Calumet Inc (CLMT) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Calumet Specialty Products Preliminary Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Mr. Joe Caminiti, Investor Relations. Sir, please go ahead.

Thank you, Liz. Good morning, everyone, and thank you for joining us today for our preliminary third quarter earnings results call. With us on today's call are Tim Go, CEO; West Griffin, CFO; and Bruce Fleming, Executive Vice President 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 our management can provide any assurance 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 filing with the Securities and Exchange Commission for a list of factors that may affect our actual results and can cause them to differ from our forward-looking statements made on this call.

Also, we have posted 2 PDF presentations that will accompany the remarks made on today's conference call. One covers our preliminary third quarter results discussion, and the second outlines a pro forma review of the company post the Superior divestiture. You may access these presentations in the Investor Relations section of our company website at calumetspecialty.com.

Also, a webcast replay of this call will be available on our site within a few hours, and you can contact 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. Good morning, everyone, and thank you for joining us today as we honor and pay tribute to our veterans today. As you've seen by now, we are delaying the reporting of our financial third quarter results, due primarily to the implementation of our new ERP system. We've chosen to still host the call today as we want to give you a high-level overview of what we believe was a strong quarter for us, and we want to walk you through our pro forma financials post the Superior divestiture.

The key takeaways for you today are that we believe we are moving closer to our vision as we execute our business plans this year and that we are pleased to see our transformation and momentum picking up steam. As Joe noted, we have 2 presentations to talk you through, so let's start with the one focused on the third quarter review, and please turn to Slide 3.

As many of you know, we've been in the process of implementing a new ERP system over the last year. We chose to delay the final stages of that implementation until we were past the seasonally busy summer months, and thus, we went live on September 1. As many of you have seen with other companies, this kind of significant change, no matter how well you plan, always has some element of learning as you go.

Further compounding the implementation were 2 onetime events as we simultaneously closed on the Superior refinery divestiture, which officially closed this week, and we also navigated the multi-week impact of Hurricane Harvey.

While we are disappointed that the implementation of this system has delayed the formal filing of our third quarter results, we felt it was prudent to take extra care to complete our financials and allow our auditors time to complete the review. Our team has been working diligently with our implementation partner to ensure the accuracy of our reported results as quickly as possible.

Let's take a step back and review the importance of this new system to our organization and its potential benefits. Before most of my team and I joined Calumet, the company's businesses operated and were run independently. So this new ERP system will change that as we bring all of our assets and various business processes onto a more efficient system. This new system will allow for real-time reporting, which will help us drive business improvements that were not available to us in the past. We've talked about the importance of our self-help program for nearly 2 years now, and this new tool will enable new categories of self-help as it will allow for opportunities to improve sales and product mix. Further, it will provide a platform to optimize 2 of our larger expense categories in transportation and procurement. We are looking forward to completing the first closing of the system, after which we believe we will pivot from implementation of the system to optimization.

Slide 4 offers a high-level review of our top line and liquidity expectations for the third quarter. Big picture, we expect very solid performance during the period, including another quarter of over $1 billion in revenue despite some of the obstacles that emerged relating to the storms and as a result of our ongoing ERP implementation. These strong results helped us increase our available liquidity to over $400 million, which does not take into account the $492 million we received from the close of the Superior divestiture 2 days ago. And our results are expected to include another $12 million in additional self-help that our teams identified and captured during the period as well.

I will turn the call over to our CFO, West Griffin, who will take us through a few more qualitative details on our expected third quarter performance across our segments. West?

Thanks, Tim. We'll provide some further color on our third quarter segment expectations. As a reminder, the second quarter fundamentals were strong, with a number of our specialty products categories experiencing some general tightness in supply driven by industry outages. That tightness continued through the first 2 months of the third period. And as a result, we do expect to see improved year-over-year performance when we finalize our segment performance.

