Calumet Inc (CLMT) 2022 Q2 法說會逐字稿

Good day. Thank you for standing by. Welcome to the Second Quarter 2022 Calumet Specialty Products Partners LP Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Brad Murray, Investor Relations. Please go ahead, sir.

Good morning. Thank you for joining us today for our second quarter 2022 earnings call. With me on today's call are Louis Borgmann, CEO; Vince Donargo, CFO; Bruce Fleming, EVP Montana Renewables and Corporate Development; Scott Obermeier, EVP Specialty Products and Solutions; Marc Lawn, EVP Performance Brands; and Stephen Mawer, our Executive Chairman. Before we proceed, I will remind everyone that during this call, we may provide various forward-looking statements. Please refer to the quarterly 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 (inaudible). You may now download the slides that accompany the remarks made on today's conference call, which can be accessed in the investor relations section of our website at www.calumetspecialty.com. Also, a webcast replay of this call will be available on our site in a few hours. With that, I will pass the call to Todd. Todd?

Thanks, Brad. Good morning all and thank you for joining us today. This morning, we shared 2 announcements. First, we reported second quarter adjusted EBITDA of $175 million, which is a Calumet quarterly record. We also reported that we have concluded a set of transactions at Montana Renewables that placed a pre-commissioning enterprise value of $2.25 billion on MRL. These are game-changing accomplishments, and I thank our employees, customers, and investors for the effort, commitment, and pace you have demonstrated in Calumet. Honestly, a couple of short years ago, many did not believe that Calumet would be sitting here today, and the grit and determination of our employees is the fundamental reason that we are. It is fun to see that type of commitment rewarded with phenomenal results. Before we dive into the quarter, let us flip to Slide 3 and revisit our strategic plan to create and separate 2 independent leading businesses: our Specialty Products business and our renewable diesel business.

As we highlight the quarter on Slide 4, I will come at it to the lens of these 2 businesses. Let us start with Specialty Products. The second quarter demonstrates the upside power of our integrated specialty business. This business is unique, and it has been built one brick at a time over decades. We believe Calumet benefits from industry-leading flexibility and optionality, and we have an unparalleled ability to provide a full portfolio of specialty products across a wide array of world-class customers and end markets. Our brand names are well known and they are built on years of specific technical interactions with our customers to meet their specific needs. Our applicable asset base provides the ability to meet these needs at scale, and they have demonstrated the flexibility required to succeed in all business cycles. In tough times, we had the ability to scale back volume and target our production toward specific market niches, their business cycle agnostic, which was demonstrated during COVID.

In a strong market, like we are seeing now, we could run all out with a focus on generating as much product as possible, including the fuels that are made as by-products of our specialty manufacturing process. We have talked before about the competitive advantage of integration, and we estimate the value difference between running specialty feedstocks only and running our fully integrated system was worth more than $70 million in the second quarter. As you might expect in an integrated business, every product line and even business segment does not respond the same to changing market dynamics.

Our Specialty Products & Solutions segment benefited tremendously from both the favorable market demand and the team's commitment to commercial excellence as specialty margins not only kept up with the commodity super-cycle, but actually elevated to a level similar to the all-time highs seen late last year. Conversely, our Retail business in the Performance Brands segment is seeing the effect of this market as a rising material cost increase and the coinciding price increases are caught in a timing delay.

Calumet as a whole is happy to make that trade as we sell 20x more base oil and gasoline molecules in our system that we consume in Royal Purple, Bel-Ray, and TruFuel. So we are seeing the high cycle results that we would expect, and in a low cycle, as we saw a couple of years ago, we would see the stickier pricing, higher margin side of our business carry a larger portion of the weight. We think this dynamic puts the floor under our business to rest, and we believe the favorable misbalance of upside reward and downside risk protection to something that sets Calumet apart.

Next, let us talk about Montana Renewables. Since our last earnings call, we have essentially completed the standing up of MRL. Production is expected within the next 60 to 70 days. Our renewable diesel and sustainable aviation fuel has been sold at commercial terms superior to what we expected in our financial models. Feed purchasing continues to progress much better than anyone expected, and cars have been arriving throughout the quarter as our tanks fill, and this morning, we announced the 2 transactions that complete the capitalization of Montana Renewables. The transaction highlights of free startup MRL enterprise value of $6.25 billion, which demonstrates why MRL is so transformative for Calumet indulging all this. The transaction supports our hypothesis that this is the leading independent renewable diesel project in North America. I will come back to Montana Renewables later this morning. And in the meantime, I would like to hand the call over to Vince to discuss the quarter. Vince?

