© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day. Thank you for standing by. Welcome to the Second Quarter 2022 Calumet Specialty Products Partners, L.P. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Brad McMurray, 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 Todd 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 Steve Mawer, our Executive Chairman.
Before we proceed, I'll remind everyone that during this call, we may provide various forward-looking statements. 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 cause them to differ from expectations. 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 Web site at www.calumetspecialty.com. Also, a webcast replay of this call will be available on our site within a few hours.
With that, I'll pass the call to Todd. Todd?
Thanks, Brad. Good morning all and thank you for joining us today. This morning, we shared two announcements. First, we reported second quarter adjusted EBITDA of $175 million, which is a Calumet quarterly record.
We also reported that we've concluded a set of transactions at Montana Renewables that place the 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 faith you've demonstrated in Calumet.
Honestly, a couple short years ago, many didn't believe that Calumet would be sitting here today. And the grit and determination of our employees is the fundamental reason that we are. It's fun to see that type of commitment rewarded with phenomenal results.
Before we dive into the quarter, let's flip to Slide 3 and revisit our strategic plan to create and separate two independent leading businesses, our specialty products business and our renewable diesel business. As we highlight the quarter on Slide 4, I'll come at it through the lens of these two businesses.
Let's start with specialty products. The second quarter demonstrates the upside power of our integrated specialty business. This business is unique, and it's 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 replicable 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 have the ability to scale back volume and target our production towards specific market niches with their business cycle agnostic, which was demonstrated during COVID. In a strong market like we're seeing now, we could run all out with a focus on generating as much product as possible, including the fuels that are made as byproducts of our specialty manufacturing process.
We've talked before about the competitive advantage of integration, and we estimate the value difference between running specialty feedstock 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 doesn't respond the same to changing market dynamics.
Our Specialty Products and 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 supercycle but actually elevated to levels 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 the rising material costs increase and the coinciding price increases are caught in the 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 than we consume in Royal Purple, Bel-Ray and TruFuel.
So we're seeing the high cycle results that we'd expect. And in a low cycle, as we saw a couple of years ago, we'll see the stickier pricing, higher margin side of our business carry a larger portion of the way. We think this dynamic puts a floor under our business risk, and we believe the favorable misbalance of upside reward and downside risk protection is something that sets Calumet apart.
Next, let's talk Montana Renewables. Since our last earnings call, we've 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 two transactions that complete the capitalization of Montana Renewables.
The transaction highlights a free startup MRL enterprise value of $2.25 billion, which demonstrates why MRL is so transformative for Calumet and our unitholders. The transaction supports our hypothesis that this is the leading independent renewable diesel project in North America. I'll come back to Montana Renewables later this morning.
But in the meantime, I'd 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 margin 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 fuels material margin reflect 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 Shreveport [ph] 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've been very pleased with the results we've seen so far, and we expect to continue down this path.
On the whole, we produced over 60,000 barrels per day of products. 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 productions 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 our strong performance.
Slide 7 is a visual of some of the brands within our Performance Brands segments, including our new BioMax offering with Royal Purple. BioMax is a high performance sustainable lubricant and it's our fast and 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're 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 results 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 experience in the first quarter.
In an environment like this, the most important thing is to operate well. It's a testament to the Great Falls team for staying focused on operational excellence, while dealing with the distractions and excitement of Montana Renewables surrounding them.
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 and niche 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's turn to Slide 11 to go deeper into Montana Renewables. We've essentially finalized the execution of our commercial plan. And in some areas, it was even improved. First, on product.
We executed renewable diesel off-take contracts with three primary customers; Phillips 66, Chevron Renewable Energy Group, and another super major who was 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've also added SAF recovery to our project, and we're 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 legislations 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've recently brought a couple hundred rail cars into service which started delivering renewable feedstock in June as we ramped up our tank filled program. In fact, on this side we pictured the first tallow car 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've been pleased to land more low-CI feed than even we initially modeled, which, like the SAF improvements, is an upgrade to our economic model.
Finally, let's flip to Slide 12 and highlight the transactions announced today. We've announced two transactions that will bring $600 million of fresh capital into Montana Renewables, setting the pre-production 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 Warburg 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 decarbonisation investment platform. Warburg was one of many equity investors that have shown great interest in our project. And while we believe they're the perfect equity partner, we also don't consider our Lazard equity process complete.