However, as you all know, a large portion of the petrochemical supply chain runs through Houston, and Hurricane Harvey caused significant disruption to the supply chain throughout the month of September. While our specialty facilities didn't have any damage as a result of the storm, we did have roughly 1 week of downtime at both our Dickinson and Royal Purple plants as our employees tended some of their personal needs and the Dickinson team worked tirelessly to protect it from water damage.

I especially want to recognize the dedication and commitment of our staff at our Dickinson facility, who stayed at the plant to protect it from flooding in spite of widespread flooding in the town of Dickinson and in the case of 3 employees, the flooding at their own homes.

Further, some shipments were delayed as a result of the supply chain disruptions and our ERP implementation. The good news is that we got back to normal shipping rates by October, and we are currently working off the backlog that resulted.

In terms of our product developments, we received final certification for all Group III formulations initiated first sales during the third quarter. Additionally, we completed our final formulations on our new Transformer Oil that's focused on the international market, and it will begin to ship in the fourth quarter. As it relates to any new product, I'll caution that volumes will traditionally start out low and build over time. We remain encouraged by the feedback of our sales and marketing team that they're providing us, and we expect all of them to be meaningfully -- meaningful contributors to our future financial performance as they begin to scale throughout the next few years.

Lastly, we made solid progress on our expansion plans for both Royal Purple and TruFuel and expect those to come online during the fourth quarter to meet our strong demand.

Slide 6 provides an overview of what was a very strong performance in our fuel products segment. Higher crack spreads and ongoing improvements in our operations should lead to a significant year-over-year improvement. This was supported by a 52% increase in our 2:1:1

Gulf Coast benchmark, which spiked in September with the storms that hit the Gulf Coast region.

Our refineries ran well and experienced minimal downtime. At San Antonio specifically, we took a short 2-day precautionary outage during the storm, but headed back online quickly. As a result, both Shreveport and San Antonio were very active and helped support some of the gasoline shortages throughout the State of Texas.

We also exported diesel for the first time in our history to Mexico and had our second quarter in a row of record premium gasoline sales.

Our asphalt sales came in line with our expectations, and we grew seasonal inventory as planned and increased liquidity as a result.

Lastly, we completed the sale of the Superior refinery, and we'll talk more about that later in the call.

Slide 7 provides a summary of the performance of our oilfield services segment, which we believe delivered one of the strongest quarterly performances in almost 3 years. These results were supported by a much healthier environment and ongoing improvements in rig counts, which were up 97% year-over-year and 6% on average sequentially. We expect that this will be the second quarter in a row that oilfield service will deliver positive adjusted EBITDA, which demonstrates the hard work that our team did to increase our efficiencies and reduce our cost structure.

Slide 8 provides an update on our self-help program. We began this program in early 2016, and it focuses on driving operational excellence throughout our business and complementing that with our organic growth opportunities. As Tim mentioned, we drove an additional $12 million in incremental EBITDA through the program during the third quarter, primarily through numerous margin enhancement programs. Year-to-date, our self-help efforts have resulted in roughly $44 million of incremental EBITDA, and we remain on pace to achieve 2017's goal of $50 million to $60 million.

Slide 9 provides an update on our capital spending plans for 2017 and offers some initial guidance on our 2018 expectations. We've lowered and narrowed our 2017 CapEx forecast from an original plan of $110 million to $130 million to $85 million to $95 million. And despite having some planned turnaround and maintenance activity in 2018, we expect to keep our capital spending fairly flat to down year-over-year, and thus, are providing an outlook of $80 million to $90 million in CapEx for fiscal 2018. These reductions reflect the sale of Superior, which had significant CapEx plan during the fourth quarter and in 2018, as well as other cost containment initiatives.

Now with that, I'll turn it back to Tim to talk us through a few fourth quarter thoughts. Tim?

Thanks, West. Please turn to Slide 10 for our fourth quarter outlook. And as a reminder, the fourth quarter is usually a seasonally slower one for all of our businesses.