Thanks Todd. Turning to Slide 6, our second quarter results in our SPS business generated a record $123.5 million of adjusted EBITDA. Our team executed well in a strong margin environment as our specialty margins approached near record level. The specialty material margin of $65.95 per barrel is exceptional for this business and a $25.67 per barrel in fueled material margin reflects a very favorable crack environment as experienced by many other companies in the fuels industry. Operationally, our plants ran very well, as Todd mentioned, and even with the successful Strep turnaround in April, we were able to deliver increased volumes to take advantage of the strong margin environment.

We mentioned earlier in the year that we were making what we thought were low-risk, high-return investments in Northwest Louisiana, focused on improved control, reliability of our plants, in addition to increasing the level of integration. We have been very pleased with the results we have seen so far, and expect to continue down this path. On the whole, we produced over 60,000 barrels per day of product. To put this into context, we have never produced the volumes experienced in the first half of 2022 with our current set of assets. Our ability to ramp up production when commodity markets are strong is obvious from the improvement in our results.

On the commercial side of the SPS business, we have implemented over a dozen price increases this year as commodity prices have increased. The commercial team is doing a great job managing rising feedstock costs. Our operations are performing exceptionally well and external market factors are strong. It is this combination that is responsible for a strong performance. Slide 7 is a visual of some of the brands within our Performance Brands segment, including our new BioMax offering with Royal Purple. Biomass is a high-performance sustainable lubricant and it is our fastest growing brand in the company.

Moving to Slide 8 and quarterly results, we generated $3.7 million of adjusted EBITDA during the quarter. We have been increasing prices as quickly as possible. In fact, given a typical 90-day notice period, we are at the maximum level of price increases over the last few quarters, but we have yet to catch up. In short, the exact same market drivers that are supporting SPS margins are headwinds for Performance Brands, and that's a trade Calumet is happy to make, given the favorable volume imbalance between SPS sales and Performance Brands purchases. We saw the opposite result in the declining commodities market of 2020. When this business was a key reason, we were able to generate cash as an organization, which again, is part of the benefit of our integrated specialties business. What is critically important in our model is that demand remains strong as cost volatility will balance out over time, and we do continue to see strong demand for our Performance Brands products.

Moving to Montana on Slide 10, we had a great quarter and generated $68.6 million of adjusted EBITDA. Naturally, the strong crack environment was helpful as we saw Rocky Mountain fuel margins return to seasonal norms. Further, asphalt margins stabilized as expected, as we moved out of winter asphalt season and saw less price lag impact and experienced in the first quarter. In an environment like this, the most important thing is to operate well. It is a testament to the Great Falls team for staying focused on operational excellence while dealing with the distractions and excitement of Montana Renewables surrounding that. The Montana site will be coming down for a turnaround this quarter, and when we come back up, we will have both a highly profitable specialty asphalt in this fuels business and a leading renewable diesel business.

In fact, we estimate that had we been operating the future smaller configuration this year, it still would have earned approximately $40 million to $50 million year-to-date. We are excited to get started. With that, I will hand the call back over to Todd for closing comments. Todd?

Thanks, Vince, and let us turn to Slide 11 to get deeper into Montana Renewables. We have essentially finalized the execution of our commercial plan, and in some areas, it was even improved. First, on products. We executed renewable diesel offtake contracts with 3 primary customers: Phillips 66, Chevron Renewable Energy Group, and another super major, who is not named just yet. Obviously, these majors are intimately knowledgeable with this space and provide a rock-solid backdrop for entering the business with strong economics. We have also added staff recovery to our project, and we are increasingly excited about the growing opportunity here. This enhancement was actually finalized a couple of months ago due to strong economics, and since then, SAF is gaining quite a bit of attention after recent potential legislation highlighted $1.75 per gallon tax credit for SAF production. Our feedstock program continues to confirm our hypothesis on geographic advantage. Our startup supply is secured, and we have recently brought a couple of hundred railcars into service, which started delivering renewable feedstock in June, as we ramped up our tank fill program.

