse pricing on the non-Canadian heavies that you've been buying that's driving that, or what's underlying that?

Yes, those are just seasonal changes. I don't think, Brad, that you should look at quarter-by-quarter and draw a trend just because of the very complex crude system that's out there and the different qualities that are out there. What I think you should do is look at it more on a year average basis. And you see we drew in that dotted line showing the 2015 average in that chart, and I think that's more of what you should look at. The last few quarters, even though there's been some quarter-by-quarter volatility, they're all still below the 2015 average line in that chart.

Okay. Fair enough. And then the new tolling agreement you guys signed, is there any figure you can put out about what the implication is financially? Is there an EBITDA number associated with that or can you just say if it's even material?

We can't put any numbers out there, Brad, as you suspect. This is something that's between us and our counterparty. What I can tell you is it's built into the $150 million to $200 million self-help target that we put out there. We think it is material and we're very excited about the opportunity.

Okay. Understood. And then finally, you know we saw one of your peers acquire a lubricants operation earlier this week. I know some investors have been looking at that as a comparable for your specialty products business. I was curious if you could give any color, either Tim or maybe Bruce, as to how comparable you think the businesses are, and whether you think that the valuations are reflective of what you think Calumet should be valued at.

Yes, I'll be happy to make a comment and then I'll flip it over to Bruce if he wants to embellish on that any. But yes, with the recent M&A activities that have been occurring and Holly purchasing Petro-Canada, I think it's validation for us to see a respected player like Holly confirm our business model and focus on our specialties business. There is a lot of overlap between Petro-Canada's business and our business in terms of [white oils and base oils], but there is not complete overlap. We have so many specialty areas that are not overlapped with the Petro-Canada business that they make solvents, other things. So I don't -- I'm probably not in a position to comment on the Holly deal, but what I can tell you is that some people might consider it a valuation on our business. I would just take it as a validation of the value we see in our specialties business. And Bruce, did you have anything else to add onto that?

Yes, briefly, Brad. Thanks for the question. We do watch our competitors and try to have a sense of their strategies and strengths and directions as part of our benchmarking, so we are familiar with the former PCLI and we congratulate HollyFrontier on a good acquisition at six times their EBITDA according to the headline numbers. I think that represents a really good deal, not a sector valuation. So I would certainly direct you to the specialty chemicals peers and between us and a couple of them, you'd probably form a view in that anywhere in the 10 to 15 multiple range for the sector.

Great. Thank you for that color.

Our next question comes from the line of Sean Sneeden with Oppenheimer. Your line is now open.

Hi, thank you for taking the question.

Yes, hi Sean.

Pat, maybe for you to start. Can you elaborate on the new crude supply agreement? I guess can you give us a little bit more color about what exactly it is? And did I hear you correctly that there's a $150 million lien associated with that?

Yes, there's a $150 million lien that's allowed under our indentures for forward crude oil purchase contracts. And that lien construct has been in place for a long time. It's not new. It's been there really since we entered into I think our first indenture of unsecured notes. What it allows us to do is -- this new agreement is allowing us to move further into the maximization or the optimization of that $150 million lien. So we're effectively under that lien enhancing our crude oil payment terms with the counterparty, and that will effectively give us greater payables and help with our overall working capital and liquidity. So the way I would look at it, we were already utilizing the lien, just not fully. This is a substantial increase in utilization of the lien, and then we're going to keep exploring ways and options to fully optimize the lien over time.

Got it. And is that, that crude supply agreement, is that the driver behind the jump in letters of credit in the quarter, because I think you went from $64 million to call it $113 million. Is that what was going on there?

It's not related to that. I think over time we have a valuation with suppliers around letters of credit. Sometimes the letter of credit amounts move around just based on the timing and which crude oil suppliers were utilizing the LC can change with changes in crude oil price, but it's not related to this particular item. I think again, as we explore ways that we can utilize that lien, which again is essentially a form of credit support, I think there are opportunities to look at our letters of credit and have a positive impact there. But those two things are not related today.

Okay. Got you. I guess just kind of moving on, can you talk a little bit about working capital in the quarter? It looked like inventory was a decent source of cash, but basically everything else more or less offset that. Talk a bit I guess what the driver was behind all that.

Well I think the key headline here is that we continue to pull inventories lower. Over the course of the quarter, that's about a $25 million benefit. I think that movements in things like A/R and A/P often are the result of timing differences and not sematic of something else. So we're going to continue to focus on all of our efforts to continue to reduce our working capital over time. But if we look at just what the net impact of working capital were for the course of the quarter, they really were pretty much even. But I guess I'd comment that if we look at sort of views of working capital in concert with other balance sheet changes and lower CapEx and the like, I mean we've continued to see progress in terms of sort of what our cash flow overall has -- that profile has looked like by quarter over the course of the year.

Okay, that's helpful. And then maybe just two quick ones. One, it looks like your RIN expense was actually somewhat consistent with the second quarter, which I think you had the benefit from the small refinery exemptions that flow through. Just given the jump in prices in the quarter, what was the driver there? Is it just timing related from when you actually want to purchase RINs or can you elaborate on that at all?

It was really more just the typical standard obligation. There wasn't too much mark to market impact in the quarter.

Okay. And then, Tim, I'll get you involved here. Can you talk a little bit about the competitive dynamics in specialty now that you have the Holly transaction? So I guess specifically are you anticipating any pricing pressures on some of your more commoditized elements like base oils? You know, I think Holly has kind of indicated that they're trying to grow the lubes business on a whole going forward.

Yes, Sean, I'm happy to try to weigh in. I mean it's still early and obviously there's a lot of observations and we have to watch and see what happens. But let me just point out that Petro-Canada was running this business before Holly. We were competitors with Petro-Canada and are pretty familiar with what they were doing and how our businesses overlapped and competed with Petro-Canada. Whether Holly is going to change or be similar to that, we'll just have to wait and see. But I think we're pretty familiar, at least with their capabilities and their offerings, and feel like we understand that business.

And so suffice it to say, if I'm kind of judging your body language correctly here, the expectation is, at least in the near term, you're not anticipating any significant changes, at least talking about market dynamics?

Yes. And again, I can't speak for Holly in terms of what their intentions or plans are, but we know what our business looked like with Petro-Canada in the mix, and we'll just continue to watch and see how that changes as Holly gets to understand the business and decides to make changes or not. So I really can't provide you any more background or details than that, Sean. We'll just have to wait and see.

Okay. Thank you very much.

All right, ladies and gentlemen, that is all the time we have allocated for questions today. So with that said, I would like to turn the conference back over to CEO, Mr. Tim Go, for any further remarks.

Okay, thanks, Andrew. Thank you again, everyone, for your time today and your continued support. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.