In terms of the specialty products business, they saw supply remain somewhat tight, and we are continuing to work through the backlog that West discussed. In response to higher crude prices, we also have taken price adjustments in the fourth quarter across a number of our product categories such as solvents, base oils and our Branded and Packaged Products. Additionally, our new products should start to have some modest contribution in the fourth quarter, and we'll continue to implement our self-help initiatives, all of which should help offset some of the typically seasonal weakness we usually see this time of the year. As a result, we hope to see year-over-year growth in the specialties business.

On the fuels front, we typically see lower volumes and lower local market premiums this time of the year. The crack spreads have held up reasonably well through the October month. So we'd expect a fairly solid fuels environment, but we do have some smaller maintenance activity in the fourth quarter. Three Forks work was completed in October, while San Antonio has work in process right now.

Market conditions for all our oilfield services segment remain positive, and thus, we expect to see continued solid performance and improvement from the group year-over-year.

At the corporate level, we will be finalizing the last year -- the ERP implementation, and thus, we'll have higher costs during the fourth quarter. And lastly, we'll continue to execute our plans to derisk the business, enhance our liquidity and lower our debt profile over the long-term.

That concludes our third quarter remarks. So I'd like to give you, following along, to open up the second presentation we have provided on our website, and we'll walk you through a review of the go-forward Calumet post the divestiture of the Superior refinery.

First, let me remind you of the facts and figures on Slide 3 of the transaction. The Superior divestiture closed Wednesday, and we received a total consideration of $492 million. That included $435 million for the refinery and its associated storage, terminals and pipeline assets, plus an additional $57 million for the plant's inventories, net working capital and reimbursement of certain capital spending. I'm pleased to report that Husky agreed to take all of the refineries, roughly 180 employees. And I want to again thank the employees of the Superior refinery for their hard work and commitment to make the refinery a success over the past 6 years.

Slide 4 outlines the 5 key benefits of the transaction to Calumet: First, the sale of Superior is accretive to both this year and next year's cash flows. Note that we were budgeting over $100 million of capital spending at the plant next year. And by selling at this time, we are able to redeploy that capital into our other businesses.

Next, we have a stated goal to reduce our leverage profile. And obviously, this was a transaction that helped us take a very large step towards that goal. In fact, our net debt to total capitalization falls immediately from 90% to 76%. This deal also decreases our volatility in earnings by shifting our portfolio away from the higher beta fuels products commodity markets.

Our capital intensity decreases because our specialty facilities do not require the same level of turnaround and maintenance, as do our fuels refineries. We've lowered our 2017 capital spending projection significantly from $110 million to $130 million down to $85 million to $95 million. And we've also introduced a 2018 projection that we expect will fall between 2017's -- will fall below 2017's level despite some expected turnaround activity that I mentioned earlier.

Lastly, the sale of Superior decreases our RINs exposures by roughly 1/3. Calumet's 2017 systemwide obligation of 128 million RINs will now fall to approximately 85 million RINs in 2018 prior to any mitigation strategies such as blending. We estimate that ethanol and biodiesel blending will still allow us to offset roughly half of the 85 million RINs obligation. To sum up, this was a strategic deal, and this transaction moves us closer to our vision.

Slide 5 provides a reminder of the vision that I have been referencing all year, which is focused on becoming the premier specialty petroleum products company. Our vision is supported by 3 fundamental strategies represented as layers in the pyramid: The first layer, operations excellence, forms the foundation of our approach and has been a corporate-wide mission to reduce unnecessary costs, optimize raw materials and enhance margins across the portfolio. We've already discussed the success of these efforts, represented by the self-help report card we showed you earlier. But I think it's critical to understand that our self-help program will not just be a 3-year exercise. It will be a part of our culture as we look to drive continuous improvement in all of our businesses.