Complementing the equity deal is a $350 million sale leaseback transaction was 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 cushion.
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. Per the original plan and the contract, approximately $350 million of these new proceeds will be used to pay off the Oaktree bridge loan as we step from bridge to permanent financing.
There's been a lot of investor misunderstanding that more capital could be added with Oaktree remaining invested. In terms of the Oaktree investment, we're always that Oaktree would be refinanced with any meaningful injection of new capital. And it's 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 proceeds to the parents 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 explore 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'll 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 timeline and financing plan have come together.
Next, we've established the pre-commissioning market value for MRL. This sets the base from which we'll evaluate future transactions. Last, the core specialty business is performing exceptionally well. With these three pillars in place, we believe we are equipped to turn towards strengthening our balance sheet.
We have a few levers to pull. We may take more equity off the table at MRL. Also, we're generating meaningful cash flow in the specialty business that can 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'd like to welcome our two new independent Board members who were appointed earlier this week, Jack Boss and Karen Twitchell. And we also thank Bob Funk who is retiring after many years of exceptional service. Bob was one of the original Board members at Calumet. He's made a meaningful impact and he'll be greatly missed.
With that, let's head to Q&A. Operator?
Thank you. [Operator Instructions]. And our first question comes from the line of Manav Gupta with Credit Suisse. Your line is open. Please go ahead.
Hi, guys. For the first question, obviously a very impressive performance at SPS. Help us understand how sustainable are these margins, the price hikes you're putting through? How should we think about this business in the second half of this year?
Yes. This is Scott Obermeier. So let me answer a couple different ways. Overall, I'd say that we're cautiously optimistic as we look at the second half of the year. We're aware of a lot of the global market indicators tilting towards some downside risks from an economic perspective. Fuel cracks have regressed over the past couple of months, et cetera. But with all that said, we're overall very competent in the business. We've been operating in a highly volatile environment 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 has been 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 demand, lower demand. So I'd say all that said, we feel good about the business and the resiliency of our specialties business.
Perfect. And help us understand a little bit on these new transactions which are announced. For growth to process, are we at a state where we 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. Thank you. And I'll turn it over.
Hi, Manav. It's Bruce Fleming. Good morning. 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, just the whole sequence of things. And that's 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 o'clock this morning. So there's 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 link to transactions that we've concluded this morning.
Thank you for that, guys, and congrats on a good quarter. I'll turn it over.
Thanks, Manav.
Thank you. And our next question comes from the line of Roger Read with Wells Fargo. Your line is open. Please go ahead.
Yes. Thanks. Good morning and congratulations on this transaction.
Thanks. Good morning.
Thanks. 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 300 million, so selling 14% of it for just a little bit less than that is pretty solid. Maybe to 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 two solid partners here, would you expect to further monetize a portion of this going forward? How long do these two 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, thanks. This is Bruce. I'll start that and Todd may want to chime in. One of the things you'll learn as we get our additional details pulled together and issued is that Calumet still owes 100% of the common. That's why we're continuing the Lazard process. We envision, as we've said every quarter, that the largest and best shareholder value creation is going to be to get MRL out into its own public company setting. But we've never had a fixed timeline 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 Warburg, are very patient capital. And we're not attempting to accomplish a particular objective in a particular timeframe. It's about a trajectory to maximize value. So that's why the Lazard process is going to continue to run. We're pleased -- separately from the transactions this morning, we're pleased with the interest Lazard has garnered and there's a good mix of strategics and 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. And 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're doing in the turnaround this quarter in the commissioning phase as to when you would expect to produce, let's call it, saleable quality output versus a true commercial operation where we should expect that you're 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 three things. It's a small site. Those that did join us for the tour will appreciate that visually. But there's a limit to what can be done, the size of the construction workforce that can be marshaled, et cetera. So what we're doing, we're coming down. Now the hydrocracker catalyst gets changed out. We button it up and we start back up and we are in business making spec renewables. So that will happen in September. That point we're up. We're running railcars. The products are going out to our Blue-chip customers. The next thing that happens is sequence right after that is we get the renewable hydrogen plant online. That's going to be plus or minus November at this point. And that is going to unlock full run rate. So we've got spec product at a part rate followed by full run rate when the hydrogen balance is addressed. And then what we sequence 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've generously given ourselves six months to learn how to walk up that curve. Certainly expect and hope that we'll do that quicker. But that is the short-term vision. So we're there. And the fact that we've got an excellent partner in Warburg Pincus and in Stonebriar that we're willing to underwrite a 2.25 billion pre-commissioning value tells you a lot about what the market expects from us.