In fact, on the slide we fixtured the first Calocar unloaded into the facility. Early on, we wondered if we were too bullish on feedstock, given the vast amount of skepticism in the marketplace, but we have been pleased to land more low CI feeds than even we initially modeled, with likely staff improvements is an upgrade to our economic model. Finally, let us flip to Slide 12 and highlight the transactions announced today. We have announced 2 transactions that will bring $600 million of fresh capital into Montana Renewables, setting the preproduction enterprise value of MRL at $2.25 billion.

The equity transaction is a $250 million preferred equity investment from Warburg Pincus that ultimately will convert to common with over owning a 14.2% equity stake in MRL. We believe Warburg Pincus is the perfect equity partner. They have an unparalleled reputation for partnering, supporting management, and providing capital and skills with a focus on helping to scale businesses. For many years, Warburg Pincus has been a powerhouse in energy investing, and their investment in Montana Renewables will be part of their growth focused decarbonization investment platform. Warburg was one of many equity investors that had shown great interest in our projects, and while we believe they are the perfect equity partner, we also do not consider our Lazaro equity process complete.

Complementing the equity deal, is the $350 million sale-leaseback transaction with Stonebriar Commercial Finance. This money comes with roughly a 12.3% cost of capital, and it completes the capital raise required to start up MRL with a comfortable balance sheet question. Importantly, the transaction comes with a unique opportunity to repurchase $250 million of the assets immediately, which leaves room for the highly opportunistic yet time-intensive options like the Department of Energy or municipal financing, both of which appear to be meaningful opportunities for MRL. We have an existing strong relationship with Stonebriar and they have time and again demonstrated that they are flexible, creative, and a collaborative partner. For the original plan and the contract, approximately $350 million of these new proceeds will be used to pay off the Oaktree bridge loans, as we step from bridge to permanent financing. There has been a lot of investor misunderstanding that more capital could be added Oaktree remaining invested.

The terms of the Oaktree investment were always that Oaktree will be refinanced with any meaningful injection of new capital, and it is nice when a plan comes together. That investment has played out exactly as we all expected. With this refinancing complete, we now have the option to push any future monetization (inaudible) for deleveraging, which we have not had until now. Oaktree was a supportive partner and we thank them for their help in standing up MRL, for making the founding investment last September, and for being a true thought partner as we explored the right path for Montana Renewables. Shortly put, MRL is now fully financed with first-class trusted partners, and we look forward to renewable diesel production in the very near future. On Slide 13, I will close with a summary of our strategic milestones and where we go from here. First, Montana Renewables is fully funded. The highest priority is ensuring this business gets off the ground successfully and the commercial plan, operational time line, and financing plans have come together.

Next, we have established a pre-commissioning market value for MRL. This sets the base from which we will evaluate future transactions. Last, the core specialty business is performing exceptionally well. With these 3 pillars in place, we believe we are equipped to turn toward strengthening our balance sheet. We have a few levers to pull. We may take more equity off the table at MRL. Also, we are generating meaningful cash flow in the specialty business that could accelerate organic delevering. And last, MRL will be generating cash flow in the very near future that can be used for parent delevering. Our work is not complete, but we are pleased with the manner in which our plan is unfolding. Before we turn to questions, I would like to welcome our 2 new independent Board members who were appointed earlier this week, John (Jack) Boss and Karen Twitchell, and we also thank Robert Funk, who is retiring after many years of exceptional service. Robert was one of the original Board members at Calumet. He has made a meaningful impact and he'll be greatly missed. With that, let's head to Q&A. Operator?

(Operator Instructions) and our first question comes from the line of Manav Gupta with Crédit Suisse.

So the first question, obviously, a very impressive performance at SPS. Help us understand how sustainable are these margins, the price hikes you are putting through, how should we think about this business in the second half of this year?

Yes. Well, this is Scott Obermeier. So let me answer a couple of different veins. Overall, I would say that we are cautiously optimistic as we look at the second half of the year. We are aware of a lot of the global market indicators tilting towards some downside risk from an economic perspective, fuel cracks have regressed over the past couple of months, et cetera; but with all that said, we are overall very confident in the business. We've been operating in a highly volatile environment in the past couple of years, and the business has been performing well.