The second layer of the pyramid is opportunistic growth projects. This has been a primary focus in 2017 as we look to capture opportunities with 1- to 2-year payouts with low capital investment requirements. For example, as we talked about earlier, we leveraged our proprietary technology to introduce our new Group III lubricant product as well as our new Transformer Oil. And our expansion projects for our high-margin Royal Purple and TruFuel brands should contribute significantly to future growth.

Lastly, the sale of Superior has now moved us into the top of the pyramid, where we undertake strategic M&A to optimize our portfolio.

I'm going to pass the call onto Bruce Fleming, who heads our Strategic and Growth group to talk a little bit more about this third level of Calumet strategy. Bruce?

Yes. Thanks, Tim, and good morning, everyone. For those of you I haven't met personally, I'm Bruce Fleming. I'm Calumet's head of Strategy and Growth, where my team is accountable for strategic M&A. As it tells on the slide, that's intended to focus the portfolio on high returns in niche specialty markets, where we are competitively advantaged. That's a mouthful.

Let's talk about what that means and why you should care. Move to Slide 6, which provides a broad sense of our product profile and our various product margin premiums against WTI crude price.

The sale of the Superior refinery reduces Calumet's exposure to the lower left quadrant, where you see the low-margin commoditized products like asphalt, gasoline and jet fuel. These commoditized products are low-margin because customer behavior is price-driven, leading to industry competition based on cost. Reducing our exposure here means, of course, that our remaining portfolio is more heavily-weighted up the value stream to higher-margin. As we move up the value stream, industry competition changes from price-driven competition to quality-driven and finally, the brand-driven competition. At each step, our margin potential increases. So the sale of Superior allowed us to make a significant change in portfolio weighting for high-return specialty markets. The next slide measures the impact of this step change.

On Slide 7, the 2 pie charts show that on the basis of gross margin, our specialty products contribution increases. It was 57% of our former business and jumps to 69% of our go-forward business. This shift to the higher-margin product also brings an important improvement to earnings volatility. The lower figure is a normal distribution curve showing historical Calumet EBITDA volatility. The specialty products volatility is shown as the blue line and is much less volatile than our fuels refining business, shown as the yellow line.

So in summary, the Superior sale shifts our portfolio towards specialty products earnings that are less volatile as well as being higher-margin.

So what does that set Calumet up for? Slide 8 provides the strategic M&A principles for Calumet. I want to spend a minute on what this means so that you know what to expect from us going forward. We already covered the first point, which is stability. Stable cash flows are more highly valued, and so our actions will include rotating portfolio holdings to improve quality of earnings.

The second point addresses sustainability of cash flows. Sustainability means making sure that our individual assets are competitive over the long- term. For each individual asset, we create and maintain disciplined competitive strategies, including industry structure and outlook. We review strategies with our Board of Directors as part of allocating capital budget resources and recommending portfolio adjustments.

Third, as Tim mentioned, reducing capital requirements reduces the drag on a stockholders' equity. We explained how this works using the example of our Superior divestment and moving our portfolio toward lower capital intensity. Separately, though, and on the same point of capital, we have also instituted at Calumet a classical stage and gates approval process for internal capital projects. This discipline has contributed to sharply lower levels of organic CapEx, with better returns on those investments.

And last, on Slide 8, perhaps what you've all been waiting for, let's talk about stand-alone growth by M&A and -- including what it is and what it is not. The purpose of Calumet's merger and acquisition activities is to drive unitholder value starting with our existing portfolio of businesses. Growth can take the form of small acquisitions that provide simple, tactical fill-ins along our existing value chains. This can be very attractive in generating disproportionate synergy value, and we will look favorably on this type of acquisition.

More conventional M&A activity involves the search for new platforms capable of sustaining our individual businesses for the long run. This becomes a possibility as we continue the resets of our capital structure and especially, our leverage profile. So let me leave you with the footer on this slide, which is that divestment can actually facilitate growth and stockholders' equity. The right divestment executed at the right time and at the right value can provide portfolio reweighting, which grows equity value consistent with Calumet's long-term vision.