Yes, absolutely agree with that. If I could just ask one clarifying thing. You mentioned the IRA bill potentially being a favorable event for you. Is there anything in the negotiation that occurred with the two partners that envision that, or should we think of that as upside from here in terms of like the value of the project?
There will 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're reading that, we're mapping that over to our particulars. There's definitely support in it for us if it was to pass in its current form. It's got a very substantive upside in our SAF capability, for example. So it's definitely top of mind. And none of it is in the base underwriting model, so all upside.
Great. Thank you.
Thank you. And our next question comes from the line of Amit Dayal with HCW. Your line is open. Please go ahead.
Thank you. Good morning, everyone. Congrats on the execution. Could you guys talk a little bit about the flexibility you have between SAF production and RD production relative to off-take agreements for each of these product lines?
Sure, happy to. We've actually got a slide in our public material probably from 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 of SAF, and that'd be the 100% renewable. So into weighing, [ph] that will get multiplied as they blend with fossil for a specification, but 2,000 barrels a day initially recoverable from our 12,000 barrels a day full run rate. We can turn that up if there's an economic signal. Roger asked about the proposed legislation, if that was to pass on that form, it's probably economic for us to recover 4,000 barrels a day. And we are at the start line now with this capitalization that you've heard about this morning of designing our expansion. We can probably take the site to 15,000 barrels a day of SAF within a couple of years.
Interesting. And then with respect to the transactions today and Warburg sort of investment, is the probability of moving towards an IPO now higher for the MRL segment?
Well, I'll remind you that we already carved Montana Renewables away from the parent. That was the importance of the unrestricted sub and Oaktree's support last year. So it's a matter of degree, right. So we will -- 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'd like to partner with you but we have to have control. That's fine. That's in the cards. If it's a higher value to take it to the public markets, we'll control that. So we've 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 timeline with MRL, if we were under the gun. Now we're going to run an optimal timeline.
Understood. Thank you for that. That's all I have, guys. I appreciate it.
Thank you for the question.
And our next question comes from the line of Carly Davenport with Goldman Sachs. Your line is open. Please go ahead.
Hi. Good morning. Thanks for taking the questions. 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 like 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're seeing them and Scott referenced sort of the volatility in the marketplace. At the moment, we're 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 price increases. As we mentioned, we're moving as fast as we can on that. And 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 EBITDA, we haven't changed our view of that at all. These were in exceptional circumstances that we've 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've directed previously -- affected new advice previously.
That's helpful. Thank you. 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. 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're 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 three projects that I mentioned to Roger, the pre-treater is on its own fast track. Each of the projects was schedule driven, which means we're taking the uncertainty by trying to go as fast as possible. That's being refined. We've got our onsite construction contractor and it's being stood up now. If you accept a little bit of range, because the contractor is refining the estimate, it's going to be basically right after the first of the year. And I can get you more exact figure within the next couple of weeks.
That's great. Thanks so much for the color.
And our next question comes from the line of Gregg Brody with Bank of America. Your line is open. Please go ahead.
Good morning, guys, and congrats. Todd, nice A-Team [ph] reference there, and I appreciate that. Just a couple of things. First of the transaction, obviously, bringing the money today. So you [indiscernible] some dry powder. How much -- just remind us how much dry powder is there left after this transaction, and have your cost changed at all to complete the facility to get through December?
Hi, Gregg. It's 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 it's pay as we go in the field. As you're aware, we've 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's tightly choreographed. But it's an intensely congested site. So we'll 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's going to have to be in field, labor costs and productivity. We're pretty well baked on everything else.
Thank you. And our last question comes from the line of Jason Gabelman with Cowen. Your line is open. Please go ahead.