Todd mentioned during the earnings call that we continue to leverage our highly integrated business model and the flexibility and optionality that, that creates. In addition, our customer base being extremely diversified across both consumer and industrial markets and our broad product line, allow us to drive growth in the business and minimize pockets of risk and lower demand. So I would say all that said, we feel good about the business and the resiliency of our specialties business.

Perfect. Help us understand a little bit on these new transactions, which are announced, what drove the process, are you at a state where you are now comfortable with all the financing in because at one point, I think you were also looking at other ways to monetize this business through SPAC and other stuff. So just walk us through these new transactions and what it means for this overall business.

Hey Manav, this is Bruce Fleming. So the capital markets transactions were part of the evolution that we designed actually 18 months ago. We did run into some headwinds with the global conditions, there is a whole sequence of things, and that probably got us running a little bit slower than the original plan, but what the plan calls for is to take this step now, and as Todd said, to continue with our large equity process, which Lazard continues to run. So the details of the transactions, we literally finished at 7:00 this morning. So there is not a lot of meat in this deck. We will get you a lot of additional insights and an 8-K filing, which details the linked transactions that we have concluded this morning.

Congrats on a good quarter.

And our next question comes from the line of Roger Read with Wells Fargo.

Congratulations on this transaction. I look back in my notes from years ago, and it looked like you were going to sell all the refineries. I think we had an estimated value of Montana at $300 million. So selling 14% of its crew, just a little bit less and pretty solid. Maybe a follow-on with Manav's question there, and obviously, you're going to put the 8-K out, but what should we think about as the process going forward now that you've got 2 solid partners here. Would you expect to further monetize a portion of this going forward? How long do these 2 partners really want to stay in the current condition of their investment? When would they want to convert? Would they have a plan to make MRL a standalone business down the line?

Roger, this is Bruce. I'll start that, and Todd may want to chime in. One of the things you learn as we get our additional details pulled together and issued is that (inaudible). That's why we're continuing the Lazard process. The vision as we have said it every quarter is that the largest and best shareholder value creation is going to be to get MRL out into its own public company setting, but we have never had a fixed time line for that. This may not be a great year to do that in the capital markets, for example, and so one of the things we like about our partner arrangement is that both of these entities, Stonebriar and Lazard, and Warburg are very patient capital.

We are not attempting to accomplish a particular objective in a particular timeframe. It is about a trajectory to maximize value. So that is why the Lazard process is going to continue to run. We are pleased separately from the transactions this morning. We are pleased with the interest Lazard has garnered and there's a good mix of strategies in for funds and some of the smarter money on the financial side. So we look forward to having that continue to play out.

It sounds great. I missed the big tour back in June, but is there a chance you could kind of give us an update on the actual finishing part of what you are doing in the turnaround this quarter in the commissioning phase as to when you would expect to produce, let us call it, salable quality output versus a true commercial operation where we should expect that you are delivering on a consistent basis, producing on a consistent basis.

You bet. I'm happy to walk that. So the refinery is coming down as we speak and we have a sequenced commissioning of 3 things. It is a small site. Those that did join us for the tour will appreciate that visually, but there is a limit to what can be done, the size of the construction workforce that can be marshalled, et cetera. So what we are doing, we are coming down now, the hydrocracker catalyst gets changed out. We button it up and we start back on up, and we are in business making spec renewables. So that will happen in September. At that point, we are up, we are running. Railcars to product are going out to our blue-chip customers. The next thing that happens, sequenced right after that, is we get the renewable hydrogen plant online, that is going to be plus or minus November at this point, and that is going to unlock full run rate.

So we have got spec product at a part rate followed by full run rate when the hydrogen balance is addressed, and then what we sequenced third is the feedstock pre-treater that opens the universe of any feedstock from anywhere. So all of that is in our financial model, we have generously given ourselves 6 months to learn how to walk up that curve, certainly expect and hope that we will do that quicker, but that is the short-term vision. So we're there, and the fact that we have got an excellent partner in Warburg Pincus and in Stonebriar that we are willing to underwrite a $2.25 billion pre-commissioning value tells you a lot about what the market expects from us.

Yes, absolutely, I agree with that. If I could just ask one clarifying thing on you mentioned the IRA bill potentially being a favorable event for you. Is there anything in the negotiation that occurred with the 2 partners that envision that? Or should we think of that as upside from here in terms of like the value of the project?