And let's continue to use the sale of Superior to prove a point. The next slide, Slide 9, shows how our leverage profile has changed as a result of closing this transaction. As you can see on the far right, our net debt to total capital makes a step-change improvement to levels we haven't seen since late 2015. This is a much more comfortable position for Calumet's capital structure.

With that, I'd like to ask our CFO, West Griffin, to take you through the pro forma benefits of the Superior divestment in more detail. West?

Thanks, Bruce. Slide 10 shows our debt maturity schedule. And as you can see, we retained significant flexibility as all of our debt has 3-plus years until maturity. The great part about the Superior transaction is that it's going to allow us to eliminate our secured notes. They carry the highest interest rates, the nearest-term maturity and have the most-restrictive financial covers. We should be in a position to call these notes after the filing of our 10-Q.

Slide 11 shows the specific impact of removing Superior from our first half 2017 results. It's worth noting that SG&A savings from this divestiture are roughly $1.6 million. But these are only the immediate cost reduction we realize from the sale while we are still providing transition services to the buyer. Once those services are completed, we should be able to realize further SG&A reductions.

In looking at the balance sheet highlights, as Tim and Bruce both talked about, the divestiture lowers the capital intensity of the business, and thus, you see this sizeable reduction in our inventories and property, plant and equipment.

Lastly, you can see that the operating income is reduced by $64 million through the first half of the year. It's been our historical policy to not talk about the financial performance of our individual assets, but we understand that this is a unique situation. So to guide you on how you can better reconcile that operating income charge against our historical adjusted EBITDA, you need to make 2 adjustments: First, as the footnote indicates, the $64 million operating income for Superior includes a 37 million RIN credit for the Superior facility that was included in the second quarter. Remember, that is 37 million RINs, not dollars. So you need to make an assumption to reconcile that to dollars, and then subtract that from the total. Then you can estimate the go-forward depreciation add-back by assuming a 20-year straight-line depreciation on our property, plant and equipment.

Slide 12 summarizes a few historical metrics that we've guided on in the past and offers a new outlook on each of them going forward. Tim already talked about the reduction in both our RIN obligation and in our capital spending forecast that results from the exclusion of Superior from our portfolio. Historically, we provide a short-term 40,000- to 45,000-barrel a day target for our use of heavy Canadian crude. The next elements of that advantaged crude strategy were primarily focused on Superior. And thus, our go-forward target has been reduced to 40 -- to 25,000 barrels per day, which is what our Great Falls, Montana refinery can run when conditions are optimal.

Lastly, in terms of our self-help program, Superior had only contributed roughly $3 million to our cumulative total of $133 million in self-help achieved since the start of 2016. Thus, we are maintaining our guidance of $50 million to $60 million in self-help for all of 2017.

Looking forward, Superior was a component of the total $150 million to $200 million 3-year goal, but we are still maintaining that goal as we believe we can make up our loss in Superior with new self-help programs. Over the fourth quarter, we plan to analyze our 2000 expectations -- 2018 expectations in more detail, and we'll provide a formal update on those in our fourth quarter earnings call.

With that, I'll hand the call back to Tim for some closing remarks. Tim?

Thanks, West, and thanks, Bruce. I'll end on Slide 13. I'd like to close simply by saying that we're excited about our future. We're still in the middle of our transformation, but we're starting to move out of the first to second inning through this very important step of divesting Superior. Our team remains energized to continue to evolve and grow our businesses. The steps we've taken to fortify the foundation of the business and the patience that we've shown to make the right value-creating decisions have provided us with the optionality we needed to make real, long-lasting change. The new Calumet is starting to come into view as we continue to build and enhance our focus around becoming the premier specialties company in the world. We look forward to the next steps in our journey, and we want to thank all of you for your support during this process.