Hi, guys. Congrats on the transaction. I want to ask a couple on it. First, on the Warburg Pincus preferred equity, do they have any option -- there's mention of I guess 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'll 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's a potential homerun to be had here for getting in this early. We don't have to service with cash. There is a Moloch [ph] and an 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 assistant's succession here. I guess the first one is it seems like the intention is for MRL to have essentially zero net debt at startup. Is that right? And then with the pre-treatment unit starting up in the first of the year, I would imagine it's safe to assume limited EBITDA contribution from the renewable diesel plant until that's 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? Thanks.
You bet, Jason. It's Bruce. So I'll stay with it here. Yes, there is no debt. The net debt is zero. 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 Cascade County where we operate, passed 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's -- 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 order. As a practical matter and the grand scheme of things, I'd call it a flat year. Our models show a positive, but nothing like what we're 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's up on the IR Web site for the last couple of months. But we have never found enough feedstock to fill this hydrocracker. So we're really not sure what its ultimate capability is. As we stretch it, we will find the minor debottlenecking opportunities. There'll 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'll do over the first six months, we will know where to lever the hardware. And we've estimated the forward case is 18,000 barrels a day, which is up a lot from what we're advertising presently at 12,000. Now, that's part one. Part two of the answer, which I'll give a lot more simply is, and if we get the economic signals to do it, we can pivot this thing to about a 90% SAF yield and pivot it away from RD entirely. We've got two very strong technology providers looking at that with us. And so we've notionally penciled in 24 months to get that all figured out and get that stood up. So point one, hydraulic expansion; point two, 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 one of those are dependent on monetizing MRL more fully. Is that right?
The current estimates which are very early FEL [ph] estimates, and frankly would be notional, but they're well within MRL's ability to sell fund through cash flow from operations.
Great. Thanks for the answers.
You bet. Thank you for asking.
And we do have a follow-up question from the line of Gregg Brody with Bank of America. Your line is open. Please go ahead.
Hi, guys. I put myself on mute there and they took me off. 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 come up to Calumet or are there restrictions for doing that?
There are not 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's part of how Warburg will get their floor return that you'll 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 as you -- that's one of the comments you guys made early on. So there's been a goal to reduce debt at Calumet and clearly now it seems like you're in a position that you can do that. Just talk about the approach, how you're thinking about it today?
Yes, so I'll give you the MRL piece in order to bridge back to Todd. But we've 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, its order of magnitude equal and half 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.
Yes. I think Bruce said it. Really kind of to boil it down, we think of it as there are three options. There's base cash flow out of our specialty business, which looks to be strong as far as we can see. There's MRL cash flow that you already hit on Gregg. And then there's 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 number is still -- you're still targeting towards [indiscernible].
That's right.
And maybe just this moving on to the business, WCS/WTI blowout, what's your view on the ability for margins to stay here? And just in general, there's a comment that you made in your slides. I don't know if you said it out loud. 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. So 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've said it's about $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 purely coincidental that those numbers overlap. So basically run right this year, annualized this year today, small refinery, we'd be looking at $80 million to $100 million a year versus kind of the $50 million normal cycle.
Thanks for clarifying that. And then just a little insight on WCS fallout, I think a lot better in the last month than it was in the quarter.
Yes, WCS/WTI kind of weakened a little bit at the end of the quarter and continues to stay favorable for us. We don't think about it as a major blowout. When you look at what's happening to sweet, sour just in the Gulf, you look at kind of the transportation costs, increased drilling, that type of deal expectation of a portion. There was a lot of production offline in Canada earlier this summer for turnaround and improvements, and a lot of that's coming back on. So I think we're just looking at expectations of kind of continued apportionment returning and the typical sweet, sour gist that we're 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's going on out there that are worth highlighting today that you think are trends that can impact the business positively or negatively?
I don't think anything on the consumer side yet. Obviously, prices are increasing in a hurry and we'll see how the consumer responds. So far, so good. We've seen demand stay stable and we're watching it pretty closely. But I think you hit the nail on the head. It's an integrated business and obviously the larger volumes are coming from some of the fuel byproducts and the higher volume specialty solvents, lube oils, that really are benefiting from kind of high commodity margins and it looks like it's going to be that way for the foreseeable future.
Great, guys, congrats on getting everything done and I appreciate the comment.
Thanks, Gregg. I appreciate it.
Thank you. 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.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.