That will all be upside, Roger. The bill has to become law. It may or may not take its current form. But the support, the policy support, for driving the energy transition economy has been rock solid or if anything, is accelerating and strengthening. We are reading that, we're mapping that over to our particulars. There is definitely support in it for us if it was to pass in its current form. We have got a very substantive upside in our SAF capability, for example. So it is definitely top of mind, and none of it is in the base underwriting model. So all upside.

Our next question comes from the line of Amit Dayal with HCW.

Congrats on the on the execution. Could you guys talk a little bit about the flexibility you have between SAF production and RD production relative to offtake agreements for each of these product lines?

Sure, happy to. We have actually got a slide in our public material, probably from the Cowen conference in June that shows you the breakdown. So initially, we can recover out of the renewable diesel stream an estimated 2,000 barrels a day at best, and that would be the 100% renewable. So into wing, that will get multiplied as they blend with fossil for specification, but 2,000 barrels a day initially recoverable from our 12,000 barrel a day full run rate. We can turn that up if there is an economic signal. Roger asked about the proposed legislation. If that was to pass on that form, it is probably economic for us to recover 4,000 barrels a day, and we are at the start line now with this capitalization that you heard about this morning of designing our expansion, we can probably take the site to 15,000 barrels a day at best within a couple of years.

Interesting. Then, with respect to the transactions today and Warburg sort of investment, I mean, is the probability of moving towards an IPO now higher for the MRL segment?

Well, I will remind you that we already carved Montana Renewables away from the parent. That was the importance of the unrestricted sub and Oaktree support last year. So it is a matter of degree, right? So we can sell 0 to 100% of the common. We think the sweet spot is going to be to remain in a partner structure, and we imagine that this is going to be of considerable interest to a lot of investors. So if somebody came in and said, we would like to partner with you, but we have to have control. That is fine. That's in the cards. If it is a higher value to take it to the public markets, we will control that. So we have got a lot of roads open to us. I think the success of the base business is really the key enabler here. We might have felt like we needed to run a faster time line with MRL if we were under the gun. Now we are going to run an optimal time line.

And our next question comes from the line of Carly Davenport with Goldman Sachs.

I wanted to just start out on the quarter on Performance Brands. Can you just talk a little bit about how you see the supply chain constraints and the price lag impacts evolving here through the rest of the year? And then if your views have changed at all in terms of what the normalized earnings power of that business would be over time?

Yes, it's Marc Lawn here. So in terms of that, you've seen the uncertainties of the year as we are seeing them and Scott referenced sort of the volatility in the marketplace. At the moment, we are seeing supply chain has been improving, and we expect that to continue through the balance of the year. The teams have been very, very strong in terms of their progression around the leases as we have in hand and getting as fast as we can on that.

We expect ourselves to catch up as soon as the marketplace starts to normalize again. And then coming back to your question around the normalized run rate of the EBITDA, we have not changed our view of that at all. These are exceptional circumstances that we have been working through in the marketplace at the moment, but when we look at the underlying trends, if we sort of model effectively freezing the marketplace. We see that underlying business looking the same as we have directed previously effectively advised previously.

That is helpful. And then the follow-up was just a clarification question on the pretreatment unit. Does the $100 million from the Stonebriar transaction fully fund that asset or is there any residual spend that we should be thinking about? And then can you just give us an update around kind of construction and expected startup timing of that particular unit?

Sure, Carly. It's Bruce again. Yes, it's fully funded. Everything is fully funded across the board. And we've left dry powder inside of MRL. When we set this up with Oaktree last year, we did withdraw $300 million up to the parent. We elected not to do that. We are very excited about getting going on our expansion, which is in the business plan for late 2024. In terms of the immediate sequence of the 3 projects that I mentioned to Roger, the pre-treater is on its own fast track. Each of the projects was scheduled driven, which means we are taking the uncertainty by trying to go as fast as possible. That is being refined. We've got our on-site construction contractor, and it is being stewarded up now. If you accept a little bit of range because the contractor is refining the estimate, it is going to be basically right after the first of the year, and I can get you a more exact figure within the next couple of weeks.

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

Congrats, Todd, nice (inaudible) reference there. I appreciate that. Just a couple of things. First, the transaction, obviously, bringing in the money today. So you left I believe -- you said the to some dry powder. How much -- just remind us how much dry powder was left after this transaction and has your costs changed at all to complete the facility to get through December.