With that, operator, we'll open the lines for questions.

(Operator Instructions) Our first question comes from the line of Sean Sneeden with Guggenheim.

I guess, Tim, maybe for you, just kind of bigger picture. You first -- kind of talked a little about this in prepared comments, but just -- when you look at, I guess, strategically where you're going, and you kind of highlight a lot of it -- the rationale behind the Superior sale. Should we really be thinking about a lot of those comments applying, generally speaking, to the rest of the fuels refining business? As you kind of highlight -- focusing more on stability of cash flow and -- which is more tied to your specialty business.

Yes, Sean. This Tim. Let me try to answer that. And then if Bruce wants to chime in, I'll give him an opportunity as well. We've talked about this over the last, really, 2 years, and nothing has changed from the way we're approaching this business. We do want to be the premier specialty petroleums product company in the world. We do want to stabilize the cash flows. We do have a plan and -- as I mentioned earlier, to get to that position. But we don't put a time frame on ourselves to say we have to do this in a certain time period. And that's the patience and the discipline that we talked about a little bit a few minutes ago because, again, our process has been to develop our 5-year plans for all of our facilities. We're very excited about the plans that the rest of our fuels refineries have put together. We see some real opportunities that we can go after, and we see some real value that makes up our overall 5-year plan bet -- and 5-year bets. So by no means do we feel like our fuels and our oilfield services businesses aren't contributing to our bottom line, and we're very excited about the future that it holds. But Superior is the best example of what will happen. We have -- we had great plans for Superior with the flexibility project, with the idea to continue to heavy up at that site and continue to grow the profitability. But in this case, Husky had a portfolio that valued it even more than we did. And so we were able to make a transaction that benefited both of us and allowed us to move closer to our vision and I presume, Husky closer to theirs. So those are the kind of things that we're going to be looking for, Sean. I wouldn't say we've got a timetable or a specific timeline that we're trying to meet. We're going to continue to drive our base business. And then as we continue to talk to other interested parties, and believe me, Bruce continues to be very active in that area, we'll see if we can find a partner like we did with Superior and really, like we did with the Dakota Prairie refinery a year ago.

I appreciate those comments. I think that's helpful, Tim. Maybe just a couple on -- maybe for West, on the Superior. I just want to make sure that I'm kind of understanding what kind of the cash EBITDA impact is. So you highlighted $64 million of operating income in the first half. And if you adjust that for RINs, it probably gets to the context of rough -- it's kind of like a $45 million of EBITDA. Can you give us a sense of what, I guess, second half of '16 looked like from that [math] facility just so we can kind of get a true apples-to-apples comparison and a kind of good go-forward plan of how we should think about it?

Yes. So let me kind of give you a -- walk through the math for you a little bit in a little more detail. You get -- you start off with about $64 million of operating income for the first half of 2017. You got a backed-up amount for the $37 million -- or 37 million RINs. So make your own assumptions on that, but call it $30 million-ish. So you end up with $34 million. And then you have to annualize that. Maybe if you just multiply it by 2 or something -- make your own assumptions on it -- $68 million, and then you back off, assuming a 20-year life with PP&E of roughly $200 million, so you come up with $10-ish million. So that gives you about $78 million. You do a similar sort of math on the full year 2016. You start off with $53 million. We didn't have any RINs exemptions that year, so you just add your assumption of DD&A, call it $10-ish million. So it'd be somewhere around $63-ish million. But you need to make your own assumptions on that. But that kind of gives you a [sense] kind of what the math does -- of kind of how you get there.

Okay, that -- it's helpful. And I guess, when you look at that versus kind of the rest of the fuels EBITDA that is reported. I think it was roughly, call it, $70 million in the first half. Does that kind of imply that the Montana and San Antonio are substantially less than kind of the math you outlined there? Or how should we kind of think about the EBITDA contribution from those facilities?

Yes. One of the things that you're not picking up there is, obviously, there's a fair bit of SG&A. So when our -- as we highlighted during the call, we have just $1.5 million of SG&A that immediately goes away, and then we're going to have significantly more that will go away once we finish the transition services at Husky. So you're kind of combining at -- you're kind of look at apples and oranges there when you compare the total fuels to what's -- just at the plant level.

Yes. And Sean, let me add in, Sean. I think West is right to make sure you consider the overhead allocations that have to -- and go across that as well. But let me also remind you, this pro forma is based on the first half of 2017. And if you look back at the cracks during the first half of the year, they were significantly lower than they are today. The other thing I would point to is, remember, the WCS-WTI spread narrowed significantly in the first half of the year with the Syncrude problems. And so that contributed quite a bit to lower margins at, say, the Montana refinery. So I think when you look at today's environment, where cracks are much stronger and the WCS-WTI differentials are back to what we would consider to be more normal ranges, I think you'll see a stronger fuels performance.

Okay, that's helpful, and I appreciate those comments. Maybe just 2 quick ones if you can. Just on the -- I know you guys are kind of working through like the ERP issues. But West, can you just -- I just want to clarify on the specialty performance in the third quarter. Should we be thinking -- I know you said kind of year-over-year improvement, but should we be thinking about kind of gross profit per barrels kind of similar in nature to what you saw in Q2? Or how should we kind of think about that?

Yes. Let -- I can jump in, Sean. We saw a nice improvement in our specialty margins in the second quarter. We talked about that last call. Since then, crude prices have risen, call it, $5-or-so versus what we had in the second quarter. So I think you can kind of assume that that's going to eat into your specialty margins. Otherwise, we continue to see tightness in the base oil market. In fact, we think that -- with some of the outages that occurred during the Hurricane Harvey event, that it continued to keep the base oil market tighter than what folks were forecasting for the second half of the year. So we feel pretty good about specialty margins going forward. And as I mentioned earlier, with the price of crude increasing, we've actually pushed through some price adjustments as well in our business. So we feel pretty good about that.

Okay, that's helpful. And then just -- West, I know you said that you're planning to call the 11.5% post filing the 10-Q. I just want to be clear. Are you guys using a make-whole redemption just because the -- I think bonds aren't callable until April next year.

Yes, no, that's a great question. The -- we've looked at it very carefully in the bonds since where they're trading today is -- they're trading right at sort of the make-whole coal price. So that's correct in that we're kind of looking at it. And we've looked -- run a bunch of different scenarios on it. But basically, where they're trading, you might as well call them at the make-whole price. The savings of calling today versus calling on -- in April is almost -- it's almost -- it really is almost negligible, especially since we've got the proceeds invested in treasuries right now and in the call. Right now, as you know, we're really focused on getting the 10-Q filed and getting that done. And so that's our primary focus right now. But once that's done, we'll start focusing on the secured notes.

Yes. And Sean, I'll just chime in, too. I mean, West and his team have been looking at all the options of what we should do with the proceeds. They've been talking to many experts and trying to get different opinions on different things. And what we've concluded is the best thing for Calumet, the best thing for our shareholders, is just to go ahead and call at the make-whole price. It's about the same as waiting for the April 15 call, and so that's what we're going to do.

Our next question comes from the line of Mike Gyure with Janney.

Yes. On the forward capital guidance that you gave for 2018, is -- I guess, what's the assumption there in the specialty business versus the oilfield services versus the fuels business? Kind of where is most of the capital being allocated for next year?

Mike, this is Bruce. The spending on maintenance and turnarounds in the plant tends to eat up about half or 60% of the growth part. We've got that tilted towards specialties.

Yes. I would -- Mike, I would just tell you, we're probably 60-30 specialties, fuels.

Okay. And nothing to oilfield services?

That's right.

That tends to be a cash-on-cash business as opposed to capital.

Okay. And then on the divestiture transaction, I assume there's no tax ramification to this transaction?