Gregg, it is Bruce again. So let me leave you this framework. We put in the press release $300 million of liquidity today. I probably should have called that availability because some of the character of the Stonebriar instruments are that we pay as we go in the field. As you are aware, we have never disclosed a capital cost, we do like the dollar per capacity barrel framework. And look, the best way for us to deliver on budget is to deliver on schedule.

So the field work is moving fast. It is tightly choreographed, but it is an intensely congested site. So we will see. I hate to speculate. What I can tell you is that by jumping the long lead equipment more than a year ago at this point, we at least partially if not substantially, insulated ourselves from all the supply chain disruption and inflation. So if we do have something happen, it is going to have to be in field labor costs and productivity. We are pretty well baked on everything else.

And our last question comes from the line of Jason Gabelman with Cowen and Company.

Congrats on the transaction. I wanted to ask a couple on it. First, on the Warburg Pincus preferred equity. Do they have any options? There is a mention of that, some minimum return rates. Do they have an option to take out cash to get those returns as the project ramps up?

No. But if I give you a little bit longer answer. So the minimum return is a very, very attractive one. Warburg is betting on the capital appreciation. We've got a pre-commissioning value established now. It was locked in at $2.25 billion. I will remind everybody that the energy transition publicly traded companies are all in the teams on EBITDA multiples, and we've given guidance on our EBITDA potential. So there is a potential home run to be had here for getting in this early. We do not have to service with cash. There is the MOIC and IRR dual gate and the 8-K is going to give you a lot more color on that.

Okay. I'll wait for that. Maybe I'll ask my other question here. I guess the first one is it seems like the intention is for MRL to have essentially zero net debt and that startup is that right? And then with the pre-treatment unit starting up in the first of the year, I would imagine it is safe to assume limited EBITDA contribution from the renewable diesel plant until that is up and running. So can you confirm that? And then thirdly, can you just remind us, you mentioned the expansion opportunity. Can you remind us what that expansion opportunity is and how quickly you could plan to move forward with that and if you need to monetize MRL more fully before advancing that expansion?

You bet, Jason. It's Bruce. So I will stay with it here. The -- yes, the -- there is no debt. The net debt is 0. That remains an opportunity for us. And I believe Todd mentioned that we are working on municipal bond financing, which is a longer-term track at State County, where we operate past a resolution to enable that. We are very advanced with the Department of Energy. These are not controllable in terms of timing exactly, but that would be the preferred debt instrument. In terms of calendar 2022 financial results, yes, I think it is because of the commissioning and the walk up that we've talked about, the sequential installation of projects over a number of months through the fourth quarter.

As a practical matter in the grand scheme of things, I would call it a flat year, our models show a positive, but nothing like what we are going to get after all the gear is commissioned. And then in terms of the forward thinking -- and this is public, I would direct everybody to the information that is up on the IR website for the last couple of months, but we have never found enough feedstock to fill this hydrocracker. We are really not sure what its ultimate capability is. As we stretch it, we will find the minor debottlenecking opportunities. There will be kind of a staircase of pipe stretching, pump is too small, control valve replacement, the mundane stuff that the chemical engineers are just really, really good at.

The learning curve and the capacity creep is the fascinating part of the opportunity. As we establish that, which we will do over the first 6 months, we will know where to lever the hardware, and we have estimated the forward case is 18,000 barrels a day, which is up a lot from what we are advertising presently at 12 now, that's part one. Part 2 of the answer, which I will give a lot more simply is if we get the economic signal to do it, we can pivot this thing to about a 90% SAF yield and pivot it away from RD entirely. We've got 2 very strong technology providers looking at that with us, and so we have notionally penciled in 24 months to get that all figured out and get that stood up. So point one, hydraulic expansion, point 2 pivot to high SAF, if we get the economic signal to make that additional investment.

Got it. And just to clarify in terms of funding that, neither on the lows are dependent on monetizing MRL more fully. Is that right?

The current estimates, which are very early FEL estimates and, frankly, would be notional, but they are well within MRL's ability to self-fund through cash flow from operations.

And we do have a follow-up question from the line of Gregg Brody with Bank of America.