That's right. I mean, we've looked at a whole range of different scenarios and looking at it from the standpoint of all of our unitholders. And we believe -- there's always uncertainty associated with it, but we believe that we can manage the tax liabilities such that there should be relatively minimal, if any, taxes biting any of the unitholders.

Last question comes from the line of Gregg Brody with Bank of America.

I have 2 questions, sort of bigger picture. The first one being in terms of reinstating our distribution or -- and within that remaining (inaudible) -- or sorry, how are you thinking about that today? And then the second question is given the outcome of the refining sale -- of the Superior sale, which was obviously very good. Is that -- are you rethinking how you're thinking about the oilfield services business? Just -- and what I mean by that is, in the past, you've said that's something you might consider divesting. I'm curious how strategic that is to you.

Yes. Let me take a shot at that, Gregg. And then, again, Bruce and West can chime in. Let me take your first question on distributions. When I was on the call 2 years ago and cut the distribution, I said that I was committed and Calumet is still committed to restoring the distribution. I will tell you, though, that I'm even more committed to fixing our balance sheet and getting our leverage back into a reasonable target range. And so I would tell you at this point, our leverage is a still too high, and we're focused on getting our leverage down. A couple years ago we originally said 4.0 was a good leverage target that we thought fit our portfolio. I think when we look back on it now, we'll probably say that was probably too high given the volatility in our fuels and oilfield services segment. I would say going forward, we haven't put out yet what our new leverage target would be, but I can tell you it's going to be less than 4.0. And so as we continue to work through that, that becomes a higher priority for us to get to before we resume the distribution. But I would also tell you that the removal of the secured notes is the first, and the covenants associated with it, is the first step towards getting back into a position where we can restore the distribution. In terms of asset divestitures, I'll let Bruce chime in.

So Gregg, I guess, I'll give you our stock answer. We're going to be good stewards of unitholders' capital. We're going to be very disciplined in having an outlook for each of our asset values. And whenever we come across a counterparty who places a higher value, we're neutral. We're not going to point to something and say, we would never do this or we would never do that. So I think the question on oilfield services and whether it's strategic is -- at a portfolio level, we'll be value-conscious. If there's an opportunity, we'll be appropriately responsive to that.

If I could ask a follow-up to that. I guess as you think about the synergies target that you have this year and the larger one, how important is reducing costs at oilfield services to hitting that target?

Yes. I would tell you that it's not critical in that self-help target, Gregg. As they're -- as oilfield services, we've talked about, they've -- they had their first positive EBITDA quarter last quarter probably in, whatever it was, 10 months or so. And this quarter, we said earlier that they're going to have another positive quarter. And in fact, it'll be their best quarter in almost 3 years. As they continue to recover, they're going to continue to be -- their activity in order to continue to grow their EBITDA. So their costs are going to go up in line with their -- with the revenue and their growth. And so we're not looking to cut costs anymore in that sector. Instead, we're looking to grow that sector. So they're not going to be contributing to that overall self-help goal that we've been talking about.

And just in terms of how the business is trending this quarter, some of the comments we're hearing from other oilfield service providers is that fourth quarter is holding up well, just not necessarily accelerating. Most folks are looking towards next year for that. Is that a fair characterization?

I think that's fair, Gregg. I mean fourth quarter has always been the slowest quarter in the oilfield services sector. I don't think anyone is anticipating anything different. I will say October looked fairly strong, like you pointed out. And I think folks are seeing some good activity continuing, especially as crude prices are continuing to decline. And so the outlook for this quarter is reasonably optimistic given the fact that it's typically a slow quarter.

And that concludes today's question-and-answer session. I'd like to turn the call back to Tim Go for any closing remarks.

Well, thank you again, guys, for your time today and your continued support. We look forward to reporting the third quarter results as soon as possible, and we will continue to execute against our plans with a strong sense of urgency and purpose. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.