So Jason answered a bunch of questions that I wanted to ask on the RD facility. Just one element there. Can you actually take cash out next year of MRL through distributions that can go up to Calumet or are there restrictions to doing that?

There are no restrictions. The Montana Renewables Board of Directors, which will include the Warburg member, will look at cash generation from ops. They will look at the capital allocations for the project, which I mentioned, and a bit of prudent rainy day probably to be held in the treasury, we expect to exceed all of that. So we do envision distributions, and that is part of how Warburg will get their floor return that you learn about as we resuscitate the deal team from overnight and get the 8-Ks out the door. But yes, this is a strong cash flow generator.

So that is one of the comments you had made early on. So there's been a goal to reduce debt at Calumet. And clearly now, it seems like you are in a position that you can do that. Just talk about the approach, how you are thinking about it today?

Yes. So I will give you the MRL piece in order to bridge back to Todd, but we have historically been a more modest cash flow. And the base business is doing great, as Vince and Todd covered. That opens up an organic delevering opportunity. And then as we get Montana Renewables stood up, order of magnitude equal and help to our base business, which opens up the second organic delevering. And then, of course, the Lazard process may in fact give us an inorganic delevering opportunity. But let me get Todd to frame that a bit more strategically for you.

No, I think Bruce said it really kind of the bullet down, we think of it, there are 3 options. There is base cash flow out of our specialty business, which looks to be strong for as far as we can see. There's MRL cash flow that you already hit on, Gregg, and then there is sell more of MRL potentially down the road. So I think any of those and obviously, none of those are mutually exclusive. So any or all of those could add to the future Calumet deleveraging plan.

And the numbers still targeting to reduce that between the $40 million to $50 million I just think about it...

That's right.

And then maybe just moving on to the business. WCS-WTI blowout. What is your view on the ability for the margins to stay here? And just in general, there is a comment that you made in your slide, I do not know if you said it aloud, but you said that post MRL conversion, the crude operations would be about $40 million to $50 million, and you say in a similar price environment. Is that in today's price environment that's been particularly strong or is that normalized?

Yes. Let me hit on that one first. The $40 million to $50 million comment is year-to-date in today's environment. So if we simulated everything that's happened this year and then assuming that we had the future refinery, the specialty asphalt refinery, 12,000 barrels a day, we would have made $40 million to $50 million of EBITDA year-to-date. That's a bit confusing because historically, we have said it is about a $50 million, we expect that smaller business to be about a $50 million run rate business as it serves the local market and kind of focuses on more specialty asphalt. So just feel like incidental those numbers overlap. So basically, run rate this year, annualized this year-to-date, smaller refinery would be looking at $80 million to $100 million a year versus kind of the $50 million normal cycle.

Thanks for clarifying and then just a little insight on the WCS part, I think it is a lot better in the last month than it was in the quarter.

Yes, WCS kind of weakened a little bit at the end of the quarter and continues to stay favorable for us. We do not think about it as a major blow out. When you look at what's happening to the sweet-sour dips in the gulf, you look at kind of the transportation costs, increased drilling, that type of deal expectation of apportionment. There was a lot of production off-line in Canada earlier this summer for turnaround and improvements and a lot of that is coming back on. So I think we are just looking at expectations of sort of continued apportionment returning and the typical sweet-sour dips that we are seeing on the Gulf Coast.

Great. And just one last bigger picture question. You're obviously diversified across the consumer and industrial customer base. Are there any nuances to what is going on out there that are kind of worth highlighting today that you think should -- or trends that can impact the business positively or negatively?

No. I do not think anything on the consumer side yet. Obviously, prices are increasing in a hurry, and we will see how the consumer responds. So far, so good. We have seen demand stay stable. And we are watching it pretty closely. But I think you hit the nail on the head. It is an integrated business, and obviously, the larger volumes are coming from some of the fuel by-products and the higher-volume specialty solvents, lube oils that really are benefiting from kind of high commodity margins. And it looks like it is going to be that way for the foreseeable future.

Great guys. Congrats on getting everything done and I appreciate the time.

And this does conclude our question-and-answer session. And I'd like to turn the conference back over to Brad McMurray for any further remarks.

Yes. Thanks, everybody, for your time and your interest on behalf of the management team here in the room and really all of Calumet. We appreciate your ongoing interest in the company. So thanks again and have a great weekend.

That concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.